Revision Test Paper CAP III June 2020

CHARTERED ACCOUNTANCY PROFESSIONAL III
(CAP-III)
Revision Test Paper

June 2020
Education Department
The Institute of Chartered Accountants of Nepal
The Revision Test Papers are prepared by the institute with a view to assist the students in their study.
The suggested answers given here are indicative and not exhaustive. Students are expected to apply their
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may notify to the email educationdepartment@ican.org.np at Education Department of the Institute.
Paper 1: Advanced Financial Reporting
© The Institute of Chartered Accountants of Nepal 1

Revision Questions:
1. Accounting Standards Mix (Numerical and Logical)
Delta is an entity which prepares financial statements to 31 March each year. Each year, the
financial statements are authorized for issue on 25 May. The following events have occurred which
are relevant to the year ended 31 March 2017:
Event (a)
On 1 April 2016, Delta purchased an asset for $771,000 and immediately leased this asset to entity
X. The lease term was for five years and the lease rental, receivable annually in arrears on 31 March,
was $200,000. Delta incurred direct costs of $20,000 in arranging this lease. The annual rate of
interest implicit in this lease was 10%. Under the terms of the lease, entity X is responsible for
ensuring the asset and for carrying out any necessary repairs and maintenance of the asset. At a
discount rate of 10% per annum the present value of $1 receivable annually in arrears for five years
is $3·80.
Event (b)
On 1 April 2016, Delta entered into a joint arrangement with entity Y to jointly operate a delivery
depot. Entity Y is located, and has major customers in, the same geographical region as Delta. Delta
and entity Y each made the following payments in respect of the arrangement on 1 April 2016:
- $25 million each to purchase a joint 25-year leasehold interest in a depot which was close to
both Delta and entity Y’s business premises. This depot was to act as headquarters for the
delivery vehicles (see below).
- $7·5 million each to purchase a fleet of delivery vehicles. The vehicles have an expected useful
life of five years, with no expected residual value.
Delta and entity Y agreed to jointly use the delivery vehicles to deliver products to their customers,
and to share the operating costs of the depot equally. Any delivery charges to customers were levied
by Delta and entity Y directly at the discretion of the individual entities. During the year ended 31
March 2017, the total cash cost of operating the depot was $8 million. This was paid equally by
Delta and entity Y. In the year ended 31 March 2017, Delta charged its customers a total of $2
million in delivery charges.
Event (c)
On 31 March 2017, Delta was owed $10m by entity Z. The amount was due for payment by 30
April 2017. Entity Z has been a customer for many years and has an excellent payment record. At
31 March 2017, there was no reason to suppose that entity Z would fail to pay the $10m owed to
Delta by 30 April 2017. By 20 April 2017, entity Z’s going concern status was in considerable
doubt.
Required: Explain and state (where possible by quantifying amounts) how the events would
be reported in the financial statements of Delta for the year ended 31 March 2017.
2. Earnings Per Share – (Simple) Financial Reporting Standards

Following information pertains to Sajjad Limited (SL) for the year ended 31 December 2016:
i. The share capital of SL comprises of:

Particulars Rs. in million
Ordinary share capital (Rs. 100 each) 1,000
9% Class A preference shares (Rs. 100 each) 200
6% Class B preference shares (Rs. 100 each) 300

ii. Class A preference shares which were issued on 1 January 2014 are cumulative, nonconvertible
convertible and non-redeemable. These shares were issued at Rs. 77.22 per share i.e. at a
discount of Rs. 22.78 per share. These shareholders are entitled to annual dividend of 9% with
effect from 1 January 2017. At the time of issue, the market dividend yield on such type of
preference shares was 9% per annum.
iii. Class B preference shares which were issued on 1 January 2016 are noncumulative, non-
convertible and non-redeemable. The payment of dividend of these shares was made on 29
December 2016. These shareholders are also entitled to participate in any remaining profits
after adjusting dividend to ordinary and preference shareholders. Such remaining profits are
allocated between the Class B shareholders and the ordinary shareholders in such a manner that
the profit per share of ordinary shareholders is twice the profit per share of Class B shareholders.
iv. SL earned profit after tax of Rs. 150 million during the year ended 31 December 2016 and paid
interim dividend of Rs. 2.50 per share to ordinary shareholders.
Required:
Compute basic earnings per share for the ordinary shareholders for the year ended 31 December
2016.
3. Earnings Per Share (Complex)- Financial Reporting Standards

Following information pertains to Tiger Limited (TL):
Particulars Quarter ended 31-Dec-17 Half year ended 31-Dec-17
Profit after tax (Rs. in million) 140 239
Average market price per share (Rs.) 330 360
Ordinary shares
20 million shares of Rs. 100 each were outstanding as at 1 July 2017.
4 million shares were issued on 1 August 2017 at market price of Rs. 355 per share.
Convertible bonds
On 1 November 2016 TL issued 0.8 million 7% convertible bonds at par value ofRs. 1,000 each.
Each bond is convertible into 3 ordinary shares at any time prior tomaturity date of 31 October
2019. On inception the liability component was calculatedas Rs. 760 million. On the date of issue,
the prevailing interest rate for similar debt without conversion option was 9% per annum. 50% of
these bonds were converted into ordinary shares on 1 November 2017.
Warrants
On 1 January 2016, TL issued share warrants giving the holders right to buy 6 million ordinary
shares at Rs. 340 per share. The warrants are exercisable within a period of 2 years.
Applicable tax rate is 30%.
Required:
Compute basic and diluted earnings per share to be disclosed in statement of profit or loss for the
following periods: (Show all relevant workings)
(a) Quarter ended 31 December 2017 (06)
(b) Half year ended 31 December 2017 (07)
4. Consolidated Financial Statement (Complex)- Financial Reporting Standards

The draft statements of financial position of Ant Limited (AL), Bee Limited (BL) and Fly Limited
(FL) as at 31 December 2017 are as follows:
Rs. in million
Particulars AL BL FL
Assets
Property, plant and equipment 3,510 2,835 2,200

Investment property 130 45 -

Investment in BL at cost 3,540 - -
Investment in FL at cost - 2400 -
Current assets 2,120 1,420 2,800
TOTAL ASSETS 9,300 6,700 5,000
Equity and liabilities
Share capital (Rs. 10 each) 5,500 4,000 2,500
Retained earnings 2,000 1,314 1,000
Gratuity 25 - -
Current liabilities 1,775 1,386 1,500
TOTAL EQUITY AND LIABILITIES 9,300 6,700 5,000
Other information:
(i) Details of investments are as follows:
Rs. in million
Cost of Retained earnings
Date of investment Investor % holding Investee
investment of investee
1-Jan-2015 AL 65% BL 3100 520
1-Apr-2015 AL 10% BL 440 815
20-Jun-2017 BL 60% FL 2400 1150
(ii) On acquisition date of BL, fair value of its net assets was equal to their carrying value except a
plant whose fair value was Rs. 120 million whereas its carrying amount was Rs. 140 million.
Value in use and remaining useful life of the plant were Rs. 150 million and 10 years respectively
at that date.
(iii) At the date of acquisition of FL, fair value of its net assets recorded in the books was equal to
their carrying value. Further, a contingent liability of Rs. 70 million was disclosed in the financial
statements of FL. AL's legal adviser had at that time estimated that this claim would be settled
at Rs. 50 million. However, it was actually settled on 15 February 2018 at Rs. 40 million. Date
of authorization of FL's financial statements was 10 February 2018 and the claim were disclosed
as contingent liability in FL's financial statements.
(iv) On 1 July 2017 AL sold its office building having carrying value of Rs. 43 million to BL at its
fair value of Rs. 50 million. The building had a remaining useful life of 5 years on the date of
disposal. On the same date, BL rented out the building to Monkey Limited for one year.
AL group follows fair value model for investment property whereas BL uses cost model for
investment property. Fair value of the building on 31 December 2017 was Rs. 58 million.
(v) (v) On 31 December 2017 FL’s recoverable amount was estimated at Rs. 3,700 million.
(vi) AL group follows a policy of valuing the non-controlling interest at its proportionate share of
the fair value of the subsidiary's identifiable net assets.
(vii) The following information relates to AL's gratuity scheme for the year ended 31 December 2017:
Rs. in million
Contribution paid 70
Benefits paid 55
Current service cost 85
Re-measurement gain 10

During the year, payments made by AL were charged to profit or loss account. No further
adjustments have been made.
Discount rate and fair value of plan assets at 1 January 2017 were 12% per annum and Rs. 320
million respectively.
Required:
Prepare AL's consolidated statement of financial position as on 31 December 2017 in accordance
with the requirements of NFRSs.
5. Consolidated Statement of Cash Flows (Complex)- Financial Reporting Standards
Summarized consolidated statement of financial position of Vitz Limited (VL) as at 30 June 2018 is
presented below:
Assets 2018 2017 Equity & Liabilities 2018 2017
Rs in million Rs. in million
Property, plant & equipment 3,678 4,173 Share capital (Rs. 10 each) 2,800 2,500
Goodwill 569 639 Share Premium 300 -
Investment in associate 670 - Other group Reserves 3,519 2,451
Inventories 1,850 1,050 Non-Controlling Interest 1,638 874
Trade & Other receivables 975 823 Trade & Other Payables 912 1630
Cash and Bank 1,568 770 Deferred Consideration 223 -
9,392 7,455 9,392 7,455
Following information is available for preparation of consolidated statement of cash flows:
i. On 1 January 2018, VL acquired 40% shares in Audi Limited (AL) by paying Rs. 600 million. On
that date, cash balance of AL was Rs. 100 million. AL earned profit of Rs. 800 million (accrued
evenly) during the year ended 30 June 2018. Further, VL sold goods for Rs. 400 million to AL in
2018 at 30% profit margin. 25% of these goods remained unsold on 30 June 2018.
ii. On 1 April 2018, VL disposed of its 100% shareholdings in Subaro Limited (SL) for Rs. 1,600
million. On that date, carrying value of SL’s net assets was as follows:
Rs. in million
Property, plant and equipment 1,300
Working capital (other than bank balances) (150)
Bank balances 100
1,250
On the date of disposal, carrying value of SL's goodwill was Rs. 200 million. SL earned profit of Rs.
185 million (accrued evenly) during the year ended 30 June 2018.
iii. A building having carrying value of Rs. 170 million was disposed of during the year for Rs. 350
million in cash. Another machine having carrying value of Rs. 250 million was disposed of during
the year for Rs. 230 million which will be received in August 2018.
iv. During the year, VL disposed of 30% shareholdings (leaving 60% with VL) in Wing Limited (WL)
for Rs. 450 million when WL’s net assets and goodwill were Rs. 1,000 million and Rs. 150 million
respectively.
v. On 1 July 2017, VL acquired its first foreign subsidiary, Ford Limited (FL) by purchasing 80%
shareholdings against:
• immediate cash payment of Rs. 495 million (USD 4.5 million)
• issuance of 15 million shares of VL at market value of Rs. 25 each.

• deferred payment of USD 2 million payable after two years. Applicable discount rate is 8%.
The fair value of net assets of FL at the date of acquisition was as follows:
USD in million
Property, plant and equipment 5.5
Working capital (other than bank balances) 3.5
Bank balances 1.0
10.0
FL earned profit of USD 1.5 million (accrued evenly) during the year ended 30 June 2018. FL’s
goodwill was not impaired at year-end.
Exchange reserve on translation of FL comprises of Rs. 13 million for bank balances, Rs. 36 million
for working capital (other than bank balances) and the remaining relates to goodwill and property,
plant and equipment.
vi. Following exchange rates are available:

1-Jul-17 31-Dec-17 30-Jun-18 Average
1 USD to Rs. 110 115 120 116
vii. No dividend was paid during the year by the group.
viii. Depreciation for the year was Rs. 480 million.
ix. VL values non-controlling interest on the date of acquisition at its proportionate share of the fair
value of the subsidiaries' identifiable net assets.
Required
Prepare VL’s consolidated statement of cash flows for the year ended 30 June 2018 using 'indirect
method' in accordance with NFRS. (Ignore corresponding figures)
6. Share based payment (Comprehensive logic with numerical) - Financial Reporting Standards
Query One
On 1 January 2014, Corolla Limited (CL) granted share options to each of its 50 executives to
purchase CL’s shares at Rs. 1,000 per share. In this respect following information is available:
(i) The share options will vest and become exercisable upon completion of 3 years provided that:
• The executives remain in service till the vesting date.
• CL’s share price increases to Rs. 1,500 per share.
(ii) Each executive will receive 4,000 share options if average annual gross profit during the vesting
period is atleast Rs. 900 million. However, if the average gross profit exceeds Rs. 1,000 million
each executive would be entitled to 6,000 share options.
(iii) On 1 January 2016, CL extended the vesting period to 31 December 2017 and reduced the
exercise price to Rs. 900 per share. On 1 January 2016, fair value of each share option was Rs. 580
for the original share option granted (i.e. before taking into account the re-pricing) and Rs. 710 for
re-priced share option.
Following further information is also available:

1st Jan 31 December
2014 2014 2015 2016 2017
Executives in employment 50 47 44 43 42
Executives expected to leave during 12 8 4 2 -

remaining vesting period

Gross profit for the year (Rs. in million) - 940 820 1,270 1,200
Fair value of each share (Rs.) 1,400 1,450 1,550 1,480 1,650
Fair value of each option (Rs.) 600 650 580 650 750
At each year-end, CL estimated that gross profit for the future years would approximately be the
same as of current year.
Required:
Calculate the amounts recorded in respect of share options in CL’s financial statements for the years
ended 31 December 2014, 2015, 2016 and 2017 and explain the basis of your calculations.
Query Two
Newtown Ltd granted 1,000 share appreciation rights (SARs) to each of its 500 employees on 1
July 2014. To be eligible for the rights, employees must remain employed by Newtown Ltd for 3
years from the date of grant. The rights must be exercised in July 2017, with settlement due in cash.
In the year to 30 June 2015, 42 employees left and a further 75 were expected to leave over the
following two years.
In the year to 30 June 2016, 28 employees left and a further 25 were expected to leave in the
following year.
The fair value of each SAR was Rs. 90 at 30 June 2015 and Rs. 110 at 30 June 2016.
Required:
Prepare the journal entry to record the expense associated with the SARs for the year ended 30 June
2016, in accordance with NFRS 2 Share-based payment.
7. Employee Benefits (Comprehensive Logic with Numerical) - Financial Reporting Standards
(a) Explain the following as used in NAS 19 Employee Benefits:

(i) The term ‘defined benefit pension plan’
(ii) The basis to be adopted in measuring scheme assets
(iii) The basis to be adopted in measuring scheme liabilities
(iv) Actuarial gains and losses.
(b) Universal Solutions operates a defined benefit pension scheme on behalf of its employees.
The company conducts an annual review of funding in conjunction with their actuaries who
have supplied the following information:
At Dec 31 20X3 At Dec 31 20X4
Rs. Rs.
Present value of pension fund obligations 1,200 1,300
Market value of pension fund assets 1,000 1,100
Information relevant to the actuarial valuation:

Discount rate used to determine pension fund liabilities 5%
Current service cost Rs. 100
Contributions to the pension fund Rs. 140
Benefits paid out amounted to Rs. 95
Required:
Explain and state (where possible by quantifying amounts) how the three events would be reported
in the financial statements of Delta for the year ended 31 March 2017.

8. (Simple Logical) - Financial Reporting Standards
Epsilon is an entity which prepares financial statements to 30 September each year.
(a) Purchase of machine
On 1 April 2018, Epsilon accepted delivery of a large and complex machine from an overseas
supplier. The agreed purchase price for the machine was 20 million francs – the functional currency
of the supplier. Under the terms of the agreement with the supplier 12·6 million francs was payable
on 31 July 2018, with the balance of 7·4 million francs being payable on 30 November 2018. The
payment due on 31 July 2018 was made in accordance with the terms of the agreement. Epsilon
does not use hedge accounting.
On 1 April 2018, Epsilon incurred direct costs of $250,000 in installing the machine at its premises.
Although the machine was ready for use from 1 April 2018, Epsilon did not bring the machine into
use until 30 April 2018.
During April 2018 Epsilon incurred costs of $200,000 in training relevant staff to use the machine.
The directors of Epsilon estimate that the machine is capable of being usefully employed in the
business until 31 March 2023, and that it will have no residual value at that date.
(b) Decommissioning
On 31 March 2023, Epsilon will be legally required to decommission the machine using the original
supplier.
The directors of Epsilon estimate that the cost of safely decommissioning the machine on 31 March
2023 will be 3 million francs.
Note: A relevant annual rate to be used in any discounting calculations is 8% and the appropriate
discount factor is 0·681.
(c) Impairment review
During the final few months of the accounting period ending on 30 September 2018, Epsilon
experienced difficult trading conditions. These difficulties did not affect the ability of Epsilon to
operate as a going concern. In an impairment review of the machine at 30 September 2018, the
directors of Epsilon estimated that the machine’s recoverable amount was $2·5 million.
Relevant exchange rates (francs to $1) are as follows:

– 1 April 2018 – 10 francs to $1.
– 30 April 2018 – 9·5 francs to $1.
– 31 July 2018 – 9 francs to $1.
– 30 September 2018 – 8 francs to $1.
– Average rate for the period from 1 April 2018 to 30 September 2018 – 9·2 francs to $1.
Required:
Explain and show with appropriate calculations how the above events would be reported in the
financial statements of Epsilon for the year ended 30 September 2018.
9. Income Taxes (Tax expenses and Deferred Tax – Simple Numerical) - Financial Reporting
Standards
The following statement of financial position relates to Model Town Group, a public limited
company at 30 June 2016:
Rs.000
Assets:
Non-current assets:

Property, plant, and equipment 10,000

Goodwill 6,000
Other intangible assets 5,000
Financial assets (cost) 9,000
a. Total 30,000
Trade receivables 7,000
Other receivables 4,600
Cash and cash equivalents 6,700
b. Total 18,300
c. Total (a+b) 48,300

Share capital 9,000
Other reserves 4,500
Retained earnings 9,130
a. Total equity 22,630
Non-current liabilities
Long term borrowings 10,000
Deferred tax liability 3,600
Employee benefit liability 4,000
b. Total non-current liabilities 17,600
Current tax liability 3,070
Trade and other payables 5,000
c. Total current liabilities 8,070
Total liabilities (b+c) 25,670
Total equity and liabilities (a+b+c) 48,300
The following information is relevant to the above statement of financial position:
(i) The financial assets are investments in equity. Model Town has made an irrevocable
election to recognise gains and losses on these assets in other comprehensive income.
However, they are shown in the above statement of financial position at their cost on 1
July 2015. The market value of the assets is Rs. 10.5 million on 30 June 2016. Taxation
is payable on the sale of the assets.
(ii) The stated interest rate for the long term borrowing is 8 per cent. The loan of Rs. 10
million represents a convertible bond which has a liability component of Rs. 9.6 million
and an equity component of Rs.0.4 million. The bond was issued on 30 June 2016.
(iii) The tax bases of the assets and liabilities are the same as their carrying amounts in the
statement of financial position at 30 June 2016 except for the following:
(a)
Rs.000
Property, plant, and equipment 2,400
Trade receivables 7,500
Other receivables 5,000
Employee benefits 5,000
(b) Other intangible assets were development costs which were all allowed for tax
purposes when the cost was incurred in 2015.
(c) Trade and other payables include an accrual for compensation to be paid to
employees. This amounts to Rs. 1 million and is allowed for taxation when paid.

(iv) Goodwill is not allowable for tax purposes in this jurisdiction.
(v) Assume taxation is payable at 30%.
Required
Calculate the provision for deferred tax at 30 June 2016 after any necessary adjustments to the
financial statements showing how the provision for deferred taxation would be dealt with in the
financial statements. (Assume that any adjustments do not affect current tax. You should briefly
discuss the adjustments required to calculate the provision for deferred tax).
10. What are the agreed Actions under the Nepal Portfolio Performance Review (NPPR )14
Action Plan 2010? (theory)
11. Define following terms with respect to Public Financial Management: (Theory)
a. Treasury Single Account (TSA)
b. PEFA Assessment
c. NPSAS
12. Related Parties (Simple Logical) - - Financial Reporting Standards

a. Define the following:
• Related Party
• Key Management Personnel
b. What are the disclosure requirements as per NAS 24?
13. Foreign Exchange (Numerical) - Financial Reporting Standards

KL purchased an investment property in United States for USD 2.6 million. 10% advance payment
was made on 1 May 2017 and 70% payment was made on 1 July 2017 on transfer of title and
possession of the property. The remaining amount was paid on 1 August 2017.
On 1 September 2017, KL rented out this property at annual rent of USD 0.24 million for one year
and received full amount in advance on the same date.
KL uses fair value model for its investment property. On 31 December 2017, an independent valuer
determined that fair value of the property was USD 2.5 million.
Following spot exchange rates are available:

1-May-17 1-Jul-17 1-Aug-17 1 Sept-17 31-Dec-17
1 USD to Rs. 110 105 108 110 116
Following average exchange rates are also available:

2017 Jul to Dec 2017 Sep to Dec 2017
1 USD to Rs. 105 111 113
Required
Prepare the extracts relevant to the above transactions from KL’s statements of financial position
and comprehensive income for the year ended 31 December 2017, in accordance with the NFRSs.
14. Inventories (Simple Numerical) – Financial Reporting Standards

On 31 March 20X1, the inventory of ABC includes spare parts which it had been supplying to a
number of different customers for some years. The cost of the spare parts was ` 10 million and
based on retail prices at 31 March 20X1, the expected selling price of the spare parts is ` 12 million.
On 15 April 20X1, due to market fluctuations, expected selling price of the spare parts in stock

reduced to ` 8 million. The estimated selling expense required to make the sales would ` 0.5 million.
Financial statements were authorised by Board of Directors on 20th April 20X1.
As at 31st March 20X2, Directors noted that such inventory is still unsold and lying in the
warehouse of the company. Directors believe that inventory is in a saleable condition and active
marketing would result in an immediate sale. Since the market conditions have improved, estimated
selling price of inventory is 11 million and estimated selling expenses are same 0.5 million.
What will be the value inventory at the following dates?
(a) 31st March 20X1

(b) 31st March 20X2
15. Conceptual - Financial Reporting Standards

Company A has taken a long term loan arrangement from Company B. In the month of December
20X1, there has been a breach of material provision of the arrangement. As a consequence of which
the loan becomes payable on demand on March 31, 20X2. In the month of May 20X2, the Company
started negotiation with the Company B for not to demand payment as a consequence of the breach.
The financial statements were approved for the issue in the month of June 20X2. In the month of
July 20X2, both company agreed that the payment will not be demanded immediately as a
consequence of breach of material provision.
Advise on the classification of the liability as current / non –current.
16. Value Added Statement (Simple Numerical)
The following data is given in respect of Samriddhi Ltd. for the year ended 31 3-20X1:
Abstract of Statement of Profit & Loss for the year ended 31 3-20X1
` in ‘000 ` in ‘000
Income
Sale 2,380
Other Income 370 2,750
Expenditure
Operating Cost 1,855
Administrative Expenses 150
Interest Cost 215
Depreciation 240 2,460
Profit before tax 290
Provision for tax 87
Profit after tax 203
Credit balance as per last balance sheet 60
263
Other Information:
` in ‘000
1. Operating cost consists of:
Material cost 1,220
Wages, salaries & other benefits to employees 330
Local taxes including cess 70
Other manufacturing expenses 235

2. Administrative expenses consist of:

Directors’ Remuneration 55
Audit Fee 25
Provision for doubtful debts 8
Others 62
3. Interest cost consists of:
Interest on 10% debentures 180
Interest on temporary bank overdraft 35
4. The capital structure of the company consists of:
Equity share capital 1,500
9% Preference share capital 600
You are required to prepare a Gross Value Added (GVA) statement and calculate the
following ratios:
(a) GVA to Material Cost Ratio (Industry average 0.80)
(b) GVA to Employee Cost Ratio (Industry average 3.82)
(c) GVA to Sales Ratio (Industry average 0.70)
(d) GVA to Capital Employed Ratio (Industry average 0.30)
Also advise on the utility of the above ratios in comparison to the Industry average.
17. Financial Instruments (Conceptual Numerical) - Financial Reporting Standards

On 15 October 2016, Syangjali Industries Limited (SIL) made the following investments:
Name of Investee No. of shares Percentage of Cost of Investment
shareholding acquired (Rs in million)
Laure Ltd. (LL) 155,000 4% 20
Shaili Ltd (SL) 135,000 2% 65
*including transaction costs
a. Investment in LL was made with no intention to sell the shares while investment in BL was
made with the intention to sell the shares before 31 December 2016.
b. The board of directors in its meeting held on 30 November 2016 decided that since the future
prospects of SL are quite attractive, its shares should be held till 30 June 2018. The market rate
on 30 November 2016 was Rs. 621.
c. On 31 December 2016, RIL decided to record an impairment loss of Rs. 5 million against
investment in KL. The market price of shares of KL and BL as on 31 December 2016 was Rs.
80 and Rs. 600 respectively.
d. SIL’s broker normally charges transaction costs of 0.2%.
Required:
Explain the accounting treatment of above transactions in accordance with Nepal Financial
Reporting Standards.
18. Leases (Simple Numerical) - Financial Reporting Standards
On 1 April 2015 Acacia Ltd entered into the following lease agreements. The terms of each lease
are as follows:
1. Plant with a fair value of Rs. 275,000 was leased under an agreement which requires Acacia
Ltd to make annual payments of Rs. 78,250 on 1 April each year, commencing on 1 April 2015,
for four years. After the four years Acacia Ltd has the option to continue to lease the plant at a
nominal rent for a further three years and is likely to do so as the asset has an estimated useful

life of six years. The present value of the lease payments is Rs. 272,850. Acacia Ltd is
responsible for insuring and maintaining the plant during the period of the lease.
2. Office equipment with a fair value of Rs. 24,000 was leased under a non-cancellable agreement
which requires Acacia Ltd to make annual payments of Rs. 6,000 on 1 April each year,
commencing on 1 April 2015, for three years. The lessor remains responsible for insuring and
maintaining the equipment during the period of the lease. The equipment has an estimated
useful life of ten years. The present value of the lease payments is Rs. 16,415.Acacia Ltd
allocates finance charges on an actuarial basis. The interest rate implicit in both of the leases is
10%.
Required:
Prepare all relevant extracts from Acacia Ltd's financial statements for the year ended 31 March
2016 in respect of the above leases. The only notes to the financial statements required are those in
respect of lease liabilities or commitments.
19. Intangible Assets (Concept and Numerical) - Financial Reporting Standards
On 1 April 2017 ZL acquired a licence for operating a TV channel for Rs. 86.3 million out of which
Rs. 50 million was paid immediately. The balance amount is payable on 1 April 2019. A mega
social media and print media campaign was launched to promote the channel at a cost of Rs. 10
million. The transmission of the channel started on 1 August 2017.
The license is valid for 5 years but is renewable every five years at a cost of Rs. 35 million. Since
the renewal cost is significant, the management intends to renew the license only once and sell it at
the end of 8 years.
In the absence of any active market, the management has estimated that residual value of the license
would be Rs. 15 million and Rs. 20 million at the end of 5 years and 8 years respectively.
Applicable discount rate is 10% p.a.
Required:
Discuss how these transactions should be recorded in ZL’s books of accounts for the year ended 31
December 2017.
20. Provisions, Contingent Assets and Contingent Liabilities (Conceptual) - Financial Reporting
Standards
You will be aware that the board of directors met on 10 March 20X7 to discuss over-capacity in
parts of the group. The decision was reluctantly taken to implement a programme of redundancies.
The programme was to be implemented in two phases:
- Phase 1 involves 300 redundancies on 30 June 20X7. This phase of the programme was planned
out in detail at the meeting on 10 March 20X7. The redundancy costs were calculated in some
detail at the meeting and this first phase was made public to all affected parties on 25 March
20X7.
- Phase 2 involves 200 redundancies on 30 September 20X7. This phase of the programme was
also planned out in detail at the meeting on 10 March. The redundancy costs were estimated at
the meeting and this second phase was announced on 25 April 20X7.
The financial statements for the year ended 31 March 20X7 include a provision for the first phase
of the redundancies but not the second phase. Both phases were agreed and the costs calculated at
the same meeting. Surely both costs should be accounted for consistently?

Answers/Hints:
1. Accounting Standards Mix (Numerical and Logical)
Event (a)
It would appear that the lease of the asset to entity X is a finance lease. This is because entity X is
responsible for repairs, maintenance and insurance of the asset and because the present value of the
minimum lease payments by entity X is $760,000 (200,000 x $3·80). This is 98·6% of the fair value
of the asset at the inception of the lease ($771,000).
Because the lease is a finance lease, Delta will show a lease receivable – net investment in finance
leases under non-current assets. The carrying amount of the lease receivable on 1 April 2016 will
be $791,000 ($771,000 + $20,000).
During the year ended 31 March 2017, Delta will recognize income from finance leases in the
statement of profit or loss. The amount recognized will be $79,100 ($791,000 x 10%).
Following recognition of the lease income and the rental payment from Delta on 31 March 2017,
the net investment in finance leases in the statement of financial position of Delta at 31 March 2017
will be $670,100 ($791,000 + $79,100 – $200,000).
Event (b)
The joint arrangement with entity Y is a joint operation because Delta and entity Y have equal rights
to the assets and joint obligations for the liabilities relating to the arrangement. In a joint operation,
the operators include their share of any jointly held assets. Therefore the property, plant and
equipment of Delta at 31 March 2017 will include:
– Leasehold property of $25m x 24/25 = $24m
– Plant and equipment of $7·5m x 4/5 = $6m
In a joint operation, the operators include their share of jointly incurred costs. Therefore the
statement of profit or loss of Delta for the year ended 31 March 2017 will include the following
costs:
– Amortisation of lease premium $1m.
– Depreciation of plant and equipment $1·5m.
– Cash cost of operating the depot $4m.
Delta will also include its own discretionary delivery charges of $2m as a reduction in its operating
costs.
Event (c)
Doubts regarding the going concern status of a customer would normally be regarded as prima facie
evidence that any trade receivable had suffered impairment. In such circumstances an impairment
allowance equal to the expected losses would normally be appropriate.
However, IFRS 9 Financial Instruments requires the impairment assessment to be made at the
reporting date. At the reporting date, the going concern status of Z was not in doubt, so in this case
no allowance is necessary. However, the information about the decline in the going concern status
of Z after the reporting date is a non-adjusting event after the reporting date. Therefore whilst no
impairment allowance is necessary, it will be necessary to disclose details of the 20 April event at
Z’s business premises and its impact on the collectability of Delta’s trade receivable

2. Earnings Per Share – (Simple) Financial Reporting Standards
Rs. in million
Profit for the year 150.00
Less: Dividend
Class A Preference shareholders (9÷1.09×2) 16.51
Class B Preference shareholders (300×6%) 18.00
Profit attributable to class B preference shareholders 11.80
[90.49(W-1)×3÷(20+3)(W-2)]
46.31
Profit available for ordinary shareholders 103.69
Earnings per share (103.16÷10) 10.37
W-1 Undistributed earnings
Profit after tax 150.00

Less: Imputed dividend (16.51)
Dividend to class B preference shares (18.00)
Dividend to ordinary shareholders (25.00)
Undistributed earnings 90.49
W-2: Determination of ratio for distribution of undistributed earnings between ordinary and
class B preference shareholders
No. of outstanding Weight Product
shares (in million)
Ordinary shareholder 10 2 20
Class B preference shareholder 3 1 3
23
3. Earnings Per Share (Complex)- Financial Reporting Standards
Tiger Limited
a. EPS for quarter ended 31 December 2017
Numerator Denominator EPS Effect
Rs. in million Shares in million Rs. / share
Basic EPS 140 24.80 (W-1) 5.65
Warrant 0 0 No effect
140 24.8 5.65
1.6
8.05 0.8(2.4×1/3)+0.8(1.2×2/3)
Bonds (W-3) OR 1.2+0.4(1.2÷3) 5.03
148.05 26.40 5.61 Dilutive
Rs. per share

Basic EPS 5.65
Diluted EPS 5.61
b. EPS for half year ended 31 December 2017

Numerator Denominator EPS Effect
Rs. in million Shares in million Rs. / share
Basic EPS 239 23.73 (W-2) 10.07
Warrant 0 0.333

[6- (340÷360×6)]
239 24.06 9.93 Dilutive
2
20.02 1.6(2.4 ×4/6)+0.4(1.2×2/6)
Bonds (W-3) OR 1.2+0.8(1.2×4÷6) 5.03
Anti-
259.02 26.067 9.94 Dilutive
Rs. per share

Basic EPS 10.07
Diluted EPS 9.93
W-1: Weighted average shares for quarter ended 31 December 2017

Date Shares Period Total
1 Oct (20+4) 24 1/3 8
0.333
1 Nov (0.8*3*50%) 1.2 [6- (340÷360×6)]
25.20 2/3 16.80
24.80
W-2: Weighted average shares for half year ended 31 December 2017
Date Shares Period Total
1 Jul 20 1/6 3.33
1 Aug 4
24 3/6 12
1 Nov 1.20
25.20 2/6 8.40
23.73
W-3: Interest on Bonds for half year (net of tax):

Rs. in million
First quarter
July to Sep [(760×(9%×3/12×70%) ] 11.97
Second quarter
Oct [(760×(9%×1/12×70%)] 3.99
Nov to Dec [386.20(W-4)×(9%×2/12×70%) 4.06
8.05
20.02
Rs. in million
First quarter
July to Sep [(760×(9%×3/12×70%) ] 11.97
Second quarter
Oct [(760×(9%×1/12×70%)] 3.99
Nov to Dec [386.20(W-4)×(9%×2/12×70%) 4.06
8.05
20.02
W-4: Carrying value of bonds after conversion:

Rs. in million
Initial recognition 760.00
Interest for the year (760×9%) 68.40

Interest paid (800×7%) (56.00)

772.40
Conversion (772.40×50%) (386.20)
386.20
4. Consolidated Financial Statement (Complex)- Financial Reporting Standards
Ant Limited
Consolidated Statement of Financial Position
As on 31 December 2017
Particulars Rs. in million
Assets
Property, plant and equipment [3,510+2,835+ 2,200– (20 – 6(W-1))] 2,200.00
Goodwill [175 (W-2) + 108 (W-4)] 283.00
Investment property (130 + 45 + 5(W-1)+ 8(W-1)) 188.00
Current assets (2,120 + 1,420 + 2,800) 6340.00
TOTAL ASSETS 15,342
Share capital (Rs. 10 each) 5,500.00
Group Reserves (W-5) 2476.75
NCI (W-7) 2631.25
Gratuity [25 + 8 (W-9)] 33.00
Current liabilities (1,775 + 1,386+ 1,500+ 40(W-3)) 4701.00
TOTAL EQUITY AND LIABILITIES 15,342
W-1: Net Assets- BL

Rs. in million
Acquisition
Date 1 Apr-17 Reporting Date
Share Capital 4,000 4,000 4,000
Retained Earning 520 815 1,314
Decrease in FV of machine (20) (20) (20)
Depreciation expense (20×10%×2.25),
(20×10%×3) - 4.50 6
Adjustment for uniform accounting
policy [58-45] - - 13
4500 4799.50 5313
299.50 513.50
Post-Acquisition Profit
W-2: Goodwill- BL
Rs in million
Cost 3,100
Decrease in FV of machine (2,925)
175
W-3: Net Assets- FL

Acquisition
Date Reporting Date
Share Capital 2,500 2,500
Retained Earning 1,150 1,000

Decrease in FV of machine (50) (40)

3,600 3,460
(140)
Post-Acquisition Profit
W-4: Goodwill- FL
Rs in million
Cost (2400*75%) 1,800
Net Assets [3,600 × 45%(60%×75%)] (1,620)
On acquisition 180
Impairment (W-8) (72)
On reporting date 108
W-5: Group Reserves

Rs in million
AL 2,000
Post acquisition - BL (Up to Mar 2017) - [(299.5 (W-1) × 65%) 194.68
(Apr to Dec 2017) (513.5 (W-1) × 75%)] 385.12
Post acquisition - FL (140 (W-3) × 45%) (63.00)
Equity adjustment on further holding of 10% (W-6) 39.95
Gratuity expense (W-9) (8)
Impairment of goodwill of FL (W-8) (72)
2,476.75
W-6: Equity adjustment on further holding of 10%

Rs in million
Net Assets acquired (4,799.5 (W-1)*10%) 479.95
Cost (440.00)
Increase in equity 39.95
W-7: NCI
Rs in million
Acquisition – BL(4,500*35%) 1,575
Post acquisition (Up to Mar 2017) - [(299.5 (W-1) × 35%) 104.82
(Apr to Dec 2017) (513.5 (W-1) × 2%)] 128.38
10% further acquisition (4,799.50 (W-1) × 10%) (479.95)
Acquisition - FL (3,600 × 55%) 1,980
Post Acquisition – FL (140 (W-3) × 55%) (77)
Indirect Holding (2400 *25%) (600)
2,631.25
W-8: Impairment of Goodwill – FL
Rs in million
Grossing up of goodwill (180/0.45) 400
Net assets on 31 December 2017 (W-3) 3,460
3860
Recoverable amount 3,700
Notional write off 160
Impairment to be recorded (160 × 45%) 72

W-9: Gratuity scheme

Rs in million
Charge for the year (P&L and OCI)
Current service cost 85
Interest cost (25×12%) 3
Remeasurment gain (10)
78
Contribution paid (70)
Net Increase 8
5. Consolidated Statement of Cash Flows (Complex)- Financial Reporting Standards
Vitz Limited Rs. in million

Cash Flow from Operating activities
Profit (W-5)817.2+(W-6)222.8 1,040
Adjustments for:
Share of associate profit (W-3) (160–12) (148)
Gain on disposal of subsidiary SL (1,600–1,250–200) (150)
Gain on disposal of property, plant & equipment (350+230)–(170+250) (160)
Unwinding of interest on deferred consideration [189(W-7)×8%] 15
Exchange loss on deferred consideration [223–(189+15)] 19
Depreciation 480
Impairment of Goodwill (W-2) 65
1,161
Increase in working capital (W-4) (951)
210
Cash Flow from Investing activities
Acquisition of shares in associate – AL (600)
Proceeds from disposal of subsidiary - SL (1,600–100) 1,500
Proceeds from disposal of property, plant & 350
equipment
Acquisition of foreign subsidiary - FL (W-7) (495–110) (385)
Purchase of property, plant and equipment (W-1) (1,043)
Dividend received from associate (W-3) 78
(100)
Cash Flow from Financing activities
Proceeds from sale of shares of subsidiary – WL 450
Proceeds from issue of shares at premium (2,800+300)–(2,500+375) 225
675
Net increase in cash and cash equivalents 785
Effect of exchange rate movement 13
798
Cash and cash equivalents – beginning 770
Cash and cash equivalents – ending 1,568
W-1: Additions to property, plant and equipment

Rs in million
Closing balance 3,678
Opening balance 4,173
Transfer-in on acquisition of FL (W-7) 605
Exchange gain relating to FL’s PPE (122–13–36–16) 57
Transfer-out on disposal of SL (1,300)
Carrying value of PPE disposed of (170+250) (420)

Depreciation (480)
(2,635)
Additions 1,043
W-2: Impairment of Goodwill

Rs in million
Opening balance 639
Goodwill on acquisition of FL (W-7) 179
Exchange gain on FL’s goodwill (W-8) 16
Goodwill de-recognised on disposal of SL (200)
634
Closing Balance (569)
Impairment of Goodwill 65
W-3: Dividend from associate AL

Rs in million
Cost of acquisition of associate 600
Share of profit (800×6/12×40%) 160
Unrealised profit on inter-co inventory (400×30%×25%×40%) (12)
748
Closing Balance (670)
Dividend from associate 78
W-4: (Increase)/Decrease in working capital

Rs in million
Opening balance (1050+823-1630) 243
Working capital of subsidiary FL (W-7) 385
Exchange gain on working capital of FL 36
Working capital pertaining to SL disposed of during the year 150
814
Closing Balance (1950+957-912) (1,995)
Receivable for property, plant & equipment disposed off 230
(1,765)
951
W-5: Other group reserves/Profit attributable to parent

Rs in million
Closing Balance 3,519
Opening balance 2,451
Equity adjustment on sale of 30% shareholdings in WL (450–300) 150
Exchange gain - attributable to parent [122–21.2(W-6)] 100.8
2,701.8
Profit attributable to parent 817.2
W-6: Non-controlling interest/Profit attributable to NCI

Rs in million
Closing Balance 1,638
Opening balance 874
NCI share of 30% in subsidiary WL (1000*30%) 300
NCI share of 20% in subsidiary FL (W-7) 220
Share of exchange gain on translation of operation – FL (106×20%) 21.2

(1,415.2)
Profit attributable to NCI 222.8
W-7: Goodwill - FL
USD in Rate Rs in
million million
Purchase Consideration:
- Cash 4.5 110 495
- Shares at market value (15×25/110) 3.41 110 375
- Deferred consideration payable after 1.714 110 189
two year (2/(1.08)2
9.624 1,059
NCI (10×20%) 2 110 220
Fair value of net assets:
- Property, plant & equipment 5.5 110 605
- Working Capital 3.5 110 385
- Cash 1 110 110
(10) (1,100)
FL - Goodwill at the date of acquisition 1.624 179
W-8: Exchange gain reserve – FL

Rs in million
Exchange gain on FL goodwill (W-7) 179/110×(120–110) 16
Exchange gain on translation of FL operations:
- Net assets at year-end date rate (10+1.5)×120 1,380
- Net assets on acquisition date rate 10×110 (1,100)
- Profit for the year at average rate 1.5×116 (174)
106
122
6. Share based payment (Comprehensive Logic) - Financial Reporting Standards
Query One
Amounts recorded in respect of share options in CL’s financial statements:
Year No. of No. of Fair value per Period Equity Expense
executives share option balance for the
options (Rs.) at year- year
end
2014 39 (47-8) × 4,000 × 600 × 1/3 = 31.20 31.20
2015 40 (44-4) × - × 600 × 2/3 = - (31.20)
2016 43 × 6,000 × 600 × 3/3 = 154.80 154.80
41 (43-2) × 6,000 × 130 (710-580) × 1/2 = 15.99 15.99
170.79 170.79
43 × 6,000 × 600 × 3/3 = 154.80 -
2017 42 × 6,000 × 130 (710-580) × 2/2 = 31.76 16.77
187.56 16.77
Explanation of basis of calculation:

Service condition/No. of executives:
Service condition shall be taken into account by adjusting the number of share options based on
expected number of executives that would remain in service till the vesting date at each year end.

Performance condition/No. of share options:

Performance condition other than market condition shall be taken into account by adjusting the
number of equity instruments included in the measurement of the transaction amount at each year
end. In this respect, number of options are based on expected average annual gross profit during the
vesting period as worked-out below:
Year Average gross profit for vesting period No. of Options
2014 (940×3÷3) = 940 4,000
2015 (940+820×2) ÷ 3 = 860 Nil
2016 (940+820+1,270) ÷3= 1,010 6,000
2017 (940+820+1,270+1,200) ÷4=1,058 6,000
Market condition/Fair value per option:

Market conditions are only taken into account when estimating the fair value of the share options
at the measurement date.
CL should recognize an expense irrespective of whether market conditions are satisfied at year end
provided all other vesting conditions are satisfied.
Vesting period:
The expense is spread over the vesting period. At the grant date the vesting period was three years
which was subsequently revised to four years on 1 January 2016.
Query Two
2015
Total expected expense (at end of 2016)
1,000 SARs x Rs. 110 x 405 (500 – 42 – 28 – 25) Rs. 44,550,000
Fraction of vesting period by the year end 2/3
Liability to be recognised by the year end Rs. 29,700,000
Less opening liability:
Total expected expense (at end of 2015)
1,000 SARs x Rs. 90 x 383 (500 – 42 – 75) Rs. 34,470,000
Fraction of vesting period by the year end 1/3
Liability recognised by the end of 2015 Rs. 11,490,000
To be recognised in 2016 Rs. 18,210,000
Entry in 2016:
Dr Statement of profit or loss – staff costs Rs. 18,210,000
Cr Liability Rs. 18,210,000
7. Employee Benefits (Comprehensive Logic with Numerical) - Financial Reporting Standards
a. As per NAS 19 Employee Benefits:
(i) Defined benefit pension scheme:

The employees of a defined benefit scheme will be guaranteed a pension based on their final salary
and their number of years of service. Accordingly, the higher paid the employee is on retirement
and the longer the length of service:
- the greater the employee’s pension entitlement and
- the greater the liability of the pension fund.

An actuary will advise the company of the cash contributions to be paid into the plan each year in
order to provide the promised pensions. This is a complicated calculation involving many estimates
such as employee mortality, future increases in salary and expected future investment returns.
The employer has an open-ended liability to make additional contributions should there be a deficit
in the defined benefit pension fund. A deficit may arise, for example, if salary levels rise more than
expected or staff turnover reduces, increasing service years.
It will be necessary for the actuary to regularly re-value the pension fund’s assets and liabilities to
assess the surplus or deficit position and revise the company’s contributions.
(ii) The basis to be adopted in measuring scheme assets:

Assets should be measured at their fair value. For quoted securities, for example, this means their
market price.
(iii) The basis to be adopted in measuring scheme liabilities:

Liabilities should be measured on an actuarial basis (i.e. discounted cash flow), using the projected
unit method.
The projected unit method is an accrued benefits valuation method in which the scheme’s liabilities
reflect projected future earnings. To derive the scheme liabilities, the expected future pension
payments should be discounted at a rate that reflects the time value of money, for example, using
an AA (high quality) corporate bond rate.
(iv) Actuarial gains and losses:

Actuarial gains and losses are deficits or surpluses that arise because:
• events have not coincided with the actuarial assumptions made at the last valuation (experience
gains and losses) or
• the actuarial assumptions have changed.
For example, if the actuary forecast that investment returns were going to be 7% in a year, but in
fact the return actually achieved was only 5%, this would give rise to an actuarial deficit.
b. In the books of Universal Solutions

Statement of financial position – extract
Year 3 Year 4
Defined benefit net liability 200 300
Journal Entries:
Dr. Cr.
P&L:
Interest Cost 10
Current Service Cost 100
110
OCI 130
Cash 140
Defined benefit met liability 100
Workings:
Pension Fund Company Position
Liabilities Assets SFP
Rs. Rs. Rs.
Opening balance 1 Jan 20X4 (1,200) 1,000 (200)
Interest cost (5%) (60) 50 (10)
Current service cost (100) - (100)

Contributions to the pension fund - 140 140

Benefits paid out 95 (95) -
Amounts recorded by company (1,265) 1,095 (170)
Actuarial difference (balance) (135) 5 (130)
Closing balance 31 Dec Year 4 (1,400) 1,100 (300)
8. (Simple Logical) - Financial Reporting Standards
(a) Purchase of machine

The cost of purchasing the machine from the foreign supplier (20 million francs) will initially be
recognized in the financial statements using the rate of exchange at the date of delivery (10 francs
to $1). Therefore $2 million (20 million/10) will be included in Epsilon’s property, plant and
equipment (PPE).
PPE is a non-monetary item, so even though the exchange rate (francs to the $) fluctuates during
the accounting period, this will cause no change to the $2 million carrying amount.
The liability to pay the supplier will initially be recognized at $2 million (the $ cost of the machine).
The part payment of the liability on 31 July 2018 will be recorded using the rate of exchange on
that date. Therefore $1,400,000 (12,600,000/9) will be credited to cash and debited to the liability.
The closing liability is a monetary item, so on 30 September 2018 it needs to be re-measured using
the rate of exchange in force at that date.
The amount of the closing liability in $ is $925,000 (7·4 million /8). This will be shown as a current
liability.
Due to the strengthening of the franc against the $, there will be an exchange loss on the
re‑measurement of the liability which must be recognized in the statement of profit or loss. The
amount of the exchange loss is $325,000 ($925,000 – ($2,000,000 – $1,400,000)).
The $250,000 cost of installing the machine is a directly attributable cost of getting the machine
ready for use and this amount will be added to the cost of PPE.
The costs of $200,000 incurred in training staff to use the machine are revenue items and cannot be
included in the cost of PPE. These must be charged in the statement of profit or loss as an expense.
(b) Decommissioning
Epsilon has a legal obligation to dispose of the machine safely at the end of its useful life. This
obligation is reliably measurable and so it must be recognized as a provision on 1 April 2018. The
provision is recognized at the present value of the estimated future expenditure of 3 million francs
(3 million x 0·681 = 2,043,000 francs).
The provision is added to the cost of the asset using the rate of exchange on 1 April 2018 (10 francs
to $1). Therefore $204,300 (2,043,000/10) is added to the cost of PPE.
As the date for payment of the disposal costs draws closer the provision increases. This ‘unwinding
of the discount’ is shown as a finance cost in the statement of profit or loss.
The finance cost in francs is 81,720 (2,043,000 x 8% x 6/12). This will be translated into $ using
the average rate for the period from 1 April 2018 to 30 September 2018 (9·2 francs to $1). Therefore
the charge to the statement of profit or loss for the finance cost will be $8,883 (81,720/9·2). The
closing provision for decommissioning is a monetary item, so on 30 September 2018 it needs to be
re-measured using the rate of exchange in force at that date.
The provision in francs is 2,124,720 (2,043,000 + 81,720). The $ equivalent of this is $265,590
(2,124,720/8).

The provision will be shown as a non-current liability in the statement of financial position at 30
September 2018. Due to the strengthening of the franc against the $, there will be an exchange loss
on the remeasurement of the provision which must be recognized in the statement of profit or loss.
The amount of the exchange loss is $52,407 ($265,590 – ($204,300 + $8,883)).
(c) Impairment review

The total initial cost of the machine will be $2,454,300 ($2 million + $250,000 + $204,300).
The machine will be depreciated from 1 April 2018 over its five-year useful life, so the depreciation
charge for the year ended 30 September 2018 will be $245,430 ($2,454,300 x 1/5 x 6/12). The
closing carrying amount of the machine in PPE will be $2,208,870 ($2,454,300 – $245,430).
This will be shown as a non-current asset in the statement of financial position at 30 September
2018.
The difficult trading conditions experienced by Epsilon in the final few months of the financial year
is an indicator that the machine could have suffered impairment. Therefore, a review is required.
However, since the recoverable amount ($2·5 million) of the machine is higher than its carrying
amount, no impairment loss needs to be recorded.
9. Income Taxes (Tax expenses and Deferred Tax – Simple Numerical) - Financial Reporting
Standards
Assets: Carrying amount Tax base Temp difference

Property, plant, and equipment 10,000 2,400 (7,600)
Goodwill 6,000 6,000 -
Other intangible assets 5,000 - (5,000)
Financial assets (cost) 10,500 9,000 (1,500)
Trade receivables 7,000 7,500 500
Other receivables 4,600 5,000 400
Cash and cash equivalents
6,700 6,700 -
Sub Total (13,200)
Liabilities
Long term borrowings 9,600 10,000 (400)
Employee benefit liability 4,000 5,000 (1,000)
Current tax liability 3,070 3,070 -
Trade and other payables 5,000 4,000 1,000
Sub Total (400)
Total (13,600)
Deferred tax expense @ 30% (4,080.00)
Less existing liability (3600)
Charged to P & L (480.00)
10. The agreed Actions under the Nepal Portfolio Performance Review (NPPR )14 Action Plan
2010 are mentioned as under: (Theory)
1. Develop and adopt effective selection criteria for deploying accounting staff in development
projects.
2. Develop transparent placement and transfer criteria of accounts staff in development projects.

3. Provide connectivity to FCGO’s FMIS system for selected development projects (selected
programs/projects Education SWAp, Health SWAp, Road Sector Development Project,
LGCDP, Nepal Peace Trust, RRRSDP, Melamchi, PAF, Rural Water Supply, Irrigation Water
Resources Management Project) to implement computerized government accounting system
(CGAS) which facilitates effective monitoring and reporting of financial information.
4. Provide basic financial management training (mainly dealing with foreign assisted development
projects) to all accounts staff, and then a refresher training program in an interval of six months.
5. Monitor the accounts staff position in all foreign assisted development projects and ensure that
there are no vacant positions.
6. Develop Performance Based Reward System for Finance Staff working in foreign aided
development projects based on certain result indicators to recognize the contribution of Finance
Staff.
7. Discontinue the system of allowing four months grace period to fiscal year for 12 remote
districts which is having serious impacts in the financial management system.
8. Make an arrangement to involve FCGO in making decisions on accounts staff related to
creating new positions, upgrading or canceling the positions.
9. FCGO representative to be mandatorily included in discussions during project preparation,
appraisal and negotiations.
10. Issue the revised guidelines regarding Conditional Grants in line with the budget spirit.
11. Form a working group in each line ministry headed by the Planning Chief to internalize the
MTEF into the line ministry.
12. All line ministries to be mandated to prepare sectoral MTEF prior to preparation of annual
budget.
13. Develop MTEF software and Manual.
14. Provide basic financial management and auditing training (mainly dealing with foreign assisted
development projects) to all audit staff, and then a refresher training programs.
15. Develop Risk-based Financial Audit Manual, and pilot in selected foreign aided development
projects, and then finalize the Manual.
16. Review and update the existing Performance Audit Guidelines.
11. Define following terms with respect to Public Financial Management: (Theory)
a. Treasury Single Account (TSA)
The Treasury Single Account (TSA) system is a unified structure of government bank accounts
that gives a consolidated view of government cash resources. In Nepal, the TSA has been rolled
out in all 75 districts a year ahead of the planned schedule, a process which takes several years
in most countries. This means processing budget expenditures, which previously would take
hours, even days, has now shortened to simply a few minutes.
Alongside improved management of idle cash balances, this complete rollout has helped
centralize payments at DTCOs. Once the TSA regime is fully operationalized, most of the
responsibilities related to payment services,management of bank accounts and government
accounting and reporting will be shifted from the Nepal Rastra Bank (NRB), banks and the
spending units to the DTCOs. The available accurate real-time or prompt information will be
useful for cash forecasting, cash management, working on the better debt management; and just
in time release of funds for the budget execution. Besides, the DTCO’s will have the accurate
and authentic information on the expenditure, revenue and deposit accounts of the spending
units on a day to day basis.
b. PEFA Assessment
The Public expenditure and Financial Accountability (PEFA) framework is an internationally
approved tool to measure performance in PFM using standard indicators. It provides the
foundation for evidence-based measurement of countries’ PFM systems. In Nepal, the PEFA
assessment has been carried out twice by the government with support from the World Bank.

With the completion of the second PEFA assessment, which has shown progress in 61% of
per4formance indicators from 2010 to 2015, the government has developed a new PFM reform
action plan that adopts a holistic approach to PFM reforms encompassing both institutional and
technical aspects. It has been approved by the National PEFA Steering Committee in March
2016.
c. NPSAS
GON is committed to implement Nepal Public Sector Accounting Standard (NPSAS), in line
with cash based International Public Sector Accounting Standard (IPSAS). On 5th September
2009, the government also approved NPSAS to be used for use in public entities; as
recommended and pronounced by the Accounting Standards Board of Nepal. It is expected that
the Financial Comptroller General Office is gearing to start its financial statements in NPSAS
format from financial year 2012-2013. The actual implementation will have to be seen on
ground.
12. Related Parties (Simple Logical) - - Financial Reporting Standards
a. Define:
• Related Party:
A party is related to an entity if it either:
 controls, is controlled by, or is under common control with, the entity
 has an interest in the entity that gives a significant influence over the entity
 has joint control over the entity
 is an associate
 is a joint venture in which the entity is a venturer
 is a member of the key management personnel of the entity or its parent
 is a close family member of any of the above
 is a post-employment benefit plan for the employees of the entity or of any entity that
is a related party of the entity
• Key Management Personnel:

Those persons having authority and responsibility for planning, directing and controlling the
activities of the entity, directly or indirectly, including any director of that entity.
b. Disclosure of transactions and balances generally:

Relationships between parents and subsidiaries shall be disclosed irrespective of whether there
have been transactions between those related parties.
 Name of entity’s parent and;
 If different the ultimate controlling party
If there have been transactions between related parties, an entity should disclose the nature of
the related party relationships as well as information about the types of transactions and the
outstanding balances necessary for an understanding of the financial statements. Disclosure
should be made irrespective of whether a price is charged.
At a minimum the disclosure should include:

 The amount of the transactions
 The amount of outstanding balances, including terms and conditions, whether they are
secured and the nature of the consideration to be provided
 Provisions for doubtful debts based on the amount outstanding
 The expense recognised during the period in relation to bad and doubtful debts

13. Foreign Exchange (Numerical) - Financial Reporting Standards
Kangaroo Ltd.
Statement of Financial Position
As on 31 December 2017
Assets Rs in million
Investment property (W-1) 290
Investments (105 + 130) (W-2) 235
Liabilities
Unearned rent (0.24 × 8 ÷12 × 110) 17.60
Statement of comprehensive income

For the year ended 31 December 2017
Profit & Loss Account Rs in million
Exchange loss on 20% payment (2.6 × 20% × (105 – 108) (1.56)
Increase in fair value of investment property (W-1) 18.30
Rent income (0.24 × 4÷12 × 110) 8.80
Transaction cost – Investment-A (2)
Dividend income (12 + 9) 21
Realised gain on investment-A [(23 × 0.98 – (100 × 20%)] 2.54
Unrealised Gain – Investment-A (W-2) 25
Other Comprehensive Income

Unrealized gain- Investment-B (W-2) 22.90
Realised gain on investment-B [(50 × 0.98 – (153 × 0.3)] 3.10
W-1: Investment property

Rs. in million
Advance payment (2.6 × 10% × 100) 26.00
Initial recognition (2.6 × 70% × 105) 191.10
(2.6 × 20% × 105) 54.60
Total cost 271.70
Fair value (2.5 × 116) 290.00
Gain (P & L) 18.30
W-2: Investments
Assets Investment A Investment B
Rs in million
Purchase price 100 150
Transaction cost - 3
Total cost 100 153
Cost of shares held at 31 Dec 2017 (100×80%) 80.00 (153×70%) 107.10
Fair value - 31 Dec 2017 105 130
Gain 25 22.90
14. Inventories (Simple Numerical) – Financial Reporting Standards
As per NAS 2 ‘Inventories’, inventory is measured at lower of ‘cost’ or ‘net realisable value’.
Further, as per NAS 10: ‘Events after Balance Sheet Date’, decline in net realisable value below
cost provides additional evidence of events occurring at the balance sheet date and hence shall be
considered as ‘adjusting events’.

• In the given case, for valuation of inventory as on 31 March 20X1, cost of inventory would be
10 million and net realisable value would be 7.5 million (i.e. Expected selling price 8 million-
estimated selling expenses ` 0.5 million). Accordingly, inventory shall be measured at 7.5
million i.e. lower of cost and net realisable value. Therefore, inventory write down of 2.5
million would be recorded in income statement of that year.
• As per para 33 of NAS 2, a new assessment is made of net realizable value in each subsequent
period. It Inter alia states that if there is increase in net realizable value because of changed
economic circumstances, the amount of write down is reversed so that new carrying amount is
the lower of the cost and the revised net realizable value. Accordingly, as at 31 March 20X2,
again inventory would be valued at cost or net realisable value whichever is lower. In the
present case, cost is 1 million and net realisable value would be 10. 5 million (i.e. expected
selling price 11 million – estimated selling expense 0.5 million). Accordingly, inventory would
be recorded at 10 million and inventory write down carried out in previous year for 2.5 million
shall be reversed.
15. Conceptual - Financial Reporting Standards
As per para 67 of NAS 1 “Presentation of Financial Statements”, Some borrowing agreements

incorporate undertakings by the borrower (covenants) which have the effect that the liability
becomes payable on demand if certain conditions related to the borrower’s financial position are
breached. In these circumstances, the liability is classified as non – current only when:
a. The lender has agreed, prior to the approval of the financial statements, not to demand payment
as a consequence of the breach; and
b. It is not probable that further breaches will occur within twelve months of the balance sheet
date.
In the given case, Company B (the lender) agreed for not to demand payment but only after the
financial statements were approved for issuance. The financial statements were approved for
issuance in the month of June 20X2 and both companies agreed for not to demand payment in the
month of July 20X2 although negotiation started in the month of May 20x2 but could not agree
before June 20X2 when financial statements were approved for issuance.
Hence, the liability should be classified as current in the financial statement for the year ended
March 31, 20X2.
16. Value Added Statement (Simple Numerical)
Samriddhi Ltd.
Value Added Statement for the year ended 31st March, 20XI
(in Rs.‘000)
Sales 2,380
Less: Cost of Bought in Materials and Services:
Operational Cost ` (1,220 + 235) 1,455
Administrative Expenses ` (25+8+62) 95
Interest cost 35 (1,585)
Value addition by manufacturing and trading activities 795
Add: Other Income 370
Gross Value Added 1,165

Application of Gross Value Added

(Rs in ‘000) (Rs in ‘000) %
To Pay Employees:
Wages/ Salaries to Administrative Staff 330 0.28
To Pay Directors:
Directors’ Remuneration 55 0.05
To Pay Government:
Local taxes including cess 70
Provision for tax 87 157 0.14
To Pay Providers of Capital
Interest on Debentures 180 0.15
To Provide for Maintenance:
Depreciation 240
Retained Profit 203 443 0.38
1,165 1.00
Ratios:
(a) Gross Value Added to Material Cost Ratio =Gross Value Added ÷Material cost
= 1165 ÷ 1220
= 0.95
Higher GVA ratio of Samriddhi Ltd. in comparison to Industry shows that it has better material
utilisation policy than industry’s material utilisation policy.
(b) Gross Value Added to Employee Cost Ratio =Gross Value Added ÷ Employee Cost
= 1165÷ 330
= 3.53
Higher GVA ratio of Industry in comparison to Samriddhi Ltd. shows that Industry’s labour
productivity or policy is better than Samriddhi Ltd.’s labour productivity or policy.
(c) Gross Value Added to Sales Ratio =Gross Value Added÷ Sales
= 1165÷ 2380
= 0.49
Higher GVA ratio of Industry in comparison to Samriddhi Ltd. shows that Industry’s sales policy
is better than Samriddhi Ltd.’s sales policy.
(d) Gross Value Added to Capital Employed Ratio = Gross Value Added÷ (Equity share capital
+ Preference share capital + Retained Earnings)
=1165÷ (1500+600+263)
= 0.49
Higher GVA ratio of Samriddhi Ltd. in comparison to Industry shows that managerial efficiency
of Samriddhi Ltd. is better than Industry. Samriddhi Ltd. is able to efficiently utilise its capital in
the generation of profit and in addition of value to its organisation.
17. Financial Instruments (Concept) - Financial Reporting Standards

Investment in LL:
Initial measurement
According to NFRS 9, at initial recognition, RIL may make irrevocable election to present
subsequent changes in fair value in equity investment in other comprehensive income instead
of profit or loss account.
If SIL opted as above, investment in LL would initially be recognized at fair value plus
transaction costs i.e. Rs. 20 million. However, if SIL opted to measure the investment at fair
value through profit and loss (FVTPL), investment should initially be measured at Rs. 19.96

million (20/1.002) and transaction costs of Rs. 0.04 million (20–19.96) should be charged to
profit and loss account.
Subsequent measurement
On 31 December 2016, if fair value through other comprehensive income has been opted,
investment in LL should be measured at fair value of Rs. 12.4 million and a loss of Rs. 7.6
million [20–12.4(155,000×80)] (instead of Rs. 5 million) should be booked through other
comprehensive income.
According to NFRS 9, amount presented in other comprehensive income shall not be
subsequently transferred to profit or loss. However, the entity may transfer the cumulative gain
/(loss) within equity.
If fair value through profit or loss has been opted, then SIL should account for the loss of Rs.
7.56 million (20–0.04(transaction cost)–12.4) through profit and loss account.
Investment in SL:
Initial measurement
The investment in SL should be recognized as held for trading at fair value of Rs. 64.87 million
(65÷1.002) and transaction cost of Rs. 0.13 million should be charged to profit and loss account.
Subsequent measurement
As at 30 November 2016, the investment should be re-measured to fair value at the market price
of Rs. 83.835 million (135,000×621) and a gain of Rs. 18.965 million (83.835–64.87) shall be
booked in the profit and loss account.
Reclassification of asset
On 30 November 2016 when SIL decided to hold the shares for a longer period, investment in
BL should be reclassified from held for trading to non-trading investment. Further, SIL may
make irrevocable election that investment in SL would be re-measured at fair value through
other comprehensive income, as discussed in the case of LL above. Similarly, treatment on 31
December 2016 would depend on whether SIL opted to re-measure at fair value through OCI
or not.
18. Leases (Simple Numerical) - Financial Reporting Standards

Relevant Extracts:
Statements of profit or loss for the year ended 31 March 2016 (extracts)
Rs.
Depreciation (272,850 ÷ 6) 45,475
Lease payments 6,000*
Finance costs (W) 19,460
* Considering low value item as described in NFRS16
Statement of financial position as at 31 March 2016 (extracts)

Rs.
Non-current assets:
Right of use (272,850 – 45,475) 227,375
Non-current liabilities
Lease liabilities (Note 1) 135,810
Current liabilities
Lease liabilities (Note 1) 78,250
Statement of cash flows for the year ended 31 March 2016 (extracts)
Cash flows from financing activities
Payment of lease liabilities (78,250)

Notes to the financial statements (extracts)

Rs.
Lease liabilities include the following:
Amounts due within
One year 78,250
Two to five years 135,810
214,060
WORKING:
Lease of plant (Amount in Rs.)
B/f Payment Capital Interest @ 10% C/f
2016 272,850 (78250) 194,600 19,460 214,060
2017 214,060 (78250) 135,810
19. Intangible Assets (Conceptual) - Financial Reporting Standards
Since a part of the payment for the license has been deferred beyond normal credit terms so the
license will be initially recognised at cash price equivalent of Rs. 80 million i.e. Rs. 50 million plus
Rs. 30 million (i.e. present value of Rs. 36.3 million discounted at 10% for 2 years.)
The advertisement cost of Rs. 10 million incurred on launching of the channel cannot be included
in the cost of the license and will be charged to Profit and loss account.
Since the renewal cost is significant so the useful life of the license will be restricted to the original
5 years only.
The residual value of the license will be assumed to be zero since there is no active market for the
license and there is no commitment by 3rd party to purchase the license at the end of useful life.
The amortization for the year will be Rs. 12 million [(80 – 0) × 1/5 ×9/12] calculated from 1 April
2017 when the license was available for use:
Unwinding of interest expense of Rs. 2.25 million (30 × 10% × 9/12) shall be recorded with
increasing the liability of payable for license with same amount.
20. Provisions, Contingent Assets and Contingent Liabilities (Conceptual) - Financial Reporting
Standards
As per provisions stated in NAS 37:

NAS 37 states that in order for a provision to be recognised, an obligation needs to exist at the
reporting date which can be measured reliably.
The costs of both phases of the redundancy programme have been either estimated or calculated,
so for both phases the potential obligation can be measured reliably.
The reason for the different treatments of the two phases is due to whether or not an obligation
exists at the reporting date.
An obligation can be legal or constructive; in this case the redundancy programme was determined
internally by the company so the obligation is not a legal one.
In the case of phase 1 of the programme, a constructive obligation does exist at the reporting date
because the details have been announced to those affected by it, giving them a valid expectation
that it will be carried through. Therefore NAS 37 requires a provision for the costs to be included
in the financial statements. As no such obligation exists for phase 2 at the reporting date, since the
announcement had not been made at that time, neither a provision nor disclosure of a contingent
liability is required.

Paper 2: Advanced Financial Management

Revision Questions:
CHAPTER: FINANCIAL INTERMEDIARIES
Question No. 1
Write short note on:
i. Stock Lending Scheme.

ii. Book Building
CHAPTER: THE FINANCIAL SYSTEM
Question No. 2
Discuss about regulation of Nepalese Financial Market.
CHAPTER: CAPITAL MARKET
Question No. 3
Describe briefly about Mutual Funds, Pension Funds and their importance:
Question No. 4
What do you know understand by swaptions? Write about the uses of Swaption?
Question No. 5
On 1-4-2012 NIC ASIA Mutual Fund issued 20 lakh units at 10 per unit. Relevant initial
expenses involved were 12 lakhs. It invested the fund so raised in capital market instruments
to build a portfolio of 185 lakhs. During the month of April 2012 it disposed-off some of the
instruments costing 60 lakhs for 63 lakhs and used the proceeds in purchasing securities for 56
lakhs. Fund management expenses for the month of April 2012 were 8 lakhs of which 10%
was in arrears. In April 2012 the fund earned dividends amounting to 2 lakhs and it distributed
80% of the realized earnings. On 30-4-2012 the market value of the portfolio was 198 lakhs.
Mr. Roshan, an investor, subscribed to 100 units on 1-4-2012 and disposed-off the same at
closing NAV on 30-4-2012. What was his annual rate of earning?
CHAPTER: VALUATION OF ASSETS, SHARES AND COMPANIES
Question No. 6
Jagadamba Manufacturing Company is considering a new sales strategy that will be valid for
the next 4 years. They want to know the value of the new strategy. Following information
relating to the year which has just ended, is available:
Income Statement Amount

Sales 20,000
Gross margin (20%) 4,000
Administration, Selling & distribution expense (10%) 2,000
PBT 2,000
Tax (30%) 600
PAT 1,400
Balance Sheet Information
Fixed Assets 8,000
Current Assets 4,000
Equity 12,000
If it adopts the new strategy, sales will grow at the rate of 20% per year for three years. The
gross margin ratio, Assets turnover ratio, the Capital structure and the income tax rate will
remain unchanged.
Depreciation would be at 10% of net fixed assets at the beginning of the year. The Company’s
target rate of return is 15%.
Determine the incremental value due to adoption of the strategy.
Question No. 7
Nerolac Ltd., a market leader in printing industry, is planning to diversify into defense
equipment businesses that have recently been partially opened up by the GON for private
sector. In the meanwhile, the CEO of the company wants to get his company valued by leading
consultants, as he is not satisfied with the current market price of his scrip.
He approached consultant with a request to take up valuation of his company with the
following data for the year ended 2009:
Share Price 66 per share
Outstanding debt 1934 lakh
Number of outstanding shares 75 lakh
Net income (PAT) 17.2 lakh
EBIT 245 lakh
Interest expenses 218.125 lakh
Capital expenditure 234.4 lakh
Depreciation 234.4 lakh
Working capital 44 lakh
Growth rate 8% (from 2010 to 2014)
Growth rate 6% (beyond 2014)
Free cash flow 240.336 lakh (year 2014 onwards)
The capital expenditure is expected to be equally offset by depreciation in future and the debt is

expected to decline by 30% in 2014.

Required:
Estimate the value of the company and ascertain whether the ruling market price is
undervalued as felt by the CEO based on the foregoing data. Assume that the cost of equity is
16%, and 30% of debt repayment is made in the year 2014.
Question No. 8
The following information relating to the acquiring Company Abhiman Ltd. and the target
Company Abhishek Ltd. are available. Both the Companies are promoted by Multinational
Company, Trident Ltd. The promoter’s holding is 50% and 60% respectively in Abhiman Ltd.
and Abhishek Ltd.:
Particulars Abhiman Ltd. Abhishek Ltd.
Share Capital 200 lakh 100 lakh
Free Reserve and Surplus 800 lakh 500 lakh
Paid up Value per share 100 10
Free float Market Capitalisation 400 lakh 128 lakh
P/E Ratio (times) 10 4
Trident Ltd. is interested to do justice to the shareholders of both the Companies. For the swap
ratio weights are assigned to different parameters by the Board of Directors as follows:
Book Value 25%
EPS (Earning per share) 50%
arket Price 25%
(a) What is the swap ratio based on above weights?
(b) What is the Book Value, EPS and expected Market price of Abhiman Ltd. after
acquisition of Abhishek Ltd. (assuming P.E. ratio of Abhiman Ltd. remains unchanged
and all assets and liabilities of Abhishek Ltd. are taken over at book value).
(c) Calculate:
(i) Promoter’s revised holding in the Abhiman Ltd.
(ii) Free float market capitalization.
(iii) Also calculate No. of Shares, Earning per Share (EPS) and Book Value (B.V.), if after
acquisition of Abhishek Ltd., Abhiman Ltd. decided to:
(a) Issue Bonus shares in the ratio of 1: 2; and
(b) Split the stock (share) as 5 each fully paid.

CHAPTER: INVESTMETN DECISIONS AND STRATEGIES
Question No. 9
Describe about Capital Budgeting Process in Risk and Uncertainty.
Question No. 10
Shailung Construction Ltd., an infrastructure company is evaluating a proposal to build, operate

and transfer a section of 35 kms. of road at a project cost of 200 crores to be financed as follows:
Equity Shares Capital 50 crores, loans at the rate of interest of 15% p.a. from financial
institutions 150 crores. The Project after completion will be opened to traffic and a toll will be
collected for a period of 15 years from the vehicles using the road. The company is also required
to maintain the road during the above 15 years and after the completion of that period, it will be
handed over to the Department of Roads at zero value. It is estimated that the toll revenue will be
50 crores per annum and the annual toll collection expenses including maintenance of the roads
will amount to 5% of the project cost. The company considers to write-off the total cost of the
project in 15 years on a straight line basis. For Corporate Income- tax purposes the company is
allowed to take depreciation @ 10% on WDV basis. The financial institutions are agreeable for
the repayment of the loan in 15 equal annual instalments – consisting of principal and interest.
As a financial consultant of the Company, you are required to:
i. Calculate Project IRR and Equity IRR. Ignore corporate taxation.

ii. Explain the difference in Project IRR and Equity IRR
Question No. 11
Hulas Ltd. is considering investing 50,00,000 in a new machine. The expected life of
machine is five years and has no scrap value. It is expected that 2,00,000 units will be
produced and sold each year at a selling price of 30.00 per unit. It is expected that the
variable costs to be 16.50 per unit and fixed costs to be 10,00,000 per year. The cost of
capital of Hulas Ltd. is 12% and acceptable level of risk is 20%.
You are required to measure the sensitivity of the project’s net present value to a change in
the following project variables:
(a) sale price;
(b) sales volume;
(c) variable cost;
(d) On further investigation it is found that there is a significant chance that the expected
sales volume of 2,00,000 units per year will not be achieved. The sales manager of
Hulas Ltd. suggests that sales volumes could depend on expected economic states
which could be assigned the following probabilities:

State of Economy Annual Sales (in Units) Prob.

Poor 1,75000 0·30
Normal 2,00,000 0·60
Good 2,25,000 0·10
Calculate expected net present value of the project and give your decision whether company
should accept the project or not.
Question No. 12
US Pharma Inc., a U.S. based Pharmaceutical Company has received an offer from Aidscure
Ltd., a company engaged in manufacturing of drugs to cure Dengue, to set up a manufacturing
unit in Birgunj, Nepal in a joint venture.
As per the Joint Venture agreement, US Pharma Inc. will receive 55% share of revenues plus a
royalty @ US $0.01 per bottle. The initial investment will be 200 crores for machinery and
factory. The scrap value of machinery and factory is estimated at the end of five (5) year to be 5
crores. The machinery is depreciable @ 20% on the value net of salvage value using Straight
Line Method. An initial working capital to the tune of 50 crores shall be required and thereafter
5 crores each year.
As per GON directions, it is estimated that the price per bottle will be 7.50 and production will
be 24 crores bottles per year. The price in addition to inflation of respective years shall be
increased by 1 each year. The production cost shall be 40% of the revenues.
The applicable tax rate in Nepal is 30% and 35% in US and there is Double Taxation Avoidance
Agreement between Nepal and US. According to the agreement tax credit shall be given in US
for the tax paid in Nepal. In both the countries, taxes shall be paid in the following year in which
profit have arisen.
The Spot rate of $ is 57. The inflation in Nepal is 6% (expected to decrease by 0.50% every
year) and 5% in US.
As per the policy of GON, only 50% of the share can be remitted in the year in which they are
earned and remaining in the following year.
Though WACC of US Pharma Inc. is 13% but due to risky nature of the project it expects a
return of 15%. Determine whether US Pharma Inc. should invest in the project or not (from
subsidiary point of view).
CHAPTER: INTERNATIONAL FINANCIAL MANAGEMENT
Question No. 13
Your bank’s London office has surplus funds to the extent of USD 5,00,000/- for a period of 3
months. The cost of the funds to the bank is 4% p.a. It proposes to invest these funds in
London, New York or Frankfurt and obtain the best yield, without any exchange risk to the

bank. The following rates of interest are available at the three centres for investment of
domestic funds there at for a period of 3 months.
London 5 % p.a.
New York 8% p.a.
Frankfurt 3% p.a.
The market rates in London for US dollars and Euro are as under: London on New York
Spot 1.5350/90
1 month 15/18
2 month 30/35
3 months 80/85
London on Frankfurt
Spot 1.8260/90
1 month 60/55
2 month 95/90
3 month 145/140
At which centre, will be investment be made & what will be the net gain (to the nearest pound)
to the bank on the invested funds?
CHAPTER: PORTFOLIO THEORY AND ASSETS PRICING
Question No. 14
The board of directors of World Portfolio Limited (WPL) wants to have a representation on the
board of directors of a leading company operating in the telecommunication sector. To achieve
this objective, three listed companies have been identified for equity investment. Details of these
potential investments are given below:
Investment Standard Correlation of Correlation of
Expected
Companies Required (In Deviation of Returns with Returns with
Return
Million) Returns NEPSE Index WPL
A 28 19.50% 10.50% 0.65 0.62
B 35 20% 8.30% 0.67 0.81
B 40 22% 8% 0.77 0.95
Annualized returns on NEPSE Index are 15% with a standard deviation of 6.9%. One-year
treasury bills are yielding 6% per annum.
The value of the existing equity investment portfolio of WPL is Rs. 110 million with a beta of
1.25 and standard deviation of 8.6%.
Required:

a. Determine which company you would recommend for investment by WPL.

b. Determine the revised systematic risk and expected return of WPL's equity investment
portfolio after investing in the company identified in part (a) above. Briefly discuss the
impact of revised systematic risk and expected return.
Question No. 15
A study by a Mutual fund has revealed the following data in respect of three securities:
Security σ (%) Correlation with
Index, Pm
A 20 0.60
B 18 0.95
C 12 0.75
The standard deviation of market portfolio (BSE Sensex) is observed to be 15%.
(i) What is the sensitivity of returns of each stock with respect to the market?
(ii) What are the covariances among the various stocks?
(iii) What would be the risk of portfolio consisting of all the three stocks equally?
(iv) What is the beta of the portfolio consisting of equal investment in each stock?
What is the total, systematic and unsystematic risk of the portfolio in (iv)?
CHAPTER: FOREIGN EXCHANGE MANAGEMENT
Question No. 16
Allare Ltd. and Bekare Ltd. intend to borrow $200,000 and $200,000 in ¥ respectively for a
time horizon of one year. The prevalent interest rates are as follows:
Company ¥ Loan $ Loan
Allare Ltd. 5% 9%
Bekare Ltd. 8% 10%
The prevalent exchange rate is $1 = ¥120.
They entered in a currency swap under which it is agreed that Bekare Ltd. will pay Allare Ltd.
@ 1% over the ¥ Loan interest rate which the later will have to pay as a result of the agreed
currency swap whereas Allare Ltd. will reimburse interest to Bekare Ltd. only to the extent of
9%. Keeping the exchange rate invariant, quantify the opportunity gain or loss component of
the ultimate outcome, resulting from the designed currency swap.

Question No. 17
Zaz plc, a UK Company is in the process of negotiating an order amounting €2.8 million with a
large German retailer on 6 month’s credit. If successful, this will be first time for Zaz has
exported goods into the highly competitive German Market. The Zaz is considering following
3 alternatives for managing the transaction risk before the order is finalized.
(a) Mr. Peter the Marketing head has suggested that in order to remove transaction risk
completely Zaz should invoice the German firm in Sterling using the current €/£ average
spot rate to calculate the invoice amount.
(b) Mr. Wilson, CE is doubtful about Mr. Peter’s proposal and suggested an alternative of
invoicing the German firm in € and using a forward exchange contract to hedge the
transaction risk.
(c) Ms. Karen, CFO is agreed with the proposal of Mr. Wilson to invoice the German first in
€, but she is of opinion that Zaz should use sufficient 6 month sterling further contracts (to
the nearest whole number) to hedge the transaction risk.
Following data is available
Spot Rate € 1.1960 - €1.1970/£
6 months forward points 0.60 – 0.55 Euro Cents.
6 month further contract is currently € 1.1943/£
trading at
6 month future contract size is £62,500
After 6 month Spot rate and future rate € 1.1873/£
You are required to :
i. Calculate (to the nearest £) the £ receipt for Zaz plc, under each of 3 above proposals.
ii. In your opinion which alternative you consider to be most appropriate.
Question No. 18
Mr. Thapa has to remit USD $1,00,000 for his son’s education on 4 th April 2018. Accordingly,
he has booked a forward contract with his bank on 4 th January @ 63.8775. The Bank has
covered its position in the market @ 63.7575.
The exchange rates for USD $ in the interbank market on 4th April and 14th April were:
4th April ` 14th April `

Spot USD 1= 63.2775/63.2975 63.1575/63.1975
Spot/April* 63.3975/63.4275 63.2775/63.3275
May 63.5275/63.5675 63.4075/63.7650

June 63.7775/63.8250 63.6575/63.7275

July 64.0700/64.1325 63.9575/64.0675
Exchange margin of 0.10 percent and interest outlay of funds @ 12 percent are applicable. The
remitter, due to rescheduling of the semester, has requested on 14 thApril 2018 for extension of
contract with due date on 14thJune 2018.
Rates must be rounded to 4 decimal place in multiples of 0.0025.
Calculate:
(i) Cancellation Rate;

(ii) Amount Payable on $ 100,000;
(iii) Swap loss;
(iv) Interest on outlay of funds, if any;
(v) New Contract Rate; and Total Cost
CHAPTER: EMERGING CONCEPT OF FINANCING
Write short notes on
Question No. 19
Write Short Notes on Straddles and Strangles.
CHAPTER: FOREIGN DIRECT INVESTMENT
Question No. 20
Distinguish between Forfeiting and Factoring.

Answers/Hints:
CHAPTER: FINANCIAL INTERMEDIARIES
Question No. 1
i. Stock Lending Scheme.
Answer
In ‘stock lending’, the legal title of a security is temporarily transferred from a lender to a
borrower. The lender retains all the benefits of ownership, other than the voting rights. The
borrower is entitled to utilize the securities as required but is liable to the lender for all
benefits.
A securities lending programme is used by the lenders to maximize yields on their portfolio.
Borrowers use the securities lending programme to avoid settlement failures.
Securities lending provide income opportunities for security-holders and creates liquidity to
facilitate trading strategies for borrowers. It is particularly attractive for large institutional
shareholders as it is an easy way of generating income to offset custody fees and requires
little involvement of time. It facilitates timely settlement, increases the settlements, reduces
market volatility and improves liquidity.
The borrower deposits collateral securities with the approved intermediary. In case the
borrower fails to return the securities, s/he will be declared a defaulter and the approved
intermediary will liquidate the collateral deposited with it. In the event of default, the
approved intermediary is liable for making good the loss caused to the lender. The borrower
cannot discharge his liabilities of returning the equivalent securities through payment in
cash or kind.
ii. Book Building
Answer
Book building is a technique used for marketing a public offer of equity shares of a
company. It is a way of raising more funds from the market.
A company can use the process of book building to fine tune its price of issue. When a
company employs book building mechanism, it does not pre-determine the issue price (in
case of equity shares) or interest rate (in case of debentures) and invite subscription to the
issue. Instead it starts with an indicative price band (or interest band) which is determined
through consultative process with its merchant banker and asks its merchant banker to
invite bids from prospective investors at different prices (or different rates). Those who bid
are required to pay the full amount. Based on the response received from investors the final

price is selected. The merchant banker (called in this case Book Runner) has to manage the
entire book building process. Investors who have bid a price equal to or more than the final
price selected are given allotment at the final price selected. Those who have bid for a
lower price will get their money refunded.
In India, there are two options for book building process. One, 25 per cent of the issue has
to be sold at fixed price and 75 per cent is through book building. The other option is to
split 25 per cent of offer to the public (small investors) into a fixed price portion of 10 per
cent and a reservation in the book built portion amounting to 15 per cent of the issue size.
The rest of the book-built portion is open to any investor.
The greatest advantage of the book building process is that this allows for price and demand
discovery. Secondly, the cost of issue is much less than the other traditional methods of
raising capital. In book building, the demand for shares is known before the issue closes. In
fact, if there is not much demand the issue may be deferred and can be rescheduled after
having realised the temper of the market.
In Nepal, Dish Media Ltd. is planning to go for public offering using book building method
for the first time.
CHAPTER: THE FINANCIAL SYSTEM
Question No. 2
Financial system refers to the system of economy which transfers funds from units having excess
funds to units having deficit of funds. Many units in economy may have excess funds and many
other units may be requiring additional funds. This gap in an economy is bridged by financial
system. Financial intermediaries like banks and financial markets like stock and bond markets
are major parts of financial system.
As financial system is an essential part of economy, regulation of financial system is also

important issue. Irregularities that can incur in financial system can cause major damage in an
economy that is why financial system should be regulated by government bodies. In Nepal also
financial system is regulated by various government authorities. Banks and Financial Institutions
are closely regulated and monitored by Nepal Rastra Bank (NRB). NRB regulates entire
financial intermediaries of the country. Similarly, Insurance Companies are regulated by
Insurance Board. Financial markets and securities trading in country are regulated by Securites
Board of Nepal (SEBON). SEBON regulates primary as well as secondary security markets and
security market participants like merchant banks, mutual funds, brokers, market makers, etc.
Similarly, policy level regulation of financial system like formulation of broader policies,
frameworks and planning is done by government through ministry of finance. Government is
shall be the ultimate responsible person for regulation of financial market.

CHAPTER: CAPITAL MARKET
Question No. 3
a. Pension Funds and their importance

Pension funds are investment pools that pay for employee retirement commitments. Funds are
paid for by either employees, employers, or both. This collected funds are pooled by pension
funds and invested to generate returns. Pension funds act as financial intermediaries in financial
system because they collect funds from those who have excess funds to those who are in need of
funds. They collect funds from contributories and provide funds to borrowers like banks, various
projects, etc.
Importance of Pension Funds:
i. They encourage savings from contributories.

ii. They provide large amount of investible funds for borrowers which are in need of funds.
iii. They provide tax benefits to contributories.
b. Mutual Funds and their importance
A mutual fund is a type of financial vehicle made up of a pool of money collected from many
investors to invest in securities such as stocks, bonds, money market instruments, and other
assets. Mutual funds are operated by professional money managers, who allocate the fund's
assets and attempt to produce capital gains or income for the fund's investors. A mutual fund's
portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Mutual funds pool money from the investing public and use that money to buy other securities,
usually stocks and bonds. The value of the mutual fund company depends on the performance of
the securities it decides to buy. So, when you buy a unit or share of a mutual fund, you are
buying the performance of its portfolio or more precisely, a part of the portfolio's value.
Investing in a share of a mutual fund is different from investing in shares of stock. Unlike stock,
mutual fund shares do not give its holders any voting rights. A share of a mutual fund represents
investments in many different stocks (or other securities) instead of just one holding. That's why
the price of a mutual fund share is referred to as the net asset value (NAV) per share. A fund's
NAV is derived by dividing the total value of the securities in the portfolio by the total amount of
shares outstanding.
Generally, there are two types of mutual funds, Closed End Mutual Funds and Open End Mutual
Funds. Closed end mutual funds are those in which units are issued for one time and further issue
and buy back of units is not done. Whereas, in case of Open end mutual fund once units are
issued, further issuance of units and buy back can also be done.
Following are some of the importance of mutual funds:

i. Mutual funds act as financial intermediaries which pool funds from people having
excess funds to people having deficit funds.
ii. They provide small investors opportunities to participate in professionally managed
funds.
iii. They provide risk diversification through investment in variety of securities.
iv. Lower transaction and other costs
v. Operation and management of funds is regulated by regulators.
Question No. 4
Answer
Swaptions are combination of the features of two derivative instruments, i.e., option and
swap. A swaption is an option on an interest rate swap. It gives the buyer of the swaption
the right but not obligation to enter into an interest rate swap of specified parameters
(maturity of the option, notional principal, strike rate, and period of swap). Swaptions are
traded over the counter, for both short and long maturity expiry dates, and for wide range of
swap maturities. The price of a swaption depends on the strike rate, maturity of the option,
and expectations about the future volatility of swap rates. The swaption premium is
expressed as basis points
Uses of swaptions:
(a) Swaptions can be used as an effective tool to swap into or out of fixed rate or floating
rate interest obligations, according to a treasurer’s expectation on interest rates.
Swaptions can also be used for protection if a particular view on the future direction of
interest rates turned out to be incorrect.
(b) Swaptions can be applied in a variety of ways for both active traders as well as for
corporate treasures. Swap traders can use them for speculation purposes or to hedge a
portion of their swap books. It is a valuable tool when a borrower has decided to do a
swap but is not sure of the timing.
(c) Swaptions have become useful tools for hedging embedded option which is common in
the natural course of many businesses.
(d) Swaptions are useful for borrowers targeting an acceptable borrowing rate. By paying an
upfront premium, a holder of a payer’s swaption can guarantee to pay a maximum fixed
rate on a swap, thereby hedging his floating rate borrowings.
(e) Swaptions are also useful to those businesses tendering for contracts. A business, would
certainly find it useful to bid on a project with full knowledge of the borrowing rate
should the contract be won.

Question No. 5
Answer:
(i) Returns for the year

(All changes on a Per -Unit Basis)
Change in Price: 48 – 45 = 3
Dividends received:
Capital gains distribution 2
Total reward 6
Holding period reward: = 6 / 45 x 100 = 13.33%

(ii) When all dividends and capital gains distributions are re-invested into
additional units of the fund @ ( 46/unit)
Dividend + Capital Gains per unit = 1.00 + 2.00 = 3.00
Total received from 200 units = 3.00 x 200 = 600/-.
Additional Units Acquired = 600/ 46 = 13.04 Units.

Total No. of Units = 200 units + 13.04 units = 213.04 units.
Value of 213.04 units held at the end = 213.04 units x 48 = 10225.92 of the
year
Price Paid for 200 Units at the beginning = 200 units x 45 = 9000.00 of the
year
Holding Period Reward = 1225.92
(10225.92 – 9000.00)
Holding Period Reward = 1225.92 / 9000 x 100 = 13.62%
CHAPTER: VALUATION OF ASSETS, SHARES AND COMPANIES
Question No. 6
Answer:
Projected Balance Sheet Year 1 Year 2 Year 3 Year 4

Fixed Assets (40% of Sales) 9,600 11,520 13,824 13,824
Current Assets (20% of Sales) 4,800 5,760 6,912 6,912
Total Assets 14,400 17,280 20,736 20,736
Equity 14,400 17,280 20,736 20,736

Projected Cash Flows:-
Particulars Year 1 Year 2 Year 3 Year 4

Sales 24,000 28,800 34,560 34,560
PBT (10% of sale) 2,400 2,880 3,456 3,456
PAT (70%) 1,680 2,016 2,419.20 2,419.20
Depreciation 800 960 1,152 1,382
Addition to Fixed Assets 2,400 2,880 3,456 1,382
Increase in Current Assets 800 960 1,152 -
Operating cash flow (FCFF) (720) (864) (1,036.80) 2,419.20
Projected Cash Flows:-
Present value of Projected Cash Flows:-
Cash Flows PVF at PV

15%
-720 0.870 -626.40
-864 0.756 -653.18
-1,036.80 0.658 -682.21
-1,961.79
Residual Value = 2419.20/0.15 = 16,128
Present value of Residual = 16128/(1.15)3

value
= 16128/1.521 = 10603.55
Total shareholders’ value = 10,603.55 – 1,961.79 = 8,641.76
Pre strategy value = 1,400 / 0.15 = 9,333.33
Value of strategy = 8,641.76 – 9,333.33 = – 691.57
Question No. 7
Answer:
As per Firm Cash Flow Approach
i. Computation of tax rate

EBIT = 245 lakh
Interest = 218.125 lakh

PBT = 26.875 lakh
PAT = 17.2 lakh
Tax paid = 9.675 lakh
Tax rate = 9.675 /26.875 = 0.36 =36%
ii. Computation for increase in working capital
Working capital (2009) = 44 lakh

Increase in 2010 = 44 X 0.08 = 3.52 lakh
It will continue to increase @ 8% per annum.
iii. Weighted average cost of capital
Present debt = 1934 lakh

Interest cost = 218.125 lakh / 1934 = 11.28 %
Equity capital = 75 lakh X66 = 4950 lakh
Ke is given by
iv. As capital expenditure and depreciation are equal, they will not influence the free cash
flows of the company.
v. Computation of free cash flows upto 2012
Year 2010 2011 2012 2013 2014
EBIT (1-t) 169.344 lakh 182.89 lakh 197.52 lakh 213.32 lakh 230.39 lakh
Increase in 3.52 lakh 3.80 lakh 4.10 lakh 4.43 lakh 4.78 lakh
working capital
Debt repayment - - - - 1934 × 0.30
= 580.2 lakh
Free cash flows 165.824 lakh 179.09 lakh 193.41 lakh 208.89 lakh -354.59 lakh
PVF @ 13.54% 0.8807 0.7757 0.6832 0.6017 0.53
PV of free cash flow 146.04 lakh 138.92 lakh 132.14 lakh 125.69 lakh -187.93 lakh
@ 13.54%
Present value of free cash flows upto 2014 = 354.86 lakh

vi. Cost of capital (2014 Onwards)

Debt = 0.7 X 1934 = 1353.80 lakh
Equity = 4950 lakh
Ke is given by
= 12.56 + 1.55% = 14.11%
vii. Continuing value

240.336 / (0.1411 x 0.06) x (1/ 1.1354)5
(a) Value of the firm = PV of free cash flows upto 2014 + continuing value
= 354.86 lakh + 1,570.556 lakh
= 1925.416 lakh
(b) Value per share = (Value of Firm – Value of Debt)/ Number of Shares
= (1925.416 lakh – 1353.80 lakh) / 75 lakh
= 7.622<66 (present market price )
Alternatively, following value can also be considered
= (Value of Firm – Value of Debt)/No. of Shares
= (1925.416 lakh - 1934)/75 lakh
= - 0.1145 or 0
Thus, share has zero value, and hence overvalued.
Answer as per Equity Cash Approach
i. Computation of tax rate

EBIT = 245 lakh
Interest = 218.125
PBT = 26.875 lakh
PAT = 17.2 lakh

Tax Paid = 9.675 lakh
Tax rate = 9.675/26.875 = 0.36 = 36%
ii. Computation for increase in working capital

Working capital (2009) = 44 lakh
Increase in 2010 = 44 lakh x 0.08 = 3.52 lakh
iii. As capital expenditure and depreciation are equal, they will not influence the free cash
flows of the company.
iv. Computation of free cash flows upto 2014
2010 2011 2012 2013 2014

Year lakh lakh lakh lakh lakh
EBIT 245.000 264.600 285.768 308.629 333.319
Less Interest 218.125 218.125 218.125 218.125 152.688
EBT 26.875 46.475 67.643 90.504 180.631
Tax 9.675 16.266 24.351 32.581 65.027
EAT 17.200 30.209 43.292 57.923 115.604
Increase in working 3.52 3.80 4.10 4.43 4.78
capital
Debt repayment - - - - 1934 × 0.30 =
580.20
Free cash flows 13.68 26.409 39.192 53.493 -469.376
PVF @ 16% 0.8621 0.7432 0.6407 0.5523 0.4761
PV of free cash flow 11.794 19.627 25.110 29.544 -223.470
Present value of free cash flows upto 2014 = - 137.395 lakh
v. Continuing value
117.473* / (0.16 - 0.06 ) x (1 / 1.16)5
= 559.304 lakh
* (115.604 – 4.78) (1.06)
(a) Value of the Equity

= PV of free cash flows upto 2014 + continuing value
= - 137.395 lakh + 559.304 lakh
= 421.909 lakh

(b) Value per share

= Value of Equity/Number of Shares
= 421.909 lakh/75 lakh
= 5.62< 66 (present market value)
Question No. 8
Answer:
a. Swap Ratio
Particulars Abhiman Ltd. Abhishek Ltd.

Share Capital 200 Lakh 100
Lakh
Free Reserves 800 Lakh 500 Lakh
Total 1000 Lakh 600 Lakh
No. of Shares 2 Lakh 10 Lakh
Book Value per share 500 60
Promoter’s holding 50% 60%
Non promoter’s holding 50% 40%
Free Float Market Cap. i.e. 400 Lakh 128
Lakh
relating to Public’s holding
Hence Total market Cap. 800 Lakh 320
Lakh
No. of Shares 2 Lakh 10 Lakh
Market Price 400 32
P/E Ratio 10 4
EPS 40 8
Profits (2 X 40 lakh) 80 lakh -
(8 X 10 lakh) - 80 lakh
Calculation of Swap Ratio
Book Value 1 : 0.12 i.e. 0.12 x 25% 0.03
EPS 1 : 0.2 0.20 x 50% 0.10
Market Price 1 : 0.08 0.08 x 25% 0.02
Total 0.15
Swap ratio is for every one share of Abhishek Ltd., to issue 0.15 shares of Abhiman Ltd. Hence

total no. of shares to be issued.

10 Lakh x 0.15 = 1.50 lakh shares
b. Book Value, EPS & Market Price
Total No of Shares 2 Lakh + 1.5 Lakh = 3.5 Lakh

Total Capital 200 Lakh + 150 Lakh = 350 Lakh Reserves
800 Lakh + 450 Lakh = 1,250 Lakh
Book Value 350 Lakh + 1,250 Lakh = 457.14 per share
3.5 Lakh
EPS = Total Profit / No. Shares = (80 Lakh = 80 Lakh) / 3.5 Lakh
= 45.71
Expected Market Price EPS (45.71) x P/E Ratio (10) = 457.10
c.
(i) Promoter’s holding

Promoter’s Revised Holding
Abhiman 50% i.e. 1.00 Lakh shares
Abhishek 60% i.e. 0.90 Lakh shares
Total 1.90 Lakh shares
Promoter’s % = 1.90/3.50 x 100 = 54.29%
(ii) Free Float Market Capitalisation
Free Float Market = (3.5 Lakh – 1.9 Lakh) x 457.10
Capitalisation = 731.36 Lakh
(iii)
Revised Capital 350 Lakh + 175 Lakh = 525 Lakh No.
of shares before Split (F.V 100) 5.25 Lakh
No. of Shares after Split (F.V. 5 ) 5.25 x 20 = 105 Lakh
EPS 160 Lakh / 105 Lakh = 1.523
Book Value Cap. 525 Lakh + 1075 Lakh
No. of Shares =105 Lakh = 15.238 per share

CHAPTER: INVESTMETN DECISIONS AND STRATEGIES
Question No. 9
Answer:
Risk denotes variability of possible outcomes from what was expected. Standard Deviation
is perhaps the most commonly used tool to measure risk. It measures the dispersion around
the mean of some possible outcome.
(a) Risk Adjusted Discount Rate Method- The use of risk adjusted discount rate is based
on the concept that investors demands higher returns from the risky projects. The
required return of return on any investment should include compensation for delaying
consumption equal to risk free rate of return, plus compensation for any kind of risk
taken on.
(b) Certainty Equivalent Approach- This approach allows the decision maker to
incorporate his or her utility function into the analysis. In this approach a set of risk
less cash flow is generated in place of the original cash flows.
(c) Other Methods-
(i) Sensitivity Analysis: Also known as “What if” Analysis. This analysis
determines how the distribution of possible NPV or internal rate of return for a
project under consideration is affected consequent to a change in one particular
input variable. This is done by changing one variable at one time, while keeping
other variables (factors) unchanged.
(ii) Scenario Analysis: Although sensitivity analysis is probably the most widely
used risk analysis technique, it does have limitations. Therefore, we need to
extend sensitivity analysis to deal with the probability distributions of the inputs.
In addition, it would be useful to vary more than one variable at a time so we
could see the combined effects of changes in the variables.
(iii) Simulation Analysis (Monte Carlo): Monte Carlo simulation ties together
sensitivities and probability distributions. The method came out of the work of
first nuclear bomb and was so named because it was based on mathematics of
Casino gambling. Fundamental appeal of this analysis is that it provides decision
makers with a probability distribution of NPVs rather than a single point
estimates of the expected NPV. Following are main steps in simulation
analysis:
• Modelling the project. The model shows the relationship of NPV with
parameters and exogenous variables;
• Specify values of parameters and probability distributions of exogenous
variables;
• Select a value at random from probability distribution of each of the
exogenous variables;

• Determine NPV corresponding to the randomly generated value of

exogenous variables and pre-specified parameter variables;
• Repeat steps (3) & (4) a large number of times to get a large number of
simulated NPVs; and
• Plot frequency distribution of NPV.
(iv) Decision Trees - By drawing a decision tree, the alternations available to an
investment decision are highlighted through a diagram, giving the range of
possible outcomes.
• The stages set for drawing a decision tree is based on the following rules:
• It begins with a decision point, also known as decision node, represented by
a rectangle while the outcome point, also known as chance node, denoted by
a circle
• Decision alternatives are shown by a straight line starting from the decision
node.
• The Decision Tree Diagram is drawn from left to right. Rectangles and
circles have to be next sequentially numbered.
• Values and Probabilities for each branch are to be incorporated next.
• The expected monetary value (EMV) at the chance node with branches
emanating from a circle is the aggregate of the expected values of the
various branches that emanate from the chance node.
• The expected value at a decision node with branches emanating from a
rectangle is the highest amongst the expected values of the various branches
that emanate from the decision node.
Question No. 10
Answer:
i. Computation of Project IRR

Project IRR is computed by using the following equation:
Where,
CO0 = Cash outflow at time zero
CFi = Net cash inflow at different points of time N = Life of the project and
R = Rate of discount (IRR)
Now,
CO 0 = 200 crores
CFi = 40 crores p.a. for 15 years (Refer to working note (i))
Therefore,
200 crore = 40 crores / (1 + r)15
The value of IRR of the project:

1. An approximation of IRR is made on the basis of cash flow data. A rough approximation
may be made with reference to the payback period. The payback period in the given case
is 5 years i.e. (200 crores / 40 crores). From the PVAF table the closest figures are given in
rate 18% (5.092) and the rate 19% (4.876). This means the IRR of the project is expected to
be between 18% and 19%.
2. The estimate of IRR cash inflow of the project for both these rates is as follows:
At 18%
= 40 crores x PVAF (18%, 15 years)
= 40 crores x 5.092
= 203.68 crores
At 19%
= 40 crores x PVAF (19%, 15 years)
= 40 crores x 4.876
= 195.04 crores
3. The exact IRR by interpolating between 18% and 19% is worked out as follows:
IRR = 18% + 203.68 crores - 200 crores X 1%

203.68 crores - 195.04 crores
= 18% + 0.426%
= 18.43%
Therefore, the IRR of the project is 18.43%.
Working Notes:
Net cash inflow of the project
Cash inflow `
Toll revenue 50 crores p.a. for 15 years
Cash outflow `
Toll collection expenses including maintenance of 10 crores p.a. for 15 years
the roads
(5% of 200 crores) _____________________
Net cash inflow 40 crores p.a. for 15 years
Note: Since corporate taxes is not payable. The impact of depreciation need not be considered.
ii. Computation of Equity IRR
Equity IRR is computed by using the following equation:

Cash inflow at zero date from equity shareholders

= Cash flow Available to Equity Shareholders / (1+n)n
Where,
r = Equity IRR
n = Life of the project
Here, Cash inflow at zero date from equity shareholders = 50 crores
Cash inflow for equity shareholders = 14.35 crores p.a. (Refer to working note)
Therefore:
50 crores = 14.35 crore / (1+r)15
The value of equity IRR of the project is calculated as follows:
1. An approximation of IRR is made on the basis of cash flow data. A rough

approximation may be made with reference to the payable period. The payback period
in the given case is 3.484 i.e. ( 50 crore / 14.35 crore). From the PVAF table the closest
figure may be about 25% and 30%. This means the equity IRR of project must be
between 25% and 30%.
2. The estimated NPV of the project at 25% = 14.35 crores X 3.859 = 55.3766 crores The
estimated NPV of the project at 30% = 14.35 crores X 3.268 = 46.896 crores
3. IRR by using Interpolation Formula will be
= 25% + (55.377- 50) / ( 55.3766- 46.896)
= 25%+ 3.17%
=28.17%
Working Notes:
(i) Equated annual installment (i.e. principal + interest) of loan from financial institution:
Amount of loan from financial institution 150 crores

Rate of interest 15% p.a.
No. of years 15
Cumulative discount factor for 1-15 years 5.847
Hence, equated yearly instalment will be 150 crores /5.847 i.e. 25.65 crores.
(ii) Cash inflow available for equity shareholders
Net cash inflow of the project 40.00 crores

[Refer to working note (i)]

Equated yearly installment of the project 25.65 crores

[Refer to working note (ii)] ______________
Cash inflow available for equity shareholders 14.35 crores
iii. Difference in Project IRR and Equity IRR:

The project IRR is 18.4% whereas Equity IRR is 28%. This is attributed to the fact that
Shailug Construction Ltd. is earning 18.4% on the loan from financial institution but paying
only 15%. The difference between the return and cost of funds from financial institution
has enhanced equity IRR. The 3.4% (18.4% - 15%) earnings on 150 crores goes to equity
shareholders who have invested 50 crore i.e. 3.4% X (150 crore / 50 crore) = 10.2% is
added to the project IRR which gives equity IRR of 28%.
Question No. 11
Answer:
Calculation of NPV
= - 50,00,000 + [2,00,000 (30 – 16.50) – 10,00,000] PVIAF (12%,5)

= - 50,00,000 + [2,00,000 (13.50) – 10,00,000] 3.605
= - 50,00,000 + [27,00,000 – 10,00,000] 3.605
=- 50,00,000 + 61,28,500 = 11,28,500
Measurement of Sensitivity Analysis
(a) Sales Price:-
Let the sale price/Unit be S so that the project would break even with 0 NPV.
50,00,000 = [2,00,000 (S – 16.50) – 10,00,000] PVIAF (12%,5)
50,00,000 = [2,00,000S – 33,00,000 – 10,00,000] 3.605
50,00,000 = [2,00,000S – 43,00,000] 3.605
13,86,963 = 2,00,000S – 43,00,000
56,86,963 = 2,00,000S
S = 28.43 which represents a fall of (30 - 28.43)/30 or 0.0523 or 5.23%
(b) Sales volume:-
Let V be the sale volume so that the project would break even with 0 NPV.
50,00,000 = [V (30 – 16.50) – 10,00,000] PVIAF (12%,5)
50,00,000 = [V (13.50) – 10,00,000] PVIAF (12%,5)

50,00,000 = [13.50V – 10,00,000] 3.605

13,86,963 = 13.50V – 10,00,000
23,86,963 = 13.50V
V = 1,76,812 which represents a fall of (2,00,000 - 1,76,812)/2,00,000 or 0.1159 or

11.59%
(c) Variable Cost:-
Let the variable cost be V so that the project would break even with 0 NPV.
50,00,000 = [2,00,000(30 – V) – 10,00,000] PVIAF(12%,5)
50,00,000 = [60,00,000 – 2,00,000 V – 10,00,000] 3.605
50,00,000 = [50,00,000 – 2,00,000 V] 3.605
13,86,963 = 50,00,000 – 2,00,000 V
36,13,037 = 2,00,000V
V = 18.07 which represents a fall of (18.07 – 16.50)/16.50 or 0.0951 or 9.51%
(d) Expected Net Present Value
(1,75,000 X 0.30) + (2,00,000 X 0.60) + (2,25,000 X 0.10) =1,95,000
NPV = [1,95,000 X 13.50 – 10,00,000] 3.605 – 50,00,000 = 8,85,163
Further NPV in worst and best cases will be as follows:
Worst Case:
[1,75,000 X 13.50 – 10,00,000] 3.605 – 50,00,000 = - 88,188
Best Case:
[2,25,000 X 13.50 – 10,00,000] 3.605 – 50,00,000 = 23,45,188
Thus there are 30% chances that the rise will be a negative NPV and 70% chances of positive
NPV. Since acceptable level of risk of Hulas Ltd. is 20% and there are 30% chances of negative
NPV hence project should not be accepted.
Question No. 12
Answer:
1. Estimated Exchange Rates (Using PPP Theory)
Year 0 1 2 3 4 5 6
Exchange rate 57 57.54 57.82 57.82 57.54 56.99 56.18

2. Share in sales
Year 1 2 3 4 5
Annual Units in crores 24 24 24 24 24
Price per bottle (`) 7.50 8.50 9.50 10.50 11.50
Price fluctuating Inflation Rate 6.00% 5.50% 5.00% 4.50% 4.00%
Inflated Price (`) 7.95 8.97 9.98 10.97 11.96
Inflated Sales Revenue (`Crore) 190.80 215.28 239.52 263.28 287.04
Sales share @55% 104.94 118.40 131.74 144.80 157.87
3. Royalty Payment
Year 1 2 3 4 5
Annual Units in crores 24 24 24 24 24
Royalty in $ 0.01 0.01 0.01 0.01 0.01
Total Royalty ($ Crore) 0.24 0.24 0.24 0.24 0.24
Exchange Rate 57.54 57.82 57.82 57.54 56.99
Total Royalty (`Crore) 13.81 13.88 13.88 13.81 13.68
4. Tax Liability
(` Crore)
Year 1 2 3 4 5
Sales Share 104.94 118.40 131.74 144.80 157.87

Total Royalty 13.81 13.88 13.88 13.81 13.68
Total Income 118.75 132.28 145.61 158.61 171.55
Less: Expenses
Production Cost 41.98 47.36 52.69 57.92 63.15
Depreciation 39.00 39.00 39.00 39.00 39.00
PBT 37.77 45.92 53.92 61.69 69.40

Tax on Profit @30% 11.33 13.78 16.18 18.51 20.82
Net Profit 26.44 32.14 37.74 43.18 48.58

5. Free Cash Flow
( Crore)
Year 0 1 2 3 4 5 6
Sales Share 0.00 104.94 118.40 131.74 144.80 157.87 0.00
Total Royalty 0.00 13.81 13.88 13.88 13.81 13.68 0.00
Production Cost 0.00 -41.98 -47.36 -52.69 -57.92 -63.15 0.00
Initial Outlay -200.00 0.00 0.00 0.00 0.00 0.00 0.00
Working Capital -50.00 -5.00 -5.00 -5.00 -5.00 70.00 0.00
Scrap Value 0.00 0.00 0.00 0.00 0.00 5.00 0.00
Tax on Profit 0.00 0.00 -11.33 -13.78 -16.18 -18.51 -20.82
Free Cash Flow -250.00 71.77 68.59 74.15 79.51 164.89 -20.82
6. Remittance of Cash Flows (` Crore)
Year 0 1 2 3 4 5 6
Free Cash Flow -250.00 71.77 68.59 74.15 79.51 164.89 -20.82
50% of Current Year Cash Flow 0.00 35.89 34.29 37.07 39.76 82.45 0.00
Previous year remaining cash
0.00 0.00 35.88 34.30 37.08 39.75 82.44
flow
Total Remittance -250.00 35.88 70.17 71.37 76.84 122.20 61.62
7. NPV of Project under Appraisal
Year 0 1 2 3 4 5 6
Total Remittance (`Crore) -250.00 35.88 70.17 71.37 76.84 122.20 61.62
Exchange Rate 57.00 57.54 57.82 57.82 57.54 56.99 56.18
Remittance ($mn) -43.86 6.24 12.14 12.34 13.35 21.44 10.97
US Tax @35% ($mn) 0.00 0.00 2.18 4.25 4.32 4.67 7.50
Indian Tax ($mn) 0.00 0.00 1.96 2.38 2.82 3.25 3.71
Net Tax ($mn) 0.00 0.00 0.22 1.87 1.51 1.42 3.79
Net Cash Flow ($mn) -43.86 6.24 11.92 10.47 11.84 20.02 7.18
PVF 1.000 0.870 0.756 0.658 0.572 0.497 0.432
Present Value ($mn) -43.86 5.43 9.01 6.89 6.77 9.95 3.10

Net Present Value ($mn) = -2.71

Decision: Since NPV of the project is negative, US Pharma Inc. should not invest in the project.
CHAPTER: INTERNATIONAL FINANCIAL MANAGEMENT
Question No. 13
Answers:
(i) If investment is made at London

Convert US$ 5,00,000 at Spot Rate (5,00,000/1.5390) = £ 3,24,886
Add: £ Interest for 3 months on £ 324,886 @ 5% =£ 4,061
= £ 3,28,947
Less: Amount Invested $ 5,00,000
Interest accrued thereon $ 5,000
= $ 5,05,000
Equivalent amount of £ required to pay the
above sum ($ 5,05,000/1.5430*) = £ 3,27,285
Arbitrage Profit = £ 1,662
(ii) If investment is made at New York
Gain $ 5,00,000 (8% - 4%) x 3/12 = $ 5,000
Equivalent amount in £ 3 months ($ 5,000/ 1.5475) £ 3,231
(iii) If investment is made at Frankfurt
Convert US$ 500,000 at Spot Rate (Cross Rate) 1.8260/1.5390 = € 1.1865 Euro equivalent
US$ 500,000 = € 5,93,250
Add: Interest for 3 months @ 3% =€ 4,449
= € 5,97,699
3 month Forward Rate of selling € (1/1.8150) = £ 0.5510
Sell € in Forward Market € 5,97,699 x £ 0.5510 = £ 3,29,332
Less: Amounted invested and interest thereon = £ 3,27,285
Arbitrage Profit =£ 2,047
Since out of three options the maximum profit is in case investment is made in New York.
Hence it should be opted.
* Due to conservative outlook.

CHAPTER: PORTFOLIO THEORY AND ASSETS PRICING
Question No. 14
Answers:
a.
b. The revised systematic risk of the WPL's portfolio can be measured as the weighted average
of all individual investment's beta which is computed as follows:

After selecting the company C, overall risk profile of WPL would be improved from 1.25 to
1.15. The reduction in expected return from 17.25% to 16.35% may be a cause of concern for
WPL. However, the reduction in expected return is compensated by reduction in risk from
8.6% to 8.36% i.e. combined standard deviation. Now it is the decision of the management
whether this trade-off between risk and return is acceptable to WPL.
Question No. 15
Answers:
(i) Sensitivity of each stock with market is given by its beta. Standard deviation of market Index
= 15%
Variance of market Index = 0.0225
Beta of stocks = σi r/ σ m A = 20 ×
0.60/15 = 0.80 B = 18 × 0.95/15 =
1.14 C = 12 × 0.75/15 = 0.60
(ii) Covariance between any 2 stocks = β1β 2 σ 2m
Covariance matrix
Stock/Beta 0.80 1.14 0.60

A 400.0 205.200 108.000
00
B 205.2 324.000 153.900
00
C 108.0 153.900 144.000
00
(iii) Total risk of the equally weighted portfolio (Variance) = 400(1/3)2 + 324(1/3)2 +
144(1/3)2 + 2 (205.20)(1/3)2 + 2(108.0)(1/3)2 + 2(153.900) (1/3)2 = 200.244
(iv) β of equally weighted portfolio
= β p = ∑ β I / N = (0.80 + 1.14 + 0.60) / 3

= 0.8467
(v) Systematic Risk β P2 σ m2

= (0.8467)2 (15)2 =161.302
Unsystematic Risk = Total Risk – Systematic Risk

= 200.244 – 161.302 = 38.942
Working Notes
Calculation of Interest Payment on 9% Debentures PVAF (9%,6) = 4.486
Annual Installment = Rs. 22.50 crore = Rs. 5.0156 crore

4.486
Year Balance Interest Installment Principal Balance (Rs.

Outstanding (Rs. Crore) (Rs. Crore) Repayment Crore)
(Rs. Crore) (Rs. Crore)
1 22.5000 2.025 5.0156 2.9906 19.5094
2 19.5094 1.756 5.0156 3.2596 16.2498
3 16.2498 1.462 5.0156 3.5536 12.6962
4 12.6962 1.143 5.0156 3.8726 8.8236
Statement showing Value of Equity
Particulars 2013-14 2014-15 2015-16 2016-17

(Rs. Crore) (Rs. Crore) (Rs. Crore) (Rs. Crore)
EBIT 48.0000 57.0000 68.0000 82.0000
Interest on 9% Debentures 2.0250 1.7560 1.4620 1.1430
Interest on 8% Loan 12.8000 12.8000 12.8000 12.8000
EBT 33.1750 42.4440 53.7380 68.0570
Tax* @35% 11.6110 14.8550 18.8080 23.8200
EAT 21.5640 27.5890 34.9300 44.2370
Dividend @12.5% of EAT* 2.6955 3.4490 4.3660 5.5300
18.8685 24.1400 30.5640 38.7070
Balance b/f Nil 18.8685 43.0085 73.5725
Balance c/f 18.8685 43.0085 73.5725 112.2795
Share Capital 82.5000 82.5000 82.5000 82.5000
101.3685 125.5085 156.0725 194.7795
*Figures have been rounded off.
In the beginning of 2013-14 equity was Rs. 82.5000crore which has been grown to Rs. 194.7795
over a period of 4 years. In such case the compounded growth rate shall be as follows:
(194.7795/82.5000)¼ - 1 = 23.96%
This growth rate is slightly higher than 20% as projected by Mr. Smith.
If the condition of VenCap for 18 shares is accepted the expected share holding after 4

years shall be as follows:

No. of shares held by Management 6.00 crore
No. of shares held by VenCap at the starting stage 2.25 crore
No. of shares held by VenCap after 4 years 4.05 crore
Total holding 6.30 crore
Thus, it is likely that Mr. Smith may not accept this condition of VenCap as this may result in
losing their majority ownership and control to VenCap. Mr. Smith may accept their condition
if management has further opportunity to increase their ownership through other forms.
CHAPTER: FOREIGN EXCHANGE MANAGEMENT
Question No. 16
Answers:
Opportunity gain of Allare Ltd. under currency

Receipt Payment Net
swap
Interest to be remitted to Bekare Ltd in $
2,00,000х9%=$18,000 ¥21,60,000
Converted into ($18,000х¥120)
Interest to be received from Bekare Ltd ,in $ converted ¥14,40,000 -
into Y (6%х$2,00,000 х ¥120)
Interest payable on Y loan - ¥12,00,000
¥14,40,000 ¥33,60,000
Net Payment ¥19,20,000 -
¥33,60,000 ¥33,60,000
$ equivalent paid ¥19,20,000 х(1/¥120) $16,000
Interest payable without swap in $ $18,000
Opportunity gain in $ $ 2,000
Opportunity gain of Bekare Ltd. under currency swap Receipt Payment Net
Interest to be remitted to Allare Ltd. in ($ 2,00,000 х 6%) $12,000
Interest to be received from Allare Ltd. in Y converted into $ $18,000
=¥21,60,000/¥120
Interest payable on $ loan@10% -

$20,000
$18,000 $32,000
Net Payment $14,000 -
$32,000 $32,000
Y equivalent paid $14,000 X ¥120 ¥16,80,000
Interest payable without swap in ¥
($2,00,000X¥120X8%) ¥19,20,000
Opportunity gain in Y ¥ 2,40,000
Alternative Solution
Cash Flows of Allare Ltd.
(i) At the time of exchange of principal amount
Transactions Cash Flows

Borrowings $2,00,000 x ¥120 + ¥240,00,000
Swap - ¥240,00,000
Swap +$2,00,000
Net Amount +$2,00,000
(ii) At the time of exchange of interest amount

Interest to the lender ¥240,00,000X5% ¥12,00,000
Interest Receipt from Bekare Ltd. ¥2,00,000X120X6% ¥14,40,000
Net Saving (in $) ¥2,40,000/¥120 $2,000
Interest to Bekare Ltd. $2,00,000X9% -$18,000
Net Interest Cost -$16,000
Allare Ltd. used $2,00,000 at the net cost of borrowing of $16,000 i.e. 8%. If it had not opted for
swap agreement the borrowing cost would have been 9%. Thus there is saving of 1%.
Cash Flows of Bekare Ltd.
(i) At the time of exchange of principal amount

Borrowings + $2,00,000
Swap - $2,00,000
Swap +¥240,00,000

Net Amount $2,00,000X¥120 +¥240,00,000

(ii) At the time of exchange of interest amount

Interest to the lender $2,00,000X10% - $20,000
Interest Receipt from Allare Ltd. +$18,000
Net Saving (in ¥) -$2,000X¥120 - ¥2,40,000
Interest to Allare Ltd. $2,00,000X6%X¥120 - ¥14,40,000
Net Interest Cost - ¥16,80,000
Bekare Ltd. used ¥240,00,000 at the net cost of borrowing of ¥16,80,000 i.e. 7%. If it had not
opted for swap agreement the borrowing cost would have been 8%. Thus, there is saving of
1%.
Question No. 17
Answers:
i.
(a) Proposal of Mr. Peter
Invoicing in £ will produce = € 2.8 million / 1.1965 = £ 2.340 million
(b) Proposal of Mr. Wilson
Forward Rate = €1.1970-0.0055 = 1.1915
Using Forward Market hedge Sterling receipt would be € 2.8million / 1.1915 = £ 2.35 million
(c) Proposal of Mr. Karen
The equivalent sterling of the order placed based on future price (€1.1943)
= € 2.8million / 1.1943 = £ 2,344,470 (rounded off)
Number of Contracts = £2, 344, 470 / 62, 500 = = 37 Contracts (to the nearest whole number)
Thus, € amount hedged by future contract will be = 37 X £62,500 = £23,12,500
Buy Future at €1.1943
Sell Future at €1.1873
€0.0070
Total loss on Future Contracts = 37 X £62,500 X €0.0070 = €16,188
After 6 months
Amount Received €28,00,000

Less: Loss on Future Contracts € 16,188

€ 27,83,812
Sterling Receipts
On sale of € at spot = € 27,83,812 / 1.1873 = = £ 2.3446 million
(ii) Proposal of option (b) is preferable because the option (a) & (c) produces least receipts.
Further, in case of proposal (a) there must be a doubt as to whether this would be
acceptable to German firm as it is described as a competitive market and Zaz is moving
into it first time.
Question No. 18
Answers:
i. Cancellation Rate:
The forward sale contract shall be cancelled at Spot TT Purchase for $ prevailing on the date of
cancellation as follows:
$/ Rs. Market Buying Rate 63.1575

Less: Exchange Margin @ 0.10% 0.0632
63.0943
Rounded off to 63.0950
ii. Amount payable on $ 1,00,000
Bank sells $1,00,000 @ 63.8775 63,87,750

Bank buys $1,00,000 @ 63.0950 63,09,500
Amount payable by customer ` 78,250
iii. Swap Loss
On 4th April, the bank does a swap sale of $ at market buying rate of 63.2775 and forward
purchase for April at market selling rate of 63.4275.
Bank buys at 63.4275

Bank sells at 63.2775
Amount payable by customer 0.1500
Swap Loss for $ 1,00,000 in = 15,000

iv. Interest on Outlay of Funds
On 4th April, the bank receives delivery under cover contract at 63.7575 and sell spot at
63.2775.
Bank buys at 63.7575

Bank sells at 63.2775
Amount payable by customer 0.4800
Outlay for $ 1,00,000 in 48,000
Interest on 48,000 @ 12% for 10 days = 158
v. New Contract Rate
The contract will be extended at current rate
$/ Market forward selling Rate for June 63.7275

Add: Exchange Margin @ 0.10% 0.0637
63.7912
Rounded off to 63.7900
vi. Total Cost
Cancellation Charges 78,250.00

Swap Loss 15,000.00
Interest 158.00
93,408.00
CHAPTER: EMERGING CONCEPT OF FINANCING
Write short notes on
Question No. 19
Answers:
Straddles
An options strategy with which the investor holds a position in both a call and put with the
same strike price and expiration date. Straddles are a good strategy to pursue if an investor
believes that a stock's price will move significantly, but is unsure as to which direction. The
stock price must move significantly if the investor is to make a profit. However, should only

a small movement in price occurs in either direction, the investor will experience a loss. As a
result, a straddle is extremely risky to perform. Additionally, on stocks that are expected to
jump, the market tends to price options at a higher premium, which ultimately reduces the
expected payoff should the stock move significantly. This is a good strategy if speculators
think there will be a large price movement in the near future but is unsure of which way that
price movement will be. It has one common strike price.
Strangles
The strategy involves buying an out-of-the-money call and an out-of-the-money put option.
A strangle is generally less expensive than a straddle as the contracts are purchased out of
the money. Strangle is an unlimited profit, limited risk strategy that is taken when the options
trader thinks that the underlying stock will experience significant volatility in the near term.
It has two different strike prices.
CHAPTER: FOREIGN DIRECT INVESTMENT
Question No. 20
Answers:
Forfeiting was developed to finance medium to long term contracts for financing capital
goods. It is now being more widely used in the short-term also especially where the contracts
involve large values. There are specialized finance houses that deal in this business and
many are linked to some of main banks.
This is a form of fixed rate finance which involves the purchase by the forfeiture of trade
receivables normally in the form of trade bills of exchange or promissory notes, accepted
by the buyer with the endorsement or guarantee of a bank in the buyer’s country.
The benefits are that the exporter can obtain full value of his export contract on or near shipment
without recourse. The importer on the other hand has extended payment terms at fixed rate
finance.
The forfeiture takes over the buyer and country risks. Forfeiting provides a real alternative to
the government backed export finance schemes.
Factoring can however, broadly be defined as an agreement in which receivables arising
out of sale of goods/services are sold by a “firm” (client) to the “factor” (a financial
intermediary) as a result of which the title to the goods/services represented by the said
receivables passes on to the factor. Henceforth, the factor becomes responsible for all credit
control, sales accounting and debt collection from the buyer(s). In a full service factoring
concept (without recourse facility) if any of the debtors fails to pay the dues as a result of his
financial instability/insolvency/bankruptcy, the factor has to absorb the losses.
Some of the points of distinction between forfeiting and factoring have been outlined in the
following table.

Factoring Forfeiting
This may be with recourse or without This is without recourse to the exporter. The
recourse to the supplier. risks are borne by the forfeiter.
It usually involves trade receivables of short It usually deals in trade receivables of medium
maturities. and long term maturities.
It does not involve dealing in negotiable It involves dealing in negotiable instrument like
instruments. bill of exchange and promissory note.
The seller (client) bears the cost of factoring.The overseas buyer bears the cost of
forfeiting.
Usually it involves purchase of all book debts Forfeiting is generally transaction or project
or all classes of book debts. based. Its structuring and costing is case to
case basis.
Factoring tends to be a ‘case of’ sell of debt There exists a secondary market in forfeiting.
obligation to the factor, with no secondary This adds depth and liquidity to forfeiting.
market.

Paper 3: Advanced Audit and Assurance

Revision Questions
GENERAL CONCEPTS-AUDITING
Question No. 1
Answer the following with reference to ICAN Act, Rules, circulars/notices and code of ethics
issued by ICAN.
a) PR and Associates is a sole proprietorship Chartered Accountants firm having its
registered office at Kathmandu. With growing number of clients in eastern part of
Nepal, it is planning to open its branch office in Biratnagar. The branch office will be
led and managed by senior staff who is a semi qualified and four other junior staffs who
are article trainees. Can he open the branch office? Comment.
b) Mr. X, a Chartered Accountant is external auditor of Galaxy Ltd. for FY 2075/76.

There was fire in the production plant of one of its major products on Mangsir 2076.
The fire destroyed almost 80% of the plant and the management has estimated that it
would take six months to recover the plant operation. However, the event was not
disclosed in the financial statements of FY 2075/76 and auditor has not mentioned
anything in audit report of FY 2075/76 issued on Poush 2076. Comment.
c) What are the special considerations to be taken while taking custody of clients’ cash
and bank balances?
d) Write short note on UDIN.
Question No. 2
What do you mean by engagement quality control review? What policies and procedures
shall be established by the firm regarding engagement quality control review?
GENERAL CONCEPTS-GOVERNANCE
Question No. 3
Describe the role of stakeholders in corporate governance as one of the OECD Principles on
corporate governance.
AUDIT PROCESS-ENGAGEMENT PROCEDURE

Question No. 4
Mr. Avinash Lama, Chartered Accountant has been proposed as the statutory auditor by
Moonlight Private Limited for the fiscal year 2075/76. During discussion meeting, the
management declared that they will not provide the minutes of board meetings of the
company since these contain crucial confidential decisions which cannot be known to
outsiders. Advice Mr. Lama whether the audit engagement should be accepted?
AUDIT PROCESS-PLANNING AND RISK ASSESSMENT

Question No. 5

Mr. Sudhir Thapa, Chartered Accountant has been appointed as statutory auditor of PVC
Limited. He has discussed with his team about audit engagement but has not maintained any
documentation regarding planning of the audit. He believes that audit should be carried in
planned way but documentation regarding planning is not required since they do not produce
any audit evidence. Guide him regarding the documentation of audit planning with reference
to NSA 300.
Question No. 6
Describe analytical procedures performed as risk assessment procedures.
AUDIT PROCESS-AUDIT TEST

Question No. 7
The auditor needs to obtain an understanding of the entity’s related party relationships and
transactions sufficient to be able to conclude whether the financial statements, insofar as they
are affected by those relationships and transactions; achieve fair presentation or are not
misleading. Explain how auditor can obtain such an understanding of the entity’s related
party relationships and transactions.
Question No. 8
The external auditor expresses its opinion on the financial statements for the specific
financial period only. Does the auditor have any responsibilities towards events occurring
after the date of the financial statements and the date of the auditor’s report?
Question No. 9
Write short note on Block Sampling.
Question No. 10
Shyam Udas, a Chartered Accountant is appointed as the external auditor of Sambridhi Ltd.
The company has its own internal audit department to carry out internal audit function. He is
planning to use the work of internal auditor in obtaining audit evidence so that the external
audit can be completed on time. Can he use the work of internal audit function? In which
areas and to what extent the work can be used? Discuss with reference to auditing standards.
Question No. 11
You have appointed the statutory auditor of Global Pvt. Ltd., a manufacturing company for
the fiscal year 2075/76 only on 15th of Shrawan 2076 due to some problem. The inventory
forms 20% of the total assets of the balance sheet. The physical inventory counting has
already been conducted on Ashad end 2076. How will you obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory?
AUDIT PROCESS-AUDIT REPORTING

Question No. 12
Draft the relevant audit opinion part as an external auditor of QRS Ltd. for the FY 2075/76 in
following cases. The financial statements are prepared for a general purpose by management

of the entity in accordance with NFRSs and the terms of the audit engagement reflect the
description of management’s responsibility for the financial statements
a) The short-term marketable securities are carried in the balance sheet at cost Rs.15 lakh.
Management has not marked these securities to market where the value is Rs.12 lakh.
Also, there is uncertainty relating to a pending exceptional litigation matter.
b) You were unable to obtain sufficient appropriate audit evidence about the entity’s
inventories as you did not observe the counting of physical inventories at the end of the
year due to late appointment. In addition, the introduction of a new computerized
accounts payable system in Mangsir 1, 2075 resulted in numerous errors in accounts
payable and management was still in process of rectifying the system deficiencies and
correcting errors. You were unable to satisfy yourselves by alternative means inventories
of amount Rs.2.5 crores and account payables of total amount Rs.35 lakh.
Question No. 13
a) Communicating key audit matters provides additional information to users of the
financial statements to assist them in understanding those matters that, in the auditor’s
professional judgment, were of most significance in the audit of the financial statements
of the current period. How shall the auditor determine key audit matters?
b) Differentiate between management letter and written representation.
AUDIT PROCESS-AUDIT OF SPECIALIZED ENTERPRISES

Question No. 14
Mr. A, Chartered Accountant as the external auditor of Sambriddhi Bank Ltd. is conducting
risk assessment for the audit of bank. He believes that nowadays the operational risk of the
banks is of major concern and focus. Explain him the factors that contribute significantly to
the operational risk.
Question No. 15
You are appointed as an external auditor of a retirement fund. Mention special areas to be
covered for audit of retirement benefit funds.
Question No. 16
Sahayogi Nepal, an NGO based on Kathmandu had collected huge donations from national
and international donors for flood victims in fiscal year 2075/76. The donations so collected
were distributed to different NGOs operating in Rautahat, Sarlahi, Mahottari, Dhanusha,
Siraha and Saptari for relief operations. You have been appointed by Sahayogi Nepal to audit
its account for FY 2075/76. Draft an audit program for the audit of receipts of donations and
remittance of such donations to different NGOs.
ASSURANCE AND RELATED SERVICES

Question No. 17
a) What do you understand by compilation engagement? Why is it required?

b) Describe the audit tools to conduct management audit.
OTHER SERVICES
Question No. 18
What is forensic audit? Why is forensic audit conducted?
AUDIT ISSUES- AUDIT UNDER COMPUTERISED ENVIRONMENT

Question No. 19
When the computer information systems are significant the auditor should assess whether it
may influence the assessment of inherent and control risks. Explain the risks that may arise
due to computer information system.
AUDIT ISSUES- FRAUD AND AUDITOR’S LIABILITY

Question No. 20
a) The statutory auditor of ABC Ltd. noticed a misstatement resulting from fraud suspected
to be committed by Finance Manager during the audit and the concluded that it is not
possible to continue the audit engagement. How would you deal as the statutory auditor?
b) Discuss the responsibility of auditor regarding prevailing Money Laundering Act.

Answers/Hints:
GENERAL CONCEPTS-AUDITING
Answer No. 1
a) As per Rule 65 of ICAN Rules 2061, the firm willing to open branch office shall give
application to ICAN in prescribed form and giving prescribed fees and can open the
branch office after approval from ICAN. Accordingly, the branch should be managed by
at least one member of ICAN of same level and class.
In the given case, the firm is planning to open the branch office in Biratnagar which will
be managed by a semi qualified staff. The firm has also not obtained approval for opening
branch office from the ICAN.
Thus the firm cannot open the branch office without approval of ICAN and without
management at least one member of ICAN. The firm should give application to the ICAN
in prescribed form mentioning the details of one CA member of ICAN who will manage
the branch and open the branch office only after the approval.
b) According to NAS 10 ‘Events after the reporting period’, the destruction of a major
production plant by a fire after the reporting period is a non-adjusting event after the
reporting period which is material and could influence the economic decisions that users
make on the basis of the financial statements. Accordingly, an entity shall disclose the
nature of such event and estimate of its financial effect or a statement that such an
estimate cannot be made. Further, section 34 of ICAN Act has provision that the 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 and one should have obtained sufficient information prior
to give audit opinion.
Here the financial statements of FY 2075/76 has not disclosed anything about the
destruction of one of the major production plant by fire and the auditor Mr. X has also not
drawn this material fact in his audit report. Hence he has done misconduct by not
discharging his duty with professional due care.
c) The professional accountants while assuming custody of the clients’ monies shall comply
with the fundamental principles and identify, evaluate and address threats provided in of
code of ethics. Holding clients’ monies or assets creates self- interest threats or other
threats to compliance of fundamental principles such as professional behaviour and
objectivity. The professional accountant shall first verify and evaluate the risks associated
as follows:
• Whether local laws and regulations permit to assume cash and bank balances of the
clients’ in the name of Professional accountant?
• Verify the legality of earning of cash and bank balances of the clients and if found
legal and also permitted by local laws and regulations, regulatory authorities and

bank and financial institution then proceed to assume the custody; if not decline the
engagements.
• If permitted to assume the custody of cash and bank balances, then proceed to
provide safe custody of such assets but shall not mix up with the Professional
accountant or firm’s assets;
• make legal declaration that these assets are owned by the clients and the
professional accountant has only professional services by assuming the safe custody
of clients’ such assets;
• open and operate bank account in the name of client as permitted and directed by
the local regulatory authorities;
• collect client’s monies or income earned on bank deposits such as interest, dividend
on securities and other recoverable and deposit them in time into the clients’ bank
accounts;
• in case of foreign currency if any received then verify the source of income and if
found legal then open a separate foreign currency bank account in the name the
clients and deposit it in time;
• obtain monthly bank statement and reconcile them within seven days of the
succeeding moth on regular basis;
• In case of occurrence of any error the professional accountant shall ensure its
prompt remedy;
• Before making any disbursement out of these cash or bank balances the professional
accounts shall ensure that such disbursements are having prior approval of the
clients;
• In case of disbursement of professional accountant’s fees and expenses if any, the
professional accountant shall ensure that these disbursements are having prior
approval of the client and disbursed time;
• maintain up –to- date appropriate accounts and records to be made available with all
upto-date information to clients on regular basis;
• Account and records maintained shall be preserved for the period as required by the
local laws and regulations and the engagement assignments and also be made
available for inspection if any at their requirement in time.
d) UDIN is abbreviation of Unique Document Identification Number which is the

information procedure based on in order to enhance social trust and belief on accounting
profession and to deter illegal auditing practice. UDIN is 18 digit unique number
generated by UDIN application for every certifications and audits by a practicing
Chartered Accountant/Registered Auditor member of ICAN. It may be reflected in the
related certification/audited financial statement for which UDIN is generated. UDIN
application assigns unique identification number to every legitimate document issued by
practicing Chartered Accountants/Registered Auditors members of ICAN after
certification and every audit report accompanying audited financial statement by a
practicing Chartered Accountant Member/Registered Auditor member of ICAN.

The objective of UDIN is to provide assurance of authenticity of document certified by

practicing ICAN members to investors, lenders, regulators and other stakeholders by
simply entering UDIN in UDIN application. UDIN application provides the specific
details related to certification/audited financial statement entered by practicing Chartered
Accountant/ Registered Auditor member of ICAN which can be cross verified with
document presented to various parties. The objective of UDIN Application is also to
identify and take legal actions against non-members misrepresenting themselves as
members of ICAN and providing services authorized to be delivered by ICAN members
only as mandated by ICAN Act, 1997. In addition, its purpose is to take legal action
against ICAN members who certify/audit multiple statements without observing due
procedures and standards prescribed by ICAN. Unique document identification numbers
will be generated in every audit/certifications for number of audits/ certifications
performed by an ICAN member to the extent of limit allowed as per directive issued by
the Institute. As such, members are automatically checked before providing
audit/certifications service beyond the prescribed limit.
Answer No. 2
Engagement quality control review is a process designed to provide an objective evaluation,
on or before the date of the report, of the significant judgments the engagement team made
and the conclusions it reached in formulating the report. The engagement quality control
review process is for audits of financial statements of listed entities, and those other
engagements, if any, for which the firm has determined an engagement quality control review
is required. Whether other engagements require engagement quality control review depends
on the nature of the engagement, including the extent to which it involves a matter of public
interest and the identification of unusual circumstances or risks in an engagement or class of
engagements as well as the requirements of it by any law or regulations.
The firm shall establish policies and procedures requiring, for appropriate engagements, an
engagement quality control review. Such policies and procedures shall:
• Require an engagement quality control review for all audits of financial statements of
listed entities;
• Set out criteria against which all other audits and reviews of historical financial
information and other assurance and related services engagements shall be evaluated to
determine whether an engagement quality control review should be performed; and
• Require an engagement quality control review for all engagements, if any, meeting the
criteria established as above.
The firm shall establish policies and procedures setting out the nature, timing and extent of an
engagement quality control review which shall require that the engagement report not be
dated until the completion of the engagement quality control review.
The firm shall establish policies and procedures to require the engagement quality control
review to include:
• Discussion of significant matters with the engagement partner;

• Review of the financial statements or other subject matter information and the proposed
report;
• Review of selected engagement documentation relating to significant judgments the
engagement team made and the conclusions it reached; and
• Evaluation of the conclusions reached in formulating the report and consideration of
whether the proposed report is appropriate.
For audits of financial statements of listed entities, the firm shall establish policies and
procedures to require the engagement quality control review to also include consideration of
the following:
• The engagement team’s evaluation of the firm’s independence in relation to the specific
engagement;
• Whether appropriate consultation has taken place on matters involving differences of
opinion or other difficult or contentious matters, and the conclusions arising from those
consultations; and
• Whether documentation selected for review reflects the work performed in relation to the
significant judgments and supports the conclusions reached.
GENERAL CONCEPTS-GOVERNANCE
Answer No. 3
A key aspect of corporate governance is concerned with ensuring the flow of external capital
to companies both in the form of equity and credit. Corporate governance is also concerned
with finding ways to encourage the various stakeholders in the firm to undertake
economically optimal levels of investment in firm-specific human and physical capital. The
competitiveness and ultimate success of a corporation is the result of teamwork that embodies
contributions from a range of different resource providers including investors, employees,
creditors, and suppliers. Corporations should recognise that the contributions of stakeholders
constitute a valuable resource for building competitive and profitable companies. It is,
therefore, in the long-term interest of corporations to foster wealth-creating cooperation
among stakeholders. The governance framework should recognise that the interests of the
corporation are served by recognising the interests of stakeholders and their contribution to
the long-term success of the corporation. The corporate governance framework should
recognise the rights of stakeholders established by law or through mutual agreements and
encourage active co-operation between corporations and stakeholders in creating wealth,
jobs, and the sustainability of financially sound enterprises.
A. The rights of stakeholders that are established by law or through mutual agreements are to
be respected.
B. Where stakeholder interests are protected by law, stakeholders should have the opportunity
to obtain effective redress for violation of their rights.
C. Performance-enhancing mechanisms for employee participation should be permitted to
develop.

D. Where stakeholders participate in the corporate governance process, they should have
access to relevant, sufficient and reliable information on a timely and regular basis.
E. Stakeholders, including individual employees and their representative bodies, should be
able to freely communicate their concerns about illegal or unethical practices to the board
and their rights should not be compromised for doing this.
F. The corporate governance framework should be complemented by an effective, efficient
insolvency framework and by effective enforcement of creditor rights.
AUDIT PROCESS-ENGAGEMENT PROCEDURE
Answer No. 4
The auditor shall obtain the agreement of management that it acknowledges and understands
its responsibility to provide the auditor with:
a. Access to all information of which management is aware that is relevant to the preparation
of the financial statements such as records, documentation and other matters;
b. Additional information that the auditor may request from management for the purpose of
the audit; and
c. Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.
If management or those charged with governance impose a limitation on the scope of the
auditor’s work in the terms of a proposed audit engagement such that the auditor believes the
limitation will result in the auditor disclaiming an opinion on the financial statements, the
auditor shall not accept such a limited engagement as an audit engagement, unless required
by law or regulation to do so.
Here in the given case, the management has clearly stated that it will not provide the minute
of board meetings to the auditors. Thus management has imposed limitation on scope by
limiting the access to necessary documents necessary to plan the audit, obtain the audit
evidence and analyse the evidence to draw the conclusion. Hence, if the auditor believes this
limitation will result in the auditor disclaiming an opinion on the financial statements, the
auditor shall not accept such a limited audit engagement.
AUDIT PROCESS-PLANNING AND RISK ASSESSMENT
Answer No. 5
According to NSA 300 ‘Planning an audit of financial statements’, the auditor shall include
in the audit documentation:
(a) The overall audit strategy;
(b) The audit plan; and
(c) Any significant changes made during the audit engagement to the overall audit strategy or
the audit plan, and the reasons for such changes.
The documentation of the overall audit strategy is a record of the key decisions considered
necessary to properly plan the audit and to communicate significant matters to the

engagement team. For example, the overall audit strategy may be summarized in the form of
a memorandum that contains key decisions regarding the overall scope, timing and conduct
of the audit. Similarly, the documentation of the audit plan is a record of the planned nature,
timing and extent of risk assessment procedures and further audit procedures at the assertion
level in response to the assessed risks. It also serves as a record of the proper planning of the
audit procedures that can be reviewed and approved prior to their performance. The auditor
may use standard audit programs or audit completion checklists, tailored as needed to reflect
the particular engagement circumstances. Further, the record of the significant changes to the
overall audit strategy and the audit plan, and resulting changes to the planned nature, timing
and extent of audit procedures, explains why the significant changes were made, and the
overall strategy and audit plan finally adopted for the audit. It also reflects the appropriate
response to the significant changes occurring during the audit.
Thus, the notion of Mr. Sudhir is not correct. Documentation of audit planning is quite
necessary.
Answer No. 6
Analytical procedures performed as risk assessment procedures may identify aspects of the
entity of which the auditor was unaware and may assist in assessing the risks of material
misstatement in order to provide a basis for designing and implementing responses to the
assessed risks. Analytical procedures performed as risk assessment procedures may include
both financial and non-financial information, for example, the relationship between sales and
square footage of selling space or volume of goods sold. Analytical procedures may help
identify the existence of unusual transactions or events, and amounts, ratios, and trends that
might indicate matters that have audit implications. Unusual or unexpected relationships that
are identified may assist the auditor in identifying risks of material misstatement, especially
risks of material misstatement due to fraud. However, when such analytical procedures use
data aggregated at a high level (which may be the situation with analytical procedures
performed as risk assessment procedures), the results of those analytical procedures only
provide a broad initial indication about whether a material misstatement may exist.
Accordingly, in such cases, consideration of other information that has been gathered when
identifying the risks of material misstatement together with the results of such analytical
procedures may assist the auditor in understanding and evaluating the results of the analytical
procedures.
AUDIT PROCESS-AUDIT TEST
Answer No. 7
It is the objective of the auditor irrespective of whether the applicable financial reporting
framework establishes related party requirements, to obtain an understanding of related party
relationships and transactions sufficient to be able to recognize fraud risk factors, if any,
arising from related party relationships and transactions that are relevant to the identification
and assessment of the risks of material misstatement due to fraud; and to conclude, based on
the audit evidence obtained, whether the financial statements, insofar as they are affected by
those relationships and transactions; achieve fair presentation; or are not misleading. The

understanding of the entity’s related party relationships and transactions can be obtained by
following ways:
• The engagement team discussion about the susceptibility of the entity’s financial
statements to material misstatement shall include specific consideration of the
susceptibility of the financial statements to material misstatement due to fraud or error
that could result from the entity’s related party relationships and transactions.
• Further, the auditor shall inquire of management regarding:
(a) The identity of the entity’s related parties, including changes from the prior period
such as the entity’s ownership and governance structures; types of investments that
the entity is making and plans to make; and the way the entity is structured and how it
is financed.
(b) The nature of the relationships between the entity and these related parties; and
(c) Whether the entity entered into any transactions with these related parties during the
period and, if so, the type and purpose of the transactions.
• The auditor shall inquire of management and others within the entity, and perform other
risk assessment procedures considered appropriate, to obtain an understanding of the
controls, if any, that management has established to:
(a) Identify, account for, and disclose related party relationships and transactions in
accordance with the applicable financial reporting framework;
(b) Authorize and approve significant transactions and arrangements with related parties;
and
(c) Authorize and approve significant transactions and arrangements outside the normal
course of business.
• The auditor may consider features of the control environment relevant to mitigating the
risks of material misstatement associated with related party relationships and transactions,
such as:
a) Internal ethical codes, appropriately communicated to the entity’s personnel and
enforced, governing the circumstances in which the entity may enter into specific
types of related party transactions.
b) Policies and procedures for open and timely disclosure of the interests that
management and those charged with governance have in related party transactions.
c) The assignment of responsibilities within the entity for identifying, recording,
summarizing, and disclosing related party transactions.
d) Timely disclosure and discussion between management and those charged with
governance of significant related party transactions outside the entity’s normal course
of business, including whether those charged with governance have appropriately
challenged the business rationale of such transactions (for example, by seeking advice
from external professional advisors).
e) Clear guidelines for the approval of related party transactions involving actual or
perceived conflicts of interest, such as approval by a subcommittee of those charged
with governance comprising individuals independent of management.
f) Periodic reviews by internal auditors, where applicable.

g) Proactive action taken by management to resolve related party disclosure issues, such
as by seeking advice from the auditor or external legal counsel.
h) The existence of whistle-blowing policies and procedures, where applicable.
Answer No. 8
Though the financial statements are for the specific financial period; it may be affected by
certain events that occur after the date of the financial statements. Many financial reporting
frameworks ordinarily identify two types of events: (a) Those that provide evidence of
conditions that existed at the date of the financial statements; and (b) Those that provide
evidence of conditions that arose after the date of the financial statements. The date of the
auditor’s report informs the reader that the auditor has considered the effect of events and
transactions of which the auditor becomes aware and that occurred up to that date. It is the
responsibility of auditor to obtain sufficient appropriate audit evidence about whether events
occurring between the date of the financial statements and the date of the auditor’s report that
require adjustment of, or disclosure in, the financial statements are appropriately reflected in
those financial statements in accordance with the applicable financial reporting framework.
Thus, the auditor shall perform audit procedures designed to obtain sufficient appropriate
audit evidence that all events occurring between the date of the financial statements and the
date of the auditor’s report that require adjustment of, or disclosure in, the financial
statements have been identified. The auditor is not, however, expected to perform additional
audit procedures on matters to which previously applied audit procedures have provided
satisfactory conclusions. The auditor shall take into account the auditor’s risk assessment in
determining the nature and extent of such audit procedures, for example; obtaining an
understanding of any procedures management has established to ensure that subsequent
events are identified, inquiring of management and, where appropriate, those charged with
governance, reading minutes and reading the entity’s latest subsequent interim financial
statements. In addition, the auditor shall request management and, where appropriate, those
charged with governance, to provide a written representation 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.
Answer No. 9
Block sampling involves selection of a block(s) of contiguous items from within the
population. Block selection cannot ordinarily be used in audit sampling because most
populations are structured such that items in a sequence can be expected to have similar
characteristics to each other, but different characteristics from items elsewhere in the
population. Although in some circumstances it may be an appropriate audit procedure to
examine a block of items, it would rarely be an appropriate sample selection technique when
the auditor intends to draw valid inferences about the entire population based on the sample.
For example take first 100 sales invoices from the sales day book in one month; alternatively
take any four blocks of 25 sales invoices, therefore once the first item in the block is selected,
the rest of the block follows the item to the completion. There is close similarity between this
method and non-statistical sampling method. It is simple and economic. However there is risk
of bias and of establishing a pattern of selection which may be noted by the auditees.

Answer No. 10
NSA 610 ‘Using the Work of Internal Auditors’ provides guidance on the external auditor’s
responsibilities if using the work of internal audit function in obtaining audit evidence. 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. While
the objectives of an entity’s internal audit function and the external auditor differ, the
function may perform audit procedures similar to those performed by the external auditor in
an audit of financial statements. If so, the external auditor may make use of the function for
purposes of the audit in to obtain information that is relevant to the external auditor’s
assessments of the risks of material misstatement due to error or fraud. Unless prohibited, or
restricted to some extent, by law or regulation, the external auditor, after appropriate
evaluation, may decide to use work that has been performed by the internal audit function
during the period in partial substitution for audit evidence to be obtained directly by the
external auditor. Accordingly, the external auditor shall determine whether the work of the
internal audit function can be used for purposes of the audit by evaluating the following:
(a) The extent to which the internal audit function’s organizational status and relevant
policies and procedures support the objectivity of the internal auditors;
(b) The level of competence of the internal audit function; and
(c) Whether the internal audit function applies a systematic and disciplined approach,
including quality control.
The external auditor shall not use the work of the internal audit function if the external
auditor determines that:
a) The function’s organizational status and relevant policies and procedures do not adequately
support the objectivity of internal auditors;
(b) The function lacks sufficient competence; or
(c) The function does not apply a systematic and disciplined approach, including quality
control.
Once the external auditor has determined that the work of the internal audit function can be
used for purposes of the audit, a first consideration is whether the planned nature and scope
of the work of the internal audit function that has been performed, or is planned to be
performed, is relevant to the overall audit strategy and audit plan. As a basis for determining
the areas and the extent to which the work of the internal audit function can be used, the
external auditor shall consider the nature and scope of the work that has been performed, or is
planned to be performed, by the internal audit function and its relevance to the external
auditor’s overall audit strategy and audit plan.
The external auditor shall also communicate how the external auditor has planned to use the
work of the internal audit function communicate to those charged with governance while
communicating an overview of the planned scope and timing of the audit.
Answer No. 11
In the given case, the inventory is material to the financial statements being manufacturing
company and inventory holding 20% of total assets of the company. The auditor has been
appointed only on 15th of Shrawan 2076 such that the auditor could not attend the physical

inventory counting conducted on Ashad end 2076. In this regards, NSA 501 ‘Specific
considerations for selected items’ has provided specific considerations while obtaining
sufficient appropriate audit evidence regarding the existence and condition of inventor where
inventory is material to the financial statements. Accordingly, if the auditor is unable to
attend physical inventory counting due to unforeseen circumstances, the auditor shall make or
observe some physical counts on an alternative date, and perform audit procedures on
intervening transactions. The auditor shall evaluate the risks of material misstatement related
to inventory and the nature of the internal control related to inventory, whether adequate
procedures are expected to be established and proper instructions issued for physical
inventory counting. The auditor shall evaluate management’s instructions and procedures for
recording and controlling the results of the entity’s physical inventory counting for example
the application of appropriate control activities, the accurate identification of the stage of
completion of work in progress, of slow moving, obsolete or damaged items and of inventory
owned by a third party such as on consignment, control over the movement of inventory
between areas and the shipping and receipt of inventory before and after the cut-off date. The
auditor should perform test counts, for example, by tracing items selected from
management’s count records to the physical inventory and tracing items selected from the
physical inventory to management’s count records, provides audit evidence about the
completeness and the accuracy of those records. In addition to recording the auditor’s test
counts, obtaining copies of management’s completed physical inventory count records assists
the auditor in performing subsequent audit procedures to determine whether the entity’s final
inventory records accurately reflect actual inventory count results. Since physical inventory
counting is conducted at a date other than the date of the financial statements, the auditor
shall, perform audit procedures to obtain audit evidence about whether changes in inventory
between the count date and the date of the financial statements are properly recorded.
The auditor shall also perform alternative audit procedures to obtain sufficient appropriate
audit evidence regarding the existence and condition of inventory. For example, inspection of
documentation of the subsequent sale of specific inventory items acquired or purchased prior
to the physical inventory counting, may provide sufficient appropriate audit evidence about
the existence and condition of inventory.
If it may not be possible to obtain sufficient appropriate audit evidence regarding the
existence and condition of inventory by performing alternative audit procedures, the auditor
shall modify the opinion in the auditor’s report as a result of the scope limitation.
Answer No. 12
a) Here, the investments are misstated and the misstatement is deemed to be material but not
pervasive to the financial statements. The appropriate opinion in this case is qualified
opinion. The opinion part is given below:
Basis for Qualified Opinion

The company’s short-term marketable securities are carried in the balance sheet at Rs. 15
lakh. Management has not marked these securities to market but has instead stated them
at cost, which constitutes a departure from Nepal Financial Reporting Standards. The

company’s records indicate that had management marked the marketable securities to
market, the company would have recognized an unrealized loss of Rs.3 lakh in the
income statement for the year. The carrying amount of the securities in the balance sheet
would have been reduced by the same amount at Ashad 31, 2076, and income tax, net
income and shareholders’ equity would have been reduced by Rs.75 thousand, Rs.2.25
lakh and Rs. XXX respectively.
Qualified Opinion
In our opinion, except for the effects of the matter described in the Basis for Qualified
Opinion paragraph, the financial statements present fairly, in all material respects (or
“give a true and fair view of”) the financial position of QRS Limited as at Ashad 31,
2076, and of its financial performance and its cash flows for the year then ended in
accordance with Nepal Financial Reporting Standards.
Emphasis of Matter
We draw attention to Note X to the financial statements which describes the uncertainty
related to the outcome of the lawsuit filed against the company by QRS Limited. Our
opinion is not qualified in respect of this matter.
b) Here, sufficient audit evidence regarding inventories and accounts payable could not be
obtained. The possible effects of this inability to obtain sufficient appropriate audit
evidence are deemed to be both material and pervasive to the financial statements. The
appropriate opinion in this case is disclaimer opinion. The opinion part is given below:
Disclaimer of Opinion
We do not express an opinion on the accompanying financial statements of QRS Limited
(the Company). Because of the significance of the matters described in the Basis for
Disclaimer of Opinion section of our report, we have not been able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on these financial
statements. We were engaged to audit the financial statements of the Company, which
comprise the statement of financial position as at Ashad 31, 2076, and the statement of
comprehensive income, statement of changes in equity and statement of cash flows for
the year then ended, and notes to the financial statements, including a summary of
significant accounting policies.
Basis for Disclaimer of Opinion

We were not appointed as auditors of the Company until after Ashad 31, 2076 and thus
did not observe the counting of physical inventories at the end of the year. We were
unable to satisfy ourselves by alternative means concerning the inventory quantities held
at Ashad 31, 2076, which are stated in the statement of financial position at Rs. 2.5
crores. In addition, the introduction of a new computerized accounts payable system in
Mangisr 1, 2075 resulted in numerous errors in accounts receivable. As of the date of our
audit report, management was still in the process of rectifying the system deficiencies and
correcting the errors. We were unable to confirm or verify by alternative means accounts

payable included in the statement of financial position at a total amount of Rs.35 lakh as
at Ashad 31, 2076. As a result of these matters, we were unable to determine whether any
adjustments might have been found necessary in respect of recorded or unrecorded
inventories and accounts payable, and the elements making up the statement of
comprehensive income, statement of changes in equity and statement of cash flows.
Answer No. 13
a) The auditor shall determine which of the matters communicated with those charged with
governance are the key audit matters. Determining the key audit matters to communicate
in the auditor’s report is a matter of the auditor’s professional judgment. The auditor’s
decision-making process in determining key audit matters is designed to select a smaller
number of matters, from the matters communicated with those charged with governance,
based on the auditor’s judgment about which matters were of most significance in the
audit. The significance of a matter is judged by the auditor in the context in which it is
being considered. Significance can be considered in the context of quantitative and
qualitative factors, such as relative magnitude, the nature and effect on the subject matter
and the expressed interests of intended users or recipients. This involves an objective
analysis of the facts and circumstances, including the nature and extent of communication
with those charged with governance. For example, the auditor may have had more in-
depth and frequent communications with those charged with governance on more difficult
and complex matters. The auditor may develop a preliminary view at the planning stage
about matters that are likely to be the key audit matters in the audit and may communicate
this with those charged with governance when discussing the planned scope and timing of
the audit.
The number of key audit matters to be included in the auditor’s report may be affected by
the size and complexity of the entity, the nature of its business and environment, and the
facts and circumstances of the audit engagement. In general, the greater the number of
key audit matters, the less useful the auditor’s communication of key audit matters may
be. When the auditor has determined a long list of key audit matters, the auditor may need
to reconsider whether each of these matters meets the definition of a key audit matter. The
auditor’s determination of key audit matters is limited to those matters of most
significance in the audit of the financial statements of the current period, even when
comparative financial statements are presented.
In making this determination, the auditor shall take into account areas of significant
auditor attention in performing the audit, including:
i. Areas identified as significant risks or involving significant auditor judgment
including significant transactions with related parties. Areas of significant
management judgment and significant unusual transactions may often be
identified as significant risks.
ii. Areas in which the auditor encountered significant difficulty during the audit,
including with respect to obtaining sufficient appropriate audit evidence for
example, related party transactions, limitations on the group audit.

iii. Circumstances that required significant modification of the auditor’s planned

approach to the audit, including as a result of the identification of a significant
deficiency in internal control.
In addition, considerations that may be relevant to determining the significance of a
matter communicated with those charged with governance and whether such a matter is a
key audit matter include:
i. The industry in which the entity operates. There may be areas of complexity in
financial reporting that are specific to a particular industry, or accounting policies
unique to that industry.
ii. Recent significant economic, accounting, regulatory or other developments. For
example, significant changes to the economic environment that affected
management’s assumptions or judgments, or the auditor’s approach, may cause the
auditor to determine that a matter is a key audit matter.
iii. Whether the matter involved a number of separate, but related, auditing
considerations. For example, long-term contracts may involve significant auditor
attention with respect to revenue recognition, litigation or other contingencies, and
may have an effect on other accounting estimates.
iv. Whether the auditor determined it was necessary to obtain written representation
from management to support other audit evidence relevant to the matter or one or
more specific assertions in the financial statements relating to the matter. For
example, such written representations may include representations about plans or
intentions that may affect the carrying value or classification of assets and liabilities.
b) Difference between management letter and written representations:

Basis Management letter Written Representations
Meaning It is a letter to management It is a letter or any written form
regarding internal control from the management confirming
deficiencies/weaknesses. its responsibility and its oral
representations.
Issued by Issued by auditor to management or Issued by management or those
those charged with governance. charged with governance to auditor.
Purpose To convey information about To emphasize or impress upon
accounting and management issues management its ultimate
in the entity including responsibility for the financial
weakness/deficiencies in internal statements and for the completeness
control system to management. of the information provided to the
auditor.
Timing Provided at the completion of audit Written representations are dated as
program. near as practicable to, but not after,
the date of the auditor’s report on
the financial statements.
Nature It is outcome of auditor’s These are necessary information
observations in the form of report that the auditor requires in

about the entity and its system, connection with the audit of the
accounting policies and procedures, entity’s financial statements, so are
internal controls, and operating audit evidence or support other
policies. audit evidence relevant to the
financial statements
AUDIT PROCESS-AUDIT OF SPECIALIZED ENTERPRISES
Answer No. 14
Operation risk of banks refers to the risk of direct or indirect loss resulting from inadequate or
failed internal processes, people and systems or from external events. Factors that contribute
significantly to operational risk include the following:
 The need to process high volumes of transactions accurately within a short time. This
need is almost always met through the large-scale use of IT, with the resultant risks of:
- Failure to carry out executed transactions within the required time, causing an
inability to receive or make payments for those transactions;
- Failure to carry out complex transactions properly;
- Wide-scale misstatements arising from a breakdown in internal control;
- Loss of data arising from systems’ failure;
- Corruption of data arising from unauthorized interference with the systems; and
- Exposure to market risks arising from lack of reliable up-to date information.
 The need to use electronic funds transfer or other telecommunications systems to transfer
ownership of large sums of money, with the resultant risk of exposure to loss arising from
payments to incorrect parties through fraud or error.
 The conduct of operations in many locations with a resultant geographic dispersion of

transaction processing and internal controls. As a result:
- There is a risk that the bank’s worldwide exposure by customer and by product may
not be adequately aggregated and monitored; and
- Control breakdowns may occur and remain undetected or uncorrected because of the
physical separation between management and those who handle the transactions.
 The need to monitor and manage significant exposures that can arise over short time-
frames. The process of clearing transactions may cause a significant build-up of
receivables and payables during a day, most of which are settled by the end of the day.
This is ordinarily referred to as intra-day payment risk. These exposures arise from
transactions with customers and counterparties and may include interest rate, currency
and market risks.
 The handling of large volumes of monetary items, including cash, negotiable instruments
and transferable customer balances, with the resultant risk of loss arising from theft and
fraud by employees or other parties.

 The inherent complexity and volatility of the environment in which banks operate,
resulting in the risk of inappropriate risk management strategies or accounting treatments
in relation to such matters as the development of new products and services.
 Operating restrictions may be imposed as a result of the failure to adhere to laws and
regulations. Overseas operations are subject to the laws and regulations of the countries in
which they are based as well as those of the country in which the parent entity has its
headquarters. This may result in the need to adhere to differing requirements and a risk
that operating procedures that comply with regulations in some jurisdictions do not meet
the requirements of others.
Answer No. 15
As an external auditor of a retirement fund, following are the key areas to be covered during
the audit of retirement benefit funds:
i. Legal framework
Examine the legal framework such as the approval of retirement from Inland Revenue
Department, byelaws of the fund and other relevant legal compliance.
ii. Contribution
Test the contributions from the employee and employer to determine whether the amounts
received by or due to the plan are properly determined and recorded and disclosed in the
financial statements, and whether any appropriate allowance have been made for
uncollectable amounts.
iii. Investments
Ensure whether the funds are invested as per the established investment policy of the
retirement fund. Determine whether the investments are properly recorded, owned by the
fund, properly valued at fair value as of the financial statement date and properly
presented in the financial statements and appropriate related discourse have been made.
iv. Investment income
Test whether the income from the fund’s investments has been properly recorded. Also
test the allocation of investment income to individual participant accounts and evaluates
whether investment income are properly presented in the financial statements and the
appropriate related disclosures are made.
v. Benefit payments
Benefits are tested to determine whether the payments are in accordance with fund
provisions and related documents, whether payments are made to or on behalf of the
persons entitled to them and only to such persons, and whether transactions are properly
recorded in the proper account, amount and period. Also examine the application of
applicable tax laws on the benefit payments.
vi. Liabilities and plan obligations
Perform tests to determine whether all fund liabilities are reported in the financial
statements. In a defined benefit plan, the auditor will test plan obligations to determine
that they are properly estimated and reported in the financial statements. Testing plan
obligations typically will include using the work of an actuary. Thus, the actuarial report
should be examined and tested whether the work of actuary can be relied.
vii. Loans to participants

Loans to participants and the related interest are tested to determine whether the amounts
due the fund have been properly identified, valued, recorded and disclosed in the financial
statements.
viii. Administrative expenses
Expenses may be tested to determine if they are in accordance with agreements, are
properly classified and are recorded in appropriate amounts in the proper period.
ix. Participant data
The auditor applies procedures to relevant participant data, such as demographic data
(e.g., sex, marital status, birth date and period of service); payroll data relevant to
determining contributions and benefit payments (e.g., wage rate, hours worked, earnings
and contributions to the plan); participant elections (e.g., investment elections and elected
deferral rates); and benefit data (e.g., benefit levels and options selected) to determine
whether all covered employees have been properly included and whether accurate
participant data were supplied to fund management and the actuary, if applicable. This
work often is done in conjunction with other audit areas such as contributions or benefits
testing. The auditor also tests whether investment income has been properly allocated to
individual participant accounts. In addition, the auditor should examine whether the KYM
(Know Your Member) has been updated of all participants and the AMLCFT Directive
issued for retirement benefit fund has been complied with.
Answer No. 16
Audit program for receipt of donations is given below:
• Internal control system: Existence of internal control system particularly with
reference to division of responsibilities in respect of authorised collection of
donations, custody of receipt books and safe custody of money.
• Custody of receipt books: Existence of system regarding issue of receipt books,
whether unused receipt books are returned and the same are verified physically
including checking of number of receipt books and sequence of numbering therein.
• Receipt of cheques: Receipt book should have carbon copy for duplicate receipt and
signed by a responsible official. All details relating to date of cheque, bank’s name,
date, amount, etc, should be clearly stated.
• Bank reconciliation: Reconciliation of bank statements with reference to all cash
deposits not only with reference to date and amount but also with reference to receipt
book.
• Cash receipts; Register of cash donations to be vouched more extensively. If
addresses are available to donors who had given cash, the same may be cross-checked
by asking entity to post thank you letters mentioning amount and receipt number.
• Foreign contributions: Check the compliance with applicable laws and regulations in
addition to bank receipts confirmation.
Audit program for remittance of donations to different NGOs is given below:

• System of NGO’s selection: System for selecting NGO to whom donations have been
sent.

• Mode of sending remittance: all remittances are through account payee cheques or
direct bank transfers. Remittances through demand draft would also need to be
scrutinised thoroughly with reference to the recipient.
• Confirming receipt of remittance: All remittances are supported by receipts and
acknowledgments.
• Identity: Recipient NGO is a genuine entity. Verify the address, registration
documents, objectives, bank account etc.
• Direct confirmation procedure: Send confirmation letters to entities to whom
donations have been paid.
• Donation utilisation: Utilisation of donations for providing relief for flood victims and
not from any other purpose. Check the supporting documents and reports sent by
different NGOs.
ASSURANCE AND RELATED SERVICES
Answer No. 17
a) Compilation engagement refers to an engagement in which a practitioner applies
accounting and financial reporting expertise to assist management in the preparation and
presentation of financial information of an entity in accordance with an applicable
financial reporting framework, and reports as required by standard on compilation
engagement. It is not an assurance engagement, a compilation engagement does not
require the practitioner to verify the accuracy or completeness of the information
provided by management for the compilation, or otherwise to gather evidence to express
an audit opinion or a review conclusion on the preparation of the financial information.
Management retains responsibility for the financial information and the basis on which it
is prepared and presented.
Management may request a professional accountant in public practice to assist with the
preparation and presentation of financial information of an entity. Financial information
that is the subject of a compilation engagement may be required for various purposes
including:
(a) To comply with mandatory periodic financial reporting requirements established in
law or regulation; or
(b) For purposes unrelated to mandatory financial reporting under relevant law or
regulation, including for example:
For management or those charged with governance, prepared on a basis appropriate for
their particular purposes (such as preparation of financial information for internal use).
For periodic financial reporting undertaken for external parties under a contract or other
form of agreement (such as financial information provided to a funding body to support
provision or continuation of a grant).
For transactional purposes, for example to support a transaction involving changes to the
entity’s ownership or financing structure (such as for a merger or acquisition).

b) 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 audit tools to conduct
the management audit in general are:
i. Questionnaire
ii. Interview with employee and managers
iii. Examination and
iv. Observation
i. Questionnaire
Management audit questionnaire is an important tool for conducting the management
audit. It is through these questionnaires that the auditors make an inquiry into important
facts measuring current performance. Such questionnaires aim at a comprehensive and
constructive examination of an organization’s management and its assigned tasks. Overall
it is concerned with the appraisal of management actions in accomplishing the
organization’s objectives. The primary objective is to highlight the weaknesses and
deficiencies of the organization. Normally there are three possible answers to the
questions as Yes, No or Not applicable. The questionnaire comments on negative answers
not only provide documentation for future reference but more important provide
background information for undertaking remedial action. Thus the management audit
questionnaire for this part of the audit not only serves as management tool to analyse the
current situation, but also enables the management auditors to synthesis those elements
that are causing organizational difficulties and deficiencies.
ii. Interview with employee and managers
The interview with employees and managers collects most evidence about the
performance and achievement of management’s action. The interview may cover
information about objectives, planning process, organisation, control systems: procedures,
functional areas etc.
iii. Examination
Examination involves the examination of information, documents and records of
organization which may provide evidence regarding the performance of management. It
also help to confirm the information gathered by questionnaire and interview. The
information should be carefully studied to ascertain the real position of organisation.
iv. Observation
Management auditor may sometimes have to observe pertinent activities and conditions
in the organization to understand in better way. The auditor may prepare organizational
charts and flow charts as result of his observation. This will give more insight in to the
activities undertaken.
OTHER SERVICES
Answer No. 18
Generally, the term ‘forensic accounting’ is used to describe the wide range of investigative
work which forensic accountants in practice could be asked to perform. The work would

normally involve an investigation into the financial affairs of an entity and is often associated
with investigations into alleged fraudulent activity. Forensic accounting refers to the whole
process of investigating a financial matter, including potentially acting as an expert witness if
the fraud comes to trial. Finally, ‘forensic auditing’ refers to the specific procedures carried
out in order to produce evidence. A Forensic Audit is an examination of a company’s
financial records to derive evidence which can be used in a court of law or legal proceeding.
Forensic audit investigations are made for following reasons:
i. Corruption
Corruption is involved in around one third of all frauds as reflected by the research. There are
three types of corruption fraud: conflicts of interest, bribery, and extortion.
• In a conflict of interest fraud, the fraudster exerts their influence to achieve a personal
gain which detrimentally affects the company. The fraudster may not benefit financially,
but rather receives an undisclosed personal benefit as a result of the situation. For
example, a manager may approve the expenses of an employee who is also a personal
friend in order to maintain that friendship, even if the expenses are inaccurate.
• Bribery is when money (or something else of value) is offered in order to influence a
situation.
• Extortion is the opposite of bribery, and happens when money is demanded (rather than
offered) in order to secure a particular outcome.
ii. Asset misappropriation
By far the most common frauds are those involving asset misappropriation, and there are
many different types of fraud which fall into this category. The common feature is the theft of
cash or other assets from the company, for example:
• Cash theft – the stealing of physical cash, for example petty cash, from the premises of a
company.
• Fraudulent disbursements – company funds being used to make fraudulent payments.
Common examples include billing schemes, where payments are made to a fictitious
supplier, and payroll schemes, where payments are made to fictitious employees (often
known as ‘ghost employees’).
• Inventory frauds – the theft of inventory from the company.
• Misuse of assets – employees using company assets for their own personal interest.
iii. Financial statement fraud

This is also known as fraudulent financial reporting, and is a type of fraud that causes a
material misstatement in the financial statements. It can include deliberate falsification of
accounting records; omission of transactions, balances or disclosures from the financial
statements; or the misapplication of financial reporting standards. This is often carried out
with the intention of presenting the financial statements with a particular bias, for example
concealing liabilities in order to improve any analysis of liquidity and gearing.

AUDIT ISSUES-AUDIT UNDER COMPUTERISED ENVIRONMENT
Answer No. 19
The nature of the risks and the Internal Control System in CIS environment include the
following:
a. Lack of Transaction Trails - Some computer information systems are designed so that a
complete transaction trail that is useful for audit purposes might exist for only a short
period of time or only in computer readable form. Where a complex application system
performs a large number of processing steps, there may not be a complete trail.
Accordingly errors embedded in an application’s program logic may be difficult to detect
on a timely basis by manual procedures.
b. Uniform processing of Transactions - Computer programs processing transactions
uniformly, virtually eliminating the occurrence of clerical errors. However, if
programming error exists all transactions will be processed incorrectly.
c. Lack of Segregation of functions - Many controls becomes concentrated in a CIS
environment allowing data processing of incompatible functions.
d. Potential for errors and Irregularities - The potential for human error in the development,
maintenance and execution of computer information systems may be greater than in
manual systems, because of the level of detail inherent in these activities. Also, the
potential for individuals to gain unauthorized access to data or to alter data without visible
evidence may be greater in CIS environment than in manual systems.
e. Initiation or Execution of Transactions - In a CIS process certain types of transactions are
triggered internally by the system, the authorization for which may not be documented as
in manual system. In such cases, management; authorization of these transactions may be
implicit.
f. Dependence of other controls over computer processing - Certain manual control
procedures are dependent on computer generated reports and outputs for their
effectiveness. In term, the effectiveness and consistency of transaction processing
controls are dependent on the effectiveness of general computer information systems
controls.
g. Increased management Supervision - Computer information can offer management a
variety of analytical tools that can enhance the effectiveness of the entire internal control
structure.
AUDIT ISSUES -FRAUD AND AUDITOR’S LIABILITY
Answer No. 20
a) If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor
encounters exceptional circumstances that bring into question the auditor’s ability to
continue performing the audit, the auditor shall:
i. Determine the professional and legal responsibilities applicable in the circumstances,
including whether there is a requirement for the auditor to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities;

ii. Consider whether it is appropriate to withdraw from the engagement, where

withdrawal is possible under applicable law or regulation; and
iii. If the auditor withdraws:
• Discuss with the appropriate level of management and those charged with
governance the auditor’s withdrawal from the engagement and the reasons for the
withdrawal; and
• Determine whether there is a professional or legal requirement to report to the
person or persons who made the audit appointment or, in some cases, to
regulatory authorities, the auditor’s withdrawal from the engagement and the
reasons for the withdrawal.
b) Professional Accountant should conduct a Customer Due Diligence as required by Money

laundering act when they prepare for or carry out transactions for their client concerning
the following activities:
- buying and selling of real estate;
- managing of client money, securities or other assets;
- management of bank, savings or securities account;
- organization of contributions for the creation, operation or management of companies;
- Creation, operation or management of legal persons or arrangements, and buying and
selling of business entities.
Customer Due Diligence includes following:

- Keeping and verifying identification document of the key persons (Directors/ owners/
senior management personnel)
- The address of the registered office, and, if different, a principal place of business
- Appointing a contact person in firm and communicating the details of the contact person
to Financial Information Unit of Nepal Rastra Bank
- Make a suspicious transaction report to the financial Information unit.
However, accountants acting as independent legal professionals, are not required to report
suspicious transactions if the relevant information was obtained in circumstances where they
are subject to professional secrecy or legal professional privilege.

Paper 4: Corporate Laws

Revision Questions:
NEPAL CHARTERED ACCOUNTANTS ACT, 2053 AND RULES, 2061
1. Mr. Mohan Lama Obtained the certificate of auditor of class ‘B’ pursuant to the Auditors Act, 2031
(1975). He went to Australia in the year 2040 and settled there. Due to some critical problems in Australia
he returned back permanently to Nepal in Kartik, 2076. Now he is contemplating of carrying accounting
profession in Nepal. He applied to ICAN for membership of Registered Auditor in the month of Poush,
2076. The Council of ICAN is in confusion whether to issue Mohan Lama Membership of the Institute or
not. Advice the Council of ICAN on the light of Nepal Chartered Accountants Act/Regulations.
2. Mr. Ramu Sherchan, accounting professional convicted by a court in a criminal offence involving moral
turpitude and punished thereof. The council removed his name from the Membership Register. After
completion of punishment he wishes to restore his membership. Can he do so?
COMPANIES ACT, 2063

3. Himalayan Airlines Private Limited is registered as a foreign company in Company Registrar Office in
2070. The corporate office of the company is located at Sinamangal, Kathmandu. It has been operating in
profit from the first year of its operation in Nepal. In Posh 2076, Civil Aviation Authority of Nepal (CAAN)
published a notice to prohibit foreign airlines company to operate in Nepal. Is the registration of Himalayan
Airlines in Nepal bound to be cancelled? Advice the company and the procedures to be adopted by it in the
light of Companies Act, 2063
4. Gimi Golf Club is currently registered under Association Registration Act, 2034. The executive
committee of the club has made decision to register the club under Company Act, 2063 as a non-profit
distributing company. You as a consultant, advise the committee on this matter.
SECURITIES ACT, 2063

5. Explain the activities deemed to have affected stock exchange and the punishment if any levied for such
activities pursuant to the Securities Act, 2063.
BANKS AND FINANCIAL INSTITUTIONS ACT, 2073

6. Yes Bank is in the process of compulsory liquidation. Mr. Johnson, a Chartered Accountant is appointed
for liquidation proceedings of the bank. He published notice for the information of the creditors/depositors
to make their claims against the bank. The depositors/creditors made the claims accordingly. Now, you are
required to guide Mr. Johnson for the preparation of the detailed liquidation plan for submission to the
court.
7. The following data is taken from the Balance Sheet of Hamro Development Bank Limited as on Ashadh
31, 2076:
5 Million Equity shares of Rs. 100 each Rs. 50, 00,00,0000
General Reserve Rs. 10, 00,00,0000
Total Debts Rs. 90, 00,00,0000

The Board of Directors of the Bank has resolved to buy back shares from the open market.
(i) Calculate the maximum amount of share capital that the Bank can buy back.
(ii) What is the time limit for completion of the buy-back?
(iii) Reliance Bank wishes to re-issue the bought shares to its employees who have served the Bank since
its incorporation. Comment.
NEPAL RASTRA BANK ACT, 2058
8. Dr. Chiranjibi Nepal, governor of Nepal Rastra Bank is retiring from Nepal Rastra Bank after serving
tenure of 5 years on 2076/12/5. The bank notes signed by the governor have legal tender in Nepal. Thus,
the post of governor is also viewed as celebrity. In this regard many persons desire to become the governor
of the central bank. CA. Maha Prasad Adhikari, CEO of Investment Board of Nepal retired from the post
of deputy governor of Rastra Bank 5 years back. Before becoming deputy governor, he served Rastra Bank
for 28 years. He holds Masters Degree in Management from Tribhuvan University as well and also
subscribes 4.5% equity shares of Machapuchchhre Bank Limited since last 10 years. On the light of Nepal
Rastra Bank Act, 2058 you are required to discuss his eligibility for appointment in the post of Governor
of Rastra Bank.
AUDIT ACT, 2075

9. The post of Auditor General was vacant for 4 months. There was a huge protest from the opponent
political parties regarding the vacant post. The President of Nepal upon the recommendation of ICAN
appointed Mr. Lokman Tamang, a Chartered Accountant member of ICAN having over 25 years of
experience in audit as Auditor General of Nepal. Examine the validity of the appointment of Mr. Lokman
Tamang.
INDUSTRIAL ENTERPRISES ACT, 2073

10. Mr. Ram Lal applied to the Department of Industries for the registration of a large biscuit industry on
2076/7/15. The Department refused to register the industry and notified the applicant on 2076/7/28 along
with the reasons. Mr. Ram Lal is contemplating for remedy against the decision of the Department and
approached you on 2076/9/5 to advise him on this matter. Please advise him as an expert whether he can
obtain any remedy.
FOREIGN INVESTMENT AND TECHNOLOGY TRANSFER ACT, 2075
11. Johnson & Nicolson, a US Company made foreign investment in Deurali Pharmaceuticals Limited, a
company registered in Nepal in the form of share investment before 5 years. During the fiscal year 2075/76,
Deurali Pharmaceuticals earned profit for the first time. Can Johnson & Nicolson repatriate dividend to US.
Give your opinion on the light of Foreign Investment and Technology Transfer Act, 2075.

INSURANCE ACT, 2049

12. ‘Subrogation’ and ‘Contribution’ are the fundamental principles of insurance. However, their scope
varies. In the light of this statement, explain the difference between these two terminologies.
LABOUR ACT, 2074 AND RUES, 2075

13. Kathmandu Pashmina Udyog is in operation with 200 Nepalese workers. Mr. Ram Prasad Kafle, the
manager thinks the business of the Udhyog would be more successful, if he recruited certain foreign
national in the post of knitting master. Explain the procedures required to be followed to appoint foreign
nationals as per the provisions of Labour laws.
INTERNATIONAL FINANCIAL TRANSACTIONS ACT, 2054
14. Explain the process of obtaining license by the international financial entity to carry out international
financial transactions pursuant to the International Financial Transactions Act, 2054.
COOPERATIVES ACT, 2074 & RULES, 2075
15. During the course of inspection of the Dildar Cooperatives Bank Limited, the Registrar observed serious
comments on inspection and supervision report of Nepal Rastra Bank. Can the Registrar call Extraordinary
General Meeting of the Cooperatives Bank itself in such situations? Express your view in the light of the
Cooperatives laws.
INSOLVENCY ACT, 2063

16. ABC Limited is facing insolvency proceedings from its creditors and the court has appointed an inquiry
official under Section 10(3) on the basis of an application made under Section 4(1). The inquiry official has
completed inquiry proceedings of ABC Limited. Is the inquiry official required to call the meeting of the
creditors before submitting his or her report to the Court? You are required to put your view on the light
of Insolvency Act, 2063
ASSET (MONEY) LAUNDERING PREVENTION ACT, 2064 & Rules, 2073

17. Define beneficial owner. Explain the measures to be adopted by the Reporting Entity in identification
of beneficial owner as provided in Asset (Money) Laundering Prevention Act, 2064.
PUBLIC PROCUREMENT ACT, 2063 AND RULES 2064
18. Explain the circumstance/s requiring the Public Entity to make procurement through sealed quotation.
What are the matters to be specified in the sealed quotation form? Your answer shall be based on the light
of the Public Procurement Laws of Nepal.

ARBITRATION ACT, 2055

19. Can any of the parties of the arbitration demand for removal of arbitrator? Explain in the light of
Arbitration Act, 2055.
BANKING OFFENSE AND PUNISHMENT ACT, 2064
20. NIC Bank approved term loan of Rs. 40 million (to be disbursed into 4 half yearly installments) to
Graphite Hotels Private Limited. Accordingly the Bank disbursed first installment of 10 million
immediately. The Managing Director of the hotel approached the bank for disbursement of second
instalment after 6 months. The bank refused to disburse the loan showing the position of its tight C/D ratio.
The hotel is unable to complete its project due to shortage of fund and suffered loss. Is banking offense
attracted in the case and state the punishment if any pursuant to Banking Offenses and Punishment Act,
2064?
FINANCIAL INTERMEDIARY SOCIETIES ACT, 2055 (1999)
21. Deprox Nepal, an association registered under Association Registration Act, 2034 (1977) is carrying out
the activities of financial intermediation after obtaining license from Nepal Rastra Bank since last 2 years.
It has supplied micro credit according to the norms specified by the Rastra Bank. One of its borrower has
caused default in repayment of micro credit. Highlight the powers of the Deprox Nepal for the recovery of
the micro credit.
FOREIGN EXCHANGE (REGULATION) ACT, 2019 (1962)
22. Xemi Limited exported the Nepalese handicrafts worth $ 40 million to France after duly filling the
declaration form that such amount will be brought in Nepal within a period of four months.
(i) What will be the legal course of action if the Company receives only $ 35 million because the goods
amounting to $ 5 million found defective and are returned to Nepal?
(ii) Will your answer be the same if the Company does not receive money within the prescribed period of
four months?

Answers/Hints:
NEPAL CHARTERED ACCOUNTANTS ACT, 2053 AND RULES, 2061
Answer to Question no 1
Section 16(3) of the Nepal Chartered Accountants Act, 2053 provides that the membership of Registered
Auditor shall, subject to Section 18, be granted to a person who has obtained the certificate of auditor of
class ‘B’, ‘C’, or ‘D’ pursuant to the Auditors Act, 2031 (1975) at the time of the commencement of this
Act.
Section 19(3) of the Act provides where a person having possessed the qualification to obtain the
membership pursuant to sub-section (3) of Section 16 desires to have his or her name registered in the
membership of the Institute, he or she shall submit an application to the Institute no later than Six months
after the date of the commencement of Sections 29 and 49 of this Act, by Government of Nepal upon
notification in the Nepal Gazette. A person who fails to submit an application for the membership within
that period shall not be entitled to obtain the membership as referred to in this Act.
Section 29 and 49 of the Act was made applicable by Government of Nepal with effective from 2059/04/01
as published in Nepal Gazette dated 2059/04/01.
By inferring the above legal provisions of the Act, Mr. Mohan Lama should have applied for the
membership of Registered Auditor within the period of 6 months from 2059/04/01. But he has applied for
membership on Falgun, 2076. The time limitation for applying of membership is expired. Thus, the Council
of ICAN cannot issue Mr. Mohan Lama Membership of ICAN.
Pursuant to section 22(1) of Nepal Chartered Accountants Act, 1997, the Council may issue an order to
remove the name of any member from the membership register in any of the following circumstances:
(a) If the member is convicted by a court of a criminal offence involving moral turpitude and punished
for such offence,
(b) If the member fails to pay the fees required to be paid to the Institute,
(c) If the member fails to abide by the professional conduct referred to in this Act and the Rules
framed under this Act,
(d) If the member becomes insane, or
(e) If the member dies.
Further, sub-section (2) provides that if a person whose name has been removed from membership pursuant
to sub-section (1) makes an application, accompanied by a reasonable ground to again obtain membership,
the Council may decide to grant membership by re-registering his or her name, upon receipt of the fees as
prescribed. The fee is prescribed in Rule 48 (Normal fees + 40% extra charges) and he/she should have
completed Continued Professional Education (CPE) hours pursuant to Rule 55(1) of Nepal Chartered
Accountants Rules, 2061.
Thus, Mr. Ramu Sherchan can restore his name in the membership register upon payment of the
membership fees and completion of the required Continued Professional Education (CPE) hours.

COMPANIES ACT, 2063

Section 158(1) of Companies Act, 2063 provides that a foreign company shall make an application
accompanied by the prescribed fees to the Company Registrar Office for the cancellation of its registration
in the following circumstances:
- If the foreign company wishes to close down the transaction which it is carrying on in Nepal and get
its registration canceled, or
- Where the competent authority acting in accordance with the prevailing law prohibits such company
from carrying on the transaction or business within Nepal.
Civil Aviation Authority of Nepal (CAAN) is a regulatory authority to regulate airlines business in Nepal.
It has published a notice to prohibit foreign airlines company to operate in Nepal. Thus, by referring to the
provisions of section 158(1) of the Companies Act, 2063, registration of Himalayan Airlines is bound to be
cancelled in Nepal.
Himalayan Airlines is required to follow the following procedures for the cancellation of its registration
(section 158):
 It shall make an application accompanied by the prescribed fees to the Company Registrar Office
(CRO) for the cancellation of its registration.
 It shall also submit, along with the application, an evidence and proof confirming that there is no
liability due and payable by such company to any person, organization or governmental or non-
governmental body in Nepal.
 In order to inquire whether the evidence and proof that there is no liability and payables are true or
not, Company Registrar Office shall publish at least twice in a national daily newspaper a notice
inviting claim, accompanied by evidence on any liability if any due and payable by the company to
any person within a period of 21 days.
 Where any person makes claim in pursuance of the notice published by the CRO, the concerned
company shall submit to CRO evidence or proof showing the settlement of such claim. Where the
claim made against such company cannot be settled from the assets of such company situated in
Nepal, such company shall settle the same from its assets situated outside Nepal.
 Where no claim is made by anyone within the specified time limit or a proof is submitted showing
that the claim made has been settled, CRO shall strike the name of such company off the foreign
company register and give information thereof to the concerned company.
Section 166 of the Companies Act, 2063 provides following provisions relating to establishment of
company not distributing profits:
(1) Notwithstanding anything contained elsewhere in this Act, any company may be incorporated to
develop and promote any profession or occupation or to protect the collective rights and interests of
the persons engaged in any specific profession or occupation or to carry on any enterprise for the
attainment of any scientific, academic, social, benevolent or public utility or welfare objective on the
condition of not distributing dividends.
(2) Any person or trustee of a public trust registered pursuant to the prevailing law or any other corporate
body incorporated pursuant to the prevailing law who wishes to register a company for the attainment

or the objective mentioned in Sub-section (1) may make an application to the Office pursuant to
section 4.
(3) The number of promoters promoting such company shall be at least five and after the incorporation
of such company, it may have any number of its members, with a minimum of five members.
(4) The membership of a company incorporated pursuant to sub-section (1) shall not be transferable in
any manner. The membership of any person or body shall ipso facto be terminated in the event of
death, cancellation of registration or dissolution of such member or amalgamation of such member
with another body or company.
(5) Except with the prior approval of the Office, a company incorporated pursuant to Sub-section (1)
shall not add words such as “company”, “ limited “’ or “private limited” at the end of its name.
(6) A company registered pursuant to Sub-section (1) shall obtain approval of the Office to expand its
branch.
SECURITIES ACT, 2063

Section 96 of Securities Act, 2063 provides that if any person individually or in association with others
commits any of the following acts to affect directly or indirectly the transaction in securities, such a person
shall be deemed to have affected stock exchange:
(a) To increase the market price of securities issued by any company with the intent to encourage others
to purchase or sell the securities or to avoid the purchase or sale of such securities,
(b) To decrease the market price of securities issued by any company with the intent to encourage others
to purchase or sell the securities or to avoid the purchase or sale of such securities,
(c) To stabilize the market price of securities issued by any company with the intent to encourage others
to purchase or sell the securities or avoid the purchase or sale of such securities.
Section 101(2) provides that a person who commits any offense referred to in section 96 (activities deemed
to have affected stock exchange), fine of Rs. 50,000 to Rs. 100,000 or with imprisonment for a term not
exceeding 1 year or with both punishments shall be imposed and where anyone has suffered any loss or
damage from such an act, such loss or damage has also to be recovered.
BANKS AND FINANCIAL INSTITUTIONS ACT, 2073

Section 88 of Banks or Financial Institutions Act, 2073 provides that the liquidator shall classify the claims
into claims accepted, partially accepted or rejected and record separately with segregation of it in different
title.
Section 90 provides that the liquidator shall, within 30 days after completion of classification of the claims
pursuant to section 88, prepare detail action plan of the liquidation of the said bank or financial institution
and submit it to the court for approval and information thereof shall be given to the Rastra Bank as well.
The following matters shall be incorporated in the liquidation plan:
(a) Details description of the assets and liabilities of the BFI and its nature and quantity,
(b) The past and projected income and expenditure of the bank or financial institution,

(c) Detail description as to whether to continue the current financial transactions of the bank or financial
institution or to revoke them,
(d) Decision or order of the court,
(e) Details of the actions taken for compensation from the Director, official or employee for the offences
and other unlawful acts they have committed,
(f) Details description as to classification of claims and priority order of payment,
(g) Plan of sale and liquidity of the main asset or group of assets of the BFI,
(h) Liabilities of the bank or financial institution and table of details of the probable payment to be made
to depositors and creditors within the upcoming 90 days,
(i) Costs and expenses of the mandatory liquidation,
(j) Other details as prescribed by the Rastra Bank.
Once the liquidation plan is approved by the court, the plan shall have to be made available to the creditors
of the bank or financial institution for inspection, whose claims are stated in the plan. The Liquidator shall,
in order to settle the claims according to the liquidation plan, publish and broadcast public notice stating
the nature, quantity and priority order for payment of the claims.
(i) Clause (f) of sub-section (2) of section 13 of Banks and Financial Institutions Act, 2073 provides that
the amount of capital bought back by the Bank or Financial Institutions shall not exceed 20% of the sum of
its total paid up capital and general reserve. Thus, the Bank can buy back shares representing Rs.
12,00,00,0000 of its capital.
Clause (e) of sub-section 2 states that the total debts of the Bank or financial institution shall not be more
than twice the sum of its capital and general reserves after the buy back. Since the total debts stand at Rs.
90,00,00,0000, the sum of capital and general reserve after buy back cannot be less than Rs. 45,00,00,0000
i.e. capital up to Rs. 15,00,00,0000 could be bought back. However, because of the restrictive provision of
clause (f) of sub-section (2), the Bank can only buy back 12,00,0000 equity shares.
(ii) The Bank should complete buy-back of shares within six months of the date of approval from Nepal
Rastra Bank or within twelve months from the date of passing special resolution by the General Meeting
whichever is later (sub-section 5).
(iii) As per sub-section (8) of section 13 of the Act, the amount of shares bought back by the bank or
financial institution shall be cancelled within 120 days from the date of buy back. Thus, Hamro
Development Bank cannot re-issue such shares to its employee but has to cancel them within 120 days.
NEPAL RASTRA BANK ACT, 2058

Section 15 of Nepal Rastra Bank Act, 2058 provides that Government of Nepal, the Council of Ministers
shall appoint Governor on the basis of the recommendation of the Recommendation Committee formed by
it. While making recommendation for the appointment of Governor, the Recommendation Committee shall
recommend to Government of Nepal, the Council of Ministers the names of 3 persons renowned in the

field of economic, monetary, banking, finance, commerce, management, commercial law and from among
the Deputy Governors. Government of Nepal, the Council of Ministers shall, out of the names
recommended by the Committee, appoint one person to the Office of Governor.
Section 20 provides provisions relating to qualifications required for appointment of Governor. In order to
be appointed to the post of Governor, a person shall have to meet the following qualifications:
(a) A Nepalese citizen.
(b) Having higher moral character.
(c) Having work experience in economic, monetary, banking, financial and commercial law sectors after
having attained at least master's degree in economics, monetary, banking, finance, commerce,
management, public administration, statistics, mathematics and law. "Work experience" means the
experience of works in the post of special class of Government of Nepal or of the Bank or in the post
of a university Professor or in the post of Executive Chief of class ‘A’ of a commercial bank or of a
financial institution or in the equivalent post or in the post higher than those in terms of the order of
protocol.
(d) Not disqualified under Section 21.
Section 21 provides provisions relating to disqualifications for appointment of Governor. Following

persons shall not be eligible for appointment to the Office of the Governor:
(a) Member or official of a political party, or
(b) The person blacklisted in relation to transaction with a commercial bank or financial institution,
or
(c) An official currently engaged in any commercial bank or financial institution, or
(d) A person having five percent or more shares or voting right in a Commercial Bank or financial
institution, or
(e) A person rendered bankrupt for being unable to pay debts to creditors, or
(f) An insane person, or
(g) A person convicted by a court in an offence involving moral turpitude.
CA. Maha Prasad Adhikari is past deputy governor of Nepal Rastra Bank and has also served Rastra Bank
for 28 years before becoming deputy governor. Thus, he is renowned name in banking.
Considering the implications of section 20 regarding his qualification, he holds Masters Degree in
Management and possesses the required work experience.
Considering the implications of section 21 regarding his disqualifications, he should hold five percent or
more shares or voting right in a Commercial Bank or financial institution. He holds 4.5 % equity shares of
Machapuchchhre Bank Limited. So he is not disqualified
Considering the combined implications of section 15, 20 and 21, CA. Maha Prasad Adhikari is eligible for
the post of Governor of Nepal Rastra Bank.

AUDIT ACT, 2075

Article 240(1) of the Constitution of Nepal, 2072 has laid down provisions regarding the appointment of
Auditor General. It provides that the President of Nepal shall on the recommendation of the Constitutional
Council, appoint Auditor General. The term of office of the Auditor General shall be six years from the
date of appointment.
As per the provisions provided in Article 240(6) of the Constitution of Nepal, the qualification of Auditor
General shall be as follows:
(a) Having experience in the special class of Government of Nepal or having at least 20 years of
experience in audit related work after having obtained a bachelor's degree in management, commerce
or accounting from recognized university by the Government of Nepal or having passed a chartered
accountancy examination,
(b) Not being a member of any political party at the time of appointment,
(c) Having attained the age of 45 years, and
(d) Being of high moral character.
Mr. Lokman Tamang is a CA having over 25 years of experience in audit. Considering Mr. Tamang, not
being a member of any political party, attained the age of 45 years and having high moral character, he is
qualified for the appointment.
The constitution provides that the President of Nepal shall on the recommendation of the Constitutional
Council, appoint Auditor General. In the given case, the Auditor General is appointed on the
recommendation of the ICAN. Thus, the appointment is invalid.
INDUSTRIAL ENTERPRISES ACT, 2073

Section 5 of Industrial Enterprises Act, 2073 provides that on receipt of the application for registration of
industry, the Industry registration Body shall, after making necessary examination regarding the compliance
of required documents as per the Act and regulation thereof, issue registration certificate as prescribed to
the Industry within 15 days from the date of application for registration. If, it is found that the applicant has
failed to comply required formalities as required by the Act or Rules or failed to submit the required
documents, the Industry Registration Body may refuse to register the industry with reasons thereof.
If the Industry registration Body refuses the registration of industry as above, the applicant not satisfied
with the decision, may make an appeal to the Ministry within thirty days from the receipt of issue of notice
of refusal. The Ministry has to decide the matter after necessary examination against the appeal within thirty
days of receipt of application.
In the given case the Department has notified Mr. Ram Lal the decision of refusal of registration of industry
on 2076/7/28. He has approached for legal advice on 2076/9/5 i.e. after 36 days from the date of notification
of refusal of registration of the industry. The time limit for making appeal to the Ministry is within thirty
days from the receipt of issue of notice of refusal. The time limit for making appeal has expired. Thus, Mr.
Ram Lal cannot seek any remedy against the decision of the Department.

FOREIGN INVESTMENT AND TECHNOLOGY TRANSFER ACT, 2075
Section 20 of Foreign Investment and Technology Transfer Act, 2075 provides that the foreign investor
may repatriate the amount of profit or dividend received from foreign investment in the currency in which
foreign investment was made or in another convertible currency with the approval of Nepal Rastra Bank
after payment of all taxes pursuant to the prevailing laws. Thus, Johnson & Nicolson can repatriate dividend
to US. It shall be required to undergo the following processes for the repatriation of the amount:
 Any foreign investor desirous of repatriation of foreign investment or income of foreign investment
may submit an application in the prescribed format to the Foreign Investment Approving Body for
approval. (However, such an application shall be made to the Single Stop Service Centre, if the
Government of Nepal, by a notification in the Nepal Gazette grants to the Single Stop Service
Centre, the power to give approval relating to repatriation of foreign investment or amount earned
therefrom.)
 If the foreign investor has complied conditions and liabilities pursuant to this Act, prevailing laws
or the agreement relating with the foreign investment, the Body shall grant approval of repatriation
within 15 days from the date of receipt of application.
 After receiving of approval from the Body, the foreign investor may make an application to Nepal
Rastra Bank for foreign currency exchange facilities.
 After receiving of application, Nepal Rastra Bank shall provide exchange facilities to the foreign
Investor for the repatriation of foreign investment.
 If the foreign investor is not satisfied with the decision of the Body relating to repatriation of foreign
investment, he/she may file an application to the Ministry. The Ministry shall make decision on the
application within 30 working days.
INSURANCE ACT, 2049

Basis Subrogation Contribution

Meaning Subrogation is the substitution of
Contribution is the right of the
one person in place of another insurers to claim from other sum
person in place of another in payment towards the loss and arises
only where there is double insurance.
relation to the claim, its rights,
remedies or securities. It takes place where different insurers
insure the same interest in respect of
the same property and the same
perils.
Situation Question of Subrogation does not Question of contribution comes
imply more than one insurer. where there is more than one contract
of insurance.
Number of Insurer Subrogation does not imply more Contribution implies more than one
than one contract of
Insurance insurance each of which undertakes a
similar, if not identical, liability in

respect of the same subject matter

and the same interest therein
Objective The objective is substitution of The objective of contribution is to
one person in place of another so distribute the actual loss in such a
that the one who is substituted way that each bears his proper share.
succeeds to the rights and No one insurer is more liable than
remedies of another person. any other, no more than the whole
loss can be recovered.
Outcome After satisfying the claim, the In contribution, after making
insurer stands in the place of payment to the insured, the insurer
insured. He may recover from a recovers the amount that he has paid
third party who would have been in excess of his share from other
liable to pay had there been no insurers.
insurance.
LABOUR ACT, 2074 AND RUES, 2075

Section 22 of the Labour Act, 2074 provides that no employer shall employ any foreign citizen in any
enterprise without acquiring work permit from the Department. However, the employer, if unable to acquire
skilled workers from among Nepali citizens as required, may employ foreign workers subject to the scope
of this section.
Before employing foreign workers, the employer shall publish an advertisement in national daily newspaper
in order to acquire skilled workers from among the Nepali citizens. On failure to receive applications from
Nepali citizens as specified in the advertisement or Nepali citizens could not be selected, the employer
may file an application along with the supporting documents for work permit to the Department of Labour
for hiring foreign workers.
Rule 7 and 8 of Labour Rules, 2075 provides that application shall be submitted to the Department, in the
format prescribed in Annexure 1 of the Rules for acquiring work permit prior to employing a foreign citizen.
Following documents shall be submitted with the application:
(a) Original copy of the published job advertisement pursuant to section 22 (3) of the Act.
(b) Attested copy of passport having validity of at least 6 months.
(c) Bio-data of the foreign citizen.
(d) Proof of payment of applicable taxes by the employer.
(e) Summary of the selection procedure and skills and qualifications of Nepalese candidates, if any,
who applied for the job based on the published advertisement.
(f) Work plan to groom (develop) and train a Nepalese citizen to substitute the foreign worker.
(g) Copy of work approval from Ministry of Home Affairs, if applicable.
On verification of submitted documents, Department shall notify with reason a rejected applicant within 7
days. If application is accepted, the Department shall give work permit within 30 days.

INTERNATIONAL FINANCIAL TRANSACTIONS ACT, 2054

Section 13 of the International Financial Transactions Act, 2054 provides that an international financial
entity interested to carry out international financial transaction shall, for the purpose of obtaining license to
carry out such financial transaction, submit an application to the Accreditation Committee in the format as
prescribed along with the prescribed application fee, details and documentations.
The Accreditation Committee may, before issuing a license to any international financial entity under this
Act, demand from such entity such information, details and documentations as it may deem necessary in
connection with issuing a license for carrying out international financial transactions. It shall be the duty of
the concerned international financial entity to furnish forthwith the information, details and documentations
so requested by the Accreditation Committee.
If the Accreditation Committee, after the necessary inquiry made into an application submitted under
Section 13 for obtaining license to carryout international financial transactions, deems it appropriate to
grant a license to carryout international financial transactions, it shall, upon taking the prescribed amount
of fee, issue a license in the prescribed format setting out there in the necessary terms and conditions. If a
license may not be issued, the applicant shall be informed thereof.
Section 16 of the Act provides that a license issued under section 14 for carrying out international financial
transaction shall be renewed every year.
COOPERATIVES ACT, 2074 & RULES, 2075

Section 40 of the Cooperatives Act, 2074 provides that Registrar or authority authorized by the Registrar
may direct the Cooperative Organization to call an Extraordinary General Meeting in case any of the
following circumstances is found while carrying out inspection or supervision of any Cooperative
Organization:
(a) Performed work in violation of cooperative values practice and principles,
(b) Performed work in violation of this Act, Rules, byelaws as well as internal procedures,
(c) Observation of serious comments on Nepal Rastra Bank inspection and supervision in case of
Cooperative Bank,
(d) Frequent violation of direction issued by Registrar or authority authorized by the Registrar,
(e) Order issued by Registrar or officer authorized by the registrar pursuant to section 42(2).
The Board shall call Extraordinary General Meeting within 35 days from the date of receiving direction
pursuant to above. The matters relating to complaint and observed during the supervision shall be discussed
in the EOGM and report shall be submitted to the Registrar or the authority authorized by the Registrar.
If the Board fails to call the EOGM within 35 days from the date of receiving direction from the Registrar
or the authority authorized by the Registrar, the Registrar or the authority authorized by the Registrar shall
call EOGM.

In the given case, there is observation of serious comments on Nepal Rastra Bank inspection of Dildar
Cooperatives Limited. Thus, there is valid ground for Extraordinary General Meeting. Registrar shall direct
the Dildar Cooperatives Limited to call an Extraordinary General Meeting. If the Board fails to call the
EOGM within 35 days from the date of receiving direction from the Registrar, the Registrar can call EOGM.
INSOLVENCY ACT, 2063

The issue provided in the question is based on the provisions of section 21 of Insolvency Act, 2063. The
Act has laid down the following provisions:
(1) The inquiry officer shall, before submitting his or her report to the Court, convene a meeting of the
creditors of the company to discuss his or her report in order to know the views of the creditors on
the future plan of the company which has become insolvent, and every person who is identified as a
creditor of the company from the accounts and other records of the company shall also be invited to
attend such meeting.
(2) A notice indicating the venue, date, time and agenda of the meeting shall be given to every person
identified as a creditor under Sub-section (1) in advance of at least 7 days, and the notice shall also
be published at least two times in a daily newspaper of national circulation.
(3) While giving a notice, it may be given by a letter, telex, telefax, e-mail or any other means of
electronic communication which can be recorded.
(4) Where any person other than a person mentioned in Sub-section (1) makes any claim against the
company as a creditor, the inquiry official may ask that person to submit evidence thereof and detailed
description of the claim against the company.
(5) The inquiry official may dismiss the claim of a person who fails to submit the evidence or description
referred to in Sub-section (4), and where the claim is so dismissed, such person shall not be entitled
to attend the meeting of creditors. However, a person shall not be considered to be a creditor of the
company by the reason only that the person has taken part in the meeting of creditors.
(6) The inquiry official shall chair the meeting of creditors.
(7) The meeting of creditors shall make decision by majority. In the event of a tie, decision shall be made
by lucky draw. The inquiry official may ascertain the voting right of creditors in proportion to the
claim made on the debts due to be paid immediately by or payable by the Company and specify the
mode of voting.
(8) The directors of the company or the officers invited by the inquiry official may participate in the
meeting of creditors. However, they shall not be entitled to take part in voting.
Thus, the inquiry official is required to call the meeting of the creditors before submitting his or her report
to the Court.
ASSET (MONEY) LAUNDERING PREVENTION ACT, 2064 & RULES, 2073

Section 2 of Money Laundering Prevention Act, 2064 defines "beneficial owner" means a natural person
who, directly or indirectly owns or controls or directs or influences a customer, an account, or the person
on whose behalf a transaction is conducted, or exercises effective control over a legal person or legal
arrangement or remains as an ultimate beneficiary or owner of such activities.

Section 7C of Money Laundering Prevention Act, 2064 has provided the following measures to be adopted
by the Reporting Entity in identification of beneficial owner:
 Reporting Entity shall, when establishing business relationship or conducting transaction, identify
the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner.
 Reporting entity shall ascertain whether a person is acting or establishing business relationship or
conducting transaction, on behalf of another person.
 Reporting entity, while ascertaining whether a person is establishing business relation or transaction
on behalf of other, shall follow the identification and verification measures as stipulated in clause
(d) of sub-section (4) of section 7A of the Act.
PUBLIC PROCUREMENT ACT, 2063 AND RULES, 2064

Rule 84(1) of the Public Procurement Rules, 2064 provides that the Public Entity may as per approved
program and procurement plan procure goods, construction works and other services valuing up to two
million rupees by inviting a sealed quotation.
Further, sub-rule (1A) provides that notwithstanding anything mentioned in this Rule, X-ray, ECG, medical
goods, medical equipment valuing up to Rs. 50 lakhs may be procured by inviting a sealed quotation.
Before inviting a sealed quotation, a form of sealed quotation stating clearly therein the specifications,
quality, quantity terms & conditions of supply & time and necessary matters of the goods, construction
work or other services to be procured shall have to be prepared.
Sub-rule (2) provides that a Public Entity shall have to specify the following matters as well in a sealed
quotation form:
 Details of the goods to be supplied, construction works to be completed or the service to be provided,
 Qualification of the sealed quotation giver (except in the case of procurement of construction),
 Performance security, if required,
 Validity period of sealed quotation,
 Statement that sealed quotation form shall be duly signed by the sealed quotation giver,
 Method of evaluation of a sealed quotation,
 Warranty related liability in the case of goods and defect liability in the case of construction work.
In inviting a sealed quotation, a notice shall be published in a national or local level newspaper by giving a
period of at least 15 days. The sealed quotation, once submitted, cannot be withdrawn or amended. The
lowest evaluated sealed quotation falling within the cost estimate after fulfilling the specified terms and
conditions shall have to be approved.
ARBITRATION ACT, 2055

Section 11 of the Arbitration Act, 2055 provides provisions relating to removal of arbitrator. It provides the
following provisions:

(1) The condition and procedure for removal of an arbitrator shall be as mentioned in the agreement.
(2) In case the condition and procedure has not been mentioned in the agreement, any party may, in any
of the following circumstances, submit an application to the arbitrator requesting for permission to
remove an arbitrator within 15 days from the date of his/her appointment or from the date when the
party learns that the concerned arbitrator has failed to act:
(a) In case any arbitrator is clearly seen to have shown a bias toward or discriminated against any
party instead of working in an impartial manner,
(b) In case any arbitrator engages in improper conduct or commits fraud in the course of arbitration,
(c) In case any arbitrator frequently commits mistakes or irregularities in the course of arbitration,
(d) In case any arbitrator does not attend arbitration meetings or refuses to take part in arbitration
proceedings for more than three times without furnishing satisfactory reasons with the objective
of prolonging or delaying the arbitration proceedings in an improper manner,
(e) In case any arbitrator takes any action which is opposed to the principles or rules of natural
justice, or
(f) In case any arbitrator is found to be lacking the necessary qualifications, or to have ceased to
be qualified.
(3) Upon receipt of application, the arbitrator whose removal has been demanded does not relinquish
(resign) his/her post voluntarily, or other party does not agree with grounds of his/her removal, the
arbitrator shall take a decision on the matter within 30 days from the date of application.
(4) A complain may be filed before the High Court against the decision pursuant to sub-section (3), and
the decision of the High Court shall be final.
BANKING OFFENSE AND PUNISHMENT ACT, 2064

Section 11 of Banking Offense and Punishment Act, 2064 provides that bank or financial institution which
has once provided the first installment after approving credit facility for a project of borrower shall not stop
the remaining installments in between in the way to cause loss to the working project of the borrower
without sufficient basis and considerable reason.
In the given case, NIC Bank approved term loan of Rs. 40 million to be disbursed into 4 half yearly
installments to Graphite Hotels Private Limited. The bank also disbursed first installment of 10 million
immediately. The bank refused to disburse the second installment of the loan showing the position of its
tight C/D ratio. Due to shortage of the fund, the hotel is unable to complete the project and suffered loss.
The tight position of the C/D ratio of NIC Bank for refusal to disburse the second installment of loan is not
a valid basis and considerable reason. Thus, the act of NIC Bank is an offense in the preview of Banking
Offense & Punishment Act, 2064.
Section 15 of the Act provides that if any person commits any offense specified under section 11, such
person shall be punished with recovery of the claim amount and fine as per claim amount. If offense
pursuant to section 11 is committed by chairman, director or CEO of the concerned institution, he/she shall
be imprisoned for an additional 1 year along with the punishment prescribed in this Act.

FINANCIAL INTERMEDIARY SOCIETIES ACT, 2055 (1999)
Section 11 of the Financial Intermediary Societies Act, 2055 prescribes the following provisions relating to
the powers of the financial intermediary institution in the event of violation of terms of micro credit or
recovery of micro credit:
(1) If any borrower does not abide by the agreement or terms thereof entered into with the institution or
fails to repay the micro credit to the institution within the period specified in the deed or if, upon an
inquiry held by the institution, it appears that the borrower has misused or misappropriated the amount
of the micro-credit so borrowed, the institution may, notwithstanding anything contained in the
prevailing laws, recover its principal and interest by auctioning the security furnished or held by the
borrower to or with the institution, in accordance with the prevailing laws.
(2) If the borrower transfer, in any manner, the title to the security which the borrower has furnished with
the institution to any other person or if, for any reason, the price of the security furnished with the
institution is devalued (decreased), the institution may, notwithstanding anything contained in the
prevailing laws, require the borrower to furnish additional security covering the credit for the same
within the time-limit specified by the institution. If the borrower fails to furnish such a security within
the time limit specified by the institution, it may recover its principal and interest by auctioning the
property furnished as the security.
(3) If in making recovery by making auction pursuant to Subsection (1) or (2), the whole of the principal
and interest of the institution cannot be recovered from such a security, the institution may recover its
principal and interest by auctioning other assets of a member where the member has borrowed the
micro-credit personally and of the members of a group where the micro-credit has been borrowed
collectively.
(4) The amount of expenditure incurred in making auction sale of the property and principal and interest
of the institution shall be deducted from the proceeds of the auction sale made pursuant to this Section,
and the remaining amount shall be returned to the concerned person.
(5) If in making auction sale pursuant to this section, any one does not take over, the institution may itself
take over the property as prescribed.
The institution shall write to the concerned Land Revenue Office for the registration or transmission of
property held as security in the name of the person, if any, who takes over it at the auction sale made pursuant
to Section 11 or in the name of the institution if the institution takes it over because no one has taken it over,
in accordance with the prevailing laws. If a request is made by the institution, the concerned Land Revenue
Office shall effect registration or transmission.
FOREIGN EXCHANGE (REGULATION) ACT, 2019 (1962)
(i) Xemi Limited has filled up the particulars in the declaration form as prescribed by Nepal Rastra Bank
and declared that it will bring foreign exchange $ 40 million within the period of four months. However, it
could bring only $ 35 million because of the fact that the remaining goods found defective and returned

back to Nepal. In such as a case, Nepal Rastra Bank shall grant the approval of receiving such lower amount.
This provision is mentioned in Section 9A (2) of the Foreign Exchange Regulation Act, 1962.
(ii) Section 9A (3) & (4) of the same Act provides that if the exporter could not obtain payment for the
exported goods within the prescribed time limit, it shall deemed to have violated this Act. However, if the
exporter submits application to Nepal Rastra Bank mentioning the valid reasons for the failure to obtain
payments within the prescribed time limit and if Rastra Bank is satisfied it may order the exporter as follows
after prescribing another time limit:
 If the goods have already been sold, to bring payments thereof,
 If the goods have not been sold, to sell them and bring the payments, or to bring the goods back to
Nepal.
In the above case, M/s Xemi Limited failed to bring back the payments within the prescribed time limit and
hence, it shall be deemed to have violated the Act unless it submits the valid reason for failure to obtain the
payment within the time limit. If it could produce such reason, Nepal Rastra Bank may order it to bring
payment, sell them and bring payment or bring back the goods in Nepal as the case may be within revised
time limit.

Paper 5: Management Information and Control System

Revision Questions:
Chapter 1: Organizational Management and Information System
Question No 1:
The wealth of information available from the information system continues to grow at
incredible rates. Search engines such as Google make locating useful information practical.
The impact of information system on various industries has changed over the time. In what
major ways have information systems in business changed during the last 40 years?
Question No 2:
Define the Information Security Governance? State the principles that describe the preferred
behavior to guide governance decision making. Further state the challenges of ineffective
governance and methods to overcome the challenges?
Question No 3:
PQR Ltd is a company engaged in tourism business worldwide having offices at various
locations in Nepal and abroad. Most of the company’s operations are performed online.
However, the existing infrastructure system is facing several operational and security
problems with growing volume of business. It realizes the existing information system must
be upgraded for better delivery of services for improved customer satisfaction and to remain
competitive in global market. The company also developed the IT governance system for the
protection of transaction. As an Information system auditor of the company how would you
audit the practices of IT governance by Executives and Board of Directors?
Chapter 2. Types of Information System

Question No 4
What do you understand by Transaction Processing System (TPS)? Briefly discuss the
key activities involved in a TPS ?
Question No 5
Nepal Micro Limited, a large enterprise with more than 700 employees, plans to implement an
MIS to support middle and senior level management in administration and decision making.
As an expert, what would be your response to the following?
(i) Major limitations of a Management Information System
(ii) What are the major aspects to be looked into by an IS Auditor?
Question No 6
"Information has become a key resource for any type of business activity." Briefly discuss
the various attributes of information.
Chapter 4: System Development Life Cycle-Acquisition, Development, Implementation,

Maintenance and support
Question No 7
ABC is a company that provides hospitality related services in Nepal. The management of
the company realise that the cost of hardware procurement of the company has increased
drastically in the past few months. You are appointed as an information system auditor of
the company to review the control system of hardware procurement of the company. As an
Information system auditor how you would review and evaluate policies and procedures for
controlling the procurement and movement of hardware?

Question No:8
As an Information system auditor how you would review and evaluate processes for
managing third-party services, ensuring that their roles and responsibilities are clearly
defined and monitoring their performance?
Question No 9
What are the possible advantages of System Development Life Cycle (SDLC) from the
perspective of IS Audit?
Question No 10
Explain two primary methods, which are used for the analysis of the scope of a project in
System Development Life Cycle (SDLC).
Question No 11
Discuss the activities that deal with the Systems Development Management Controls in
the IT set-up.
Chapter 5: System Analysis and Design

Question No 12
ABC is a company that provides education related services in Nepal. The management of
the company realise that current manual system of record keeping is not sufficient in the
near future so proposed to implement online system for the administrative works. You are
appointed as a team leader for the development of new system of the company. As a
system development team leader, explain the areas that should be studied in depth to
understand the present system?
Chapter 7. E-Business Enabling Software Package

Question No 13
Define Enterprise resource planning ?
Chapter 8: Protection of Information Assets

Question No 14
ABC is a company that provides tourism related services in Nepal. The ticket booking and
all the reservation is done through online system, The management of the company feels
the IT security policy is not sufficient to prevent the unethical compromise of the system.
You are appointed as an information system auditor of the company. As an auditor how do
you determine that IT security policies exist and it provide adequate requirements for the
security of the environment and compliance is monitored and enforced?
Question No 15
ABC is a company that provides hospitality related services in Nepal. Though its
operations are all online, however, the current information infrastructure contains certain
deficiency in hardware infrastructure. Thus, the management realizes that they need to
review the hardware system control. You are appointed as an information system auditor
for the company. As an information system auditor how would you review and evaluate
controls over remote access into the company’s network such as dial-up, VPN, dedicated
external connections?

Question No 16
ABC is a company that provides retail sales services worldwide to its customers
worldwide. Though its operations are all online, however, the current information
infrastructure is not sufficient to control the access physical infrastructure of data center.
Thus, the management realizes that they need to review the physical access control of the
data center. You are appointed as an information system auditor of the company. As an
auditor how do you determine that physical access control procedures are comprehensive and
being followed by data center and security staff?
Question No 17
Explain the statement by describing operating system access controls to protect IT
resources from unauthorized access?
Chapter 9: Disaster Recovery and Business Continuity Planning

Question No 18
Describe contents of a Disaster Recovery and Planning Document?
Question No: 19
While doing audit or self- assessment of the BCM Program of an enterprise, briefly
describe the matters to be verified?
Question No: 20
Explain the various plans that need to be designed for Business Continuity
Management?
Chapter 10: Auditing and Information System

Question No 21
An organization that chooses to build a risk management program should establish
some principles that will enable the program to succeed. Briefly describe the criteria
for the evaluation of risk?
Question No 22:
ABC is a company that provides tourism related services worldwide to its customers
worldwide. Though its operations are all online, however, the current information
infrastructure is not sufficient to sustain itself in the competitive environment. Thus, the
management realizes that they need to develop a sophisticated system which involves
development of semantic based information system using web technologies, in cloud
computing environment. You are appointed as a information system auditor of the
company. As an auditor of the Information system how would you review the risk
evaluation process of Information System?
Question No 23
Explain how the technology will impact the internal control?
Chapter 11: Ethics and legal Issues in Information Technology

Question No 24
Briefly define

a. Digital signatures and authentication of digitized information

b. digital data exchange and digital reporting standard-XML and XBRL
c. COSO Internal Control Framework
d. Control Objectives for Information and Related Technologies (COBIT)
Chapter 12. Electronic Transactions Act, 2063

Question No 25
Discuss p ower of the Controller to suspend the license under Section 20 and power to
revoke the license under Section 2 1 of Electronic Transaction Act?
Question No 26
Discuss offence related publication of illegal materials in electronic form of Electronic
Transaction Act
Question No 27
Discuss offence related display of false license or certificates of Electronic Transaction Act
.

Answers/Hints:
Chapter 1: Organizational Management and Information System
Answer No 1:
An information system can be any organized combination of people, hardware, software,
communications networks, data resources, and policies and procedures that stores, retrieves,
transforms, and disseminates information in an organization. People rely on modern
information systems to communicate with one another using a variety of physical devices
(hardware) , information processing instructions and procedures (software) ,
communications channels (networks) , and stored data (data resources) . Although today’s
information systems are typically thought of as having something to do with computers, we
have been using information systems since the dawn of civilization.
The business applications of information systems have expanded significantly over the
years. Until the 1960s, the role of most information systems was simple: transaction
processing, record keeping, accounting, and other electronic data processing (EDP)
applications. Then another role was added, namely, the processing of all these data into
useful, informative reports. Thus, the concept of management information systems (MIS)
was born. This new role focused on developing business applications that provided
managerial end users with predefined management reports that would give managers the
information they needed for decision-making purposes. By the 1970s, it was evident that
the pre specified information products produced by such management information systems
were not adequately meeting the decision making needs of management, so the concept of
decision support systems (DSS) was born. The new role for information systems was to
provide managerial end users with ad hoc, interactive support of their decision-making
processes. This support would be tailored to the unique decisions and decision-making styles
of managers as they confronted specific types of problems in the real world.
In the 1980s, several new roles for information systems appeared. First, the rapid
development of microcomputer processing power, application software packages, and
telecommunications networks gave birth to the phenomenon of end-user computing. End
users could now use their own computing resources to support their job requirements instead
of waiting for the indirect support of centralized corporate information services departments.
Second, it became evident that most top corporate executives did not directly use either the
reports of management information systems or the analytical modeling capabilities of
decision support systems, so the concept of executive information systems (EIS) developed.
These information systems were created to give top executives an easy way to get the critical
information they wanted, when they wanted it, and tailored to the formats they preferred.
Third, breakthroughs occurred in the development and application of artificial intelligence

(AI) techniques to business information systems. Today’s systems include intelligent
software agents that can be programmed and deployed inside a system to act on behalf of
their owner, system functions that can adapt themselves on the basis of the immediate needs
of the user, virtual reality applications, advanced robotics, natural language processing, and a
variety of applications for which artificial intelligence can replace the need for human
intervention, thus freeing up knowledge workers for more complex tasks.
Expert systems (ES) and other knowledge-based systems also forged a new role for

information systems. Today, expert systems can serve as consultants to users by providing
expert advice in limited subject areas. An important new role for information systems
appeared in the 1980s and continued through the 1990s: the concept of a strategic role for
information systems, sometimes called strategic information systems (SIS). In this concept,
information technology becomes an integral component of business processes, products, and
services that help a company gain a competitive advantage in the global marketplace.
The mid- to late 1990s saw the revolutionary emergence of enterprise resource planning
(ERP) systems. This organization-specific form of a strategic information system integrates
all facets of a firm, including its planning, manufacturing, sales, resource management,
customer relations, inventory control, order tracking, financial management, human
resources, and marketing—virtually every business function. The primary advantage of these
ERP systems lies in their common interface for all computer-based organizational functions
and their tight integration and data sharing, necessary for flexible strategic decision making.
Corporate world are also entering an era where a fundamental role for IS is business
intelligence (BI). BI refers to all applications and technologies in the organization that are
focused on the gathering and analysis of data and information that can be used to drive
strategic business decisions. Through the use of BI technologies and processes, organizations
can gain valuable insight into the key elements and factors—both internal and external—that
affect their business and competitiveness in the marketplace. BI relies on sophisticated
metrics and analytics to “see into the data” and find relationships and opportunities that can
be turned into profits.
Finally, the rapid growth of the Internet, intranets, extranets, and other interconnected global
networks in the 1990s dramatically changed the capabilities of information systems in
business at the beginning of the 21st century. Further, a fundamental shift in the role of
information systems occurred. Internet-based and Web-enabled enterprises and global e-
business and e-commerce systems are becoming commonplace in the operations and
management of today’s business enterprises. Information systems is now solidly entrenched
as a strategic resource in the modern organization.
Answer No 2:
IT security governance is the system by which an organization directs and controls IT

security .IT security governance should not be confused with IT security management. IT
security management is concerned with making decisions to mitigate risks however IT
security governance determines who is authorized to make decisions.
IT governance is the process of establishing and maintaining a framework to provide

assurance that information security strategies are aligned with and support business
objectives, are consistent with applicable laws and regulations through adherence to policies
and internal controls, and provide assignment of responsibility, all in an effort to manage
risk.
Governance specifies the accountability framework and provides oversight to ensure that
risks are adequately mitigated, while management ensures that controls are implemented to
mitigate risks. It ensures that security strategies are aligned with business objectives and
consistent with regulations.

Properly implemented, governance is a process whereby senior management exerts strategic

control over business functions through policies, objectives, delegation of authority, and
measurement. Governance is management’s control over all other IT processes, to ensure
that IT processes continue to effectively meet the organization’s business needs.
Organizations usually establish governance through an IT steering committee that is

responsible for setting long-term IT strategy, and by making changes to ensure that IT
processes continue to support IT strategy and the organization’s needs. This is accomplished
through the development and enforcement of IT policies, requirements, and standards.
Enterprise security governance results from the duty of care owed by leadership towards
fiduciary requirements. This position is based on judicial rationale and reasonable standards
of care. The five general governance areas are:
• Govern the operations of the organization and protect its critical assets
• Protect the organization's market share
• Govern the conduct of employees
• Protect the reputation of the organization
• Ensure compliance requirements are met
The following principles describe preferred behavior to guide governance decision making.
1. Responsibility: Individuals and groups within the organization understand and accept their
responsibilities in respect of both supply of, and demand for IT. Those with responsibility for
actions also have the authority to perform those actions.
2. Strategy: The organization's business strategy takes into account the current and future
capabilities of IT; the strategic plans for IT satisfy the current and ongoing needs of the
organization's business strategy.
3. Acquisition: IT acquisitions are made for valid reasons, on the basis of appropriate and
ongoing analysis, with clear and transparent decision making. There is appropriate balance
between benefits, opportunities, costs, and risks, in both the short term and the long term.
4. Performance: IT is fit for purpose in supporting the organization, providing the services,
levels of service and service quality required to meet current and future business
requirements.
5. Compliance: IT complies with all mandatory legislation and regulations. Policies and
practices are clearly defined, implemented and enforced.
6. Human Behavior: IT policies, practices and decisions demonstrate respect for Human
Behavior, including the current and evolving needs of all the 'people in the process'.
The challenges of ineffective governance are listed below. These challenges can be very
useful in presenting rationale to leadership for implementing an effective institution security
governance model.

• Understanding the implications of ubiquitous access and distributed information

• Appreciating the institution-wide nature of the security problem
• Overcoming the lack of a game plan
• Establishing the proper institutional structure and segregation of duties
• Understanding complex global legal compliance requirements and liability risks
• Assessing security risks and the magnitude of harm to the institution
• Determining and justifying appropriate levels of resources and investment
• Dealing with the intangible nature of security
• Reconciling inconsistent deployment of security best practices and standards
• Overcoming difficulties in creating and sustaining a security-aware culture
Answer No 3:
Whether the organization has a board of directors, council members, commissioners, or some
other top-level governing body, governance begins with top-level objectives and policies that
are translated into more actions, policies, and other activities downward through each level in
the organization. The purpose of IT governance is the alignment of the IT organization with
the needs of the business. The term IT governance refers to a collection of top-down
activities intended to control the IT organization from a strategic perspective.
Review whether the company has IT Strategy Committee. In organizations where IT

provides significant value, the board of directors should have an IT strategy committee. This
group will advise the board of directors on strategies to enable better IT support of the
organization’s overall strategy and objectives. The IT strategy committee can meet with the
organization’s top IT executives to impart the board’s wishes directly to them. This works
best as a two-way conversation, where IT executives can inform the strategy committee of
their status on major initiatives, as well as on challenges and risks. This ongoing dialogue can
take place as often as needed, usually once or twice per year.
Review whether the company has Information Security Governance. Security governance is
the collection of management activities that establishes key roles and responsibilities,
identifies and treats risks to key assets, and measures key security processes. Depending
upon the structure of the organization and its business purpose, information security
governance may be included in IT governance, or security governance may stand on its own.
Review whether the company has IT Strategic Planning. In a methodical and organized way,
a good strategic planning process answers the question of what to do, often in a way that
takes longer to answer than it does to ask. While IT organizations require personnel who
perform the day-to-day work of supporting systems and applications, some IT personnel need
to spend at least a part of their time developing plans for what the IT organization will be
doing two, three, or more years in the future. Strategic planning needs to be a part of a formal
planning process, not an ad hoc, chaotic activity. Specific roles and responsibilities for
planning need to be established, and those individuals must carry out planning roles as they
would any other responsibility. A part of the struggle with the process of planning stems
from the fact that strategic planning is partly a creative endeavor that includes analysis of
reliable information about future technologies and practices, as well as long-term strategic
plans for the organization itself.

Review whether the company has IT Steering Committee. A steering committee is a body of
middle or senior managers or executives that meets from time to time to discuss high-level
and long-term issues in the organization. An IT steering committee will typically discuss the
future states of the organization and how the IT organization will meet the organization’s
needs. A steering committee will typically consist of senior-level IT managers as well as key
customers or constituents. This provider-customer dialogue will help to ensure that IT as the
organization’s technology service arm will fully understand the future vision of the business
and be able to support future business activities, in terms of both capacity and the ability to
support new activities that do not yet exist.
Review the Policy, Processes, Procedures, and Standards. Policies, procedures, and standards
define IT organizational behavior and uses of technology. They are a part of the written
record that defines how the IT organization performs the services that support the
organization. Policy documents should be developed and ratified by IT management. Policies
state only what must be done or not done in an IT organization.
Review the Information Security Policy. Security policy defines how an organization will
protect its important assets. Like IT policy, information security policy defines several
fundamental principles and activities: The best practice for information security policy is the
definition of a top-down, management-driven information security program that performs
periodic risk assessments to identify and focus on the most important risks in the
organization. Roles and responsibilities define who is responsible for carrying out these
activities. Executive management should have visibility and decision-making power,
particularly in the areas of policy review and risk treatment. It is generally accepted that
security policy and security management should be separate from IT policy and IT
management. This permits the security function to operate outside of IT, thereby permitting
security to be objective and independent of IT. This puts security in a better position to be
able to objectively assess IT systems and processes without fear of direct reprisal.
Review the Privacy Policy: A privacy policy describes how the organization will treat
information that is considered private because it is related to a private citizen. A privacy
policy defines two broad activities in this regard:
• Protecting private information: An organization that is required to collect, store, or
transmit private information is duty bound to protect this information so that it is not
disclosed to unauthorized parties. This part of a privacy policy will describe what
information is obtained and how it is protected.
• Handling private information: Aside from the actual protection of private information,
some organizations may, in the course of their business activities, transmit some or all of
this information to other parts of the organization or to other organizations. A privacy
policy is typically forthright about this internal handling and the transmittals to other
parties. Further, a privacy policy describes how the information is used by the
organization, and by other organizations to which it is transmitted. Privacy policy
typically describes how a private citizen may confirm whether his or her private
information is stored by the organization, whether it is accurate, and how the citizen can
arrange for its removal if he or she wishes.
Review the Procedures and Standard Operating Procedures: Standard operating procedures
describe in step-by-step detail how IT processes and tasks are performed. Formal procedure
documents ensure that tasks are performed consistently and correctly, even when performed

by different IT staff members. In addition to the actual steps in support of a process or task, a
procedure document needs to contain several pieces of metadata: IT procedure documents
are not meant to be a replacement for vendor task documentation. IT procedure documents
need not be remedial and include every specific keystroke and mouse click: they can usually
assume that the reader has experience in the subject area and only needs to know how things
are done in this organization.
Review the IT Standards: IT standards are official, management-approved statements that

define the technologies, protocols, suppliers, and methods that are used by an IT
organization. Standards help to drive consistency into the IT organization, which will make
the organization more cost-efficient and cost-effective.
An IT organization will have different types of standards:
• Technology standards: These standards specify what software and hardware technologies
are used by the IT organization. Examples include operating system, database
management system, application server, storage systems, backup media, and so on.
• Protocol standards: These standards specify the protocols that are used by the
organization. For instance, an IT organization may opt to use TCP/IP v6 for its internal
networks, GRP routing protocols, FTPS for file transfer, SSH for device management,
and so forth.
• Supplier standards: This defines which suppliers and vendors are used for various types
of supplies and services. Using established suppliers can help the IT organization through
specially negotiated discounts and other arrangements.
• Methodology standards: This refers to practices used in various processes including
software development, system administration, network engineering, and end-user
support.
• Configuration standards: This refers to specific detailed configurations that are to be
applied to servers, database management systems, end-user
• workstations, network devices, and so on. This enables users, developers, and technical
administrative personnel to be more comfortable with IT systems, because the systems
will be consistent with each other. This helps to reduce unscheduled downtime and to
improve quality.
• Architecture standards: This refers to technology architecture at the database, system, or
network level. An organization may develop reference architectures for use in various
standard settings. For instance, a large retail organization may develop specific network
diagrams to be used in every retail location, down to the colors of wires to use and how
equipment is situated on racks or shelves.
Chapter 2. Types of Information System

Answer No 4
At the lowest level of management, TPS is an information system that manipulates data
from business transactions. Any business activity such as sales, purchase, production,
delivery, payments or receipts involves transaction and these transactions are to be
organized and manipulated to generate various information products for internal and
external use. For example, selling of a product to a customer will give rise to the
need of further information like customer billing, inventory status and increase in
account receivable balance. TPS will thus record and manipulate transaction data into

usable information.
Major activities involved in a TPS are given as follows:
• Capturing data and organizing in files or databases;
• Processing files/databases using application software;
• Generating information in the form of reports; and
• Processing queries from various quarters of the organization.
Answer No 5
Major Limitations of Management Information Systems (MIS) are as follows:
• The quality of the outputs of MIS is basically governed by the quality of input and
processes.
• MIS is not a substitute for effective management, which means that it cannot replace
managerial judgment in making decisions in different functional areas. It is merely an
important tool in the hands of executives for decision making and problem solving.
• MIS may not have requisite flexibility to quickly update itself with the changing needs of
time, especially in fast changing and complex environment.
• MIS cannot provide tailor-made information packages suitable for the purpose of every
type of decision made by executives.
• MIS takes into account mainly quantitative factors, thus it ignores the non- quantitative
factors like morale and attitude of members of organization, which have an important
bearing on the decision making process of executives or senior management.
• MIS is less useful for making non-programmed decisions. Such types of decisions are not
of the routine type and thus require information, which may not be available from
existing MIS to executives.
• The effectiveness of MIS is reduced in enterprises, where the culture of hoarding
information and not sharing with other holds.
• MIS effectiveness decreases due to frequent changes in top management, organizational
structure and operational team.
The major aspects that an Information Systems Auditor must consider while
implementing an MIS in a Nepal Micro Limited, to support middle and senior level
management in administration and decision making are as follows:
An auditor must–
• Assess the extent to which the system being developed provides for adequate audit
trails and controls to ensure the integrity of data processed and stored;
• Ensure what project control standards are to be complied with’ and determining the
extent to which compliance is being achieved;
• Examine system documentation such as functional specifications to arrive at an
opinion on controls;
• Provide a list of the standard controls, over operational concerns such as response
time, CPU usage, and random access space availability that he/she can use as an
assessment criteria;
• Review Feasibility Study Report and different work products of the Feasibility study
phase;
• Include technical experts to seek their opinion on the technical aspects of
development of MIS;

• Give control objectives, directives and in general, validate the opinion expressed by
technical experts;
• Review some of the control considerations like –
(a) Documented policy and procedures;
(b) Established Project team with all infrastructure and facilities;
(c) Developers/ IT managers are trained on the procedures;
(d) Appropriate approvals are being taken at identified mile-stones;
(e) Development is carried over as per standards, functional specifications;
(f) Separate test environment for development/ test/ production / test plans;
(g) Design norms and naming conventions are as per standards and are adhered to;
Business owners testing and approval before system going live; Version
control on programs;
(h) Source Code is properly secured;
(i) Adequate audit trails are provided in system; and
(j) Appropriateness of methodologies selected.
• Determine whether the system adequately meets earlier identified business
requirements and needs post -implementation review.
• Determine if the expected benefits of the new system are realized and whether users are
satisfied with the new system.
• Review which of the phases till implementation of MIS have not met desired objectives
and whether any corrective actions were taken in post implementation review.
Answer No 6
Some of the important attributes of useful and effective information are as follows:
o Availability - Information is useless if it is not available at the time of need.
Database is a collection of files which is collection of records and data from where
the required information is derived for useful purpose.
o Purpose/Objective - Information must have purposes/objective at the time it is
transmitted to a person or machine, otherwise it is simple data. The basic objective
of information is to inform, evaluate, persuade, and organize. This indeed helps in
decision making, generating new concepts and ideas, identify and solve problems,
planning, and controlling which are needed to direct human activity in business
enterprises.
o Mode and format - The modes of communicating information to humans should be
in such a way that it can be easily understandable by the people and may be in the
form of voice, text and combination of these two. Format design should be simple,
relevant and should highlight important point in such a way that it assists in decision
making, solving problems, initiating planning, controlling and searching. According
to the type of information, the different formats can be used e.g. diagrams, graphs,
curves are best suited for representing the statistical data.
o Current/Updated - The information should be refreshed from time to time as it
usually rots with time and usage. For example, the running score sheet of a cricket
match available in Internet sites should be refreshed at fixed interval of time so that
the current score will be available.
o Rate - The rate of transmission/reception of information may be represented by the
time required to understand a particular situation. Useful information is the one

which is transmitted at a rate which matches with the rate at which the recipient
wants to receive. For example- the information available from internet site should be
available at a click of mouse.
o Frequency - The frequency with which information is transmitted or received affects
its value. For example- the weekly reports of sales show little change as compared
to the quarterly and contribute less for accessing salesman capability.
o Completeness and Adequacy - The information provided should be complete and
adequate in itself because only complete information can be used in policy making.
For example-the position of student in a class can be find out only after having the
information of the marks of all students and the total number of students in a class.
o Reliability - It is a measure of failure or success of using information for decision-
making. If information leads to correct decision on many occasions, we say the
information is reliable.
o Validity - It measures how close the information is to the purpose for which it
asserts to serve. For example, the experience of employee supports in evaluating
his performance.
o Quality - It means the correctness of information. For example, an over-optimistic
manager may give too high estimates of the profit of product which may create
problem in inventory and marketing.
o Transparency - It is essential in decision and policy making. For example, total
amount of advance does not give true picture of utilization of fund for decision about
future course of action; rather deposit-advance ratio is perhaps more transparent
information in this matter.
o Value of Information - It is defined as difference between the value of the change in
decision behaviour caused by the information and the cost of the information. In
other words, given a set of possible decisions, a decision-maker may select one on
basis of the information at hand. If new information causes a different decision to be
made, the value of the new information is the difference in value between the
outcome of the old decision and that of the new decision, less the cost of obtaining
the information.
Chapter 4: System Development Life Cycle-Acquisition, Development, Implementation,

Maintenance and support
Answer No 7
Asset management is the controlling, tracking, and reporting of organizational assets to
facilitate accounting for the assets. Without effective asset management, the company will be
subject to the increased expense of duplicate equipment in situations where equipment is
available but unaccounted for. The company will also be subject to unnecessary lease
expenses if leased equipment is not adequately tracked and returned on time. Similarly,
without adequate asset management, end-of-life equipment conditions may not be noted,
resulting in increased risk of hardware failure. Additionally, theft of equipment that is not
tracked likely would go unnoticed. In the context of this step, the assets being referred to are
computer hardware, such as desktops, laptops, servers, and so on.
Information system auditor should conduct following procedure to review and evaluate the
company’s asset management policies and procedures, and ensure that they encompass the
following:

• Ensure that asset procurement process requires appropriate approvals prior to the purchase
of hardware.
• Ensure that the company is using asset tags and has an asset management database.
• Ensure that an inventory contains the asset number and location of all hardware, along with
information about the equipment’s warranty status, lease expiration, and overall lifecycle.
Ensure that an effective mechanism is in place for keeping this inventory up to date. A
sample of asset tags also should be inspected visibly and tied back to the inventory.
• Ensure that unused equipment is stored in a secure manner. Also ensure that data are erased
properly from equipment prior to its disposal.
Answer No: 8
Many companies outsource some or all of their IT support processes, including areas such as
PC support, web server hosting, system support, programming, and so on. If these vendors
are not managed appropriately, it can lead to poor service and unacceptable quality in the IT
environment. Depending on what portion of the IT environment has been outsourced, these
problems could significantly impact the company’s operations.
Information system auditor should conduct following procedure to review the process for
selecting vendors.
• Ensure that the process requires soliciting multiple competitive bids, the comparison of
each vendor against predefined criteria, involvement of knowledgeable procurement
personnel to help negotiate the contract, evaluation of the vendor’s technical support
capabilities and experience providing support for companies of similar size and industries,
performance of a thorough cost analysis, and investigation of each vendor’s qualifications
and financial health.
• For a sample of recent vendor selections, review evidence that the process was followed.
• Ensure that contracts with third-party service providers specifically define the roles and
responsibilities of the vendor and include defined SLAs.
• Review a sample of contracts for evidence that expectations have been specifically
defined.
• Ensure that contracts include nondisclosure clauses, preventing the vendor from disclosing
company information. Also ensure that contracts include right-to-audit clauses that allow
you to audit vendor activities that are critical to your company.
• Review a sample of contracts for evidence that these clauses are in place where applicable.
• Review processes for monitoring the performance and providing oversight of existing
third-party service providers. For a sample of existing vendors, look for evidence that they
are being monitored for compliance with SLAs and that they are performing the
responsibilities defined in the contract.

Answer No 9
From the perspective of the IS Audit, following are the possible advantages of
System Development Life Cycle (SDLC):
• The IS auditor can have clear understanding of various phases of the SDLC on the
basis of the detailed documentation created during each phase of the SDLC.
• The IS Auditor on the basis of his/her examination, can state in his/her report about
the compliance by the IS management with the procedures, if any, set by
management.
• If the IS Auditor has technical knowledge and ability to handle different areas of
SDLC, s/he can be a guide during the various phases of SDLC.
• The IS auditor can provide an evaluation of the methods and techniques used through
the various development phases of the SDLC.
Answer No 10
Two primary methods which are used for the analysis of the scope of a project in SDLC
are given as follows:
• Reviewing Internal Documents: The analysts conducting the investigation first try to
learn about the organization involved in, or affected by, the project. For example, to
review an inventory system proposal, an analyst may try to know how the inventory
department operates and who are the managers and supervisors. Analysts can
usually learn these details by examining organization charts and studying written
operating procedures.
• Conducting Interviews: Written documents tell the analyst how the systems should
operate, but they may not include enough details to allow a decision to be made
about the merits of a systems proposal, nor do they present users' views about
current operations. To learn these details, analysts use interviews. Interviews allow
analysts to know more about the nature of the project request and the reasons for
submitting it. Usually, preliminary investigation interviews involve only management
and supervisory personnel.
Answer No 11
The activities that deal with Systems Development Management Controls in the IT setup
are as follows:
♦ System Authorization Activities: All systems must be properly authorized to ensure their
economic justification and feasibility. As with any transaction, system’s authorization
should be formal. This requires that each new system request be submitted in written
form by users to systems professionals who have both the expertise and authority to
evaluate and approve (or reject) the request.
♦ User Specification Activities: Users must be actively involved in the systems development
process. User involvement should not be ignored because of a high degree of technical
complexity in the system. Regardless of the technology involved, the user can create a
detailed written description of the logical needs that must be satisfied by the system. The
creation of a user specification document often involves the joint efforts of the user and
systems professionals.

♦ Technical Design Activities: The technical design activities in the Systems

Development Life Cycle (SDLC) translate the user specifications into a set of detailed
technical specifications of a system that meets the user's needs. The scope of these
activities includes systems analysis, general systems design, feasibility analysis, and
detailed systems design. The adequacy of these activities is measured by the quality of
the documentation that emerges from each phase.
♦ Internal Auditor’s Participation: The internal auditor plays an important role in the
control of systems development activities, particularly in organizations whose users lack
technical expertise. The auditor should become involved at the inception of the SDLC
process to make conceptual suggestions regarding system requirements and controls.
Auditor’s involvement should be continued throughout all phases of the development
process and into the maintenance phase.
♦ Program Testing: All program modules must be thoroughly tested before they are
implemented. The results of the tests are then compared against predetermined
Results to identify programming and logic errors. To facilitate the efficient
implementation of audit objectives, test data prepared during the implementation phase
must be preserved for future use. This will give the auditor a frame of reference for
designing and evaluating future audit tests
♦ User Test and Acceptance Procedures: Just before implementation, the individual modules
of the system must be tested as a unified whole. A test team comprising user personnel,
systems professionals, and internal audit personnel subjects the system to rigorous
testing. Once the test team is satisfied that the system meets its stated requirements, the
system is formally accepted by the user department(s). The formal test and acceptance
of the system should consider being the most important control over the SDLC.
Chapter 5: System Analysis and Design

Answer No 12
As a System development team member, following areas should be studied to
understand the present system:
• Reviewing Historical Aspects: The historical facts of an organization enable the
system analyst to identify the major turning points and milestones that have
influenced its growth. A review of annual reports and organization charts can
identify the growth of management levels as well as the development of various
functional areas and departments. The system analyst should investigate ‘what system
changes have occurred in the past including operations’ that have been successful
or unsuccessful with computer equipment and techniques.
• Analyzing Inputs: A detailed analysis of present inputs is important since they are
basic to the manipulation of data. Source documents are used to capture the
originating data for any type of system. The system analyst should be aware of
various sources from where the data are initially captured, keeping in view the fact
that outputs for one area may serve as an input for another area. The system
analyst 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.
• Reviewing 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. Information
on common data files and their size will be an important factor, which will influence
the new information system. The system analyst should also review all on-line and
off-line files, which are maintained in the organization as it will reveal information
about data that are not contained in any outputs.
• Reviewing Methods, Procedures and Data Communications: 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. A system analyst also needs to review and understand the present
data communications used by the organization. S/he must review the types of data
communication equipment including data interface, data links, modems, dial- up and
leased lines and multiplexers. The system analyst must understand how the data-
communications network is used in the present system so as to identify the need to
revamp the network when the new system is installed.
• Analyzing Outputs: The outputs or reports should be scrutinized by the system
analysts in order to determine “how well they will meet the organization’s needs”.
The analysts 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 is used, how long it is kept on file, etc. must
be investigated.
• Reviewing Internal Controls: A detailed investigation of the present information
system is not complete until internal control mechanism is reviewed. Locating the
control points helps the analyst to visualize the essential parts and framework of a
system. An examination of the present system of internal controls may indicate
weaknesses that should be removed in the new system. The adoption of advanced
methods, procedures and equipment might allow much greater control over the data.
a. Modeling the Existing System: As the logic of inputs, methods, procedures, data
files, data communications, reports, internal controls and other important items
are reviewed and analyzed in a top down manner the processes must be properly
documented. The flow charting and diagramming of present information not
only organizes the facts, but also helps to disclose gaps and duplication in
the data gathered. It allows a thorough comprehension of the numerous details
and related problems in the present operation.
b. Undertaking Overall Analysis of the Existing system: Based upon the aforesaid
investigation of the present information system, the final phase of the detailed
investigation includes the analysis of the present work volume; the current
personnel requirements; the present costs-benefits of each of these must be
investigated thoroughly.
Chapter 7. E-Business Enabling Software Package

Answer No 13:
Enterprise resource planning is a cross-functional enterprise system driven by an integrated
suite of software modules that supports the basic internal business processes of a company.
For example, ERP software for a manufacturing company will typically process the data
from and track the status of sales, inventory, shipping, and invoicing, as well as forecast raw
material and human resource requirements.

Some of the key cross-functional business processes and supplier and customer information
flows supported by ERP systems. ERP gives a company an integrated real-time view of its
core business processes, such as production, order processing, and inventory management,
tied together by the ERP application software and a common database maintained by a
database management system. ERP systems track business resources and the status of
commitments made by the business (such as customer orders, purchase orders, and employee
payroll), no matter which department (manufacturing, purchasing, sales, accounting, and so
on) has entered the data into the system. ERP software suites typically consist of integrated
modules of manufacturing, distribution, sales, accounting, and human resource applications.
Examples of manufacturing processes supported are material requirements planning,
production planning, and capacity planning. Some of the sales and marketing processes
supported by ERP are sales analysis, sales planning, and pricing analysis, while typical
distribution applications include order management, purchasing, and logistics planning. ERP
systems support many vital human resource processes, from personnel requirements planning
to salary and benefits administration, and accomplish most required financial recordkeeping
and managerial accounting applications.
Chapter 8: Protection of Information Assets

Answer No 14
IT security policy sets a baseline of expectations for employees of the company. If policies
don’t exist or provide adequate coverage, employees are forced to make up their own rules
regarding security-related issues. The same concept extends to computer systems, which
require a standard by which system security can be evaluated. If IT security policies are too
lenient, they will not provide adequate protection of the company’s information assets. If
they are too strict, they either will be ignored or will place unnecessary overhead and costs
on the business. If the IT security policies aren’t communicated to employees, they won’t be
followed. Additionally, if compliance with those policies is not monitored and enforced,
employees will learn quickly that the policies can be ignored with no consequences, causing
the policies to become “suggestions” rather than requirements.
Auditor should conduct following procedures to determine that IT security policies exist and
it provide adequate requirements for the security of the environment and compliance is
monitored and enforced
a. Obtain a company’s IT security policies and ensure that they adequately cover
company’s IT environment. At a minimum, the policies should include coverage of the
following areas:
• Acceptable usage of the company’s information assets by employees (for example,
whether employees can use their computers, the Internet, and e-mail for personal
reasons)
• Data classification, retention, and destruction
• Remote connectivity (for example, overall network security and security
requirements for virtual private network (VPN), dial-up, and other forms of
connection to external parties)
• Passwords
• Server security (such as security requirements for Unix and Windows servers)
• Client security (such as security requirements for desktops and laptops)
• Logical access (such as requirements for obtaining and granting access to systems)

b. Review the policies for adequacy based on industry standards and the specific needs of
the company.
c. Review the company’s password policy. It should provide adequate guidelines dictating
requirements for the composition of company passwords (for example, minimum of eight
characters, combination of letters and numbers, difficult to guess, and so on), for aging
company passwords (such as requiring that they be changed every 90 days), for locking
accounts after a certain number of unsuccessful logon attempts, for timing out login
sessions after a period of inactivity, and for retaining a password history so that previous
passwords cannot be reused for a certain period of time.
d. Review the company’s logical access policy. It should provide adequate guidelines
dictating requirements for every user to have a unique ID, for accounts to be suspended
upon employee termination or job change, and for users to be granted the minimum
access necessary to perform their jobs.
e. Ensure that key stakeholders were included during policy creation. Obtain a list of
employees involved in the creation and approval of the IT security policies, such as IT
organizations that are expected to comply with the policy. If IT security policies are
created in a vacuum by the IT security organization without involving others, they are
likely to be viewed as unrealistic and will be ignored. Involvement from those who
provide the day-to-day support of the IT environment will bring an important perspective
to the policies and also will ensure buy-in from those who need to enforce and comply
with the policies.
f. Ensure that the IT security policies were approved by an executive, such as the CIO or
CEO. This will provide the IT organization with the authority and backing necessary to
enforce the policies.
g. Review processes for periodically reviewing and updating the policies to ensure that they
keep up with the ever-changing IT environment. Look for evidence that these processes
have been executed.
h. Review processes for periodically evaluating changes in the environment that might
necessitate the development of new policies. Look for evidence that these processes have
been executed.
i. Ensure that provisions have been made for obtaining approved exemptions from the
policy. There inevitably will be occasions when people do not think that they can comply
with the policy. A defined process should be in place whereby those people can formally
request an exemption from the policy. They should be required to state why they need an
exemption and define the compensating controls that will be put in place. The IT security
organization should facilitate the exception process, including providing a
recommendation and an opinion on the risk presented by the request, but they usually
should avoid making the final decision as to whether or not to accept the risk. Instead, it
should be a business decision.
j. Review the escalation policy for the exemption process and ensure that business (as
opposed to IT) management is involved at some point, at least for the acceptance of
significant risks. Ensure that the final decisions are documented and retained.

k. Review processes implemented by IT security and other IT organizations for monitoring

compliance with the policies. Ensure that enforcement and escalation processes are in
place that result in the correction of noncompliant situations.
l. Review a sample of recent applicable compliance-monitoring reports, and ensure that

significant issues were tracked to resolution. Ensure that a mechanism exists for
employees to report security incidents or concerns and that those reports are followed up
on and tracked to resolution. Review a sample of recently reported incidents, and
determine whether they were resolved adequately.
Answer No 15
Allowing remote access to a network basically results in that network being extended beyond
its normal confines, bypassing normal perimeter controls such as firewalls. A lack of strong
controls regarding this access can result in inappropriate access to the network and a
compromised network. Information system auditor should conduct following procedure to
review and evaluate controls over remote access into the company’s network
a. Ensure that a user ID and strong password are required for remote access and that these
credentials are transmitted over secure (such as encrypted) communication channels.
b. Determine whether approved processes are in place for granting remote access, especially
for nonemployees. Pull a sample of users with remote access, and look for evidence of
approval. Also evaluate processes for removing dial-up and VPN remote access accounts
when employees leave the company. Pull a sample of users with remote access, and
ensure that they are still active employees.
c. Evaluate controls for ensuring that dedicated external connections to business partners
are removed when no longer needed. Pull a sample of current connections, and by means
of interviews and documentation review, determine whether they are still legitimately
necessary. Evaluate controls for ensuring that unauthorized connections cannot be made
to the network and/or for detecting them if they are.
d. Evaluate controls for ensuring that unauthorized modems or VPN connection points
cannot be placed on the network and/or for detecting them if they are.
e. Ensure that policies provide minimum security requirements that should be met by all
machines accessing the network remotely. This should include requirements for operating
system patch level and antivirus protection.
f. Look for preventive or detective controls that enforce these requirements.
g. Ensure that machines that are remotely accessing the network are not permitted to be
dual-homed, which would bridge networks. This should be enforced technically where
possible and by explicit agreement otherwise.
Answer No 16
Physical access control procedures govern employee and guest access to the data center

facility. If physical access control procedures are incomplete or not enforced consistently,
data center physical access will be compromised.
Information system auditor should review the following related to physical access control
procedures:
• Ensure that access authorization requirements are documented and clearly defined for both
employees and guests. Approval from one (or more) of a predefined set of knowledgeable
individuals should be required before data center access is granted. Standards for what
constitutes a need for ongoing data center access should be established. For example, an
employee who needs only occasional (such as quarterly) access to the data center does not
need ongoing access but can instead arrange to be escorted on the occasions when access
is needed. The philosophy of “minimum necessary access” should be embraced when it
comes to granting access to data center facilities.
• Verify that guest access procedures include restrictions on taking pictures and outline
conduct requirements within the data center. Visitors should be required to sign a visitor
log indicating their name, company, and reason for visiting and should be required to wear
identification badges that are a different color from employee badges. Visitors should be
escorted at all times and vendor service personnel (including cleaning personnel) should
be supervised while on site.
• Review a sample of both guest access and employee ID authorization requests to ensure
that access control procedures are followed.
• Review procedures for ensuring that data center access is removed (including the
collection of physical devices such as badges, keys, and cards) when it is no longer
required. This should be part of the termination checklist and will preferably be
automated. It should also encompass changes of jobs within the company, so that
employees don’t retain data center access beyond the point when it is needed.
• Obtain a list of all individuals who have access to the data center, select a representative
sample of employees with access to the data center, and determine whether access is
appropriate.
• Determine whether management regularly reviews the physical access authorizations for
validity. Management should periodically pull a list of people with data center access and
review it for appropriateness. Review evidence that this is happening.
Answer No 17
Operating system not only provides the platform for an application to use various
Information System resources but is also the last barrier to be conquered for unlimited
access to all the resources. Hence, protecting operating system access is extremely
crucial. Some of the common operating system access controls to protect IS resources
from unauthorized access are as follows:
• Automated terminal identification: This will help to ensure that a session could
only be initiated from a location or computer terminal.
• Terminal log-on procedures: The log-on procedure does not provide unnecessary

help or information, which could be misused by an intruder.

• User identification and authentication: The users must be identified and authenticated
in a foolproof manner. Depending on risk assessment, more stringent methods like
Biometric Authentication or Cryptographic means like Digital Certificates should be
employed.
• Password management system: An operating system could enforce selection of
good passwords. Internal storage of password should use one-way hashing
algorithms and the password file should not be accessible to users.
• Use of system utilities: System utilities are the programs that help to manage critical
functions of the operating system e.g. addition or deletion of users. Obviously, this
utility should not be accessible to a general user. Use and access to these utilities
should be strictly controlled and logged.
• Duress alarm to safeguard users: If users are forced to execute some instruction
under threat, the system should provide a means to alert the authorities.
• Terminal time out: Log out the user if the terminal is inactive for a defined period.
This will prevent misuse in absence of the legitimate user.
• Limitation of connection time: Define the available time slot. Do not allow any
transaction beyond this time. For example, no computer access after 8.00 p.m. and
before 8.00 a.m.—or on a Saturday or Sunday.
Chapter 9: Disaster Recovery and Business Continuity Planning

Answer No 18
The disaster recovery and planning document may include the following areas:
• The conditions for activating the plans, which describe the process to be followed
before each plan, is activated.
• Emergency procedures, which describe the actions to be taken following an incident
which jeopardizes business operations and/or human life. This should include
arrangements for public relations management and for effective liaising with
appropriate public authorities e.g. police, fire, services and local government.
• Fallback procedures, which describe the actions to be taken to move essential
business activities or support services to alternate temporary locations, to bring
business process back into operation in the required time-scale.
• Resumption procedures, which describe the actions to be taken to return to
normal business operations.
• A maintenance schedule, which specifies the process for maintaining the plan.
• Awareness and education activities, which are designed to create an understanding
of the disaster recovery process.
• The responsibilities of individuals describing who is responsible for executing
which component of the plan. Alternatives should be nominated as required.
• Contingency plan document distribution list.
• Detailed description of the purpose and scope of the plan.
• Contingency plan testing and recovery procedure.
• List of vendors doing business with the organization, their contact numbers and

address for emergency purposes.

• Checklist for inventory taking and updating the contingency plan on a regular basis.
• List of phone numbers of employees in the event of an emergency.
• Emergency phone list for fire, police, hardware, software, suppliers, customers, back-up
location, etc.
• Medical procedure to be followed in case of injury.
• Back-up location contractual agreement, correspondences.
• Insurance papers and claim forms.
• Primary computer center hardware, software, peripheral equipment and software
configuration.
• Location of data and program files, data dictionary, documentation manuals, source and
object codes and back-up media.
• Alternate manual procedures to be followed during the period of disruption such
as manual preparation of invoices.
• Names of employees trained for emergency, first aid and life saving techniques.
• Details of airlines, hotels, supplies and transport arrangements.
Answer No 19
An audit or self-assessment of the enterprise’s BCM (Business Continuity
Management) program should verify that:
• All key products and services and their supporting critical activities and resources
have
• been identified and included in the enterprise’s BCM strategy;
• The enterprise’s BCM policy, strategies, framework and plans accurately reflect
its
• priorities and requirements;
• The enterprise’ BCM competence and its BCM capability are effective and fit -for-
purpose and will permit management, command, control and coordination of an
incident;
• The enterprise’s BCM solutions are effective, up-to-date and fit-for-purpose,
and appropriate to the level of risk faced by the enterprise;
• The enterprise’s BCM maintenance and exercising programs have been
effectively
• implemented;
• BCM strategies and plans incorporate improvements identified during incidents
and exercises and in the maintenance program;
• The enterprise has an ongoing program for BCM training and awareness;
• BCM procedures have been effectively communicated to relevant staff, and that
those staff understand their roles and responsibilities; and
• Change control processes are in place and operate effectively.

Answer No 20
• There are various kinds of plans that need to be designed for Business
Continuity Management (BCM) that include the following:
• Emergency Plan: The Emergency plan specifies the actions to be undertaken
immediately when a disaster occurs. Management must identify those situations
that require the plan to be invoked e.g. major fire, major structural damage, and
terrorist attack. The actions to be initiated can vary depending on the nature of the
disaster that occurs. If an enterprise undertakes a comprehensive security review
program, the threat identification and exposure analysis phases involve identifying
those situations that require the emergency plan to be invoked.
• Back-up Plan: The Backup plan specifies the type of backup to be kept, frequency
with which backup is to be undertaken, procedures for making backup, location of
backup resources, site where these resources can be assembled and operations
restarted, personnel who are responsible for gathering backup resources and restarting
operations, priorities to be assigned to recovering the various systems, and a time
frame for recovery of each system. For example, it might be difficult to specify;
exactly how an organization’s mainframe facility will be recovered in the event of a
fire. The backup plan needs continuous updating as changes occur. For example, as
personnel with key responsibilities in executing the plan leave the organization,
the plan must be modified accordingly.
• Recovery Plan: The Recovery plans set out procedures to restore full information
system capabilities. Recovery plan should identify a recovery committee that will be
responsible for working out the specifics of the recovery to be undertaken. The plan
should specify the responsibilities of the committee and provide guidelines on
priorities to be followed. The plan might also indicate which applications are to be
recovered first. Periodically, the recovery committee must review and practice
executing their responsibilities so they are prepared in case a disaster occurs.
• Test Plan: The purpose of the test plan is to identify deficiencies in the emergency,
backup, or recovery plans or in the preparedness of an organization and its personnel
for facing a disaster. It must enable a range of disasters to be simulated and specify
the criteria by which the emergency, backup, and recovery plans can be deemed
satisfactory. Periodically, test plans must be invoked. Unfortunately, top managers
are often unwilling to carry out a test because daily operations are disrupted.
Chapter 10: Auditing and Information System

Answer No 21
Organizations need to understand which activities, practices, and systems are
introducing unwanted risk into its operations. The span of activities that seek, identify,
and manage these risks is known as risk management. It is a continuous and phased set
of activities that includes the examination of processes, records, and systems in order
to identify risks. This is continued by an analysis that examines a range of solutions
for reducing or eliminating risks, followed by formal decision-making that brings
about a resolution to risks.
Risk management needs to support overall business objectives. This support will
include the adoption of a risk appetite that reflects the organization’s overall approach
to risk.

In an organization that chooses to build a risk management program should establish

some principles that will enable the program to succeed These may include
• Objectives: The risk management program must have a specific purpose; otherwise,
it will be difficult to determine whether the program is successful. Example
objectives: reduce number of industrial accidents, reduce the cost of insurance
premiums, or reduce the number of stolen assets. If objectives are measurable and
specific, then the individuals who are responsible for the risk management program
can focus on its objectives in order to achieve the best possible outcome.
• Scope: Management must determine the scope of the risk management program.
This is a fairly delicate undertaking because of the many interdependencies found in
IT systems and business processes. However, in an organization with several distinct
operations or business units, a risk management program could be isolated to one or
more operational arms or business units. In such a case, where there are
dependencies on other services in the organization, those dependencies can be
treated like an external service provider
• Authority: The risk management program is being started at the request of one or
more executives in the organization. It is important to know who these individuals
are and their level of commitment to the program.
• Roles and responsibilities: This defines specific job titles, together with their
respective roles and responsibilities in the risk management program. In a risk
management program with several individuals, it should be clear as to which
individuals or job titles are responsible for which activities in the program.
• Resources: The risk management program, like other activities in the business,
requires resources to operate. This will include a budget for salaries as well as for
workstations, software licenses, and possibly travel.
• Policies, processes, procedures, and records: The various risk management activities
like asset identification, risk analysis, and risk treatment, along with some general
activities like recordkeeping, should be written down.
Answer No 22:
Risk management is a life-cycle set of activities used to identify, analyze, and treat risks.
The auditor should focus on following procedure for the risk management process of the
information system
a. Asset Identification
The risk management program’s main objective (whether formally stated or not) is the
protection of organization assets. These assets may be tangible or intangible, physical,
logical, or virtual. Some examples of assets include
b. Grouping the related Assets
It is not always necessary to list each individual asset: often it is acceptable to instead list
classes of assets as a single asset entity for risk management purposes. For instance, a
single entry for laptop computers is preferred over listing every laptop computer; this is
because the risks for all laptop computers are roughly the same. This eliminates the need to
list them individually. Similarly, groups of IT servers, network devices, and other
equipment can be named instead of all of the individual servers and devices, again because
the risks for each of them will usually be similar. However, one reason to create multiple

entries for servers might be their physical location or their purpose such as servers in one
location may have different risks than servers in another location, and servers containing
high-value information will have different risks than servers that do not contain high-value
information.
c. Determine the Sources of Asset Data

An organization that is undergoing its initial risk management cycle has to build its asset
database from scratch. Management need to determine where this initial asset data will
come from.
d . Collecting and Organizing Asset Data

It is rarely possible to create a list of assets from a single source. Rather, more than one
source of information is often needed to be sure that the risk management program has
identified at least the important, in-scope assets that it needs to worry about unless an
organization has a very short list of assets, it is usually useful to organize or classify assets.
This will help to get the assets under study into smaller chunks that can be analyzed more
effectively.
e. Risk Analysis
Risk analysis is the activity in a risk management program where individual risks are
identified. A risk consists of the intersection of threats, vulnerabilities, and impact. In its
simplest terms, risk is described in the following formula:
Risk = Probability × Impact
This equation implies that risk is always used in quantitative terms, but risk is equally used
in qualitative risk analysis.
A risk analysis consists of identifying threats and their impact of realization, against each
asset. This usually also includes a vulnerability analysis, where assets are studied to
determine whether they are vulnerable to identified threats. The sheer number of assets
may make this task appear daunting; however, threat and vulnerability analyses can usually
be performed against groups of assets. For instance, when identifying natural and human-
made threats against assets, it often makes sense to perform a single threat analysis against
all of the assets that reside in a given location.
f . Threat Analysis
A threat is an event that, if realized, would bring harm to an asset. A typical approach is to
list all of the threats that have some realistic opportunity of occurrence; those threats that
are highly unlikely to occur can be left out. A more reasonable approach in a threat analysis
is to identify all of the threats that a reasonable person would believe could occur, even if
the probability is low. For example, include flooding when a facility is located near a river,
hurricanes for an organization located in hurricanes prone area or a terrorist attack in
practically every major city in the world. All of these would be considered reasonable in a
threat analysis. Alongside each threat that is identified, the risk analyst assigns a
probability or frequency of occurrence. This may be a numeric value, expressed as a
probability of one occurrence within a calendar year. For example, if the risk of a flood is 1
in 100, it would be expressed as 0.01, or 1 percent. Probability can also be expressed as a
ranking; for example, Low, Medium, and High; or on a numeric probability scale from 1 to

5 (where 5 can be either highest or lowest probability).
An approach for completing a threat analysis is to

• Perform a geographic threat analysis for each location. This will provide an analysis on
the probability of each type of threat against all assets in each location.
• Perform a logical threat analysis for each type of asset. This provides information on all
of the logical (that is, not physical) threats that can occur to each asset type. For
example, the risk of malware on all assets of one type is probably the same, regardless of
their location.
• Perform a threat analysis for each highly valued asset. This will help to identify any
unique threats that may have appeared in the geographical or logical threat analysis, but
with different probabilities of occurrence.
g. Vulnerability Identification
A vulnerability is a weakness or absence of a protective control that makes the probability
of one or more threats more likely. A vulnerability analysis is an examination of an asset in
order to discover weaknesses that could lead to a higher-than-normal rate of occurrence of
a threat.
Examples of vulnerabilities include
• Missing or inoperative antivirus software
• Missing security patches
• Weak or defective application session management
• Mantraps (devices that are designed to permit the passage of persons one at a time) that
permit tailgating
In a vulnerability analysis, the risk manager needs to examine the asset itself as well as all
of the protective measures that are—or should be—in place to protect the asset from
relevant threats.
Vulnerabilities can be ranked by severity or criticality. Vulnerabilities are indicators that
show the effectiveness (or ineffectiveness) of protective measures. For example, an
antivirus program on a server that updates its virus signatures once per week might be
ranked as a Medium vulnerability, whereas the complete absence (or malfunction) of an
antivirus program on the same server might be ranked as a High vulnerability. Severity is
an indication of the likelihood that a given threat might be realized. This is different from
impact, which is discussed later in this section.
h. Probability Analysis
For any given threat and asset, the probability that the threat will actually be realized needs
to be estimated. This is often easier said that done, as there is a lack of reliable data on
security incidents. A risk manager still will need to perform some research and develop a
best guess, based on available data.
i. Impact Analysis
A threat, when actually realized, will have some effect on the organization. Impact analysis
is the study of estimating the impact of specific threats on specific assets.In impact

analysis, it is necessary to understand the relationship between an asset and the business
processes and activities that the asset supports. The purpose of impact analysis is to
identify the impact on business operations or business processes. This is because risk
management is not an abstract identification of abstract risks, but instead a search for risks
that have real impact on business operations.
In an impact analysis, the impact can be expressed as a rating such as H-M-L (High-
Medium-Low) or as a numeric scale, and it can also be expressed in financial terms. But
what is also vitally important in an impact analysis is the inclusion of a statement of impact
for each threat. Example statements of impact include “inability to process customer
support calls” and “inability for customers to view payment history.” Statements such as
“inability to authenticate users” may be technically accurate, but they do not identify the
business impact.
j. Qualitative Risk Analysis

A qualitative risk analysis is an in-depth examination of in-scope assets with a detailed
study of threats (and their probability of occurrence), vulnerabilities (and their severity),
and statements of impact. The threats, vulnerabilities, and impact are all expressed in
qualitative terms such as High-Medium-Low or in quasi-numeric terms such as a 1–5
numeric scale.
The purpose of qualitative risk analysis is to identify the most critical risks in the
organization, based on these rankings.
Qualitative risk analysis does not get to the issue of “how much does a given threat cost my
business if it is realized?”—nor does it mean to. The value in a qualitative risk analysis is
the ability to quickly identify the most critical risks without the additional burden of
identifying precise financial impacts.
k. Quantitative Risk Analysis

Quantitative risk analysis is a risk analysis approach that uses numeric methods to measure
risk. The advantage of quantitative risk analysis is the statements of risk in terms that can
be easily compared with the known value of their respective assets. In other words, risks
are expressed in the same units of measure as most organizations’ primary unit of measure:
financial.
Despite this, quantitative risk analysis must still be regarded as an effort to develop
estimates, not exact figures. Partly this is because risk analysis is a measure of events that
may occur, not a measure of events that do occur.
l. Developing Mitigation Strategies
An important part of risk analysis is the investigation of potential solutions for reducing or
eliminating risk. This involves understanding specific threats and their impact and
likelihood of occurrence. Once a given asset and threat combination has been baselined
(that is, the existing asset, threats, and controls have been analyzed to understand the
threats as they exist right now), the risk analyst can then apply various hypothetical means
for reducing risk, documenting each one in terms of its impact. For example, suppose a risk
analysis identifies the threat of attack on a public web server. Specific effect and impact
figures have been identified for a range of individual threats. Now the risk analyst applies a

range of fixes, such as an application firewall, an intrusion prevention system, and a patch
management tool. Each solution will have a specific and unique impact; some will have
better figures than others. Each solution should also be rated in terms of cost (in financial
estimate terms or H-M-L) and effort to implement (financial or H-M-L).
m. Risk Treatment
When risks to assets have been identified through qualitative or quantitative risk analysis,
the next step in risk management is to decide what to do about the identified risks. In the
risk analysis, one or more potential solutions may have been examined, along with their
cost to implement and their impact on risk. In risk treatment, a decision about whether to
proceed with any of the proposed solutions (or others) is needed.
Risk treatment pits available resources against the need to reduce risk. In an enterprise
environment, not all risks can be mitigated or eliminated, because there are not enough
resources to treat them all. Instead, a strategy for choosing the best combination of
solutions that will reduce risk by the greatest possible margin is needed. For this reason,
risk treatment is often more effective when all the risks and solutions are considered
together, instead of each one separately.
When risk treatment is performed at the enterprise level, risk analysts and technology
architects can devise ways to bring about the greatest possible reduction in risk. This can
be achieved through the implementation of solutions that will reduce many risks for many
assets at once. For example, a firewall can reduce risks from many threats on many assets;
this will be more effective than individual solutions for each asset.
n. Risk Mitigation
Finally, risk mitigation involves the implementation of some solution that will reduce an
identified risk. For instance, the risk of malware being introduced onto a server can be
mitigated with antivirus software or a network-based intrusion prevention system. Either of
these solutions would constitute mitigation of this risk on a given asset.
Answer No 23
The impact of technology on Internal Controls is as follows:
• Competent and Trustworthy Personnel: Personnel should have proper skill and
knowledge to discharge their duties. Substantial power is often vested in the persons
responsible for the computer-based information systems developed, implemented,
operated, and maintained within organizations.
• Segregation of Duties: In a computerized system, the auditor should be concerned
with the segregation of duties within the IT department. As a basic control,
segregation of duties prevents or detects errors or irregularities. Within an IT
environment, the staff in the IT department of an enterprise will have a detailed
knowledge of the interrelationship between the source of data, how it is processed and
distribution and use of output.
• Authorization Procedures: In computer systems, authorization procedures often are
embedded within a computer program. For example: In some on-line transaction
systems, written evidence of individual data entry authorization, e.g. a supervisor’s
signature, may be replaced by computerized authorization controls such as
automated controls written into the computer programs (e.g. programmed credit limit
approvals).

• Adequate Documents and Records: In computer systems, documents might not be

used to support the initiation, execution, and recording of some transactions. Thus,
no visible audit or management trail would be available to trace the transactions in
a computerized system. However, if the controls over the protection and storage of
documents, transaction details, and audit trails etc. are placed properly, it will not be
a problem for auditor.
• Physical Control over Assets and Records: Physical control over access and records
is critical in both manual systems and computer systems. Computerized financial
systems have not changed the need to protect the data. A client’s financial data and
computer programs can all be maintained at a single site – namely the site where the
computer is located. This concentration of information system assets and records
also increases the losses that can arise from computer abuse or a disaster. The
nature and types of control available have changed to address these new risks.
• Adequate Management Supervision: In computer system, data communication
facilities can be used to enable employees to be closer to the customers they service.
Thus, supervision of employees might have to be carried out remotely. The
Management’s supervision and review helps to deter and detect both errors and
fraud.
• Independent Checks on Performance: If the program code in a computer system is
authorized, accurate, and complete, the system will always follow the designated
procedures in the absence of some other type of failure like hardware or systems
software failure.
• Comparing Recorded Accountability with Assets: Data and the assets that the data
purports to represent should periodically be compared to determine whether
incompleteness or inaccuracies in the data exist or whether shortages or excesses in
the assets have occurred. In a computer system, however, software is used to
prepare this data. Again, internal controls must be implemented to ensure the veracity
of program code, because traditional separation of duties no longer applies to the
data being prepared for comparison purposes.
• Delegation of Authority and Responsibility: A clear line of authority and
responsibility is an essential control in both manual and computer systems. In a
computer system, delegating authority and responsibility in an unambiguous way
might be difficult because some resources are shared among multiple users. Further,
more users are developing, modifying, operating, and maintaining their own
application systems instead of having this work performed by IS professionals.
Chapter 11 : Ethics and legal Issues in Information Technology

Answer No 24
a. Digital signatures and authentication of digitized information
A digital signature—a type of electronic signature—is a mathematical algorithm routinely
used to validate the authenticity and integrity of a message (e.g., an email, a credit card
transaction, or a digital document). Digital signatures create a virtual fingerprint that is
unique to a person or entity and are used to identify users and protect information in digital
messages or documents. In emails, the email content itself becomes part of the digital
signature. Digital signatures are significantly more secure than other forms of electronic
signatures.

Digital signatures work by proving that a digital message or document was not modified—
intentionally or unintentionally—from the time it was signed. Digital signatures do this by
generating a unique hash of the message or document and encrypting it using the sender’s
private key. The hash generated is unique to the message or document, and changing any part
of it will completely change the hash.
Once completed, the message or digital document is digitally signed and sent to the recipient.
The recipient then generates their own hash of the message or digital document and decrypts
the sender’s hash (included in the original message) using the sender’s public key. The
recipient compares the hash they generate against the sender’s decrypted hash; if they match,
the message or digital document has not been modified and the sender is authenticated.
b. Digital data exchange and digital reporting standard-XML and XBRL

XBRL (eXtensible Business Reporting Language) is a declarative language based on
the XML (eXtensible Markup Language) standard, designed to be a universal language
for expression, dematerialization and electronic transmission of financial data. Its mastery
and expansion are therefore a major challenge for regulators and banks that today struggle to
exchange their data in Text, Excel, PDF, HMTL formats. XBRL is an open format, led by
regulators, government agencies and software vendors united in the form of a
consortium: XBRL International Incorporated. This consortium is divided into
independent, often national, jurisdictions with a dual purpose. On the one hand, these
jurisdictions are responsible for developing the necessary classifications locally for the
evolution of the language and on the other hand, they oversee lobbying financial actors to
push the adoption of the standard. XBRL reduces mechanical data entry, eliminates entry
errors, encourages more analysis of data, facilitates comparisons against external data, and
provides greater transparency. XBRL is an important tool in allowing all stakeholders to
more efficiently share and analyze information. These subsequently affect the quality and
quantity of corporate reporting data. some of specific benefits that are considered to be
achievable by electronic standardization of reporting:
• Accuracy, quality, and data integrity: XBRL will help companies reduce the number of
errors in the information they report.
• Interoperability of systems: existing accounting software does not easily exchange data.
By standardizing concepts and reports (outputs), companies can refer to a common
standard to transform their data so that it easily transferable between systems.
• Timeliness: increasing pressure from clients, governments and investors will require
more frequent reporting of inventory data in the future. XBRL allows companies to report
inventory data with a frequency they can specify and make data available more rapidly
because the time spent rekeying and verifying is decreased.
• Transparency and Comparability: XBRL is a global standard based on XML that
allows for the provision of meaning by defining and making available to all the data and
metadata definitions.
• Value-add: XBRL allows users to select specific data in order to customize reports and
provide tailored information to end-users such as investors, auditors and analysts.
• Decrease costs: The lack of a common standard considerably increases the cost of
transforming and analyzing data. E.g. error and consistency checking.
c. COSO Internal Control Framework
COSO Internal Control Framework focuses on five integrated components of internal control:
control environment, risk assessment, control activities, information and communication, and
monitoring activities. These are describe in brief given below

The control environment describes a set of standards, processes, and structures that provide
the basis for carrying out internal control across the organization. According to the Institute
of Internal Auditors (IIA), a control environment is the foundation on which an effective
system of internal control is built and operated in an organization that strives to 1) achieve its
strategic objectives, 2) provide reliable financial reporting to internal and external
stakeholders, 3) operate its business efficiently and effectively, 4) comply with all applicable
laws and regulations, and 5) safeguard its assets.
The risk assessment forms the basis for determining how risks will be managed. A risk is
defined as the possibility that an event will occur and adversely affect the achievement of
organizational objectives. Risk assessment requires management to consider the impact of
possible changes in the internal and external environment and to potentially take action to
manage the impact.
Control activities are actions (generally described in policies, procedures, and standards) that
help management mitigate risks in order to ensure the achievement of objectives. Control
activities may be preventive or detective in nature and may be performed at all levels of the
organization.
Information is obtained or generated by management from both internal and external sources
in order to support internal control components. Communication based on internal and
external sources is used to disseminate important information throughout and outside of the
organization, as needed to respond to and support meeting requirements and expectations.
The internal communication of information throughout an organization also allows senior
management to demonstrate to employees that control activities should be taken seriously.
Monitoring activities are periodic or ongoing evaluations to verify that each of the five
components of internal control, including the controls that affect the principles within each
component, are present and functioning. around their products.
d. Control Objectives for Information and Related Technologies (COBIT)

COBIT is a leading framework for the governance and management of enterprise IT. Created
by the non-profit ISACA, COBIT was built by experts to suit the requirements of both
business executives and IT professionals. It combines enterprise governance and management
techniques, providing principles, practices, models and analytical tools to help users
consistently increase the value of, and trust in, their IT systems.
Part of COBIT’s success comes from the fact that it has been consistently updated to meet the
ever-changing needs of IT governance. For example, the latest version, COBIT 5, is better
able to integrate with other popular frameworks, standards and resources, including VAL IT,
Risk IT and ITIL.
It enables organizations to balance resource usage, risk optimization and realizing benefits,
helping them to improve business outcomes and ensure that their IT systems are supporting
them as much as possible.
This kind of flexibility can also help organizations to:
• Adapt to user demands
• Conform to industry regulations and compliance initiatives
• Manage risks and security
• Maximize the value of intellectual property
• Make sure IT is capable of supporting major changes

COBIT is a globally recognized and comprehensive business focused framework that helps
organizations make the best use of their information and technology by providing a
governance and management framework for enterprise IT.
Chapter 12. Electronic Transactions Act, 2063
Answer No 25
Controller may suspend the license in following condition :
(1) If the documents or statement and statement of financial and physical resources
submitted by the certifying authority before the Controller in order to obtain a license are
found incorrect or false or the conditions to be complied with in course of operation of
business is not complied with or this Act of the Rules framed hereunder are found to be
violated, the Controller may suspend the license of the certifying authority till the inquiry in
this regard is completed. Provided that, Certifying Authority shall be given the reasonable
opportunity to present his/her defense prior to such suspension of a license.
(2) Other procedures concerning suspension of license and other provisions related thereto
be as prescribed.
Controller may revoke the license in following condition:

(1) If the controller believes, after completion of an inquiry in connection to any activity of
Certifying Authority, made duly, as prescribed, that any of the following circumstances
have been occurred, the Controller may revoke a license issued under this Act, at any time,
as he deems to be appropriate:
(a) If the Certifying Authority fails to comply with the liabilities under this act and the rules
made thereunder.
(b) If it is found that the Certifying Authority has submitted false or incorrect document or
statement at the time of submitting an application for obtaining a license or for its renewal,
as the case may be.
(c) If the Certifying Authority operates business in such a manner so that it shall make
adverse effect to the public interest or to the national economy,
(d) If the Certifying Authority commits any act that is defined as an offence under this Act
or the Rules framed hereunder.
(2) The Controller shall, prior to revocation of a license under Subsection (1), provide a
reasonable opportunity to the Certifying Authority to present his/her defense.
(3) Other procedures concerning revocation of a license shall be as prescribed.
Answer No 26
If any person publishes or displays any material in the electronic media including
computer, internet which are prohibited to publish or display by the prevailing law or
which may be contrary to the public morality or decent behavior or any types of materials
which may spread hate or jealousy against anyone or which may jeopardize the harmonious
relations subsisting among the peoples of various castes, tribes and communities shall be
liable to the punishment with the fine not exceeding One Hundred Thousand Rupees or
with the imprisonment not exceeding five years or with both.
If any person commit an offence referred to in Sub-section (1) time to time he/she shall be
liable to the punishment for each time with one and one half percent of the punishment of
the previous punishment.

Answer No 27
If any person who works as a Certifying Authority without a license issued by the
Controller under this Act, shall be liable to the punishment with a fine not exceeding one
hundred thousands Rupees or with an imprisonment not exceeding two years or with both,
depending on seriousness of the offence.
Any person without obtaining a license from the Certifying Authority publishes a fake
license or false statement in regard to license or provides to any person by any other means,
shall be liable to the punishment not exceeding one hundred thousand Rupees in the case
where the act referred to in Sub-section (1) has not been accomplished by such a person.
If any person publishes or otherwise makes available a certificate to any other person by
any means knowingly that a certificate is not issued by the Certifying Authority referred to
in such a certificate or the subscriber listed in such certificate has not accepted the
certificate or such a certificate is already suspended or revoked, shall be liable to the
punishment with a fine not exceeding one hundred thousand Rupees or with an
imprisonment not exceeding two years or with both.
Provided that, if such a certificate suspended or revoked is published or provided for the
purpose of verification of the Digital Signature before it was suspended or revoked, it shall
not be deemed to have been committed an offence under this Sub-section.

Paper 6: Advanced Taxation

Revision Questions:
1. Question no.1
Jumna is the wholly-owned subsidiary of company Yamuna. On the last date of the
financial year 2076 Board of Director of the company has decided to merge Jumna and
the company called special AGM according. Both the company’s financial position as on
Ashad end 2076 is as under and the Special AGM and merger committee decided to
merge Jumna on the basis of their financial positions. After merger the name of Yamuna
is changed as Gang.
Equity and Liabilities Yamuna Jumna

Share Capital 100,000,000 40,000,000
Reserve Fund & Accumulated Profit 40,000,000 -
Profit for the year 10,000,000 (21,000,000)
Total Equity 150,000,000 19,000,000
Liabilities
Non-Current Liabilities
Loans And Borrowings 80,000,000 30,000,000
Deferred Tax Liability - -
Total Non-Current Liabilities 80,000,000 30,000,000
Current Liabilities
Trade & Other Payables 30,000,000 5,000,000
Total Current Liabilities 30,000,000 5,000,000
Total Equity and Liabilities 260,000,000 54,000,000
Assets
Non-Current Assets
Fixed Assets (WDV)
A) Land 10,000,000 21,500,000
B) Other Assets-WDV 60,000,000 10,000,000
Fixed Assets (WDV) 70,000,000 31,500,000
Investment in Subsidiary 40,000,000 -
Deferred Tax Assets - -
Total Non-Current Assets - -
Current Assets -
Sundry debtors 90,000,000 12,500,000
Trade & Other Receivable 40,000,000 5,000,000
Cash & Bank Balances 20,000,000 5,000,000
Total Current Assets 150,000,000 22,500,000
Total Assets 260,000,000 54,000,000
Addition information for merger are:

• Jumna is the wholly owned subsidiary of company Yamuna

• Land of Jumuna of NPR.21, 500,000 was purchased before Chaitra 18, 2058.
• Jumna loss is related to past year and same is accepted by tax officer has accepted
same amount as reported by the company.
Required:
As Tax expert prepare the financial position as per tax prospective and tax
implication to Yamuna as on the date of merger.
2. Question no.2
B.B airways Pvt. Ltd. is an airlines industries operating in Nepal and internationally. Due
to the financial crunch in the company, the company has not deposited and submitting its
Tax deducted liability and return to Tax office regularly. On dated 2076 Baikash Mr.
Sushil and Ms. Megana Tax Office of Tax Office Putalishad visited the office of M/s B.B
airways Pvt. Ltd. for Tax audit for the financial year 2073-074. While visiting the office
tax officer has found that the TDS on payment made by the company is not regularly
deposited in Inland Revenue Office nor TDS return is submitted within the stipulated
time frame. On Jestha 25, 2076, Tax office issues notice to pay the tax within 15 days
from the receiving the letter of notice along with tax fine and penalty as per Income Tax
Act 2058. Additional Tax officer are imposing fine under section 120(a) 50% of tax
reassessed by them and again the failure to file the withholding tax return is subject of
fee under section 117(3) at 2.5% P.A of total withholding tax computed for the month
and part of month basis.
Details of the payment made and TDS not deposited in Inland Revenue Office:
TDS Revenu
Particular Amount Paid Amount e Code Remarks
Remuneration is
Remuneration Tax of 250 paid on the last
11112
Staffs monthly 12,500,000 1,500,000 date of the
1 month
Remuneration
Remuneration based Social is paid on the
Security Tax of 250 Staffs last date of the
2 monthly 12,500,000 125,000 11211 month
Consultancy Fee paid to M/s payment made
3 YRP Associates 1,333,333.33 200,000 11111 on 25.09.2074
Rent is paid on
Quarterly on
15th of first
Rent payment to M/s Dikpal months of each
4 Associates 50,000 5,000 11131 quarter

Payment made
for construction
Seminar hall on
Payment made to contractor dated
5 M/s Contractor Pvt Ltd. 50,0000 7500 11120 27.02.2075.
Required:
State the consequences of the notice and quantify the amount to be paid by B.B.
airways Pvt. Ltd.as per the provisions of the Income Tax Act, 2058. Justify the
tax demanded by the Tax Officer.
3. Question no.3
Mr. Khagendra Khadka has sold a Building having ownership of Balkot of Bhaktpur
Municipality in Baikash 2076 for NPR. 1 Corer and that sold Building was purchased by
Mr.Khadka on date Chaitra end 2072 at NPR. 60 lac. Mr. khadka paid NPR. 300,000 to
the land office for the registration transfer charge. On the date of purchased Mr. Khadka
and Family have organized gathering events with their relatives in their own new
residence and spent NPR. 2 lac. Mr. Khadka has submitted tax a return on Ashwin end
2076 on disposal of land and paid NPR. 175,000 as tax to Inland Revenue Department.
The tax return submitted by Mr. Khadka is under the preview of Tax Audit and IRD has
to demand total tax of NPR. 185,000 and with an additional tax of NPR.10, 000 and with
an additional 50% fine on this amount. Mr. Khadka has consulted with you as a tax
expert advises the additional tax with fine demand by the Tax officer.
4. Question no.4
M/s Mining Pvt. Ltd has purchased “SDLG mining dump truck MT86 316KW 430PS”
from MWA Enterprises on 1st Shrawan 2075. As per the term of the agreement M/s
Mining Pvt. Ltd. installments are scheduled in such a way that customers can pay the
installments on time and total installments payable are six for complete transactions. The
first installment NPR.1500,000 is at the beginning of the year and after that, each
installment is increased by NPR. 100,000 per year up to 6th year.
As tax Expert how this transaction of “SDLG mining dump truck MT86 316KW 430PS”
is the inclusion and deduction in the financial statement of M/s Mining Pvt. Ltd and M/s
MWA Enterprises for tax perspective. Your answer must be based on the relevant
provision of the Income Tax Act 2058.
5. Question no.5
Chaya Center Management Committee has entered an agreement with Ms. Manakamana
Construction Pvt. Ltd. for construction of commercial Building Chaya Center
Kathmandu Nepal. Details of the contract amount, term and other information are as
below:

Particular/
Income year 2073-074 2074-075 2075-076 2076-077
Estimated cost of
remaining works 6,750,000,000 6,750,000,000 7,000,000,000 -
Actual cost
incurred for
completion of
works 1,350,000,000 3,900,000,000 6,000,000,000 7,050,000,000
Variation order 100,000,000 50,000,000 (25,000,000)
Contract
amount 7,500,000,000
Contract Period 3 years
Date of Contract Falgun 2073
Additional to the above information, if the contract commercial complex is completed
prior to the contract period than Chaya center management committee decided to provide
an additional Bonus of 0.3% per week maximum 8% of the contract price. M/s
Manakamana Construction Pvt. Ltd. has finished the contract three weeks prior to the
contract period.
Required:
As Tax expert determine the inclusion of income and deduction of expenses on long
term contract of respective Income Year.
6. Question no.6
Ms. Khadka has sold Building having ownership of Kathmandu kalanki in Baikash 2076
for NPR. 1 Corer and that sold Building was purchased by Ms. Khadka on date Kartik
2072 at NPR. 60 lac. Ms. Khadka paid NPR. 300,000 to the land office for the registration
transfer charge. On the date of purchased Mr. Khadka and Mr. Khadka has submitted tax
return on Ashwin end 2076 mentioning that gain on disposal of land is NPR. 3700,000
and paid NPR. 185,000 as tax to Inland Revenue Department. Ms. Khadka has submitted
tax return with filing annexure-8 for gain on disposal of Non-Business chargeable assets.
The tax return submitted by Ms. Khadka is under the preview of Tax Audit and IRD has
a demand tax of NPR. 250,000 short declared and deposit by Ms. Khadka and with an
additional 100% tax under section 120(b) NPR.250, 000. Tax officer has found Ms.
Khadka has taken two cheques from buyer of NPR. 1 corer and NPR. 50 lac but Ms.
Khadka has mention sales amount is only NPR. 1 corer on the ground that statement is
made false or misleading knowingly or recklessly. Ms. Khadka consult with you as tax
expert advise the additional tax with fine demand by Tax officer.
7. Question no.7
Define an associated person under the Income Tax Act 2058 and advise the effects of the

following transaction in Income Tax.

a) Mining Pvt.Ltd is a Chinese company. The Chinese company has established the
Subsidy Company named Nepal Mining Pvt. Ltd. in Nepal. Is this an associated
company?
b) Nepal Mining Pvt. Ltd. in Nepal has purchased all the transaction from M/s
Mining Pvt. Ltd. (Holding company). Again all the production materials are sold
through M/s Mining Pvt. Ltd or through its related companies. How this case is
handled in the Income Tax Act 2058?
c) Nepal mining Pvt. Ltd receive a 20% discount on the purchase of materials from
M/s Mining Pvt. Ltd( Holding company) and Nepal Mining Pvt. Ltd provide 12%
discount to M/s Mining Pvt. Ltd(Holding company) but the discount rate to
another party is only 3%.
d) Mr. Pandey is a Chairman of Company X registered in China. Company X has
held 52% share in company Y and again Company Y purchase share of Company
Z registered in Nepal. Company Z is a top registered company by its turnover and
profit in Nepal. For the financial year 2075-076 the company Z purchase goods
and services from company X and Y which is higher than previously purchase
price. What are the effects on Income Tax?
8. Question no.8
How compensation is characterized under the Income Tax Act 2058, state the relevant
provision of the Income Tax Act 2058 and as tax expert how you treat the following
compensation received under the Income Tax Act of 2058.
On date 22nd Jestha 2076, the office of Dikpal Associates was occurred Fire from the
electricity circuit short and destroy the furniture and fixtures written down value of NPR.
2,500,000. Mr. Dikpal owner of the associates is manage the risk of associates with an
insurance policy which sum was insured Value of NPR. 3,000,000. Mr. Dikpal lodge the
claim of the insurance value of NPR. 2,500,000 on the 1st day of Ashad 2076 but the
insurance company has provided insurance claim of NPR. 2,250,000 for furniture and
fixtures on dated Mansir end 2076. What the treatment of this loss and compensation
received by Mr. Dikpal in a respective financial year. If the insurance company has given
only NPR. 1,600,000 as insurance claim than your treatment is different?
9. Question no.9
Mr. Retirement was Chief Executive of M/s RBS Bank Pvt. Ltd. After servicing the RBC
Company over two decades he is retired from the service of the company. As on the date
of retirement, he has the following information about Retirement Contribution, Gratuity
and Leave.
Date of Joining 1/1/2054
Date of Retirement from Service 2/1/2075

Gratuity Provision in Bylaws of the company Monthly salary

Half monthly salary for every year
For completion of 5 year of service
completion year
One monthly salary for every year
For 5 year to 10 year of service
completion year
One and a Half monthly salary for
For 10 to 15 year of service
every year completion year
Two monthly salaries for every year
For more than 15 years of service
completion year
Salary at the time of retirement per months 65,000
Accumulated home leave total days 195
Accumulated home leave before Chaitra 18,
2058 60
Amount received for Accumulated Leave 350,000
Contribution to Retirement Fund(PF)
Principal Amount up to Chaitra 18, 2058 624,000.00
Principal Amount above Chaitra 18, 2058 to
Retirement date 2,340,000.00
Interest Amount up to Chaitra 18, 2058 411,840.00
Interest Amount above Chaitra 15,2058 to
Retirement date 1,544,400.00
Total Amount From Provided fund 4,920,240.00
Required:
It is notified that Mr. Retirement, contribute retirement (Provident fund) and Gratuity are
regularly deposited in approved retirement fund. Calculate the total tax deducted and
amount receivable by Mr. Retirements as on date of Retirement.
10. Question no.10

Define an investment insurance as per the Income Tax Act 2058. State the
consequence of Income tax in the following cases.
a) Ms. Pandey has taken the insurance policy (sum insured) of NPR. 1600,000 for ten year
policy on date 2055 Bhadra 25 with annual premium payable of NPR. 80,000. On the
date of maturity Ms. Pandey total paid as premium amount is NPR. 1,450,000.
Insurance company payable amount to Ms. Pandey on date of Maturity with Bonus is
NPR. 2,250,000.
b) Ms. Khadka has purchased Accidental insurance policy from Nepal Life insurance
company and paying regularly insurance premiums to the company yearly. In the 5th
year Ms. Khadka got an accident on a car and injured her leg and the Nepal Life
insurance company has provided compensation of NPR. 175,000 but the actual
premium paid by Ms. Khadka is NPR. 75,000 only.
c) Ms. Karki has taken a life insurance policy of Sum Insured NPR. 2,600,000 with an

annual premium of NPR. 115,000. On dated Bhadra 2076 Ms. Karki died after payment
of seven annual premium of NPR. 805,000. The insurance company has decided to
payment after the death of Ms. Karkai NPR. 2,750,000 with bonus and insurance policy
amount.
11. Question number: 11
Alex Construction Company entered with an agreement with Commercial Bank named
RBS on dated Chaitra 2074. Details of the contract are as below:
 Estimated cost of remaining works NPR. 1,200,000,000.00
 Actual cost incurred for completion of works for F/Y 2074-075 NPR.545,454,546
for F.Y 2075-076 is NPR.513,333,334 and for F.Y 2076-077 is NPR.
344,000,000
 Due to inflation there is cost variation and variation order for F.Y 2075-076 is
NPR. 23,333,334.and for F.Y is NPR. 65,555,556.
 Variation in estimated cost is for NPR. 200,000,000 and NPR 136,666,667 for
F.Y 2075-076 and F.Y 2076.077 respectively.
 Total Contract amount is NPR.1, 257,142,857, Contract Period is 3
years.
Due to variation in cost Alex Construction Company incurred loss in the long term
contract than expected profit.
Required:
As tax expert calculate the Inclusion of Income, deduct expenses and loss is set
off under the Income Tax Act 2058 in the contract with the commercial Bank.
12. Question number: 12
In the financial year 2076-077 Ms. Ramali has the following remuneration earning;
 Basic salary per month is NPR. 555,000 with appropriate grade facility included.
 Employer is contributing the required amount as per the provision of contribution-based
Social Security Act, 2075 and Regulation 2075.
 Ms. Ramali contributing required amount to Social security fund.
 Office has provided the vehicle facility becoming top executive of the company.
 The employer has taken group personal accident policy amount NPR. 500,000.
 The employee paid the cost of life insurance policy 75% of policy premium 500,000.
 She has Donte amount NPR. 125,000 to tax-exempt organization.
 She receives a festival allowance of one month’s salary during festival time

Required:
Calculate the remuneration Tax as per the provision of Income Tax Act 2058 and
latest amendments if any.
13. Question no.13

How the tax of Foreign Permanent Establishment is calculated as per Income Tax
Act 2058 provisions. State the consequence of foreign permanent establishment in
tax in the following cases:
a) In Dadeldhura M/s. Thomas Company (Registered in German) has established

the Sky Jumping adventure games Nepal with the Name M/s.Thomas Company
Branch. For the Financial year 2076-077 the Branch earn taxable Income of Nrs.
5 corer. What is the liability of M/s. Thomas Company or its Branch in Nepal?
b) M/s Kalika Construction holds 60% share of M.s Okalama Company registered
in Japan and 40% share are held by Mr. Japan. M/s Okalama Company awarded
a contract in international Budding for the Reconstruction of Cricket Ground TU.
In the financial year 2076-077 M/s Okalama Company earns income from the
business of NPR. 5 Corer (Expenses is NPR. 45Corer and Income is NPR. 50
corer). How the tax is computed in this case?
c) M/s Koren Construction company awarded a contract in Nepal for construction

of Kaligundaki Dame Site which was destroyed by Flood last year. M/s Koren
construction completion the work within 10 months and earn profit Taxable Profit
of NRP. 6 corer. The company want send money to the Head office after
completion of work. What is the tax liability of the company as per the Income
Tax Act 2058?
14. Question no.14

Mr. Pandeya is Managing director of Nepal Garments Pvt. Ltd. The company has produce
Nepal garments dress like t-shirts, shirts, trousers, jackets, ladies dress both for summer
and winter. Nepal garments are regularly shipping to third countries as well. The
Company is registered in VAT for its transaction from the date of incorporation. Due to
top competition in the market managing director of the company Mr. Pandeya planning
to liquidate the company and seeks your advice as Tax and Vat Expert. The company has
revalued its fixed and other assets as on the date of liquidation. As tax and Vat Expert
advice to Mr. Pandeya for procedures for liquidation and Vat implication on liquidation
as per Value Added Tax Act, 2052.

The financial position as on Ashad end 2076 is presented as below:

Equity and Liabilities NPR. Fair Value
Share Capital 500,000 500,000
Reserve Fund & Accumulated Profit 150,000 150,000
Revaluation Reserve - 1,000,000
Total Equity 650,000 1,650,000
Liabilities
Loans And Borrowings 1,500,000 1,500,000
Deferred Tax Liability -
Total Non-Current Liabilities 1,500,000 1,500,000
Current Liabilities
Trade & Other Payables 200,000 200,000
Total Current Liabilities 200,000 200,000
Total Equity and Liabilities 2,350,000 3,350,000
Assets
Non-Current Assets
Fixed Assets
A) Gross Block 2,000,000 3,000,000
B) Less: Depreciation (500,000) (750,000)
Net Block 1,500,000 2,250,000
Investments(Gold And Silver) 100,000 350,000
Deferred Tax Assets
Total Non-Current Assets 100,000 350,000
Current Assets
Inventories(Note-1) 150,000 150,000
Trade & Other Receivable 200,000 200,000
Cash & Bank Balances 400,000 400,000
Total Current Assets 750,000 750,000
Total Assets 2,350,000 3,350,000
Note-1: the inventories contain product Alfa and Beta 25000 units and 5000 units
respectively. The market price of Alfa is NPR.10 per units but the market price of Beta
product could not ascertain due to not availability of reference in the market. But the
company has valued its stocks at lower of the market value and cost.
15. Question no.15
M/s Paints Nepal Ltd. is a sole distributor of Asian pains products of Asian Paints Limited
which is an Indian multinational paint company headquartered in Mumbai, Maharashtra.

The company sales and distribution of paints, coatings, and products related to home decor,
bath fittings and providing of related services. M/s Paints Nepal Ltd. has regularly
submitting its returns to a Large Tax payer’s office while doing tax audit/TDS audit of the
company in the months of Ashad end 2076, the Tax officer has mentioned the followings
remarks.
a) The company has delivered bath fitting items Value NPR. 1,000,000 to M/s Jain
International but the company has issued invoices on Ashwin 15, 2075. In the stock
book and record of the company shows that bath fitting items are delivered to M/s
Jain international on dated Bhadra 29, 2075.
b) The company sales it’s paints, coating, and decors to M/s Yadav Hardware
Mahakali on Installments payment scheme total value of NPR. 2500, 000 with the
agreement of settlement within year of one year. On dated 2075.05.19 the company
has received NPR. 500,000 as Installments but not include that amount in the return
of the Bhadra and the company received the remaining amount on Chaitra end
2075. The tax office found that all this transaction is recorded in the sales of Chaitra
only in the Vat return.
c) In the months of Shrawan 2075 the paints and other products of Asian paints are
short supply in the market, which has serious impact in painting related transaction.
The company regular customer M/s Contractor Pvt. Ltd has given an advance of
NPR. 500,000 on dated Bhadra end 2075 for products and the company has
delivered products dated 2075.06.19 but the accountants of the company have not
mention this transaction in the return of month Bhadra 2075.
Required:
You as tax consultant of M/s Paints Nepal Ltd, advice to the company issued raised
by the Tax officer including the additional amount and interest if any for settlement
of tax issues.
16. Question no.16

As per the letter received from the department of customs:
“Dear Managing Director Ms. Deepa Sharestha, M/s Baltra LifeStyle Range Pvt. Ltd.
Custom value declared by M/s Baltra Lifestyle range Winner+ purchased is not in
accordance with the Customs Act 2064. Being suspicious of the transaction value
declared by the companies, the Customs officer Mr. Delta and Mr. Gama has collected
the selling price of such Winner + and concluded that the importer’s selling price of such
kind of oven is NPR. 22,500 before applicable VAT as per Vat Act 2052. Customs office
is believed that that the declared value is lower than the actual and we decided to apply
the deductive value method for calculation of the transaction value of the consignment.
According to the transaction value for custom duty is NPR.1,795,7833.” Please pay the
customs duty accordingly.

Details of the transaction value calculation is:

Winner+ 125 @ NPR. 13,800 1,725,000
Transportation etc. up to custom 70,833
Transaction value for custom duty 1,795,833
Thank You.
Gunanidhi
Customs Officer February 25, 2020
Other Additional Information relevant to the Tax office letter:

 M/s Baltra Life style range has import Winner+ a product of Baltra on February
25, 2020. The details of the transaction are;
Invoice Value per piece of Winner+ is $ 75.00

Transportation, clearing and other expenses up to the custom office 25,500
Bank and other L/C charges 9,500
Clearing expenses at Custom area 9,000
Transportation from custom to godown 9,000
Other direct expenses to bring the goods to godown 850
 On the industry average margin on Baltra imported products are 25% on the
landing cost for fixing the selling price.
 The rate of customs duty on the Winner+ is 21% of the transaction value.
 The rate of exchange on the day of customs clearance was NPR. 115.49 per $ on
date of February 25, 2020.
Required:
As a Customs and Tax Expert, advice the company letter issued by the customs
office with the relevant calculation along with the relevant provisions of customs
Act 2064.
17. Question No. 17.

State the consequence in the action taken by Excise office and Custom Officer in the
following cases
a. Mr. Ram is a Business Man Established its business in Kathmandu last year. During this
year Mr. Ram has converted its business goods from non-excisable goods to excisable
goods. On dated Ashad end 2076, Mr. Kamal Excise officer visited the business house of
Mr. Ram found that non-excisable goods are converted to excisable goods in business

without paying any excise duty as required by the Excise Act 2058. But Mr. Ram is arguing
that he has converted the non-excisable goods to excisable goods so no need to pay excise
duty as demand by Excise officer.
b. Mr. Netra is dealing with the excise goods in his home town Kanchanpur, due to financial
crisis Mr Netra has applied for the suspension of Excise license in accordance with the
provision of Excise Act 2058. Excise office has suspense the excise license for three years
as demand by Mr. Netra in accordance with the section 9ka of Excise Act, 2058, on dated
2073 Magh 27. Mr. Excellent Excise visited the office of Mr. Netra on dated 23rd Jestha
2076 and fine Mr. Netra for not renewed as required by the Excise Act 2058. Is the action
taken by Mr. Excellent, Excise office is in accordance with the provision of Excise Act
2058?
c. Ms. Bandana has purchased the Z goods from country UK. The date good arrival is 27th
Magh 2076 and the declaration form of such goods is registered with custom office is Magh
01, 2076. The custom duty applicable on the declaration form date is 25% and on the date
of arrival goods custom duty is applicable is 30%. Mr. Active, Custom Office is demanding
custom duty from Ms. Bandana based on the arrival date of goods on custom. As expert of
Customs is the demand of Mr. Active Custom Officer is in accordance with the provision
of the Custom Act, 2064?
d. Ms. Horizen Medicine has purchased medicine raw material from China. The supplier raw
materials were purchased with custom duty exemption on the condition that imported raw
materials are exported with value addition while testing the imported medicine raw
material which do not meet the standard quality than Ms. Horisen Medicine want to return
back imported material to China but the Customs department demand custom duty on Raw
material imported due to these raw materials were purchased on customs duty an exemption
pursuant to Custom Duty Act 2064. Is the argument of the custom officer is in accordance
with provision of Custom Duty Act 2064?
18. Question no.18

Write a short note in the following topics based on the recent change in the Income
Tax Act 2058 and VAT act 2052 by Financial Act, 2076.
a) Deduction not allowed without PAN
b) Provision related to the letter of Intent for Merger and acquisition
c) Vat Refund to consumer(Final) and TDS
d) Determination of cost of Securities Sales and Purchase
e) Amendments of Tax Return

19. Question no.19

What is the legality of Advance Ruling? Explain the Responsibility of Person willing
to apply for advance ruling and Responsibility of the department in relation to
advance Ruling.
20. Question no.20

Define Permanent Establishment as per OCED, Income Tax Act 2058 of Nepal
and Explain Permanent Establishment in digitalized economy.

Answers/Hints:
1. Answer to Question no.1
As per section 47 of the Income Tax Act 2058 “Disposal of Assets and Liabilities by
Merger” following provisions are applicable;
(1) Where a person acquires an asset or incurs a liability and as a result another asset
owned or liability owed by the person is disposed of by way of expiry or merger, the
following provisions shall be applied:-
(a) Where there are net outgoings for the merging asset or merging liability immediately
before its disposal, the person shall be treated as
(1) Deriving an amount in respect of the disposal of the merging asset or merging liability
equal to the net outgoings. Provided that, the amount shall not exceed amounts derived
by the person with respect to incurring the merged liability; and
(2) Incurring expenses in owning or owing the merged asset or merged liability in an
equal amount; and
(b) In the case of a merging liability, where there are net incomings for the merging
liability immediately before its disposal, the person shall be treated as-
(1) Incurring expenses for the disposal of the merging liability in an amount equal to the
net incomings. Provided that, the amount shall not exceed expenses incurred by the
person in acquiring the liability; and
(2) Deriving an amount in owning or owing the merged liability in an equal amount.
(2) Subsection (1) shall also be applied in the following circumstances without adversely
affecting the generality provisions made under the subsection are ,the exercise of an
option by the person to acquire or sell an asset; the acquisition of an asset that is leased
by the person; and the transfer of a liability that is guaranteed by the transferee.
According to the above section, Land & assets will be treated as transferred at the actual
cost incurred to Jumna. Cost of land actual is treated as transferred as per section 40(5)
of Income Tax Act 2058, land had purchased before Chaitra 18, 2058. Loss of the Jumna
will not be carried forward and merged as per section 47 of Income Tax Act 20578 but
if the Yamuna has “Income from Investment” it can claim the loss on an acquisition of
Jumna of against the income from investment under Section 9 of Income Tax Act, 2058.
According to merger impact is as under:
Equity and Liabilities Yamuna Jumna Gang
Share Capital 100,000,000 - 100,000,000
Reserve Fund & Accumulated Profit 40,000,000 (21,000,000) 19,000,000
Profit for the year 10,000,000 - 10,000,000
Total Equity 150,000,000 (21,000,000) 129,000,000
Liabilities

Loans And Borrowings 80,000,000 30,000,000 110,000,000
Deferred Tax Liability - -
Total Non-Current Liabilities 80,000,000 30,000,000 110,000,000
Current Liabilities
Trade & Other Payables 30,000,000 5,000,000 35,000,000
Total Current Liabilities 30,000,000 5,000,000 35,000,000
Total Equity and Liabilities 260,000,000 14,000,000 274,000,000
Assets
Non-Current Assets
Fixed Assets (WDV)
A) Land 10,000,000 21,500,000 31,500,000
B) Other Assets-WDV 60,000,000 10,000,000 70,000,000
Fixed Assets (WDV) 70,000,000 31,500,000 101,500,000
Investment in Subsidiary 40,000,000 - -
Deferred Tax Assets
Total Non-Current Assets - - -
Current Assets
Sundry debtors 90,000,000 12,500,000 102,500,000
Trade & Other Receivable 40,000,000 5,000,000 45,000,000
Cash & Bank Balances 20,000,000 5,000,000 25,000,000
Total Current Assets 150,000,000 22,500,000 172,500,000
Total Assets 260,000,000 54,000,000 274,000,000
2. Answer to question no.2:

As per section 90 of the Income Tax Act 2058, “Statements and Payments of Tax
Withheld” Every withholding agent shall be required to file with the Department within
25 days after the end of each month a statement in the manner and form prescribed
(subsection-1) again A withholding agent who fails to withhold tax in accordance with
sections 87, 88, 88A or 89 shall be treated as though the tax had been withheld at the time
required. According to this provision M/s B.B. airways Pvt. Ltd. is responsible to comply
with the Income Tax Act provisions.
According to the section of 119 of Income Tax Act 2058 “Interest for Failure to Pay Tax”
A person who fails to pay tax on or before the date on which the tax is payable is liable to
pay interest for each month and part of a month for which any of the tax is outstanding
calculated as the standard interest rate applied to the amount outstanding.(119-1) and
again the failure to file the withholding tax return is subject of free under section 117(3)
at 2.5% P.A of total withholding tax computed for the month and part of month basis.
(Amended by Financial Act 2075)

Accordingly total Tax deducted amount and Interest under Income Tax Act 2058 are as
under.
Per No. OF
Particular monthly/Quarterly months TDS amount
Remuneration Tax not
A Deposit in time 1,500,000 12 18,000,000
Interest under Section 119(1) of the Income Tax Act 2058
Calculation of Months Total Factorial 33-Factorial 23
(33*34-23*24)/2=(285*75000*15%/12) 5,343,750.00
Total Remuneration
tax(A) 23,343,750.00
Remuneration based
Social Security Tax of
B 250 Staffs monthly 125,000 12 1,500,000
Interest under Section 119(1) of Income Tax Act 2058 Calculation of
Months Total Factorial 33-Factorial 23
(33*34-23*24)/2=(285*75000*15%/12) 445,312.50
Total Remuneration based Social Security Tax (B) 1,945,312.50
C. Consultancy Fee paid to YRP Associates

TDS amount 1.5% of
paid Amount 3,000.00
Interest under Section 119(1) of Income Tax Act 2058 (
3000*155/12*29) 1,087.50
Amount paid on
25.09.074
Months in 2073-074 6
Months in 2074-075 12
Months in 2075-076 11
Total number of months
delay 29
Total Consultancy Fee paid to YRP Associates TDS and Fine 4,087.50
D. Rent payment to M/s Dikpal Associates
TDS Amount 20,000.00

Interest under Section 119(1) of Income Tax Act 2058 (
20000*10%*15%/12*118) 29,500.00
Rent Delay
Shrawan 2074 34
2074 Kartik 31
Magh 2074 28
Baikash 2075 25

Total Months 118

Total TDS and Fine Rent payment to M/s Dikpal Associates 49,500.00
E. Payment made to contractor M/s Contractor Pvt. Ltd.
TDS amount 1.5% of
paid Amount 7,500.00
Interest under Section 119(1) of Income Tax Act 2058 ( 1,125.0
7500*15%/12*12)
Amount paid on
27.02.075
Months in 2074-075 1
Months in 2075-076 11
12
Payment made to contractor M/s Contractor Pvt. Ltd.(TDS and
Fine ) -E 8,625.00
Total(A+B+C+D+E) 25,351,275.00
TDS amount As per Payment
19,530,500.00
Interest under Section 119(1) of Income Tax Act 2058
5,820,775.00
Note:
 Standard Interest rate is 15% Per annum as per the Income Tax Act Definition
section.
 Additional tax imposed by Tax officer under section 120(a) 50% of tax reassessed
can be done but the failure to file the withholding tax return is subject of fee under
section 117(3) at 2.5% P.A of total withholding tax computed for the month and part
of month basis is not applicable for the financial year 2074-075.
 In additional fees and penalties for not observing the provision of the act is not less
than 5000 and not more than NPR. 25,000 under section 119K and not less than 5000
and not more than NPR. 30,000 under section 128 of the Income Tax Act 2058.

As per section 120 of the Income Tax Act 2058, “Penalty for Making False or
Misleading” statements A person who makes a statement to the Department that is false
or misleading in a material particular; or omits from a statement made to the Department
any matter or thing without which the statement is misleading in a material particular
shall be liable for a penalty. As per this section 120(a) where the statement is happened
to be false or misleading without knowingly or recklessly, 50 percent of the
underpayment of tax; is charged by the tax officer.

According to the above provisions;
Total Incoming (sales price of land) 10,000,000

Total outgoing (cost of land)
Less: Cost of Land (6,000,000)
Less: land Transfer charge (300,000)
Gain on sales of land 3,700,000
Rate of Tax (as per Section95A (5b) 5%
Tax as per Tax rate 185,000.00
Tax paid by Mr. Khagendra 175,000.00
Short tax 10,000.00
50% additional Fine(120(a)) 5,000.00
Total additional tax payable 15,000.00
As per the above calculation expenses incurred by Mr. Khadka for organizing get
together events NPR. 300,000 is personal nature expenses is not allowed for deduction
in tax. So tax as calculation by tax officer is right and Mr. Khadka needs to pay
additional tax NPR. 15,000.

As section 32 “Characterization of Payments under Annuities, Instalment Sales, and
Finance Leases” of Income Tax act 2058 following provision are applicable for this
transaction:
1. Payments made to a person under an annuity or by a person acquiring an asset under an
instalment sale or the use of an asset under a finance lease shall be treated as interest and a
repayment of capital under a debt claim in accordance with this section.
2. All payments referred to in subsection (1) shall be aggregated and the total divided into
two portions calculated as follows:
a) a capital portion, being equal to all payments made for the annuity or the market value
of the asset at the time it is sold or leased, as the case requires; and (b) an interest portion,
being the total of all payments referred to in subsection (1) less the capital portion.
3. While determining instalments of an annuity, instalment sale, or finance lease referred to
in Subsection (2), the portions of interest and capital should be segregated at the time of
settlement and provide with a list of total payments. Those who cannot provide with the
list, shall be required to treat the interest and capital portion of annuity, instalment sale, or
finance lease as a blended loan with the interest compounded six monthly and divide them
according to payments referred to in Subsection (1).
4. A borrower under a blended loan referred to in subsection (1) shall be required to make
in part a payment of interest and in part a repayment of capital where the interest part is
calculated on capital outstanding at the time of each payment so as to be the uniform rate
of interest over the term of the loan.
5. Each payment referred to in subsection (1) shall be divided into two portions in
accordance with subsection (3), the interest portion treated as interest paid or to be paid
and the capital portion treated as a repayment of capital under a debt claim. (Subsection-
6).
6. The lessee shall be treated as the owner of property leased to the lessee under a finance
lease and the lessor shall be treated as the holder of a debt claim against the lessee.
(Subsection-7).
7. Present value of lease payments is calculated using a discount rate equal to the standard
interest rate. (subsection-8)
According to above section provisions present value of lease payment is calculated under
subsection 8 of Section 32 of Income Tax Act 2058, using standard discount rate of 15%.
Year Installment Discount Factor Discounted Value
1 1,500,000 1 1,500,000.00
2 1,600,000 0.86957 1,391,304.35
3 1,700,000 0.75614 1,285,444.23
4 1,800,000 0.65752 1,183,529.22
5 1,900,000 0.57175 1,086,331.17
6 2,000,000 0.49718 994,353.47
Total 10,500,000 7,440,962.44
Total Payment 10,500,000.00
Present Vale of Installment payment 7,440,962.44
Interest Portions 3,059,037.56
According to above the calculation now we need to segregate interest portion and
principal payment portions so Interest and principal portion of the payment made by M/s
Mining Pvt. Ltd are:
Beginning of Principal Total Interest Payment of Balance
the year amount Payment Portion Principal Principal
1 7,440,962.44 1,500,000 - 1,500,000 5,940,962.44
2 5,940,962.44 1,600,000 891,144.37 708,855.63 5,232,106.80
3 5,232,106.80 1,700,000 784,816.02 915,183.98 4,316,922.82
4 4,316,922.82 1,800,000 647,538.42 1,152,461.58 3,164,461.25
5 3,164,461.25 1,900,000 474,669.19 1,425,330.81 1,739,130.43
6 1,739,130.43 2,000,000 260,869.57 1,739,130.43 0.00
10,500,000 3,059,038 7,440,962

In summary total payment NPR. 10,500,000 by M/s M/s Mining Pvt. Ltd includes
Interest payment (Interest Expenses) is NPR.3, 059,038 and principal payment (Debt
obligation) is NPR.7,440,962. In the year of purchase 1st Shrawan 2075 M/s Mining Pvt.
Ltd recognized as purchase of fixed assets of Value NPR. 7,440,962 and payable to M/s
MWA Enterprises as finance debt obligation is NPR. 7,440,962. M/s Mining Pvt. LTd
can claim interest expenses of NRs. 30, 59,038 under section 14 of Income Tax Act 2058.
This can be claimed separately on yearly basis.
Similarly M/s MWA Enterprise recognized sales of NPR. 7,440,962 equivalent to present
value of installment payments in the first year of sales and amount equivalent can be
showan as account receivable debt claim of NPR. 7,440,962. Every year installment
received is treated as return of Capital of NPR. 7,440,962 and NPR. 3,059,038 received
as Interest is inclusion as Income from Interest.

Computation of Inclusion of Income and Deduction of Expenses of M/s
Manakamana Construction Pvt. Ltd.
Particular 2073-074 2074-075 2075-076 2076-077
Cumulative Expenses(A)
1,350,000,000 3,900,000,000 6,000,000,000 7,050,000,000
Estimated Cost (B)
6,750,000,000 6,750,000,000 7,000,000,000 7,050,000,000
Percentage of
Completion(B/A) 20.00% 57.778% 85.71% 100.00%
Contract variation Initial
(D) 7,500,000,000
Variation Order€
- 100,000,000 150,000,000 125,000,000
Contract Amount after
adjustment(F) 7,500,000,000 7,600,000,000 7,650,000,000 7,625,000,000
Cumulative Revenue{G
(F*C)} 1,500,000,000 4,391,111,111 6,557,142,857 7,625,000,000
Bonus additional prior time
completion(H) 67,500,000
cumulative revenue after
Adjustment (I))=(G+H) 1,500,000,000 4,391,111,111 6,557,142,857 7,692,500,000
cumulative expenses
1,350,000,000 3,900,000,000 6,000,000,000 7,050,000,000
Cumulative Gain
150,000,000 491,111,111 557,142,857 642,500,000
Gain of last year
- (150,000,000) (491,111,111) (557,142,857)
This year Gain/Loss
included in Income Tax 150,000,000 341,111,111 66,031,746 85,357,143

Note:
As per Income Tax Act 2058 section 26. Averaging Inclusions and Deductions under
Long-term Contracts (1) For the purposes of calculating a person's income for an
income-year from an employment, business, or investment, estimated cumulative
inclusions and deductions under a long-term contract of the person shall be treated as
derived or incurred according to the percentage of the contract completed during the year.
In addition to this section, Rule 12 of Income Tax Rule 2059 Other Provisions Regarding
Long-Term Contract: (1) Cumulative inclusions under a contract of a person at a
particular time means amounts under the contract required to be included at the time or
a previous time in calculating the person's income from employment, business, or
investment, disregarding the calculations as for a normal income year.
(2) Cumulative deductions under a contract of a person at a particular time means

amounts under the contract that may be deducted at the time or a previous time in
calculating the person's income from a business or investment, disregarding the
calculations as for a normal income year.
3) Percentage of contract completed as referred to in Section 26 (2) of the Act shall be
determined at a particular time (the time) as follows-
(a) In the case of a contract for the manufacture, installation, or construction, or, in
relation to each, the performance of related services, is determined by comparing
cumulative deductions under the contract at the time with estimated cumulative
deductions under the contract at the time the contract is to end; (b) To the extent to which
a contract is not covered by paragraph (a), is determined in the manner prescribed by the
Department subject to the paragraph (a).

As per section 120 of Income Tax Act 2058, “Penalty for Making False or Misleading”
statements A person who makes a statement to the Department that is false or misleading
in a material particular; or omits from a statement made to the Department any matter or
thing without which the statement is misleading in a material particular shall be liable for
a penalty. As per this section 120(b) where the statement is made false or misleading
knowingly or recklessly, 100 percent of the underpayment of tax.
According to above provisions Computation of Tax liability and Tax amount.
Total Incoming (sales price of land) 10,000,000
Additional income on disposal 5,000,000
Total outgoing (cost of land)
Less: Cost of Land (6,000,000)
Less: land Transfer charge (300,000)
Gain on sales of land 8,700,000
Rate of Tax 5%

Tax as per Tax rate 435,000

Tax paid by Ms. Khadka 185,000
Short tax 250,000
100% additional Fine(120(b)) 250,000
Total additional tax payable 500,000
As per the additional tax payable by Ms. Khadka is NPR. 500,000 is according to the
provision of Income Tax Act 2058 of Nepal and it is suggested to Ms. Khadka to deposit
amount accordingly.

As per section 2 (Kana) of Income Tax 2058, “Associated Persons” means two or more
persons or group of such persons where one may reasonably be expected to act in
accordance with the intentions of the other and includes-
(1) an individual and a relative of the individual or an individual and a partner of the
individual;
(2) a foreign permanent establishment and its owner; and
(3) an entity and a person who, either alone or together with an associate or associates
controls or may benefit from 50 percent or more of the rights to income, capital, or voting
power of the entity, as the case requires, either directly or through one or more interposed
entities; or a person who is an associate of such person. Provided that, the term does not
include the following persons (1) employee and (2) persons prescribed by the department
as not being associate persons.
a) As per section 2(Kana) point 3 of the Income Tax Act 2058, if an entity control 50 percent
or more of rights to income, capital or voting power of the entity either directly or through
one or more interposed entities than this entity is associate. In the given cases Nepal
Mining Pvt. Ltd is a associate company of Chinese company.
b) In the given case, Nepal Mining Pvt Ltd in Nepal has purchased all the transactions from
M/s Mining Pvt.Ltd. (Holding company) and sold all the production materials to M/s
Mining Pvt. Ltd. or through its related companies, which is an arrangement as per the
Income Tax Act and Manual 2066(updated 2068) this transaction is treated under section
33 “Transfer Pricing and Other Arrangements Between Associates” under Income Tax
Act 2058.
c) In the given case, Nepal mining Pvt. Ltd received a 20% discount on the purchase of
materials from M/s Mining Pvt. Ltd( Holding company) and Nepal Mining Pvt. Ltd
provide 12% discount to M/s Mining Pvt. Ltd(Holding company) but the discount rate to
other party is only 3% are provided. This is an arrangement of transfer pricing without
doing the transaction in arm’s length dealing so this transaction is treated under section
33 “Transfer Pricing and Other Arrangements Between Associates” under Income Tax

Act 2058. Department may inclusion and deduction of Income and expenses for
computation of Taxable Income.
d) In the given case, Mr. Pandey is a Chairman of Company X registered in China.
Company X has holding 52% share in company Y and again Company Y purchase a
share of Company Z registered in Nepal. In the financial year 2075-076 the company Z
purchase goods and services from company X and Y which is higher than previously
purchase prices that reflect the loss to the company. The transaction between these
companies are arises the question of transfer pricing so Tax office may treated theses
transaction under section 34 “Income Splitting” of Income Tax Act 2058 for computation
of Taxable Income due to not doing transaction in arm’s length.
As per section 31 “Characterization of Compensation Payments” of the Income Tax Act

2058: following provision is applicable;
Where a person or an associate of a person derives a compensation amount, including a
payment under insurance, which compensates for the following things, then, at the time
the compensation amount is derived, it shall be included in calculating the income from
the employment, business, or investment, as the case requires. Provided that individual
payment from insurance on behalf of personal accident shall not be included in income
and medical expenses incurred on that accident shall not be credited as per section 51.
(a) Compensation for income from or an amount to be included in calculating the person's
income from a business, employment, or investment, which the person expects or
expected to derive, or
(b) Then, at the time the compensation amount is derived, it shall be included in
calculating the income from the employment, business, or investment, as the case
requires.
Treatment of compensation received by Mr. Dikpal in Income Tax.

Financial year 2075-076 Amount
written Down value 2,500,000
Depreciation 25% 625,000
Written Down value next year 1,875,000

written Down value 1,875,000
Claimed received on Mansir end 2076 2,250,000
Gain on Disposal of Depreciable Assets 375,000
According in the financial year 2075-076 the company can claim deprecation according
to the Income Tax Act, 2058 provision and in the financial year 2076-077 when the
company received the compensation from the insurance company the excess amount

received over the written down value is treated as gain on disposal of depreciable assets
shall be inclusion in Taxable Income.
If insurance claim is received only NPR. 1,600,000 than the treatment for financial year
2075-076 is same but for the financial year 2076-077 the treatment is:

Written Down value 1,875,000
Claimed received on Mansir end 2076 1,600,000
Base for depreciation of the year end 275,000
According to above calculation Mr. Dikpal can claim deprecation for the base of assets
remaining of NPR. 275,000 as per the Income Tax Act provisions for financial year 2075-
076.
Calculation of Tax and net amount received by Mr. Retirement on date of

Retirements;
Year of service 21.09

Salary per months 65,000
Date of Joining Service 1/1/2054
Date of Retirements 2/1/2075
Gratuity amount 2,741,700.00
Computation of Tax on Leave and Gratuity amount
Amount received for Accumulated Leave(Home Leave) 350,000.00
Less: before Chaitra 18, 2058(50%) WN#2
107,692.31
Taxable accumulated leave payments 242,307.69
Gratuity Amount 2,741,700.00
Less : Gratuity amount up to Chaitra 18, 2058(WN#2 ) (644,800.00)
year of service up to Chaitra 18, 2058 4.96
Taxable Retirement Gratuity 2,096,900.00
Total Taxable retirement payments 2,339,207.69
Tax-15 %( WN#4) 350,881.15
Remaining amount 1,988,326.54
Total Receivable after Tax ( Leave and Gratuity)-A 2,740,818.85
Exempted amount as per regulation 20(6) of Income Tax

Regulation 2059 (WN#3)
Principal Amount up to Chaitra 18, 2058 624,000.00
Interest Amount up to Chaitra 18, 2058 411,840.00

Exempted amount 1,035,840.00

Amount of Retirement payments after implantation of Income Tax Act 2058
Principal Amount after effective of Income Tax Act 2,340,000.00
Interest on Retirement fund after Chaitra 18, 2058 1,544,400.00
Total Provident fund 3,884,400.00
PF is approved retirement fund according to the tax amount is
calculated as below
As per section 65(1(Kha)) 50% of payment amount or NPR.
500,000 whichever is higher(WN#1)
Provided fund 50% 1,942,200.00
or 500,000 500,000.00
Maximum deduction is 1,942,200.00
Taxable Amount 1,942,200.00
Tax rate(WN#3) 5%
Tax Amount 97,110.00
Net amount 3,787,290.00
Total Retirement payments receivables(Provided Fund) -B 4,823,130.00
Total Retirement payments Receivable(A+B) 7,563,948.85
Notes:
 WN#1: As per Section 65 “Retirement Payments” of the Income Tax Act 2058, (1-
b) where the payment takes the form of a lump sum payment, an amount equal to
50% of the payment or NPR. Five Lac whichever is higher is deducted from the
payment and the balancing it shall be treated as a gain from the disposal of a non-
business chargeable asset of investment of the individual.
 WN#2: Rule 20 “Approval of Retirement Funds” of Income Tax Rule 2059, sub-
rule 6(a) stated that, amounts, contributed to a provident fund or a citizen
investment trust, of employees or workers, including interest earned by the amount,
in the income years prior to the commencement of the Act and the amount for
gratuity or accumulated leave shall be exempt from tax.
 WN#3: As per Section 88(1) of the Income Tax Act 2058, at the rate of 5% on the
gain as calculated under Subsection (1) (b) of Section 65 if the retirement payment
is made by Government or contribution based an approved retirement fund.
 WN#4: As per Section 88(1) of the Income Tax Act 2058, at the rate of 15% on the
gain as calculated under this section and TDS amount is final as per section 92 and
shall not be included under section 8(3) of the Income Tax Act 2058.

As per section 2(am) of the Income Tax Act 2058, “Investment insurance” means
insurance of any of the following classes:

(1) Insurance where the event covered is the death of an individual who is the insured or
an associate of the insured;
(2) insurance where the event covered is an individual who is the insured or an associate
of the insured sustaining personal injury or becoming incapacitated in a particular
manner;
(3) insurance where the insurance agreement is expressed to be in effect for at least five
years or without limit of time and is not terminable by the insurer before the expiry of
five years except in special circumstances specified in the contract;
(4) insurance under which an amount or series of amounts is to become payable to the
insured in the future; and
(5) reinsurance of insurance referred to under subparagraphs (1), (2), or (3); and
(6) Reinsurance of reinsurance referred to under subparagraph (5).
a) In the given cases Ms. Pandey paid a total premium paid is NPR. 1,450,000 and the
total amount received on maturity is NPR.22, 500,000, the net gain is NPR.
800,000(Total Amount with Bonus on Maturity Less Premium paid) which is taxable
at the rate of 5% as per section 88(2-Kha) of Income Tax Act, 2058, Tax Amount is
NPR.40,0000 which is deducted by the insurance company at the time of payment so
Net Amount Receivable by Ms. Pandey is NPR.2,210,000
b) In the given case, Ms. Khadka has received compensation for the insurance policy of
NPR. 175,000 for accidental insurance which falls under section 31 of Income Tax Act
2058. According to section 31 of the Income Tax Act 2058, “Characterization of
Compensation Payments”, individual payment from insurance on behalf of a personal
accident shall not be included in income and medical expenses incurred on that accident
shall not be credited as per section 51. According to this provision no tax is applicable
and tax shall not be deducted under section 88 of Income Tax Act 2058.
c) In the given cases, Ms. Karki insurance payment is made after her death and total
insurance company paid with Bonus and sum insured is NPR. 2,750,000 and net gain
is NPR. 1,945,000 which is not taxable under section 32 of the Income Tax Act 2058.
Compensation payment after the death of insure is exempted from tax.
Computation of Inclusion of Income, Deduction of Expenses and Carry Back of Loss

of Alex Construction for the commercial Bank Contract:
Particular 2074-075 2075-076 2076-077

Contract variation Initial 1,257,142,857
Variation Order - 23,333,334 65,555,556

Contract Amount after adjustment(A) 1,257,142,857 1,280,476,191 1,322,698,413

Estimated Cost Beginning 1,200,000,000 1,200,000,000 1,200,000,000
Additional estimated Cost - 200,000,000 136,666,667
Total Estimated Cost(B) 1,200,000,000 1,400,000,000 1,336,666,667
This year expenses 545,454,546 513,333,334 344,000,000
Total of Cumulative Deductions (C) 545,454,546 1,058,787,880 1,336,666,667
Additional estimated Cost to completion
contract 654,545,454 341,212,120 -
Estimated profit 57,142,857 (119,523,809) (13,968,254)
Percentage of Completion-D (C/B) 45.45% 75.63% 100.00%
Total of Cumulative Inclusions after
Adjustment (E))=(D*A) 571,428,572 968,394,765 1,322,698,413
Total of Cumulative Deductions (C) 545,454,546 1,058,787,880 1,336,666,667
Cumulative Gain (F)(E-C) 25,974,026 (90,393,115) (13,968,254)
Gain of last year(F) - (25,974,026) (25,974,026)
This year Gain/Loss included in Income
Tax 25,974,026 (116,367,140) (39,942,280)
Carry Back of Loss (Under section 20(4) of
Income Tax Act 2058) (39,942,280) - -
OR
Total of Cumulative Inclusions after
Adjustment (E))=(D*A) 571,428,572 968,394,765 1,322,698,413
Amount included in last year 571,428,572 968,394,765
Amount inclusion this year 571,428,572 396,966,194 354,303,648
Amount deduction 545,454,546 1,058,787,880 1,336,666,667
Less last year deduction 545,454,546 1,058,787,880
Last year loss - - (116,367,140)
Total Deduction This year 545,454,546 513,333,334 394,245,927
This year Gain/Loss included in Income Tax 25,974,026 (116,367,140) (39,942,280)
Carry Back of Loss (Under section 20(4) of
Income Tax Act 2058) (39,942,280) - -
Notes:
 As per section 20(4) of the Income Tax Act 2058, Notwithstanding subsection (1)
or (2), where a person incurs a loss, or has and unrelieved loss available for carry
forward under subsection (1)(b) during the income-year in which a long-term
contract of the person's business is completed or otherwise disposed of by the
person, that is attributable to the long-term contract, the Department may, by notice
in writing, allow the loss to be-
(a) Carried back to a preceding income-year or years; and

(b) Treated as an unrelieved loss of that year or years in an amount not exceeding
the amount by which inclusions in calculating the income from the business to
which the long-term contract relates for that year or years exceed deductions
relating to the contract.
 Again as per section 20(5) of Income Tax Act 2058, the following loss incurred by
a person during an income-year is attributable to a long-term contract or contracts
of the person- a) loss incurred from the long-term contract or contracts related to a
business; and (b) loss for each such contract that is incurred due to the deductions
in calculating the income from the business for the year that relate to the contract
exceed inclusions that relate to the contract.
 Accordingly the above calculation loss of the contract of NPR. 39,942,280 can be
set off as Carry Back of Loss to amount NPR. 25,974,026.
Calculation of Taxable Income and Tax Liability from Employment of Ms. Ramali for
the financial year 2076-077
Particular Amount (NPR.)

Basic Salary - Sec.8(2) (Ka)(555,000*12) 6,660,000.00
Provident Fund Contribution to Social Security Fund (20% of basic salary
contributed by employer) (from employer) – Sec. 8(2)(Cha) 1,332,000.00
Dashain Bonus/Festival Allowance - Sec.8(2) (Ka) 555,000.00
Perquisite with respect to Car( as per section 27 of Income Tax Act 2058 and
Rule 13 of Income Tax Rule 2059 33,300.00
Insurance Policy premium for life insurance (500,000*75%) 375,000.00
Total Income from employment (A)-Assessable Income 9,510,300.00
Reduction
Donation (as per section12(2) of Income Tax Act 2058)
5% of AI -
NPR. 100,000 100,000.00
NPR.175,000 actual payment 125,000.00
Minimum of above 100,000.00
Life Policy (as per Schedule-1 section 1(12) of Income Tax Act 2058)
NPR. 25,000 25,000.00
Actual paid 500,000.00
Approved Retirement Fund

NPR. 500,000 (As per the amendment of Income Tax Rule 2059, updated on
2076.11.12 dated Nepal Gazette) 500,000.00
1/3rd of AI 3,170,100.00
Actual payment (31% of Basic salary) 2,064,600.00
Taxable income 8,885,300.00

No Social Security Tax for 400,000 -
10% for Next 100,000 10,000.00
20% for Next 200,000 40,000.00
30% for up to 20 lac(2000,000-700,000) 390,000.00
above 20lac @ 36% 2,478,708.00
Total Tax 2,918,708.00
Less : 10% rebate for female (as per Schedule-1 section 1(12) of Income
Tax Act 2058) 291,870.80
Net Tax 2,626,837.20
Note:
 As per the amendment of Income Tax Rule 2059, updated on 2076.11.12 dated
Nepal Gazette Social security contribution up to NPR. 500, 0000 is treated is
retirement fund contribution allowed for deduction to social security fund
contributors.
 If amount contribution to contribution-based social security fund than 1 % social
security tax is not applicable.

As per section 68 of Income Tax Act 2058, “Foreign Permanent Establishments” tax is
calculated by applying the following provisions:
 Notwithstanding section 3 but subject to the rest of this Act, a foreign permanent
establishment of a non-resident person situated in Nepal shall be liable to tax with
respect to its income.( section 68(1))
 The income of a foreign permanent establishment shall be allocated to its owner
in accordance with section 69.(Section 68(2))
 The repatriated income of a foreign permanent establishment of a nonresident
person situated in Nepal shall be taxed in the hands of the permanent
establishment in accordance with section 3(b). (Section 68(3)).
 the repatriated income for an income-year of a foreign permanent establishment
of a non-resident person situated in Nepal shall be equal to dividends distributed
by the foreign permanent establishment during the year.(section 68(4))

a) In the given cases, M/s. Thomas company which is registered in Germany is has
established the Sky Jumping adventure games Nepal with the Name M/s.Thomas
Company Branch which is a Foreign permanent establishment for the purpose of
Income Tax Act 2058. In the financial year 2076-077, the Branch earns taxable
Income of Nrs. 5 corer in this case Branch (foreign permanent establishment) is
responsible for payment of tax in Nepal according to the provisions of the Income
Tax Act 2058. Again if the branch repatriates any amount in Germany so in this
case, the tax payment liability is with the Branch of M/s. Thomas Company
Branch.
b) In the given case, M/s Kalika Construction holds 60% share of M.s Okalama
Company registered in Japan, which is a controlled foreign entity as per section
69 of the Income Tax Act, 2058. According to section 68(2) of the Income Tax
Act, 2058 stated that the income of a foreign permanent establishment shall be
allocated to its owner in accordance with section 69. The total income inclusion
is NPR. 50 corer, total deduction is NPR. 45 corer and taxable income of M/s
Okalama is NPR. 5 Corer. According to these provision, M/s Kalika Construction
shall be included in its income of NPR. 30 corer and deduction of Expenses NPR.
27 corer while calculate its taxable income. M/s Okalama is controlled Foregin
entity and permanent establishment in Nepal. So Taxable income is NPR. 5 corere
is taxed at the rate of 25% Normal business as per Income Tax Act and the
reparation of income is considered NPR. 1.25corer (NPR. 5Corer*75%*40%)
while reparation of Income to Japan.
c) As per the section 68(3) of Income Tax Act 2058 stated that the repatriated
income of a foreign permanent establishment of a nonresident person situated in
Nepal shall be taxed in the hands of the permanent establishment in accordance
with section 3(b). In the given cases M/s Koren Company a earn profit of NPR.
6 corer in construction of Kaligundaki Dame Site, according to schedule 1 section
2(1) tax rate applicable is 25% on the Taxable Income and the tax amount is NPR.
1.5 corer, amount after tax is NPR. 4.5 corer. Total amount remaining after tax is
NPR. 4.5 corer while repeating amount to Korea Tax 5% applicable on the
income repatriated abroad by in an income year by a Nepal based foreign
permanent establishment as per section 2(6) of Schedule -1 of Income Tax Act
2058. According tax is NPR. 2,250,000 and amount can send to head office is
NPR. 42,750,000.

As per Section 11 of Value Added Tax (VAT) 2052, a registered person willing to cancel
its registration needs to submit an application for cancellation of VAT registration along
with the VAT return and payable VAT amount as on the date of cancellation. As per

section 11(4) of VAT Act 2052, at the time of deregistration available assets for which
credit tax input is already claimed by taxpayer like the stock of VAT applicable goods
and capital assets are deemed to be sold on fair market value and tax shall be assessed ad
recovered accordingly.
Calculation of Vat amount on liquidation of M/s Nepal Garments Pvt. Ltd. As on
Ashad end 2076
Particular Deemed Sales Vat on Sales Remarks

Fixed Assets 2,250,000.00 292,500.00 WN#1
Inventories(Note-1)
Product Alfa 250,000.00 32,500.00 WN#2
Product Beta 50,000.00 6,500.00 WN#3
Total 331,500.00
WN#1: VAT paid on VAT applicable goods has already been claimed by the company
so, at the time of liquidation, credit tax input is already claimed by taxpayer like the stock
of VAT applicable goods and capital assets are deemed to be sold on fair market value.(
As per section 11(4) of VAT Act 2052)
WN#2: At the time of deregistration stock deemed to be sold at market rate.
WN#3: According to circular issued by IRD dated 2055.09.05, if the market value could
not be ascertained at the time of deregistration, the cost shall be assumed to be market
price in order to levy VAT on deemed disposal.
WN#4: Gold & Silver are non-VAT applicable items, hence no VAT impact applicable.
(As per Schedule -1 of Vat Act 2052)
Advice:
It is advice to Mr. Pandeya Managing director of M/s Nepal Garments Pvt. Ltd. That it
shall follow the procedures as mention in VAT Act 2052 for liquidation. Submit an
application for deregistration along with VAT return and VAT payable of NPR.
331,500.00.
As per section 11(3) of the Vat Act 2052, within fifteen days from the date of filing the tax
return for deregistration, taxpayer shall submit account for tax audit and after performing
tax audit of such taxpayer, tax officer shall within three months, cancel registration or shall
give information thereof, if the registration is not to be canceled. If the tax officer does not
cancel registration or make the decision to cancel the registration within such period
taxpayer shall not require to submit tax returns subsequent to that period. (As per section
11(3) of the Vat Act 2052)


Calculation of amount payable by M/s Paints Nepal Ltd.
S.no Particular Amount NPR

Transfer of Bath Fitting items of NPR. 1000,000 this amount is treated
as sales under section 6(2(Kha)) of the Vat Act 2052. According to bath
1
fitting items taken from Stock on dated Bhadra 29, 2075 so Vat amount
is (100, 0000*13/113) for the Bhadra Months return. 115,044.25
Amount received on installment sales NPR. 500,000 as the first
2-a installment is treated as sales under section 6(3Kha) of Vat Act 2052.
According Vat amount is NPR. 500,000*13/113. 57,522.12
Remaining sales of Installment is sales under section 6(3Kha) of Vat Act
2-b
2052 so VAT Amount is NPR. (2500000-500000)*13/113 230,088.50
Advance amount received NPR.500000 is treated as sales on date
3 Bhadra end 2075 as per Section 6(2(GA)) of Vat Act 2052. Accordingly,
the Vat Amount is NPR. 500000*13/113 57,522.12
A Total Short Vat Amount in Return time 460,176.99
Additional Tax on non-payment of Above (A) under Section 19(2)
of Vat Act 2052.
Transfer of Bath Fitting items of NPR. (1000000*13/113)*10% per
1
annum for one month 958.70
Amount received on installment sales of NPR.
2-a
500,000*13/113*10%/12* 8 month 3,834.81
Remaining sales of Installment (2500000-500000)*13/113*10%/12*8
2-b
Months 15,339.23
3 Advance amount received NPR.500000*13/113*10%/12 for 1 months 479.35
B Additional Tax under Section 19(2) 20,612.09
Interest on the above due tax under section 26 of the Vat Act 2052.
Transfer of Bath Fitting items of NPR. (1000000*13/113)*10% for one
1
months 1,438.05
Amount received on installment sales NPR.
2-a
500,000*13/113*10%/12* 8months 5,752.21
Remaining sales of Installment (2500000-
2-b
500000)*13/113*10%/12*8Months 23,008.85
3 Advance amount received NPR.500000*13/113*10%/12 for 1 month
719.03
C Total Interest 30,918.14
Total Tax Liability(A+B+C) 511,707.23

Note:
• As per Section 6 (2) of VAT Act, VAT has to be recognized whichever occurs
first: at the time of issuance of Invoice, at the time of collection of goods from
the buyer, in the case of service, on delivery of service, and on receipt of cash by
the supplier.
• Thus tax officer may select Section 29(1) (chha) of the Act as the most appropriate
provision for the case and fine the tax payer NPR. 10,000.00 based on the
provision of the Vat Act 2052.
• Transfer of Bath Fitting and advance payment received is delay by one months
and installment sales are delayed by eight months.

For the justification of the custom value calculated by the custom office we need to
calculate the transaction value of the goods applying the deductive method and
calculation are as under;
Calculation of selling price as per invoice value:
Particulars Amount NPR Per unit cost
Invoice price (125*$75*115.49) 1,082,719 24,060

Transportation etc. up to custom 25,500 567
Transaction value for custom duty 1,108,219 24,627
Custom duty 21% 232,726 5,172
Other expenses after custom 28,350 630
Total landed cost 1,369,295 30,429
Profit margin 25% on landing cost 342,324 7,607
Selling price of oven 1,711,618 13,693
Per unit selling price (before VAT) 13,693
Calculation of transaction value on the basis of deductive value method:
Selling price per Winner+ 22,500

Less: Profit margin (22500/125*25) (4,500)
Net landing cost 18,000
Expenses after custom office (630)
Transaction value + custom duty 17,370
Custom duty (17370/121*21) (3,015)
Transaction value for custom purpose 14,355
Less: Transportation expenses up to custom (567)
The invoice price per pc as per deductive value method comes to 13,789

As per our calculation the transaction value of the consignment for custom purpose
with applying the deductive value method is:
Winner+ 125 @ NPR. 13,789 1,723,588
Transportation etc up to custom 70,833
Transaction value for custom duty 1,794,421
The Value calculated by the custom office is incorrect which NPR is. 1,795,833 is
more than value calculated by us.
Opinion:
Dear Ms. Deepa Sharestha, Managing Director of M/s Baltra Life Style Range
Pvt.Ltd. thank you for seeking our professional opinion. Please our opinion as
below based on the calculation and relevant provision of Custom Act 2064.
 As per our calculation the transaction value for customs purpose is NPR.
1,794,421. Under section 13 of the act of Customs Act 2064 there are several
methods are Transaction Value method, Identical Goods method, similar goods
methods Deductive value method and computed value method.
 Under the Section 13 of Customs Act, 2064 is specific to Article VII of the
General Agreement on Tariffs and Trade 1994 for valuation of transaction value
of a consignment. The sub-section (2) to (16) of section 13 of Customs act 2064,
has provided various methods of valuing the transaction value of a consignment.
But, it is specifically mentioned that the methods shall be used in priority of the
methods suggested by sub-sections in order of the sub-sections. As per sub-
section (4) of section 13 of Custom Act 2064, transaction value is determined on
the basis of the value declared by the importer if the value is in conformity with
Article VII and is proved to be agreeing with invoices and other relevant
documents proving the price. In case the custom officer believes that the declared
value is doubtful, he can ask for more documents to prove the validity of the
declared price. Even after analyzing the required documents, in case the custom
officer is not satisfied with the declared value, he is empowered to apply other
methods of valuation as suggested by other sub-sections.
 The first method of determining transaction value is the identical goods method.
In this method, the value of the goods imported shall be determined on the basis
of identical goods previously imported. Here, identical goods mean goods which
are the same in all respect, including physical characteristics, quality, and
reputation {Sub-section (8)} of Section 13 of Custom Act 2064.
 In case the custom officer has no record of recently imported identical goods, he
may apply the second alternate method of valuation that is similar goods method
{Subsection (9)}. Here similar goods means goods which, although not alike in
all respect, have like characteristics and like component materials which enable
them to perform the same functions and to be commercially interchangeable. In
case the custom officer is not in position to apply even the similar goods method
of valuation, under the following conditions the custom officer could value the
goods applying the deductive value method: Identical goods are previously
imported in Nepal and being sold in Nepal frequently such goods were imported
by the importer other than its related firms. The deductive value method is
calculated by deducting tax, duty levied in Nepal on the selling price of each unit
of the maximum unit so sold, and other related costs and profits.

a. As per section 4ka(Na) of Excise Act, 2058 states that , in case In case a goods are converted
to non-excisable goods to excisable goods, the person having ownership over the goods is
responsible for payment of excise duty. In the given case Mr. Ram has converted its non-
excisable good to excisable goods and having ownership over these good, Excise officer
action is in accordance with the provision of Excise duty so Mr. Ram need to pay excise
duty according.
b. As per Section 9ka of Excise Act, 2058, there are several reasons and condition of
suspension of Excise license and moreover this section stated that in case of suspension, the
licensee is not required to get its excise license renewed, as required under Section 9, during
the entire period of suspension. In the given cases Mr. Neta Excise license is suspended for
three years from the date of 2073 Magh 27 to 2076 Magh 26. In this period of suspension
Excise license need not be renewed as per section 9Ka of Excise Act 2058 provision. Mr.
Excellent, Excise office visited Mr. Netra business and demand fine for not renewed excise
licensee is not in accordance with the provision of excise Act 2058.
c. As per section 8 of Customs Act, 2064, the custom duty of any goods to be exported or
imported shall be determined according to the tariff prevailing on the date on which the
declaration form of such goods is registered in the customs office. Provided that where the
declaration form has been registered in the custom office prior to the arrival of goods at the
custom office, the duty shall be determined according to the tariff prevailing on the date of
arrival of such goods at that custom office. In the given case, Ms. Bhanda purchased goods
is arrived at custom office on dated 27th Magh 2076 but declaration form date is 1st Magh
2076. According to this provision custom duty is applicable based on the date of arrival of
goods i.e 30% custom duty is applicable. Based on this provision demand of custom duty
by Mr. Active custom office is in accordance with the provisions of customs Act 2064.
d. In the given case Ms Horizen Medicine Company return back its Raw material purchased
due to raw material is not as per standard quality under Custom duty exemption facticity.
As per section 6(1) of the Custom Act 2064, If any person re-imports any goods which has
been manufactured or finished in Nepal and exported, such goods shall be subject to such
duty as is chargeable on the importation of the goods of similar kind or to the same value,
which have been manufactured or finished in a foreign country. Again section 6(3) stated
that where the raw materials and subsidiary raw materials of the goods returned back

pursuant to sub-section (1) were importer without paying duty, the duty chargeable on the
quantity of the raw materials or subsidiary raw materials used in such goods shall also be
recovered. According the argument of recover of Custom duty on raw material purchased
by Ms. Horizen Medicine is in accordance with the provision of the Customs Act 2064.

a) As per section 21(1)Gha, of the Income Tax Act 2058(amendment made by the Financial
Act 2076) expenses for salary and wage payment made to employee or workers without
having PAN is not allowed for deduction as per Income Tax Act 2058. Similarly,
expenses without Permanent number (PAN) is also not allowed for deduction in Income
tax, as per s per section 21(2)Gha of Income Tax Act, 2058(amendment made by
Financial Act 2076)
b) Bank, Financial Institutions and insurance companies shall apply for merger and
acquisition up to Ashad end 2076 and that Banking and financial institution and insurance
shall be complete merger and acquisition process with in the months of Ashad end 2078.
(As per section 47Ka update by financial Act 2076)
c) Any consumer purchased good and services and make payment through electronic
devices shall be reimbursed 10% of Vat payment made in his or her bank account and
procedures of refund is as prescribed by tax authorities (section 25(1Kha) updated by
financial act 2076) and Tax shall not deducted on this payment as per section 88(1(5) Ga
of Income Tax Act 2058 updated by financial act 2076.
d) As per section 95K(2KA) of Income Tax Act 2058, for determination of net gain as per
section 95Ka(2(ka)) the entity whose securities are disposed that entity shall be determine
on date of disposal cost of securities sales and purchases based on weighted average cost.
(Updated by Financial Act 2076).
e) Tax return submitted by the tax payer as per income tax provision (stipulated time) can
amend with 30 days from the date of submission of the return if the tax payer desire to
amend such return in accordance with the procedures prescribed by the department. As
per section 96(6) of the Income Tax Act 2058. (Updated by Financial Act 2076).
According to Income Tax Directive point no.31.3.3.3 (Income Tax Manual 2066 updated
2068) the legality of advance ruling are:
 It shall be mandatory for the department to implement this act according to the
advance ruling issued to the person so long as it remains valid. But advance ruling
will not be binding mandatory on the person to whom advance ruling is given. If
a person is not satisfied with the advance ruling issued such person may apply to
the revenue tribunal.
 In the event of a conflict between a public circular issued under section 75 of the
Income Tax Act 2058 and an advance ruling issued to any person, the matters

mentioned in the advance ruling shall be applicable to the person to whom the
advance ruling has been issued.
 Provision of the advance ruling shall be applicable only to the person to whom it
is given under situation. But if person or situation is different, provision of
advance ruling shall not be applicable.
Responsibility of person willing to apply for advance ruling;
 Person seeking for advance ruling shall for the eradication of confusion, can give
application to the department in the prescribed format.
 Full and factual description of confusion shall be presented to the department.
 If the department ask for any additional details, such details should be proided on
time to the department.
 Advance ruling should not be asked for any subject of confusion, if tax liability
has already been created or removed due to any action of the applicant and if the
issue is sub-judice on the court or the court has already has already given its
verdict on it. ( as per Income Tax directive 2066(update 2068) point no. 31.3.3.1)
Responsibility of the Department in relation to advance ruling;
 The department shall not issue advance ruling on those issues which are sub-judic
on the court or on which the court has already given its decision.
 The department shall give opportunity to the applicant himself or his
representative to present any additional details if the department requires.
 The department shall give its decision on the subject matter within 35days of
receipt of application and notify the applicant in written about the decision.
 Advance ruling shall not be given on such matter on which tax liability has
already been created or removed due to action of any person. ( as per Income Tax
Directive 2066 update 2068 point no.31.3.3.2)
The organization for Economic Corporation and Development (OCED) has incorporated
and consistently reaffirmed physical presence principal in its Model Tax Convention on
Income and on Capital (OCED 2016). The OCED convention established fundamentals
criteria for determining the Permanent Established (PE) exist are;
1. For the purposes of this Convention, the term “permanent establishment” means a fixed
place of business through which the business of an enterprise is wholly or partly carried
on.
2. The term “permanent establishment” includes especially:

a) a place of management; b) a branch; c) an office; d) a factory; e) a workshop, and

f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources.
3. A building site or construction or installation project constitutes a permanent
establishment only if it lasts more than twelve months.
4. Notwithstanding the preceding provisions of this Article, the term “permanent
establishment” shall be deemed not to include:
a) The use of facilities solely for the purpose of storage, display or delivery of goods or
merchandise belonging to the enterprise;
b) The maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of storage, display or delivery;
c) The maintenance of a stock of goods or merchandise belonging to the enterprise solely
for the purpose of processing by another enterprise;
d) The maintenance of a fixed place of business solely for the purpose of purchasing goods
or merchandise or of collecting information, for the enterprise;
e) The maintenance of a fixed place of business solely for the purpose of carrying
On, for the enterprise, any other activity;
f) The maintenance of a fixed place of business solely for any combination of activities
mentioned in subparagraphs a) to e), provided that such activity or, in the case of
subparagraph f), the overall activity of the fixed place of business, is of a preparatory or
auxiliary character.
4.1 Paragraph 4 shall not apply to a fixed place of business that is used or maintained by
an enterprise if the same enterprise or a closely related enterprise carries on business
activities at the same place or at another place in the same Contracting State and
a) That place or other place constitutes a permanent establishment for the enterprise or the
closely related enterprise under the provisions of this Article, or
b) the overall activity resulting from the combination of the activities carried on by the two
enterprises at the same place or by the same enterprise or closely related enterprises at the
two places, are not of a preparatory or auxiliary character provided that the business
activities carried on by the two enterprises at the same place, or by the same enterprise or
closely related enterprises at the two places, constitute complementary functions that are
part of a cohesive business operation.
5. Notwithstanding the provisions of paragraphs 1 and 2 but subject to the provisions of
paragraph 6, where a person is acting in a Contracting State on behalf of an enterprise and,
in doing so, habitually concludes contracts, or habitually plays the principal role leading to
the conclusion of contracts that are routinely concluded without material modification by
the enterprise, and these contracts are a) in the name of the enterprise, or
b) for the transfer of the ownership of, or for the granting of the right to use, property owned
by that enterprise or that the enterprise has the right to use, or
c) for the provision of services by that enterprise, that enterprise shall be deemed to have a
permanent establishment in that State in respect of any activities which that person
undertakes for the enterprise, unless the activities of such person are limited to those
mentioned in paragraph 4 which, if exercised through a fixed place of business (other than
a fixed place of business to which paragraph 4.1 would apply), would not make this fixed
place of business a permanent establishment under the provisions of that paragraph.
6. Paragraph 5 shall not apply where the person acting in a Contracting State on behalf of
an enterprise of the other Contracting State carries on business in the first-mentioned State
as an independent agent and acts for the enterprise in the ordinary course of that business.
Where, however, a person acts exclusively or almost exclusively on behalf of one or more
enterprises to which it is closely related, that person shall not be considered to be an
independent agent within the meaning of this paragraph with respect to any such enterprise.
7. The fact that a company which is a resident of a Contracting State controls or is
controlled by a company which is a resident of the other Contracting State, or which carries
on business in that other State (whether through a permanent establishment or otherwise),
shall not of itself constitute either company a permanent establishment of the other.
8. For the purposes of this Article, a person or enterprise is closely related to an enterprise
if, based on all the relevant facts and circumstances, one has control of the other or both
are under the control of the same persons or enterprises. In any case, a person or enterprise
shall be considered to be closely related to an enterprise if one
The OCED convention establishes fundamental criteria for determining if permanent

establishment PE exist: 1) there must be a fixed place of Business(situs test), 2) the fixed
place of business must be located in a certain territorial area(locus Test), 3) the use of the
fixed place of business must last for certain period of time(tempus test), 4) the taxpayer
must have a certain right of use(over) the fixed place of business (ius Test) the activities
performed through the fixed place of business must be of a business character as defined
in the treaty law and in the domestic tax laws(business activities test), finally if a
company does not meet these standards, PE status may still be imputed if an agent of the
company regularly conducts business in the non-resident jurisdictions
As per section 2 (KaDa) of Income Tax Act 2058,

Permanent establishment means a place where a person wholly or partly carries on a
business, and includes the following places:-
(1) a place where a person wholly or partly carries on a business through an agent, other
than a general agent of independent status acting in the ordinary course of business as such;

(2) a place where a person has, is using, or is installing substantial equipment or substantial
machinery;
(3) one or more places within a country where a person furnishes (whether through
employees or otherwise) related services (including technical, professional, or consultancy
services) for a period or periods aggregating more than 90 days within any 12 month
period; or
(4) a place where a person is engaged in a construction, assembly, or installation project
for 90 days or more, including a place where a person is conducting supervisory activities
in relation to such a project.
In the digital technology provides an environment in which automated functions can

undertake significant business with little or physical activities. This makes it difficult to
established international norms to identify the source of the taxpayer’s income. The
digitalization of the economy creates challenges for the taxation of the different companies
because several companies involve aggressive tax planning and the government of Nepal
should incorporate taxation issues related to the digital economy. It is fear that the digital
economy may change the distribution of taxable activates, alter the balance of taxing
authority and result in the erosion of country’s tax bases. In such a situation how the income
source country determines that income as taxable is the main challenge in the digital
economy.

Paper 7: Advanced Cost and Management Accounting

Revision Questions:
Budget & Budgetary Control
Question No.1
Tandukar Ltd. had prepared fixed and flexible budget for the financial year 2018-19 as under:
Particulars Fixed budget for full capacity Rs. Flexible budget for 75% level Rs.
Sales 13,50,000 10,12,500
Direct Material 4,25,000 3,18,750
Direct Labour 1,85,000 1,38,750
Variable Overheads 2,15,000 1,61,250
Semi Variable Overheads 3,65,000 3,23,750
Profit 160,000 70,000
After the closing of the financial year 2018-19, total actual sales stood at Rs. 11,07,000 and there
was a favorable sales price variance of Rs. 17,000 (F).
Required: Prepare a flexible budget for the actual level of sales.
Question No.2
Write short Notes on
a. Differential Cost
b. Growth stage of Product life cycle
c. Functions of Cost auditor
d. Prohibited routes in transportation Problem
e. Pareto Analysis
Question No.3
What are the differences between?
a. Resource Smoothing & Resource Leveling
b. Value Chain Analysis & Conventional Management Accounting
c. Program Evaluation Review Technique (PERT) & Critical Path Method (CPM)
Cost indifference point

Question No.4

X ltd. wants to replace one of its old machines. Three alternative machines namely A 1 , A 2 and A 3
are under its consideration. The costs associated with these machines are as under:
A1 A2 A3
Rs. Rs. Rs.
Direct Material Cost Per Unit 50 100 150
Direct Labour Cost Per Unit 40 70 200
Variable Overhead Per Unit 10 30 50
Fixed Cost Per Annum 2,50,000 1,50,000 70,000
Required
(i) Compute the cost indifference points for these alternatives
(ii) Based on these points suggest a most economical alternative machine to replace the old one
when the expected level of annual production is 1,200 units.
Relevant Cost Concept

Question No.5
A company has to decide whether to accept a special order or not for a certain product J in
respect of which the following information is given:
Material M required 5,000 Kgs Available in stock. It was purchased 5

years ago at Rs. 35 per Kg. If not used
for J, it can be sold as scrap@ Rs. 15
per kg.
Material N required 8,000 Kgs This has to be purchased at Rs. 25 per
kg from the market.
Other hardware items Rs. 10,000 To be incurred
Dept. P- Labour oriented 5 men for 1 month @ Rs. Labour to be freshly hired. No spare
7,000 per month per man capacity available.
Dept. Q- Machine Oriented 3,000 machine hours @Rs. 5 Existing spare capacity may be used.
per machine hour
Pattern & Specification Rs. 15,000 To be incurred for J, but after the
order, it can be sold for Rs. 2,000
Required
Considering relevant costs, find out the minimum value above which the company may accept
the order.

Linear Programming
Question No.6
The manufacturing company has 100 kg of X, 180 kg of Y & 120 Kg of Z ingredients available
per month. Company can use these materials to make three basic products namely 5-10-5, 5-5-10
and 20-5-10, where the numbers in each case represent the percentage of weight of X, Y & Z
respectively in each of products. The costs of these raw materials are as follows:
Ingredient Cost per Kg. (Rs)

X 64
Y 16
Z 40
Inert Ingredients 16
Selling price of these products are Rs. 32.60, Rs. 34.80 & Rs. 36 per kg respectively. There is
capacity restriction of the company product 5-10-5, so that company cannot produce more than
30 kg per month.
Required
Formulate this problem as an LP model to determine the production (in Kg.) of each product
which will maximize its monthly profit.
Note: Formulate only.
Simulation
Question No.7
Finance Controller of Alpha Ltd has drawn the following projections with probability
distribution:
Raw Material Wages & other variable Sales
overheads
Rs. in 000 Probability Rs. in 000 Probability Rs. in 000 Probability

08-10 0.2 11-13 0.3 34-38 0.1
10-12 0.3 13-15 0.5 38-42 0.3

12-14 0.3 15-17 0.2 42-46 0.4

14-16 0.2 46-50 0.2
Opening cash balance is Rs. 40,000 and fixed cost is estimated at Rs. 15,000 per month.
Required
Simulate cash flow projection and expected cash balance at the end of the sixth month. Use the
following single digit random numbers.
Raw Material 4 3 1 0 4 6
Wages & Other Variable Overheads 2 7 9 1 8 9
Sales 0 6 6 0 2 8
Learning Curve
Question No.8
Marketing manager of X ltd. has conducted a market research on the price-demand relationship
for its consumer durable product ‘K-2’. K-2 is recently launched product. The price demand
pattern will be as follows:
Price per unit (Rs) Demand (units)

11,100 1,000
10,700 2,000
9’600 3’000
8’700 4,000
K-2 is produced in batches of 1,000 units. Production manager of X ltd. has also researched and
studied the production pattern and has believed that 50% of the variable manufacturing cost
would have learning and experience curve effect. This learning and experience curve effect will
be continued up to 4,000 units of production at a constant rate. But after 4,000 units of
production, unit variable manufacturing cost would be equal to the unit cost at the 4th batch. The
manufacturing unit cost of the first batch will be Rs. 4,400 of which only 50% is subjected to
learning and experience curve effect. The average unit variable cost of all 4 batches will be Rs.
4,120.
Required
(i) Calculate the rate of learning that has been expected by the production manager.
(ii) Calculate the price at which X ltd. should sell the K-2 in order to maximize its contribution.

Note
log0.93=-0.0315, log2=0.3010, 2-0.1047=0.9299, 3-0.1047=0.8913,4-0.1047=0.8649
Standard Costing
Question No.9
Sharma & Associates undertake to prepare Income Tax returns. They use the weighted average
method and actual costs for financial reporting purpose. However, for internal reporting, they use
a standard cost system. The standards on equivalent performance have been established as
follows.
Labor per return 10hrs@30 per hour
Overhead per return 10hrs@15 per hour
For June 2019 performance, budgeted overhead is Rs.1,08,000 for the standard labor hours
allowed.
The following additional information pertains to the month of June 2019:
June 1 Returns in process (25% complete) 180 Nos.
Returns started in June 820 Nos.
June 30 Returns in process (80% complete) 200 Nos.
Cost data
June 1 Returns in process
Labor Rs.16,000
Overheads Rs. 8,000
June 1 to 30 labor (4000hrs) Rs.2,00,000
Overheads Rs.1,00,000
You are required to compute:
(a) For each cost element, equivalent units of performance and the actual cost per equivalent
unit,
(b) Actual cost of returns in process on June 30,
(c) The standard cost per return, and
(d) The labour rate variance, labour efficiency variance, overhead volume and overhead
expenditure variance

Decision Making (Produce or Purchase)

Question No.10
Company makes four products P, Q, R & S. The direct costs of production are estimated at
Particulars P Rs. Q Rs. R Rs. S Rs.
Material 36 38 42 24
Labour:Assembly@4/hr 8 12 16 16
Labour:Machinists@6/hr 12 24 18 36
Production Units Total Fixed Costs
Up to 50000 Rs.400,000
50001-75000 Rs.500,000
75001-100000 Rs.600,000
Demand for next year is likely to be P 18,000 units@Rs.68; Q 30,000 units@Rs.90; R 27,000
units@Rs.91 and S 15,000 units@Rs.94.Total machine hours available: 210,000 hour per
annum. A local firm has offered to manufacture any of the products on a subcontract basis at
the following prices:
P Rs.63 Q Rs.80 R Rs.72 S Rs.82
Make recommendations for maximizing the profit. Profit as per your recommendation.
Decision-making (Shut down or continue)
Question No.11
Fox ltd. operates its plant at normal capacity, it produces 2,00,000 units from the plant ‘M’. The
unit cost of manufacturing at normal capacity is as under:
Rs.
Direct material 65
Direct labour 30
Variable Overhead 33
Fixed Overhead 7
135
Direct labour cost represents the compensation to highly skilled workers, who are permanent
employees of the company. The company cannot afford to lose them. One labour hour is
required to complete one unit of the product.

The company sells its product for Rs. 200 per unit with variable selling expenses of Rs. 16 per
unit. The company estimates that due to economic down turn, it will not be able to operate the
plant at the normal capacity, at least during the next year. It is evaluating the feasibility of
shutting down the plant temporarily for one year.
If it shuts down the plant, the fixed manufacturing overhead will be reduced to Rs. 1,25,000. The
overhead costs are incurred at a uniform rate throughout the year. It is also estimated that the
additional cost of shutting down will be Rs. 50,000 and the cost of reopening will be Rs.
1,00,000.
Required
Calculate the minimum level of production at which it will be economically beneficial to

continue to operate the plant next year if 50% of the labour hours can be utilized in another
activity, which is expected to contribute at the rate of Rs. 40 per labour hour. The additional
activity will relate to a job which will be off-loaded by a sister company only if the company
decides to shut down the plant.
(Assume that the cost structure will remain unchanged next year. Ignore income tax and time
value of money).
Opportunity Cost
Question No.12
A company can produce any of its 4 products, P, Q, R and S. Only one product can be produced
in a production period and this has to be determined at the beginning of the production run. The
production capacity is 1,000 hours. Whatever is produced has to be sold and there is no inventory
build-up to be considered beyond the production period. The following information is given:
P Q R S
Selling Price (Rs./ Unit) 40 50 60 70
Variable Cost (Rs./ Unit) 30 20 20 30
No. of units that can be sold 1,000 600 900 600
No. of production hours required per unit of 1 hour 1 hour and 1 hour and 2 hours
product 15 minutes 15 minutes
What are the opportunity costs of P, Q, R and S?

Target Costing
Question No.13
M ltd. prepared the draft budget for the next year as follows:
Quantity-10,000 units
Particulars Amount Rs.
Selling price per unit 60
Variable Cost per unit
• Direct Material 16
• Direct labour (2 hrs * Rs 6) 12
• Variable Overheads (2 hrs * Rs 1) 2

Contribution per unit 30
Total budgeted contribution 3,00,000
Total budgeted fixed overheads 2,80,000
Total budgeted profit 20,000
The board of Directors are not satisfied with this draft budget and suggested the following
changes for the better profit.
(i) The budgeted profit is Rs. 50,000,
(ii) The company should spend Rs. 57,000 on advertisement and the target sales price up to Rs.
64 per unit.
(iii) It is expected that the sales volume will also rise, inspite of the price rise, to 12,000 units.
In order to achieve the extra production capacity, however, the work force must be able to reduce
the time taken to make each unit of the product. It is proposed to offer a pay and productivity
deal in which the wages rate per hour is increased to Rs. 8. The hourly rate for variable
overheads will be unaffected.
Required
Calculate the target labour time required to achieve the target profit.

Marginal Costing
Question No.14
X Ltd. supplies spare parts to an aircraft company Y ltd. The production capacity of X ltd.
facilitates production of any one spare part for a particular period. The following are the cost and
other information for the production of the two different spare parts A & B:
Per unit Part A Part B
Alloy usage………………………………………………… 1.6 kgs. 1.6 kgs.
Machine Time: Machine A………………………………….0.6 hrs 0.25 hrs
Machine Time: Machine B………………………………….0.5 hrs 0.55 hrs
Target Price Rs………………………………………………145 115
Total hours available…………………………………………….Machine A 4,000 hrs
Machine B 4,500 hrs
Alloy available is 13,000 kgs. @Rs. 12.50 per kg.
Variable overheads per machine hours:………………………….Machine A: Rs.80
Machine B: Rs. 100
Required
(i) Identify the spare part, which will optimize contribution at the offered price.
(ii) If Y Ltd. reduces target price by 10% and offers Rs. 60 per hour of unutilized machine hour,
what will be the total contribution from the spare part identified above.
Breakeven point Vs Activity Based Costing

Question No.15
C Ltd. makes a single product with the following details:
Description Current situation Proposed change

Selling price (Rs./unit) 10
Direct Costs (Rs./unit) 5
Present number of set ups per production period, 42
(before each production run, set up is done)
Cost per set up (Rs.) 450 Decrease by Rs. 90
Production units per run 960 1,008
Engineering hours for production period 500 422
Cost per engineering hour (Rs.) 10

The company has begun Activity Based Costing of fixed costs and has presently identified two
cost drivers, viz. production runs and engineering hours. Of the total fixed costs presently at Rs.
96,000, after the above, Rs. 72,100 remains to be analyzed. There are changes as proposed above
for the next production period for the same volume of output.
Required
(i) How many units and in how many production runs should C Ltd. produce in the changed
scenario in order to break even?
(ii) Should C Ltd. continue to break up the remaining fixed costs into activity based costs? Why?
Costing of Service Sector
Question No.16
Calculate a suggested fare per passenger/km from the following information for a Mini Bus:
a. Length of route: 30 km
b. Purchase price Rs. 4,00,000
c. Part of above cost met by loan, annual interest of which is Rs. 10,000 p.a.
d. Other annual charges: Insurance Rs. 15,000, Garage rent Rs. 9,000, Road tax Rs.
3,000, Repairs & Maintenance Rs. 15,000, Administrative charges Rs. 5,000.
e. Running expenses: Driver and conductor Rs. 5,000 p.m., Repairs/Replacement of
tyre-tube Rs. 3,600 p.a., Diesel and oil cost per km Rs. 5
f. Effective life of vehicle is estimated at 5 years at the end of which it will have a
scrap value of Rs. 10,000
g. Mini bus has 20 seats and is planned to make six No. two way trips for 25 days
p.m.
h. Provide profit @20% of total revenue.
CPM PERT (Crashing, Resource Allocation and Smoothing)

Question No.17
The data for a project are
Activity Preceding Time in weeks Cost (in Rs)

activity Normal Crash Normal Crash
A - 3 2 18,000 19,000
B - 8 6 600 1,000
C B 6 4 10,000 12,000
D B 5 2 4,000 10,000
E A 13 10 3,000 9,000
F A 4 4 15,000 15,000

G F 2 1 1,200 1,400
H C,E,G 6 4 3,500 4,500
I F 2 1 7,000 8,000
(a) Draw the project network diagram and find the critical path.
(b) If a deadline of 17,000 Rs is imposed for completion of the project, what activities will be
crashed, what would be the additional costs and what would be the critical activities of
the network after crashing.
Transfer Pricing
Question No: 18
The two manufacturing divisions of a company is organized on profit Centre basis.
Divisions X is the only source of a component required by Divisions Y for their product ‘P’.
Each unit of P requires one unit of the said component. As the demand of the product is not
steady, orders for increased quantities can be obtained by manipulating prices.
The manager of Division Y has given the following forecast:
Sales per day (Units) Average price per unit of P (Rs.)
5,000 393.75
10,000 298.50
15,000 247.50
20,000 208.50
25,000 180.00
30,000 150.75
The manufacturing cost (excluding the cost of the component from division X) of P in
division Y is Rs. 14,06,250 on first 5,000 units and Rs. 56.25 per unit in excess of 5,000
units.
Division X incurs a total cost of Rs. 562,500 per day for an output upto 5,000 components
and the total cost will increase by Rs.337,500 per day for every additional 5,000
components manufactured. The manager of Division X has set the transfer price for the
component at Rs.90 per unit to optimize the performance of his Division.
Required:
(i) Prepare a divisional profitability statement at each level of output, for division X and Y
separately;
(ii) Find out the profitability of the company as a whole at the output level where:

(a) Division X’s net profit is maximum:

(b) Division Y’s net profit is maximum:
(iii) Find out at what level of output, the company will earn maximum profit, if the company
is not organized on profit centre basis.
Assignment Problem
Question No: 19
Buddha airline operating 7 days a week has given the following time-table. Crews must have a
minimum layover of 5 hrs between flights. Obtain the pairing flights that minimizes layover time
away from home. For any given pairing the crew will be based at the city that results in the
smaller layover.
Flight Number Depart. Arrive Flight Number Depart. Arrive

A1 6 AM 8 AM B1 8 AM 10 AM
A2 8 AM 10 AM B2 9 AM 11 AM
A3 2 PM 4 PM B3 2 PM 4 PM
A4 8 PM 10 PM B4 7 PM 9 PM
Key factor
Question No: 20
A Company produces three products from an imported material. The Cost Structure per unit of the
products are as under:
Product
A B C
Rs. Rs. Rs.
Sales value 200 300 250
Direct Material 50 80 60
Direct wages Rs. 6 per hour 60 120 108
Variable Overheads 30 60 54
Out of Direct Material 80% is of the imported material @ Rs. 10 per kg.
Prepare a statement showing comparative profitability of the three products under the following
scenarios.
(i) Imported Material is in restricted supply.
(ii) Production Capacity is limiting factor.

(iii) When maximum sales potential of products A and B are 1,000 units each and that of product
‘C’ is 500 units for specific requirement, availability of imported material is restricted to 10,000
kgs per month, how the profit could be maximized?

Answers/Hints:
Budget & Budgetary Control
Answer No. 1
Working Notes
(A) Calculation of actual sales at budgeted prices
Particulars Rs.
Actual Sales at actual price 11,07,000
Less: Sales price variance (F) 17,000
Actual Sales at budgeted price 10,90,000
Activity level= (Actual sales at budgeted price/budgeted sales at full capacity) *100
= (10,90,000/13,50,000)*100
=80.74%
(B) Segregation of Fixed & Variable Cost element from Semi- Variable Overheads
Variable Overhead= (Overhead at full capacity-Overhead at 75% capacity)/Difference in activity
level
=Rs (3,65,000-3,23,750)/25
=Rs 1,650
Fixed Overhead= Total SV Overheads at 100% Level- Variable Overheads at 100% level
= Rs. 3,65,000- (Rs. 1,650*100)
= Rs. 200,000
Flexible Budget at 80.74% activity level
Particulars Amount in Rs.
Sales 10,90,000
Less:
Direct Material (Rs. 4,25,000 *80.74%) 3,43,148
Direct Labour (Rs. 1,85,000* 80.74%) 1,49,370
Variable Overheads (Rs. 2,15,000* 80.74%) 1,73,593
Semi- Variable Overheads
Variable Costs (Rs. 1,650*80.74) [W.N-B] 1,33,222
Fixed Cost[W.N-B] 2,00,000
Profit 90,667

Answer No.2
a. Differential Cost
Differential costs are the increase or decrease in total costs that result from producing
additional or fewer units or from the adoption of an alternative course of action.
The alternative course of action may arise due to change in sales volume, alternative method
of production, change in product/sales mix, make or buy, refuse or accept decisions, addition
of a new product, exploring a new market, decision to drop a product line, etc.
Differential cost may be referred to as either incremental cost or decremental cost. When
there is an increase in the cost due to increase in the level of production, it is called
incremental cost, and when there is decrease in the cost due to decrease in the level of
production, it is called decremental cost.
Hence, differential cost is the change of cost arising from an alternative course of action.
b. Growth stage of Product life cycle
A new product progresses through a sequence of stages from introduction to growth,

maturity and decline. This sequence is known as Product life cycle and is associated with the
changes in the marketing situation, thus impacting the marketing strategy and marketing
mix. In the growth stage of product life cycle, the firm seeks to build brand preference and
increase market share by maintaining product quality, introduction of additional features and
support services, pricing is maintained as the firm enjoys increasing demand with little
competition, distribution channels are added as demand increases and customers accept the
product and promotion is aimed at broader audience.
c. Functions of Cost auditor
The functions of cost auditor are as under:
i. It verifies that the cost accounts have been correctly maintained and prepared
according to the system of cost accounting employed by the concern so as to serve
both cost ascertainment and cost control functions.
ii. It ensures that the costing plan laid down i.e. prescribed routine of cost accounting is
being carried out.
iii. It detects and prevents errors and frauds in preparation of cost records.
d. Prohibited routes in transportation Problem

Sometimes there may be situations, where it is not possible to use certain routes in a
transportation problem. For example, road construction, bad road conditions, strike,
unexpected floods, local traffic rules, etc. Such restrictions (or prohibitions) can be handled
in the transportation problem by assigning a very high cost to the prohibited routes to ensure
that routes will not be included in the optimal solution and then the problem is solved in the
usual manner.
e. Pareto Analysis
Pareto analysis is a formal technique useful where many possible courses of action are
competing for attention. In essence, the problem-solver estimates the benefit delivered by
each action, then selects a number of the most effective actions that deliver a total benefit
reasonably close to the maximal possible one.
It is a statistical technique in decision-making used for the selection of a limited number of
tasks that produce significant overall effect.
Answer No. 3
a.
Resource Smoothing Resource Leveling
The Project end date does not change. Here the Project end date change.
The critical path does not change. However, the The critical path changes (generally
activities can be delayed within their float. increases).
Here, project end date is a constraint Here, the resources are the main constraint.
It is used when resources are unevenly It is used when resources are under or over
allocated. allocated.
Activities on the critical path is not touched. It can be applied to activities on the critical
path.
b.
Value Chain analysis Conventional Management Accounting
It is external focused. It is internal focused.
It has multiple cost drivers. It works on single cost driver concept.
Cost is reduced on each value chain. Cost is reduced across the board.
Ample space for strategic decision considering Limited insight for strategic decision.
the external factors.

c.
Basis Program Evaluation Review Technique Critical Path Method (CPM)
(PERT)
Full form Full form of PERT- Program (Project) Full Form of CPM-Critical Path
Evaluation and Review Technique Method
Meaning PERT is a technique, used to manage the CPM is a statistical technique used to
uncertain task of a project. manage the activities of a project.
Method To control time To control cost and time
Progress Research and development project Construction project
Manage Unpredictable activities Predictable activities
Appropriate Research & Development project Non-research project. Example-ship

for building, civil construction
Cost indifference point

Answer No. 4
Computation of Cost indifference points for three alternatives

Cost indifference point of two machines= Difference in fixed cost
Difference in Variable cost/unit
Machine A 1 &A 2 = _2,50,000-1,50,000_______

(100+70+30)- (50+40+10)
= 1,00,000
100
= 1,000 Units
Machine A 2 &A 3 = 1,50,000-70,000___________

(150+200+50)- (100+70+30)
= 80,000
200
= 400 Units

Machine A 1 &A 3 = _2,50,000-70,000_______

(150+200+50)- (50+40+10)
= 1,80,000
300
= 600 Units
From the above computations, it is clear that at activity level below the indifference point the
alternative (machine) with lower fixed cost and higher variable costs should be used. In case the
activity level exceeds the indifference point, a machine with lower variable cost per unit (or
higher contribution per unit) and higher fixed cost, is more profitable to operate.
At the activity, level equal to the indifference point both machines are on equal footing. Hence
from the above we conclude as follows:
Activity level Machine Preference
Less than 400 units A3
Exactly 400 units Either A 2 or A 3
Above 400 units but less than 1000 units A2
Exactly 1000 units Either A 1 or A 2
Above 1000 units A1
When expected level of activity is 1,200 units i.e. more than 1,000 units, Machine A 1 should be
used.
Relevant Cost Concept

Answer No.5
Determination of minimum value of special order
Cost element Relevant/Irrelevant Calculation Amount Rs.
Material-M Realisable value is 5,000 Kgs * Rs 15 75,000

relevant
Material-M Relevant as it has to be 8,000 Kgs * Rs 25 2,00,000

purchased
Other hardware items Relevant as it is to be - 10,000

incurred
Dept-P Labour Oriented Relevant as fresh 5 men*1 month *7,000 35,000

labours are to be hired
Dept-Q Machine Irrelevant as spare - -

Oriented capacity is available
Pattern and Relevant, Net cost after Rs. 15,000- Rs. 2,000 Rs. 13,000
Specification considering its resale
value
Minimum Value of Special Order Rs. 3,.33,000
Linear Programming
Answer No.6
Let P 1, P 2 &P 3 be the three products to be manufactured. Then the data are as follows:
Products Product ingredients
X Y Z Inert Ingredients
P1 5% 10% 5% 80%
P2 5% 5% 10% 80%
P3 20% 5% 10% 65%
Cost Per Kg Rs. 64 16 40 16
Cost of Product P 1 =5%* Rs 64+10%* Rs.16+5%*Rs 40+80%*Rs.16=Rs. 19.60 per kg
Cost of Product P 2 =5%* Rs 64+5%* Rs.16+10%*Rs 40+80%*Rs.16=Rs. 20.80 per kg
Cost of Product P 3 =20%* Rs 64+5%* Rs.16+10%*Rs 40+65%*Rs.16=Rs. 28 per kg
Let K 1, K 2 & K 3 be the quantity in Kg of P 1, P 2 & P 3 respectively to be manufactured.

The LP problem can be formulated:
Objective function:
Maximize Z= (Selling price-Cost price)* Quantity of Product

= (Rs. 32.60- Rs.19.60)K 1 + (Rs. 34.80- Rs.20.80)K 2 + (Rs. 36- Rs.28)K 3

= 13K 1 +14K 2 + 8K 3
Subject to Constraints:
1/20K 1 +1/20K 2 +1/5K 3 ≤ 100
Or, K 1 +K 2 +4K 3 ≤ 2000
1/10K 1 +1/20K 2 +1/20K 3 ≤ 180

Or,2K 1 +K 2 +K 3 ≤ 3,600
1/20K 1 +1/10K 2 +1/10K 3 ≤ 120

Or,K 1 +2K 2 +2K 3 ≤ 2,400
K 1 ≤ 30
And K 1, K 2 , K 3 ≥ 0
Simulation
Answer No.7
Allocation of Random Numbers
Raw Material Wages & Other Variable Sales

Overheads
Mid- Cum. Random Mid Cum. Random Mid- Cum. Random

Point Prob. Nos. Point Prob. Nos. Point Prob. Nos.
9 0.2 0-1 12 0.3 0-2 36 0.1 0
11 0.5 2-4 14 0.8 3-7 40 0.4 1-3
13 0.8 5-7 16 1.0 8-9 44 0.8 4-7
15 1.0 8-9 48 1.0 8-9
Simulation Table (Rs. in 000)
Month Raw Wages & Sales Fixed Cost Net Cash Cash
Material Other V.O flow Balancing
(Opening

Rs. 40
thousand)
1 11 12 36 15 -2 38
2 11 14 44 15 +4 42
3 9 16 44 15 +4 46
4 9 12 36 15 0 46
5 11 16 40 15 -2 44
6 13 16 48 15 +4 48
Learning Curve
Answer No. 8
Variable cost per unit that would be affected by learning and experience curve is Rs 2,200 (Rs.
4,400-50% of Rs. 4,400).
Let ‘r’ be the learning curve rate.
No. of batch (x) Cumulative Average Cost per unit (y)
1 2,200
2 2,200r
4 2200r2
If 2,200r2 = Rs 1,920 (Rs. 4,120-50% of Rs.4,400)
r2 =0.8727
r =0.934
Therefore, Learning curve effect=93% (rounded off)
(ii) Calculation of Optimum Price
Price Per Demand Variable Variable Total Contribution Total

Unit Rs. (Units) Cost per Cost per variable per unit Rs. Contribution
unit* [WN] unit** Rs. cost per unit Rs.

Rs
11,100.00 1,000 2,200.00 2,200.00 4,400.00 6,700.00 67,00,000
10,700.00 2,000 2,046.00 2,200.00 4,246.00 6,454.00 1,29,08,000
9,600.00 3,000 1,960.86 2,200.00 4,160.86 5,439.14 1,63,17,420
8,700.00 4,000 1,902.78 2,200.00 4,102.78 4,597.22 1,83,88,880
(*) This represents variable cost part which is affected by the learning and experience curve
effect.
(**) This represents variable cost part which is not affected by the learning and experience curve
effect.
Working Note [W.N]
Variable Cost per unit
Output in batches (x) Average Cost of the x-0.1047 Cumulative Average Cost per unit
first unit (a) (y)
1 2,200 1.0000 2,200.00
2 2,200 0.9299 2,046.00
3 2,200 0.8913 1,960.86
4 2,200 0.8649 1,902.78
y =axb
Where,
y =Cumulative average unit costs
a =Average cost of the first unit
x =Cumulative number of batches
b =log of learning ratio/log of 2
=log 0.93/log 2
=-0.0315/0.3010
=-0.1047

Standard Costing
Answer No. 9
(a) Statement showing cost elements equivalent units of performance and the actual cost per
equivalent unit:
Equivalent Units
Details of Details of Details Output Units Labour Overheads

Returns input units
Units % Units %
Returns in 180 Returns completed in 800 800 100 800 100

process at June
start
Returns 820 Returns in process at 200 160 80 160 80

started in the end of June
June
1000 1000 960 960
Costs Rs. Rs.
From Previous month 16,000 8,000
During the month 200,000 100,000
Total Cost 216,000 108,000
Cost per equivalent unit 225 112.5
(b) Actual cost of returns in process on June 30

Particulars Numbers Stage of completion Rate per return Rs Total Rs
Labour 200 returns 0.80 225.00 36,000
Overhead 200 returns 0.80 112.5 18,000
Total 54,000
(c) Standard Cost Per return:

Labour 10Hrs*30 per hour=Rs.300
Overhead 10Hrs*15 per hour=Rs.150
Rs.450

(d) Computation of variances:

Statement showing output(June only) element wise Labour Overhead
Actual performance in June in terms of equivalent units as 960 960

calculated above
Less: Return in process at the beginning of June in terms of 45 45

equivalent units i.e. 25% of returns (180)
915 915
Variance analysis
Labour rate variance=Actual time (Standard rate-Actual rate)
=Actual time*Standard rate-Actual rate*actual time
=4,000hrs*Rs.30-Rs.2,00,000=Rs.80,000(A)
Labour efficiency variance=Standard rate (Standard time-Actual Time)
=Standard rate*standard time-Standard rate*actual time
=Rs.30*(915units *10hrs)-Rs.30*4000hrs=Rs.1,54,500(F)
Overhead Expenditure or Budgeted variance=Budgeted OH-Actual OH
=Rs.1,08,000-Rs.1,00,000
=Rs.8,000(F)
Overhead Volume variance=Recovered OH-Budgeted OH
=915units*10hrs*15-Rs.1,08,000=Rs.29, 250 (F)
Decision making (Produce or Purchase)

Answer No. 10
i. Statement showing Rank
Particulars P Q R S
Purchase cost /Unit 63 80 72 82
Less: Variable Production Cost/Unit 56 74 76 76
Savings per unit 7 6 -4 6
Machine hrs Per Unit 2 4 - 6

Hourly savings 3.5 1.5 - 1
Rank I II III
Advice: R will be purchased.

ii. Allocation of available 210,000 Machine Hours
Rank Products Demand Hours required/Unit Required hours Allotted hours
I P 18,000 2 36,000 36,000
II Q 30,000 4 120,000 120,000
III S 15,000 6 90,000 54,000(b/f)
210,000
Possible production of S=54,000hours/6 hr=9,000 units

Total production=P+Q+S=18,000+30,000+9,000=57,000Units
Fixed cost for production up to 50,000Units=Rs.4,00,000
Fixed cost for production between 50,001 to 75,000 Units=Rs.5,00,000
The lower saving per unit=Rs.6
It is in the case of Q & S both.
Savings from 7,000units=7,000*6=42,000
Whereas extra fixed cost=1,00,000(Rs.5,00,000-Rs.4,00,000) for production beyond
50,000units.
Hence, the total production decided above will be reduced by 7,000 units (either Q or S).
Assumed that 7,000 more units of S is purchased from market.
Final Mix Produce Purchase
P 18,000 -
Q 30,000 -
R - 27,000
S 2,000 13,000
Contribution/unit=Selling Price-Variable Cost
On production

P =Rs. (68-56) =Rs.12

Q =Rs. (90-74) =Rs.16
S =Rs. (94-76) = Rs.18
On Purchase
R =Rs. (91-72) =Rs. 19
S =Rs. (94-82) =Rs.12
Profit statement
Product Quantity Contribution/Unit Amount Rs.
P 18,000 12 2,16,000
Q 30,000 16 4,80,000
S(Produce) 2,000 18 36,000
S(Purchase) 13,000 12 1,56,000
R 27,000 19 5,13,000
Total Contribution 14,01,000
Less: Fixed Cost 4,00,000
Profit 1,00,1000
Decision-making (Shut down or continue)

Answer No.11
(a) Contribution per unit
Particulars Rs.
Selling Price 200
Variable Cost Rs. (65+33+16) 114
Contribution per unit (Excluding direct labour, considered irrelevant & Fixed) 86
Savings & Earnings if the Plant is Shut down

Particulars Rs.
Savings in fixed Cost (Rs. 14,00,000*- Rs. 1,25,000) 12,75,000
Contribution from Alternate Activity (Rs. 40x50% of 2,00,000 hrs) 40,00,000
Shutting down and reopening cost (Rs. 50,000+Rs. 1,00,000) (1,50,000)
Total 51,25,000

*[2,00,000 units X Rs. 7]

Indifference point: Rs. 51,25,000/Rs. 86=59,593 units
Minimum level of production to justify continuation=59,594 units
Opportunity Cost
Answer No.12
Statement showing calculation of opportunity cost
P Q R S
Selling Price (Rs./ Unit) 40 50 60 70
Variable Cost (Rs./ Unit) 30 20 20 30
Contribution (Rs. per unit) [A] 10 30 40 40
Demand (units) 1,000 600 900 600
No. of units can be produced (within 1,000 1,000 800 800 500
hours of production capacity)
(1,000 hrs/1 (1,000 (1,000 (1,000
hr.) hrs/1.25 hr.) hrs/1.25 hr.) hrs/2
hr.)
No. of units can be sold (lower of demand and 1,000 600 800 500
production) [B]
Possible contribution of product (Rs.) [A]X[B] 10,000 18,000 32,000 20,000
Opportunity Cost* 32,000 32,000 20,000 32,000
*- Opportunity cost is the maximum possible contribution foregone by not producing alternative
products i.e. if product P is produced then opportunity cost will be maximum of possible
contribution from product Q, R and S i.e Rs. 32,000. Same is for product Q and S. In case of
product R opportunity cost will be the maximum of possible contribution from product P,Q and
S i.e Rs. 20,000.
Target Costing
Answer No. 13
Statement showing ‘Target cost of direct labour and variable Overheads’
Particulars Amount (Rs.)
Expected Sales (Rs. 64 * 12,000 units) 7,68,000

Less
• Direct material (Rs. 16 * 12,000 units) 1,92,000
• Advertisement expenses 57,000
• Fixed Overheads 2,80,000
• Target Profit 50,000

Target Cost of Direct Labour and Variable Overheads 189,000
Target Labour time required to achieve the target profit=

Target cost of Direct Labour and Variable Overheads=Rs. 1,89,000= 21,000 hrs.
Wages Rate+Variable Overhead Rate Rs. 8+Rs. 1
Marginal Costing
Answer No. 14
Part A Part B
Machine ‘’A’’ (4,000 hrs) 6,666 16,000
Machine ‘’B’’ (4,500 hrs) 9,000 8,181
Alloy available (13,000 kg.) 8,125 8,125
Maximum number of parts to be manufactured 6,666 8,125
Rs Rs.
Material (Rs. 12.5*1.6 kg.) 20 20
Variable Overhead: Machine ‘’A’’ 48 20
Variable Overhead: Machine ‘’B’’ 50 55
Total Variable Cost per unit 118 95
Price offered 145 115
Contribution per unit 27 20
Total Contribution for units produced (I) 1,79,982 1,62,500
Spare part A will optimize the contribution.

Part A
Parts to be manufactured numbers 6,666
Machine A: to be used 4,000
Machine B: to be used 3,333
Underutilized Machine hours (4,500 hrs-3,333 hrs.) 1,167
Compensation for unutilized machine hours (1,167 hrs* Rs. 60) (II) 70,020
Reduction in price by 10%, causing fall in Contribution of Rs. 14.50 per unit (6,666 96,657
units * Rs. 14.5) (III)
Total Contribution (I+II-III) 1,53,345
Breakeven point Vs Activity Based Costing

Answer No. 15
Statement showing ‘Non-unit Level Overhead Costs’
Particulars Current Situation Proposed Situation
No. of production runs/set ups 42 40
960 runs*42 set up
1,008 units
Cost per Set up Rs. 450 Rs. 360
Production Units per run 960 units 1,008 units
Production units 40,320 40,320
(960 units*42)
Engineering hrs. 500 422
Engineering Cost per hour Rs. 10 Rs. 10
Requirement of question
(i) Break Even Point (Changed Scenario)
Break even
=Fixed cost+ (Setup cost*No. of setups)+(Engineering Costs*No. of Engineering hrs.)
(Price- Unit Variable Cost)
= Rs. 72,100+ (Rs.360*40 Setups) + (Rs. 10*422 hrs.)

(Rs. 10-Rs. 5)
=18,144 units
Breakeven point (No. of Production Runs) = BreakEven (units) = 18,144 units

Production (units per run) 1,008 units
=18 runs
(ii) A company should adopt Activity Based Costing (ABC) system for accurate product costing,
as traditional volume based costing system does not take into account the Non-unit Level
Overhead Costs such as Setup Cost, Inspection Cost and material Handling Cost etc. Cost
analysis under ABC System showed that while these costs are largely fixed with respect to sales
volume, but they are not fixed to other appropriate cost drivers. If break up the remaining
Rs.72,100 fixed cost consist of only a small portion of these costs, ABC need not be applied.o
However, it may also be noted that the primary study has resulted in cost savings. If the savings
in cost are expected to exceed the cost of study and implementing ABC, it may be justified.
Further, it is pertinent to mention that ABC offers no increase in product-costing accuracy for
single- product setting.
Costing of service sector

Answer No. 16
Working Notes:
1. Total distance travelled (in 25 days)
=60km (two sides)*6 trips per day*25 days=9,000 km
2. Total passenger km
=9,000 km* 20 seats=1,80,000 passenger km
3. Depreciation per annum
= (Purchase price-Scrap value)/5 years= (Rs. 4,00,000-Rs. 10,000)/5 years= Rs. 78,000
Statement suggesting fare per passenger-km
Particulars Cost per annum Cost per month
Fixed Expenses
-Insurance 15,000
-Garage Rent 9,000

-Road tax 3,000
-Administrative charges 5,000
-Depreciation 78,000
-Interest on loan 10,000
1,20,000 10,000
Running expenses
-Repair & Maintenance 1,250
-Replacement of tyre tube 300
-Diesel & oil cost (9,000 km*5) 45,000
-Driver & Conductor salary 5,000
Total cost per month 61,550
Add: Profit (20% of total revenue or 25% of total cost) 15,387.50
Total revenue 76,937.50
Rate per passenger-km=Rs. 76,937.50/1,80,000 passenger km=0.43 paise
CPM PERT (Crashing, Resource Allocation and Smoothing)

Answer No. 17
4
F (4) I (6)
G (2)
2
A (3) E (13)
H (6) 6
5
1
B (8) C (6)
D (5)
3
Critical Path=A-E-H
Project duration=22 weeks

(ii) Calculation of incremental cost of crashing

Activity Nodes Normal Cost Crash cost Cost No. of week Incremental cost of
crashed crashing per week
A 1-2 18,000 19,000 1,000 1 1,000
B 1-3 600 1,000 400 2 200
C 3-5 10,000 12,000 2,000 2 1,000
D 3-6 4,000 10,000 6,000 3 2,000
E 2-5 3,000 9,000 6,000 3 2,000
F 2-4 15,000 15,000 0 0 -
G 4-5 1,200 1,400 200 1 200
H 5-6 3,500 4,500 1,000 2 500
I 4-6 7,000 8,000 1,000 1 1,000
Various path Duration

A-F-I 2
A-E-H 22(Critical Path)
A-F-G-H 15
A-B-C-H 20
B-D 13
Crashing Critical path Option Cost Involved Suction after
crashing
(1) A-E-H H (2 day) 1,000 20
(2) A-E-H A (1 day) 1,000 19
(3) A-E-H E (1 day) 2,000 18
(4) A-E-H E (1 day) 2,000
B-C-H B (1 day) 200 17
6,200

Crashing Cost=6,200
Normal Cost=62,300
Total Cost=Normal Cost+ Crashing Cost=68,500
Transfer Pricing
Answer No. 18
(i) Statement of profitability of Division X
No. of components Transfer Price for the Total Cost of Profit/loss) Rs.
component to components Rs.
Department Y @
(c)
(a) Rs.90 per unit (d) = (b)-(c)
(b)
5,000 4,50,000 5,62,500 (1,12,500)
10,000 9,00,000 9,00,000 -
15,000 13,50,000 12,37,500 1,12,500
20,000 18,00,000 15,75,000 1,25,000
25,000 22,50,000 19,12,500 3,37,500
30,000 27,00,000 22,50,000 4,50,000
(ii) Statement of Profitability of Division Y

No. of Sales Component Manufacturing Total Cost Profit/Loss
Components Revenue on Cost Cost in
Average Price (Transfer Division Y
basis Price) to
Deptt. Y
Rs.
Rs.
Rs.
(b) Rs. Rs.
(d)
(a) (c)
(e)={(c)+(d)} (f)={(b)-(e)}
5,000 19,68,750 4,50,000 14,06,250 18,56,250 1,12,500
10,000 29,85,000 9,00,000 16,87,500 25,87,500 3,97,500
15,000 37,12,500 13,50,000 19,68,750 33,18,750 3,93,750

20,000 41,70,000 18,00,000 22,50,000 40,50,000 1,20,000
25,000 45,00,000 22,50,000 25,31,250 47,81,250 (2,81,250)
30,000 45,22,500 27,00,000 28,12,500 55,12,500 (9,90,000)
(ii) Profitability of the Company as a whole

(a) At 30,000 units level, at which Division X’s net profit is maximum
Rs.
Profit of division X 450,000
Profit of division Y (990,000)
Operating profitability / (Loss) of the company (540,000)
(b)At 10,000 units level, at which Division Y’s net profit is maximum
Rs.
Profit of division X NIL
Profit of division Y 397,500
Operating profitability of the company 397,500
(iii) Profitability of the company, if it is not organized on profit Centre basis
No.of Sales Cost Manufacturing Total Cost Profit/(Loss)
Components Revenue on Component
Cost in
average basis division X
division Y
Rs. Rs. Rs.
Rs.
(a) Rs.
(b) (e)={(c)+(d)} (f)={(b)-(e)}
(c)
(d)
5,000 19,68,750 5,62,500 14,06,250 19,68,750
10,000 29,85,000 9,00,000 16,87,500 25,87,500 3,97,500
15,000 37,12,500 12,37,500 19,68,750 32,06,250 5,06,250
20,000 41,70,000 15,75,000 22,50,000 38,25,000 3,45,000
25,000 45,00,000 19,12,500 25,31,250 44,43,750 56,250

30,000 45,22,500 22,50,500 28,12,500 50,62,500 (5,40,000)
The level of output, the company will earn maximum profit, If the company is not organized
on profit Centre basis is 15,000 components.
Assignment Problem
Answer No. 19
To begin with, let us first assume that the crew is based at Kathmandu. The flight A1, which
starts from Kathmandu at 6 AM, reaches Birgunj at 8 AM. The schedule time for the flight at
Birgunj is 8 AM. Since the minimum layover time for crew is 5 hours, this flight cab departs
only on the next day i.e. the layover time will be 24 hours. Similarly, layover times for other
flights are also Calculated and given in the following tables.
Table 1: Layover Time in hours at Birgunj
Flight No. B1 B2 B3 B4
A1 24 25 6 11
A2 22 23 28 9
A3 16 17 22 27
A4 10 11 16 21
Table 2: Layover Time in hours at Kathmandu

A1 20 19 14 9
A2 22 21 16 11
A3 28 27 22 17
A4 10 9 28 23
Now since the crew can be based at either of the places, minimum layover times can be obtained
for different flight numbers by selecting the corresponding lower value out of the above two
tables. The resulting table is given below:
Table 3: Minimum Layover Time between Flights

Flight No.
A1 20 19 6 9
A2 22 21 16 9
A3 16 17 22 17
A4 10 9 16 21
Step 2→Subtracting the minimum element of each row from all the elements of that row. We get
the following matrix. Since there is zero in each column, there is no need to perform column
reduction and drawing the minimum number of lines to cover all zeros.
Flight No.
A1 14 13 0 3
A2 13 12 7 0
A3 0 1 6 1
A4 1 0 7 12
Since the minimum number of lines to cover all Zeros is four which is equal to the order of the
matrix, the above table will give the optional solution.
Step 3 → Assignment: Subtracting a row containing exactly one unmarked Zero and surrounding
it by "∎” & draw a vertical line through the column containing this zero. Repeating this process
till no such row is left; then selecting a column containing exactly one unmarked zero and
surrounding it by ‘∎′ and draw a horizontal line through the row containing this zero and
repeating the process till no such column is left.
Flight No.
A1 14 13 0 3
A2 13 12 7 0
A3 0 1 6 1
A4 1 0 7 12

Step 4 → Computing the Minimum Layover Time:

From Flight No. To Flight No. Layover time
A1 B3 6
A2 B4 9
A3 B1 16
A4 B2 9
40 hours
Key factor
Answer No. 20
(i) Statement of Profitability
Particulars Product A Product B Product C
A. sales Value P.U. (Rs): 200 300 250

B. Direct Material (Rs.) 50 80 60
Direct wages (Rs.) 60 120 108
(10 hrs. × 6) Rs. (20 hrs. × Rs.6) (18 hrs. × Rs.6)
Variable Overheads (Rs.) 30 60 54
Total Variable Cost (Rs.): 140 260 222
C. Contribution P.U. (Rs.): [A-B] 60 40 28
D. P/V Ratio: (C/S × 100) 30% 13.33% 11.2%
E. Contribution per kg. of
Imported Material (Rs.) 15 6.25 5.83
F. Contribution per hour of production 6 2 1.6
(Rs.) (Rs.60/10 hrs.) (Rs. 40/20 hrs.) (Rs.28/18 hrs.)

(i) When imported material is in restricted supply then product ‘A’ is most profitable as its
contribution per kilogram is maximum.
(ii) Even when production capacity is limited, product ‘A’ is the most profitable one.
(iii) Statement for Maximized Profit
Particulars Product A Product B Product C
Maximum sales (units) 1,000 1,000 500

Requirement of imported material per unit (kg) 4 6.4 4.8
Total requirement of imported material for maximum sales (kg) 4,000 6,400 2,400
Contribution per kg (Rs.) 15 6.25 5.83
For maximizing profit 10,000 kg of imported material is to be
used for manufacturing those products where contribution per kg 4,000 3,600 2,400
is maximum.
But 500 units of C must be produced to meet
Specific requirement. Hence the material utilized will be (kg)
No. of units 1,000 562 500
Maximum profit (Rs.) 60,000 22,480 14,000
Working Note:
Value of imported and indigenous material and quantity of imported material consumed P.U.
Products A B C
Value of imported material P.U. (Rs.) 40 64 48

Value of indigenous material P.U. (Rs.) 10 16 12
Quantity of imported material consumed P.U. (kg) 4 6.4 4.8

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CHARTERED ACCOUNTANCY PROFESSIONAL III

Revision Test Paper

Paper 1: Advanced Financial Reporting

© The Institute of Chartered Accountants of Nepal 1

2. Earnings Per Share – (Simple) Financial Reporting Standards

i. The share capital of SL comprises of:

© The Institute of Chartered Accountants of Nepal 2

3. Earnings Per Share (Complex)- Financial Reporting Standards

4. Consolidated Financial Statement (Complex)- Financial Reporting Standards

© The Institute of Chartered Accountants of Nepal 3

Investment property 130 45 -

© The Institute of Chartered Accountants of Nepal 4

5. Consolidated Statement of Cash Flows (Complex)- Financial Reporting Standards

Following information is available for preparation of consolidated statement of cash flows:

© The Institute of Chartered Accountants of Nepal 5

vi. Following exchange rates are available:

vii. No dividend was paid during the year by the group.

viii. Depreciation for the year was Rs. 480 million.

Following further information is also available:

© The Institute of Chartered Accountants of Nepal 6

remaining vesting period

7. Employee Benefits (Comprehensive Logic with Numerical) - Financial Reporting Standards

(a) Explain the following as used in NAS 19 Employee Benefits:

Information relevant to the actuarial valuation:

© The Institute of Chartered Accountants of Nepal 7

8. (Simple Logical) - Financial Reporting Standards

Epsilon is an entity which prepares financial statements to 30 September each year.

(a) Purchase of machine

(c) Impairment review

Relevant exchange rates (francs to $1) are as follows:

© The Institute of Chartered Accountants of Nepal 8

Property, plant, and equipment 10,000

Equity and liabilities

The following information is relevant to the above statement of financial position:

© The Institute of Chartered Accountants of Nepal 9

(iv) Goodwill is not allowable for tax purposes in this jurisdiction.

(v) Assume taxation is payable at 30%.

12. Related Parties (Simple Logical) - - Financial Reporting Standards

b. What are the disclosure requirements as per NAS 24?

13. Foreign Exchange (Numerical) - Financial Reporting Standards

Following spot exchange rates are available:

Following average exchange rates are also available:

14. Inventories (Simple Numerical) – Financial Reporting Standards

© The Institute of Chartered Accountants of Nepal 10

What will be the value inventory at the following dates?

(a) 31st March 20X1

15. Conceptual - Financial Reporting Standards

Advise on the classification of the liability as current / non –current.

16. Value Added Statement (Simple Numerical)

© The Institute of Chartered Accountants of Nepal 11

2. Administrative expenses consist of:

17. Financial Instruments (Conceptual Numerical) - Financial Reporting Standards

18. Leases (Simple Numerical) - Financial Reporting Standards

© The Institute of Chartered Accountants of Nepal 12

19. Intangible Assets (Concept and Numerical) - Financial Reporting Standards

© The Institute of Chartered Accountants of Nepal 13

– Leasehold property of $25m x 24/25 = $24m

– Plant and equipment of $7·5m x 4/5 = $6m

© The Institute of Chartered Accountants of Nepal 1