CHARTERED ACCOUNTANCY PROFESSIONAL II (CAP-II)

Revision Test Paper

Group I

December 2021

Education Division
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 knowledge and write the answer
in the examinations taking the suggested answers as guide. Due care has been
taken to prepare the revision test paper. In case students need any clarification,
creative feedbacks or suggestions for the further improvement on the material, or
any error or omission on the material, they may report to the email of the
Institute.
PAPER 1: ADVANCED ACCOUNTING
Questions:
Issue of Share/Bonus
1. On 1st Shrawan, 2072, Bhrikuti Ltd. issued 40,000 shares of Rs. 10 each payable as
follows:
Rs. 2 on application;
Rs. 3 on allotment;
Rs. 3 on 1st Poush, 2072; and
Rs .2 on 1st Jestha, 2073.
By 20th Bhadra, 70,000 shares were applied for and out of these, application related to
10,000 shares were rejected and shares were allotted on pro-rata basis to the remaining
application of shares. Allotment was made on 1st Ashoj. All sums due on allotment were
received on 15th Ashoj; those on 1st call were received on 20th Poush. Journalise the
transactions when accounts were closed on 31st Ashad, 2073.

Underwriting of shares
2. Nepal Export Ltd incorporated on 1st Baisakh 2065 issued a prospectus inviting
applications for 5,00,000 equity shares of Rs. 10 each at a premium of 10 per cent.
The whole issue was fully underwritten by Karki, Pandey, Sharma and Bhusal as
follows:
Karki 2,00,000 shares
Pandey 1,50,000 shares
Sharma 1,00,000 shares
Bhusal 50,000 shares
Application were received for Rs. 4,50,000 shares of which marked application were as
follows:
Karki 2,20,000 shares
Pandey 90,000 shares
Sharma 1,10,000 shares
Bhusal 10,000 shares
It is agreed that underwriters be paid commission at 5% on the issue price. You are required:
(a) To find out the liabilities of individual underwriters, and
(b) To give necessary journal entries including for cash transactions.
Buyback of shares

3. The following was the Balance Sheet of Laxmi. as on 31st Ashad, 2077:
Equity & Liabilities Rs. Lakhs Assets Rs. Lakhs
Share Capital: Fixed Assets 14,000
Equity shares of Rs. 10 each 8,000 Investments 2,350
Fully Paid Up
10% Redeemable Pref. Shares 2,500 Cash at Bank 2,300
of
 Rs 10 each Fully Paid Up
Reserves & Surplus: Other Current Assets 8,250
Capital Redemption Reserve 1,000
Securities Premium 800
General Reserve 6,000
Profit & Loss Account 300
Secured Loans:
9% Debentures 5,000
Current Liabilities:
Trade payables 2,300
Sundry Provisions 1,000
26,900 26,900
On 1st Shrawan, 2077 the Company redeemed all its Preference Shares at a Premium of 10% and
bought back 10% of its Equity Shares at Rs. 20 per Share. In order to make cash available, the
Company sold all the Investments for Rs. 2,500 lakhs.
You are required to pass journal entries for the above and prepare the Company’s Balance sheet
immediately after buyback of equity shares and redemption of preference shares.

Cash Flow Statement

4. Ashram Ltd. gives you the following summarized balance sheets. You are required to prepare
Cash Flow Statement for the year ended 31.03.2077:
Balance Sheet as on
Equity & Liabilities 31st 31st Assets 31st 31st
Ashad Ashad Ashad Ashad
2076 2077 2076 2077
Rs. Rs. Rs. Rs.
Share Capital 50,00,000 50,00,000 Plant & Machinery 27,30,000 40,70,000
Retained Earnings 26,50,000 36,90,000 Less: Depreciation 6,10,000 7,90,000
Debentures ― 9,00,000 21,20,000 32,80,000
Current Liabilities:
Trade Payables 8,80,000 8,20,000 Trade Receivables 23,90,000 28,30,000
Bank Loan 1,50,000 3,00,000 Less: Provision 1,50,000 1,90,000
Liability for expenses 3,30,000 2,70,000 22,40,000 26,40,000
Dividend payable 1,50,000 3,00,000 Cash 27,00,000 33,20,000
Inventories 20,10,000 19,20,000
Prepaid Expenses 90,000 1,20,000
91,60,000 1,12,80,000 91,60,000 1,12,80,000
Additional Information:
(i) Net profit for the year ended 31st Ashad, 2076, after charging depreciation Rs 1,80,000 is Rs.
22,40,000.
(ii) Trade Receivables of Rs. 2,30,000 were determined to be worthless and were written off
against the provisions for doubtful debts account during the year.
(iii) PQ Ltd. declared dividend of Rs. 12,00,000 for the year 2075-2076.
Amalgamation of Companies
5. Everest Limited was wound up on 31.3.2077 and its draft Balance Sheet as on that date was
given below:
Balance Sheet of Everest Limited as on 31.3.2077
Equity & Liabilities Rs. Assets Rs.

Share capital: Fixed assets 4,82,000

60,000 Equity shares of Rs 10 each 6,00,000 Current assets:
Inventory 3,87,500
Reserves and surplus:
1,56,000 Trade receivables 91,000
Contingency reserve
Cash at bank 1,64,500 6,43,000
Profit and loss A/c 1,26,000
Current liabilities:
Trade payables 1,33,000
Provisions:
Provision for income tax 1,10,000

11,25,000 11,25,000

Details of Trade receivables and Trade payables:

Trade Receivables
Sundry debtors 80,000
Less: Provision for bad and doubtful
debts 4,000 76,000
Bills receivable 15,000 91,000

Trade payables
Sundry creditors 1,13,000
Bills payable 20,000 1,33,000

Himal Limited took over the following assets at values shown as under:
Fixed assets Rs. 6,40,000, Inventory Rs. 3,85,000 and Bills Receivable Rs. 15,000.
Purchase consideration was settled by Himal Limited: Rs. 2,55,000 of the consideration was
satisfied by the allotment of fully paid 10% Preference shares of Rs. 100 each. The balance was
settled by issuing equity shares of Rs. 10 each at Rs. 8 per share paid up.
Sundry debtors realised Rs. 75,000. Bills payable was settled for Rs. 19,000. Income tax authorities
fixed the taxation liability at Rs. 1,11,000.
Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting
to Rs. 4,000.
You are required to:
(i) Calculate the number of equity shares and preference shares to be allotted by Himal
Limited in discharge of purchase consideration.
(ii) Prepare the Realisation account, Cash/Bank account, Equity shareholders account and Himal
Limited account in the books of Everest Limited.
(iii) Pass journal entries in the books of Himal Limited.
Internal Reconstruction
6. Following is the summarized Balance Sheet of Tej as at 31st Ashad, 2077:

Equity & Liabilities Rs Assets Rs

15,000, 10% Preference shares of 15,00,000 Land & Buildings 15,00,000
Rs 100 each Plant & Machinery 10,00,000
35,000 Equity shares of Rs 100 35,00,000 Inventory 6,00,000
each
Securities Premium account 1,00,000 Trade receivables 15,00,000
7% Debentures of Rs 100 each 5,00,000 Cash at bank 1,00,000
Trade payables 12,50,000 Profit & Loss A/c 23,00,000
Loan from Director 1,50,000
70,00,000 70,00,000
No dividend on Preference shares has been paid for the last 5 years.
The following scheme of reorganization was duly approved by the Tribunal:
(i) Each Equity share to be reduced to Rs. 25.
(ii) Each existing Preference share to be reduced to Rs. 75 and then exchanged for 1 new
13% Preference share of Rs. 50 each and 1 Equity share of Rs. 25 each.
(iii) Preference shareholders have forgone their right for dividend for four years. One year’s
dividend at the old rate is however, payable to them in fully paid equity Shares of Rs.
25.
(iv) The Debenture holders be given the option to either accept 90% of their claims in cash
or to convert their claims in full into new 13% Preference shares of Rs. 50 each issued at
par. One half (in value) of the debenture holders accepted Preference shares for their
claims. The rest were paid cash.
(v) Contingent liability of Rs. 1,50,000 is payable, which has been created by wrong action
of one Director. He has agreed to compensate this loss out of the loan given by the
Director to the company.
(vi) 40,000 new Equity shares of Rs. 25 each are to be issued at par, payable in full on
application. Shares were fully taken up.
(vii) Decrease the value of Plant and Machinery, Inventory and Trade receivables by Rs.
4,00,000, Rs. 1,00,000 and Rs. 1,50,000 respectively. Increase the value of Land and
Buildings to Rs. 18,00,000.
(viii) The total expenses incurred by the company in connection with the scheme excluding
underwriting commission amounted to Rs. 15,000.
Pass necessary Journal Entries to record the above transactions

Partnership
7. The following is the summarized Balance Sheet of M/s Red and Black as on 31st Ashad,
2077:
Equity & Liabilities (Rs.) Assets (Rs.)
Red's Capital 80,000 Building 1,00,000
Black's Capital 1,00,000 1,80,000 Closing Stock 60,000
 Sundry Debtors 40,000
Red's Loan 20,000 Investment
General Reserve 20,000 (6% Debentures in XYZ 40,000
Sundry Creditors 40,000 Ltd.)
Cash
20,000

2,60,000 2,60,000

It was agreed that Mr. White is to be admitted for a fifth share in the future profits from 1st
Shrawan, 2077. He is required to contribute cash towards goodwill and Rs. 20,000 towards
capital.
(a) The following further information is furnished:
(i) The partners Red and Black shared the profits in the ratio of 3:2.
(ii) Mr. Red was receiving a salary of Rs. 1000 per month from the very inception of
the firm in addition to the share of profit.
(iii) The future profit ratio between Red, Black and White will be 3:1:1. Mr. Red will
not get any salary after the admission of Mr. White.
(iv) The goodwill of the firm should be determined on the basis of 2 years' purchase of
the average profits from business of the last 5 years. The particulars of
profits/losses are as under:
Year Ended (Rs.) Profit/Loss
31.3.2073 40,000 Profit
31.3.2074 20,000 Loss
31.3.2075 40,000 Profit
31.3.2076 50,000 Profit
31.3.2077 60,000 Profit
The above profits and losses are after charging the salary of Mr. Red. The
profit of the year ended 31st Ashad, 2073 included an extraneous profit of Rs.
60,000 and the loss of the year ended 31st Ashad, 2074 was on account of loss
by strike to the extent of Rs. 40,000.
(v) It was agreed that the value of the goodwill should not appear in the books of the
firm.
(b) Trading profit for the year ended 31st Ashad, 2078 was Rs. 80,000 (Before charging
depreciation).
(c) Each partner had drawn Rs. 2,000 per month as drawing during the year 2077-78.
(d) On 31st Ashad, 2078 the following balances appeared in the books:
Building (Before Depreciation) Rs. 1,20,000
Closing Stock Rs. 80,000
Sundry Debtors Nil
Sundry Creditors Nil
Investment Rs.40,000
(e) Interest@ 6% per annum on Red's loan was not paid during the year.
(f) Interest on Debentures received during the year.
(g) Depreciation is to be provided @ 5% on closing balance of Building.
(h) Partners applied for conversion of the firm into a private Limited Company; i.e. RBW
Private Limited. Certificate received on 1.4.2078.
They decided to convert Capital accounts of the partners into share capital, in the ratio of 3:1:1 (on
the basis of total Capital as on 31.3.2078). If necessary, partners have to subscribe to fresh capital
or withdraw.
You are required to prepare:
(1) Statement of Profit or Loss for the year ended 31st Ashad, 2078 in the books of M/s Red and
Black, and
(2) Balance Sheet as on 1st Ashad, 2078 in the books of RBW Private Limited.

Branch Accounting
8. A & W Co. of Kathmandu has an integral foreign branch in Canberra, Australia. At the end of
31st Ashad 2077, the following ledger balances have been extracted from the books of the
Kathmandu office and the Canberra branch.
Kathmandu office Canberra Branch
(Rs. in thousand) (Aust. Dollars in thousand)
Dr. Cr. Dr. Cr.
Capital 1,500
Reserves & Surplus 1,500
Land 500
Buildings (Cost) 1,000
Buildings - Accumulated Dep. 200
Plant and Machinery (Cost) 2,500 200
Plant and Machinery - 600 130
Accumulated Dep.
Debtors/Creditors 280 200 60 30
Stock as on 1- 4-2076 100 20
Branch Stock Reserve 4
Cash & Bank Balances 10 10
Purchases/Sales 240 520 20 123
Goods sent to Branch 100 5
Managing Partner's Salary 30
Wages and Salaries 75 45
Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch/HO Current Account 120 7
4,880 4,880 390 390

You are required to convert the Branch Trial Balance given above into rupees by using the
following exchange rates:

Opening rate 1 A $ = Rs. 50

Closing rate 1 A $ = Rs. 53
Average rate 1 A $ = Rs. 51.00
for Fixed Assets 1 A $ = Rs. 46.00

Departmental Accounting
9. Department X sells goods to Department Y at a profit of 50% on cost and to Department Z at
 20% on cost. Department Y sells goods to Department X and Z at a profit of 25% and 15%
respectively on sales. Department Z charges 30% profit on cost to Department X and 40%
profit on sale to Y.
Stocks lying at different departments at the end of the year are as under:
Dept. X Dept. Y Dept. Z
Rs Rs Rs
Transfer from Department X 75,000 48,000
Transfer from Department Y 50,000 82,000
Transfer from Department Z 52,000 56,000
Calculate the unrealized profit of each department and also total unrealized profit.

Hire Purchase Accounting

10. X purchased three cars from Y on hire purchase basis, the cash price of each car being Rs.
2,00,000. The hire purchaser charged depreciation @ 20% on diminishing balance method. Two
cars were seized by on hire vendor when second installment was not paid at the end of the
second year. The hire vendor valued the two cars at cash price less 30% depreciation charged
under diminishing balance method. The hire vendor spent Rs. 10,000 on repairs of the cars and
then sold them for a total amount of Rs. 1,70,000.
You are required to compute:
(i) Agreed value of two cars taken back by the hire vendor and book value of car left with the
hire purchaser and
(ii) Profit or loss to hire purchaser on two cars taken back by the hire vendor.

Insurance Claim
11. On 2.6.2077 the stock of Mr. Thulo was destroyed by fire. However, following particulars were
furnished from the records saved:

Rs
Stock at cost on 1.4.2076 2,02,500
Stock at 90% of cost on 31.3.2077 2,43,000
Purchases for the year ended 31.3.2077 9,67,500
Sales for the year ended 31.3.2077 13,50,000
Purchases from 1.4.2076 to 2.6.2077 3,37,500
Sales from 1.4.2076 to 2.6.2077 7,20,000
Sales up to 2.6.2077 includes Rs. 1,12,500 being the goods not dispatched to the customers.
The sales (invoice) price is Rs. 1,12,500.
Purchases up to 2.6.2077 includes a machinery acquired for Rs. 22,500.
Purchases up to 2.6.2077 does not include goods worth Rs. 45,000 received from suppliers, as
invoice not received up to the date of fire. These goods have remained in the godown at the
time of fire. The insurance policy is for Rs. 1,80,000 and it is subject to average clause.
Ascertain the amount of claim for loss of stock.
Accounting for Incomplete Records
12. From the following information in respect of Mr. X, prepare Trading and Profit and Loss
Account for the year ended 31st Ashad, 2077 and a Balance Sheet as at that date:
 31-03-2076 31-03-2077
Rs Rs
(1) Liabilities and Assets:
Stock in trade 1,60,000 1,40,000
Debtors for sales 3,20,000 ?
Bills receivable - ?
Creditors for purchases 2,20,000 3,00,000
Furniture at written down value 1,20,000 1,27,000
Expenses outstanding 40,000 36,000
Prepaid expenses 12,000 14,000
Cash on hand 4,000 3,000
Bank Balance 20,000 9,500
(2) Receipts and Payments during 2076-2077:
Collections from Debtors
(after allowing 2-1/2% discount) 11,70,000
Payments to Creditors
(after receiving 2% discount) 7,84,000
Proceeds of Bills receivable discounted at 2% 1,22,500
Proprietor’s drawings 1,40,000
Purchase of furniture on 30.09.2076 20,000
4% Government securities purchased at 96% on 1,92,000
1-10-2076
Expenses 3,50,000
Miscellaneous Income 10,000
(3) Sales are effected so as to realize a gross profit of one third on the sale
proceeds.
(4) Goods costing Rs 18,000, were issued as samples to distributors.
(5) Purchases and Sales are made only on credit.
(6) During the year, Bills Receivable of Rs 2,00,000 were drawn on debtors. Of
these, Bills amounting to Rs 40,000 were endorsed in favour of creditors.
Out of this latter amount, a Bill for Rs 8,000 was dishonoured by the debtor.
(7) Capital introduced during the year by the proprietor by cheques was omitted
to be recorded in the Cash Book, though the bank balance of 9,500 on 31st
Ashad, 2077 (as shown above), is after taking the same into account.

Investment Accounting
13. On 1 Shrawan 2076 Sambhu issued a loan note with Rs. 50,000 nominal value. It was issued at a
discount of 16% of nominal value. The costs of issue were Rs. 2,000. Interest of 5% of the
nominal value is payable annually in arrears. The bond must be redeemed on 1 Shrawan 2081
(after 5 years) at a premium of Rs. 4,611. The effective rate of interest is 12% per year.
Required: How will this be reported in the financial statements of Shambhu over the period to
redemption?
Accounting for Banks
14. Kalanki Development Bank provides you the balances on categories of credit along with their
respective risk weights.
S.N. Particulars Carrying Risk Weight
 Amount
1 Claims on government & Central Bank 0%
2 Claims on other official entities 8,031,605 20%
3 Claims on banks 6,583,790 20%
4 Claims on corporate & securities firms 28,995,269 100%
5 Claims on regulatory retail portfolio 1,486,089 75%
6 Claims secured by residential properties 1,153,690 60%
7 Claims secured by commercial real estate 5,418,812 100%
8 Past due claims 53,175 150%
9 High risk claims 3,362,105 150%
10 Other assets 1,568,969 100%
11 Off balance sheet items 20,373,804 50%
Total 77,027,308
The above balances are extracted without considering the following information:
1. Credit risk mitigants on high risk claims, past due loans and off balance sheet items of Rs.
362,105 , Rs 3,175 and Rs, 373,804 respectively were not considered.
2. The bank has provided Term Loan to a party of Rs. 1,250,000 in excess of Single Obligor
Limit (SOL).
3. The Bank has entered into a Credit Sales agreement with recourse facilities of Rs. 5,125,
150.
From above information, find out the Risk Weighted Exposure for Credit Risk.
Contract Accounts
15. Dhanapati Limited undertook a contract for Rs, 500,000 on 1st Mangsir, 2069. On 30th Poush
2070 when the accounts were closed, the following details about the contract were gathered.
Materials purchased 100,000
Wages paid 45,000
General Expenses 10,000
Plant purchased 50,000
Materials on hand 30.09.2070 25,000
Wages accrued 30.09.2070 5,000
Work Certified 200,000
Cash received 150,000
Work uncertified 15,000
Depreciation on plant 5,000
The above contract contained an escalation clause which read as follows:
“In the event of price of materials and rates of wages increase by more than 5% the contract
price will be increased accordingly by 25% of the rise in the cost of materials and wages
beyond 5% in each case.”
 It was found that since the date of signing the agreement, the price of materials and wage
rates increased by 25%. The value of work certified does not take into account the effect of
the above clause.
Prepare the contract account. Working would form a part of the answer.

Accounting for Insurance Companies

16. Define types of Insurance.

Accounting for Non-Profit Organization

17. The following is the Income and Expenditure Account of Accountant’s Club for the year ended
31st Ashad, 2077:
Expenditure Rs. Income Rs.
To Salaries 19,500 By Subscription 68,000
To Rent 4,500 By Donation 5,000
To Printing 750
To Insurance 500
To Audit Fees 750
To Games & Sports 3,500
To Subscriptions written off 350
To Miscellaneous Expenses 14,500
To Loss on sale of furniture 2,500
To Depreciation:
Sports Equipment 6,000
Furniture 3,100
To Excess of income over
expenditure 17,050
73,000 73,000

Additional information:
31-3-2076 31-3-2077
Rs. Rs.
Subscriptions in arrears 2,600 3,700
Advance Subscriptions 1,000 1,500
Outstanding expenses:
Rent 500 800
Salaries 1,200 350
Audit Fee 500 750
Sports Equipment less depreciation 25,000 24,000
Furniture less depreciation 30,000 27,900
Prepaid Insurance - 150
Book value of furniture sold is Rs. 7,000. Entrance fees capitalized Rs. 4,000. On 1st Shrawan,
2076 there was no cash in hand but Bank Overdraft was for Rs. 15,000. On 31st Ashad, 2077. Cash
in hand amounted to Rs. 850 and the rest was Bank balance.
Prepare the Receipts and Payments Account of the Club for the year ended 31st Ashad, 2077.

Analysis and interpretation of Financial Statements

18. Operating Segment
Prepare a segmental report for publication in Bottlers Ltd. from the following details of the
company‘s three divisions and the head office:
Rs..(000)
Forging Shop Division
Sales to Bright Bar Division 4,575
Other Domestic Sales 90
Export Sales 6,135
10,800
Bright Bar Division
Sales to Fitting Division 45
Export Sales to Ruwanda 300
345
Fitting Division
Export Sales to India 270

Particulars Head Office Forging Shop Bright Bar Fitting

Division Division Division Division
Rs. (000) Rs. (000) Rs. (000) Rs. (000)
Pre-tax operating result - 240 30 (12)
Head office cost reallocated - 72 36 36
Interest costs - 6 8 2
Fixed assets 75 300 60 180
Net current assets 72 180 60 135
Long-term liabilities 57 30 15 180
19. Related Party Disclosure
Farak Limited is engaged in the manufacturing of specialized spare parts for automobile assemblers.
During the year 2076/ 2077, the company has undertaken the following transactions with its related
parties:
(a) Sales of Rs. 500 million were made to its only subsidiary M/s Shakti Motors Limited (SML).
Being the subsidiary, a special discount of Rs. 25 million was allowed to SML.
(b) SML returned spare parts worth Rs. 5.5 million.
(c) Raw materials of Rs. 5 million were purchased from Joker Enterprises, which is owned by the
wife of the CFO of Faltu Limited.
(d) Equipment worth Rs. 3 million was purchased from Kesar Limited (KL). The wife of the
Production Director of the company is a director in KL.
(e) The company awarded a contract for supply of two machines amounting to Rs. 7 million per
machine to an associated company.
(f) In 2074/2075, an advance of Rs. 2 million was given to the Chief Executive of the company.
During the year 2076/2077, he repaid Rs.0.3 million. The balance outstanding as on Shrawan 31,
2077 was Rs. 1,100,000.
Required:
Prepare a note for inclusion in the company’s financial statements in accordance with the
requirement of NAS 24: Related Party Disclosures.

Public Financial Management

20. How has public financial system evolved in Nepal?
Write Short Notes
21.
(i) Convergence with IFRS
(ii) Purpose of working capital efficiency ratios
(iii) Importance of Predictive value in financial statement
(iv) Government Accounting System in Nepal
(v) Biological Assets and Agricultural produce as per NAS 41

Accounting Standards
22. ABC Ltd. took a machine on lease from XYZ Ltd., the fair value being Rs. 10,00,000. The
economic life of the machine as well as the lease term is 4 years. At the end of each year, ABC Ltd.
pays Rs. 3,50,000. The lessee has guaranteed a residual value of Rs. 50,000 on expiry of the lease to
the lessor. However, XYZ Ltd. estimates that the salvage value of the machine will be only Rs.
35,000 only. It was not practicable for the lessee to determine the interest rate implicit in the lease,
however, the incremental borrowing rate of ABC Ltd. is determined at 16.4%. PV factors at 16.4%
for year 1, year 2, year 3 and year 4 are 0.8591, 0.7381, 0.6341 and 0.5447 respectively.
You are required to calculate the value of machinery to be considered by ABC Ltd. and the finance
charges for each year.
23. With reference to NAS 10 "Events after the balance sheet date", state whether the following
events will be treated as adjusting events or non-adjusting events after balance sheet date in case of a
company which follows Shrawan to Ashad as its financial year.
(i) A major fire has damaged the assets in a factory on 5th Shrawan, 5 days after the year
end. However, the assets are fully insured and the books have not been approved by the
Directors.
(ii) A suit against the company's advertisement was filed by a party on 10th Shrawan, 10
days after the year end claiming damages of Rs. 20 lakhs.
24. A manufacturing company enters into a contract with a supplier to procure equipment over a
period of 3 years. The Company has to pay cancellation fees for terminating the contract. The
cancellation fees would only be in respect of those equipment which are not procured by the
Company as per the contract. The Company decides to terminate the contract at the end of year 1
since it has identified another supplier which would result in a significant reduction in cost for the
company. It pays the cancellation fees in respect of the remaining equipment not yet procured.
Whether the cancellation fee paid by the Company should be capitalised as part of the cost of the
equipment purchased?

25. ABC Ltd. has received the following grants from the Government of Nepal for its newly started
pharmaceutical business:

• Rs. 20 lakhs received for immediate start-up of business without any condition.
• Rs. 50 lakhs received for research and development of drugs required for the treatment of
cardiovascular diseases with following conditions:
▪ that drugs should be available to the public at 20% cheaper from current market price,
and
▪ the drugs should be in accordance with quality prescribed by the World Health
Organization [WHO].
• Two Ropani of land (fair Value: Rs. 10 Lakhs) received for set up plant.
• Rs. 2 lakhs received for purchase of machinery of Rs. 10 lakhs. Useful life of machinery is 5
years. Depreciation on this machinery is to be charged on straight-line basis.
How should ABC Ltd. recognise the government grants in its books of accounts?
26. From 1st Shrawan 2072, the directors have decided to reclassify research and amortized
development costs as administrative expenses rather than its previous classification as cost of sales.
They believe that the previous treatment unfairly distorted the company‘s gross profit margin. What
is your view?
27. Full Stop Limited has a factory in a small Free State town. The wall of a slimes dam at a
neighbouring mine broke in May 20X8, flooding the whole town, including the company’s factoty.
The factory was submerged in two metres of mud slime that damaged all the plant and machinery.
The cost of cleaning the factory and replacing the plant and machinery amounted to Rs. 75,00,000.
The financial director is unsure how this should be accounted for and disclosed in the company’s
financial statements.
Required:
Discuss the recognition and disclosure of the loss incurred by the company in terms of Nepal
Financial Reporting Standards.
Answers:
1.
In the Books of Bhrikuti Ltd
Journal Entries

Date Particulars L.F Dr (Rs) Cr (Rs)

20th Bank A/c Dr. 140,000
Bhadra To Share Application A/c 140,000
Being the Application Money received on
70,000 @ Rs. 2 per share)
Share Application A/c Dr. 140,000
To Bank A/c (10,000 x 2) 20,000
To Share Capital A/c (40,000 x 2 ) 80,000
To Share Allotment A/c (20,000 x 2) 40,000
(Being the Application Money Adjusted)
1st Share Allotment A/c Dr (40,000 x 3) 120,000
Ashoj To Share Capital A/c 120,000
(Being the allotment due on 40,000 shares)
th
15 Bank A/c Dr (120,000 – 40,000) 80,000
Ashoj To Share Allotment A/c 80,000
(Being the allotment money received)
1st Share First Call A/c Dr 120,000
Poush To Share Capital A/c 120,000
(Being the 1st Call money due on 40,000
shares) 120,000
20th Bank A/c Dr 120,000
Poush To Share 1st Call A/c
(Being the 1st Call money received on 40,000
shares) 80,000
1st Share Second &Final Call A/c Dr 80,000
Jestha To Share Capital A/c
2073 (Being the Second & Final Call money due on
9,000 shares)
 Books are closed on 31st Ashad and amount
for final call has not been received till that
date.

2.
The net liability of the individual underwriters can be ascertained by giving credit to
unmarked applications either
(1) in the ratio of gross liability or,
(2) in the ratio of gross liability as reduced by marked applications.
• If Unmarked Application is distributed in the ratio of gross liability

Net Liability of Underwriters

Karki Pandey Sharma Bhusal
Shares shares shares shares Total
(a) Gross liability as per the 2,00,000 1,50,000 1,00,000 50,000 5,00,000
agreement
(b) Less Marked applications 2,20,000 90,000 1,10,000 10,000 4,30,000
(c) Resultant liability (-) 20,000 60,000 (-) 10,000 40,000 70,000

(d) Credit for unmarked

applications in the ratio of
gross liability (4:3:2:1) 8,000 6,000 4,000 2,000 20,000
(e) Resultant liability (-) 28,000 54,000 (-) 14,000 38,000 50,000
(f) Surplus of Karki and
Sharma distributed to Pandey
and Bhusal in the ratio of 3:1 28,000 (-) 31,500 14,000 (-) 10,500 -

(g) Net liability Nil 22,500 Nil 27,500 50,000

• If Unmarked application is distributed in the ratio of gross liability as reduced

by marked applications
• Net Liability of Underwriters
Karki Pandey Sharma Bhusal
Shares shares shares shares Total
 (a) Gross liability 2,00,000 1,50,000 1,00,000 50,000 5,00,000
(b) Less Marked applications 2,20,000 90,000 1,10,000 10,000 4,30,000
(c) Resultant liability (-) 20,000 60,000 (-) 10,000 40,000 70,000
(d) Surplus distributed in the
ratio of gross liability 20,000 (-) 22,500 10,000 (-) 7,500 ---
(e) Gross liability as reduced
by marked applications Nil 37,500 Nil 32,500 70,000

(f) Credit for unmarked

applications in the ratio of
12,000 8,000 ----
37,500 : 32,500
(g) Net liability Nil 25,500 Nil 24,500

3.
(i)
Journal Entries in the books of Laxmi Ltd. (Rs in lakhs)
Particulars
1 Bank A/c Dr. 2,500
To Investments A/c 2,350
To Profit and Loss A/c 150
(Being investment sold on profit for the purpose of buy- back)

2 10% Redeemable Preference Share Capital A/c Dr. 2,500

Premium on Redemption of Preference Shares A/c Dr. 250
To Preference Shareholders A/c 2,750
(Being redemption of preference share capital at premium of 10%)

3 Securities Premium A/c Dr. 250

To Premium on Redemption of Preference Shares A/c 250
(Being premium on redemption of preference shares adjusted
through securities premium)

4 Equity Share Capital A/c Premium on buyback Dr. 800

To Equity buy-back A/c Dr. 800
1,600
(Being Equity Share bought back, Share Capital cancelled, and
Premium on Buyback accounted for)
 5 Securities Premium A/c (800-250) Dr. 550
General Reserve A/c 250
800
To Premium on Buyback A/c
(Being premium on buyback provided first out of securities premium
and the balance out of general reserves.)

6 Preference Shareholders A/c Equity buy-back A/c 2,750

To Bank A/c 1,600
4,350
(Being payment made to preference shareholders and equity
shareholders)

7 General Reserve Account 3,300

To Capital Redemption Reserve Account 3,300
(Being amount transferred to capital redemption reserve account
towards face value of preference shares redeemed and equity shares
bought back)

(ii)

Balance Sheet of Laxmi Ltd. (after Redemption and Buyback)

(Rs Lakhs)

Particulars Note No Amount

EQUITY AND LIABILITIES `
(I)
Shareholders’ Funds:
(a) Share Capital 1 7,200
(b) Reserves and Surplus 2 7,200
(2) Non-Current Liabilities:
(a) Long Term Borrowings 3 5,000
(3) Current Liabilities:
(a) Trade payables 2,300
(b) Short Term Provisions 1,000
Total 22,700
(II) ASSETS
(1) Non-Current Assets
PPE 14,000
Current Assets:
(a) Cash and Cash equivalents (W N) 450
(b) Other Current Assets 8,250
22,700

4.
Cash flow Statement of Ashram Ltd. for the year ended 31.3.2077
 Cash flows from Operating activities Rs Rs
Net Profit 22,40,000
Add :Adjustment for Depreciation ( Rs 7,90,000 – Rs 6,10,000) 1,80,000
Operating profit before working capital changes 24,20,000
Add: Decrease in Inventories (Rs 20,10,000 – Rs 19,20,000) 90,000
Increase in provision for doubtful debts
2,70,000
(Rs 4,20,000 – Rs1,50,000)
27,80,000

Less: Increase in Current Assets:

Trade receivables 6,70,000
(Rs 30,60,000 – Rs 23,90,000)
Prepaid expenses (Rs 1,20,000 – Rs 90,000) 30,000
Decrease in current liabilities:
Trade payable (Rs 8,80,000 – Rs 8,20,000) 60,000
Expenses outstanding 60,000 8,20,000
(Rs 3,30,000 – Rs 2,70,000)
Net cash from operating activities 19,60,000
Cash flows from Investing activities
Purchase of Plant & Equipment 13,40,000
(Rs 40,70,000 – Rs 27,30,000)
Net cash used in investing activities (13,40,000)
Cash flows from Financing Activities
Bank loan raised (Rs 3,00,000 – Rs 1,50,000) 1,50,000
Issue of debentures 9,00,000
Payment of Dividend (Rs 12,00,000 – Rs (10,50,000)
1,50,000)
Net cash used in financing activities NIL
Net increase in cash during the year 6,20,000
Add: Cash and cash equivalents as on 1.4.2076 27,00,000
Cash and cash equivalents as on 31.3.2077 33,20,000
Note: Bad debts amounting Rs 2,30,000 were written off against provision for doubtful debts
account during the year. In the above solution, Bad debts have been added back in the balances
of provision for doubtful debts and debtors as on 31.3.2077. Alternatively, the adjustment of
writing off bad debts may be ignored and the solution can be given on the basis of figures of
debtors and provision for doubtful debts as appearing in the balance sheet on 31.3.2077.

5.
(i) Calculation of number of equity and preference shares

Rs
Fixed assets 6,40,000
Inventory 3,85,000
Bills receivable 15,000
Purchase consideration 10,40,000
Amount discharged by issue of preference shares = Rs 255,000

No. of preference shares to be allotted = Rs 255,000 = 2550 shares

100
Amount discharged by allotment of equity shares = Rs 10,40,000 – Rs 2,55,000 = Rs 7,85,000
Paid up value of equity share = Rs 8

Hence, number of equity shares to be issued = Rs 785,000 = 98,125 shares

8

(ii) In the books of Everest Ltd.

Realisation Account
Rs Rs
To Fixed assets 4,82,000 By Provision for bad and 4,000
doubtful debts
To Inventory 3,87,500 By Trade payable 1,33,000
To Trade receivables 95,000 By Provision for taxation 1,10,000
To Bank account: By Himal Ltd. account
Liquidation expenses 4,000 (Purchase 10,40,000
Bills payable 19,000 consideration)
Tax liability 1,11,000 By Bank account:
Sundry creditors 1,05,500 Sundry debtors 75,000
To Equity shareholders
(profit transferred) 1,58,000 ________
13,62,000 13,62,000

Cash/Bank
Account
Dr. Cr.
Rs Rs
To Balance b/d 1,64,500 By Realisation account:
To Realisation account: Sundry Liquidation expenses 4,000
debtors 75,000 Bills payable 19,000
Tax liability 1,11,000
Sundry creditors (Balancing 1,05,500
figure)

2,39,500 2,39,500

Equity Shareholders
Account
Dr. Cr.
Rs Rs
To 10% Preference shares in By Equity share 6,00,000
Himal Ltd. 2,55,000 capital account
To Equity shares in Himal Ltd 7,85,000 By Contingency reserve 1,56,000
 By Profit/loss Account 1,26,000
By Realisation A/c
(Profit) 1,58,000
10,40,000 10,40,000

Himal Limited Account

Dr. Cr.
Rs Rs
To Realisation account 10,40,000 By 10% Preference shares 2,55,000
in Himal Ltd.
_ By Equity shares in Himal Ltd. 7,85,000

10,40,000
10,40,000

(iii) Journal Entries

Particulars Amount Amount

Business purchase Account Dr. 10,40,000
To Liquidator of Everest Ltd. account 10,40,000
(Being the amount of purchase consideration payable to
liquidator of Everest Ltd. for assets taken over)

Fixed assets account Dr. 6,40,000

Inventory account Dr. 3,85,000
Bills receivable account Dr. 15,000
To Business purchase account 10,40,000
(Being assets taken over)
Liquidator of the Everest Ltd. Account Dr. 10,40,000
To 10% Preference share capital account 2,55,000
To Equity share capital account 7,85,000
(Being the allotment of 10% fully paid up preference
shares and equity shares of Rs. 10 each, Rs. 8 each paid
up as per agreement for discharge of purchase
consideration)
In the books of Himal Ltd.
6.

In the books of Tej Ltd

Journal Entries

Particulars Dr. Cr.

Amount (Rs) Amount (Rs)
1. Equity Share Capital (Rs 100) A/c Dr. 35,00,000
To Equity Share Capital (Rs 25) A/c 8,75,000
To Capital Reduction A/c 26,25,000
(Being Equity shares of Rs 100 each reduced to
Rs 25 each and balance transferred to Capital Reduction
A/c)
2. 10% Preference Share Capital (Rs 100) A/c Dr. 15,00,000
To 10% Preference Share Capital (Rs 75) A/c 11,25,000
To Capital Reduction A/c 3,75,000
(Being Preference shares of Rs 100 each reduced to
Rs 75 each and balance transferred to Capital Reduction
A/c. Total Pref Shares = 15,000)
3. 10% Preference Share Capital (Rs 75) A/c Dr. 11,25,000
To 13% Preference Share Capital (Rs 50) A/c 7,50,000
To Equity Share Capital A/c (Rs 25) 3,75,000
(Being one new 13% Preference share of Rs 50 each
and one equity share of Rs 25 each issued against 10%
Preference Share of Rs 75 each. Total Pref Shares =
15,000)
4. Capital Reduction A/c Dr. 1,50,000
To Preference share dividend payable A/c 1,50,000
(Being arrear of Preference share dividend payable for
one year)
5. Preference share dividend payable A/c To Dr. 1,50,000
Equity Share Capital A/c 1,50,000
(Being Equity Shares of Rs 25 each issued for arrears
of Preference Share dividend)
6. 7% Debentures A/c Dr. 5,00,000
To Debenture holders A/c 5,00,000
(Being balance of 7% Debentures transferred to
Debenture holders A/c )
7. Debenture holders A/c Dr. 5,00,000
 To 13% Preference Share Capital 2,50,000
A/c To Bank A/c 2,25,000
To Capital Reduction A/c 25,000
(Being 50% of Debenture holders opted to take
13% Preference shares at par and remaining
took 90% cash payment for their claims)
8. Loan from Director A/c Dr. 1,50,000
To Provision for Contingent Liability A/c 1,50,000
(Being provison for contingent liability of
Rs 1,50,000 as it is payable and the same is
adjusted against Loan from director A/c)
9. Bank A/c Dr. 10,00,000
To Equity Share Application & Allotment 10,00,000
A/c
(Being application money received on 40,000
Equity shares @ Rs 25 each)
10. Equity Share Application & Allotment Dr. 10,00,000
A/c To Equity Share Capital A/c 10,00,000
(Being application money transferred to capital
A/c, on allotment)
11. Land & Buildings A/c Dr. 3,00,000
To Capital Reduction A/c 3,00,000
(Being value of Land & Buildings appreciated)
12. Expenses on Reconstruction Dr. 15,000
A/c To Bank A/c 15,000
(Being payment of expenses on reconstruction )
13. Capital Reduction A/c Dr. 31,75,000
To Plant & Machinery 4,00,000
A/c To Inventory A/c 1,00,000
To Trade receivables A/c 1,50,000
To Profit & Loss A/c 23,00,000
To Expenses on Reconstruction 15,000
A/c To Capital Reserve A/c (bal 2,10,000
fig)
(Being various losses written off and balance
of Capital Reduction A/c transferred to Capital
Reserve A/c)
7.
(a) M/s Red, Black and White
Statement of Profit or Loss for the year ended on 31st Ashad, 2078

Rs. Rs.
To Dep. Building (1,20,000x5%) 6,000 By Trading Profit 80,000
To Interest on Red’s loan (20,000 x 1,200 By Interest on 2,400
6%) Debentures
To Net Profit to :
Red’s Capital A/c 45,120
Black’s Capital A/c 15,040
White’s Capital A/c 15,040
82,400 82,400

Balance Sheet of the RBW Pvt. Ltd. as at 1-4-2078

Notes Rs.
No.
I Equity and Liabilities
Shareholders funds 2,39,040
Non-current liabilities
Long term borrowings 1 21,200
Total 2,60,240
Assets
Non-current assets
PPE 2 1,14,000
Non-current investments 40,000
Current assets
Inventories 80,000
Cash and cash equivalents 26,240
Total 2,60,240

Notes to Accounts
Rs.
1. Borrowings
Loan from Red 21,200
2. PPE
Land and Building (1,20,000 – 6,000) 1,14,000
Working Notes:
1. Calculation of goodwill:
Year ended 31st Shrawan
2073 2074 2075 2076 2077
Rs. Rs. Rs. Rs. Rs.
Book Profits 40,000 (20,000) 40,000 50,000 60,000
Adjustment for extraneous
profit
2073 and abnormal loss 2074 (60,000) 40,000 — — —
(20,000) 20,000 40,000 50,000 60,000
Add Back: Remuneration of 12,000 12,000 12,000 12,000 12,000
Red
(8,000) 32,000 52,000 62,000 72,000

Less : Debenture Interest being (2,400) (2,400) (2,400) (2,400) (2,400)

non-operating income
(10,400) 29,600 49,600 59,600 69,600
Total Profit from 2074 to 2077 2,08,400
Less : Loss for 2073 (10,400)
Accumulated Profit 1,98,000
Average Profit 39,600
Goodwill equal to 2 years’ 79,200
purchase
Contribution from White, 15,840
equal to 1/5

2. Partners’ Capital accounts

Red Black White Red Black White
Rs. Rs. Rs. Rs. Rs. Rs.
To Drawings 24,000 24,000 24,000 By Balance b/d 80,000 1,00,000 —
To Black 15,840
To Balance 1,13,120 1,14,880 11,040 By General 12,000 8,000 —
c/d Reserve

By White 15,840 —
By Bank — — 35,840
By Profit 45,120 15,040 15,040
& Loss
A/c
1,37,120 1,38,880 50,880 1,37,120 1,38,880 50,880

3. Balance Sheet as on 31st Ashad, 2078

 Liabilities Rs. Rs. Assets Rs. Rs.
Red’s Capital 1,13,120 Land & Building 1,20,000
Black’s Capital 1,14,880 Less : Dep. (6,000) 1,14,000
White’s Capital 11,040 Investments 40,000
Red’s Loan 20,000 Stock-in-trade 80,000
Add : Int. due 1,200 21,200 Cash (Balancing figure) 26,240*
2,60,240 2,60,240
4. Conversion into Company
Rs.
Capital : Red 1,13,120
Black 1,14,880
White 11,040
Share Capital 2,39,040
Distribution of share: Red (3/5) 1,43,424
Black (1/5) 47,808
White (1/5) 47,808
Red should subscribe shares of Rs. 30,304 (Rs. 1,43,424 – Rs. 1,13,120) and White should
subscribe shares of Rs. 36,768 (Rs. 47,808 less 11,040). Black withdraws Rs. 67,072 (Rs.
47,808– Rs.1,14,880).
5. Adjustment for Goodwill amounting Rs. 79,200
To be raised in old To be written off in new Difference
Ratio ratio
Red 47,520 47,520 Nil
Black 31,680 15,840 15,840 Cr.
White 15,840 15,840 Dr.
* Also the closing cash balance can be derived as shown below:
Rs. Rs.
Trading profit (assume realised) 80,000
Add: Debenture Interest 2,400
Add: Decrease in Debtors Balance 40,000
1,22,400
Less: Increase in stock 20,000

Less: Decrease in creditors 40,000 (60,000)

Cash Profit 62,400
Add: Opening cash balance 20,000
Add: Cash brought in by White 35,840
1,18,240
Less: Drawings 72,000

Less: Additions to Building 20,000 (92,000)

 26,240

8.
A & W Co. Ltd.
Canberra, Australia Branch Trial Balance As
on 31st Ashad 2077

($ ‘000) (Rs ‘000)

Dr. Cr. Conversi Dr. Cr.
on rate
per $
Plant & Machinery (cost) 200 Rs 46 9,200
Plant & Machinery 130 Rs 46 5,980
(Accumulated Dep. )
Debtors/Creditors 60 30 Rs 53 3,180 1,590
Stock (1.4.2019) 20 Rs 50 1,000
Cash & Bank Balances 10 Rs 53 530
Purchase / Sales 20 123 Rs 51 1,020 6,273
Goods received from H.O. 5 Actual 100
Wages & Salaries 45 Rs 51 2,295
Rent 12 Rs 51 612
Office expenses 18 Rs 51 918
Commission Receipts 100 Rs 51 5,100
H.O. Current A/c 7 Actual 120
18,855 19,063
Foreign Exchange Loss (bal. fig.)
208
390 390 19,063 19,063

Trading and Profit and Loss account for the year ending 31st Ashad, 2077
Particulars Rs Particulars Rs
To Opening Stock 40,000 B Sales 4,31,250
y
To Purchases 3,45,000 B Closing Stock 40,000
y
To Gross Profit c/d (20% on
sales) 86,250
4,71,250 4,71,250
 To Business Expenses 50,000 B Gross Profit b/d 86,250
y
To Depreciation on:
Machinery 6,500
Building 5,000 11,500
To Net profit 24,750
86,250 86,250
Working Note:

Rs
(i) Calculation of Rate of Gross Profit earned during previous
year
A Sales during previous year 3,00,000
B Purchases 2,40,000

C Cost of Goods Sold (Rs 40,000 + Rs 2,40,000 – Rs 40,000) 2,40,000

D Gross Profit (A-C) 60,000
E Rate of Gross Profit Rs 60,000 x 100 20%
300,000

(ii) Calculation of sales during current year

A Cost of goods sold during previous year 2,40,000
B Add: Increases in volume @ 43.75 % 1,05,000
C Cost of goods sold during Current Year 3,45,000
D Add: Gross profit @ 25% on cost (20% on sales) 86,250
E Sales for current year [C+D] 4,31,250

9.
Calculation of unrealized profit of each department and total unrealized profit
Dept. X Dept. Y Dept. Z Total
Rs Rs Rs Rs
Unrealized Profit
of:
Department X 75,000 x 50/150 48,000 x 20/120
= 25,000 = 8,000 33,000
Department Y 50,000 x .25 82,000 x .15
= 12,500 = 12,300 24,800
Department Z 52,000 x 30/130 56,000 x 40/100
= 12,000 = 22,400 34,400
92,200
10.

Rs
(i) Price of two cars = Rs 2,00,000 x 2 4,00,000
Less: Depreciation for the first year @ 30% 1,20,000
2,80,000
30
Less: Depreciation for the second year = Rs 2, 80,000 x 84,000
100
Agreed value of two cars taken back by the hire vendor 1,96,000
Cash purchase price of one car 2,00,000
Less: Depreciation on Rs 2,00,000 @20% for the first year 40,000
Written drown value at the end of first year 1,60,000
Less: Depreciation on Rs 1,60,000 @ 20% for the second year 32,000
Book value of car left with the hire purchaser 1,28,000
(ii) Book value of one car as calculated above 1,28,000
Book value of Two cars = Rs 1,28,000 x 2 2,56,000
Value at which the two cars were taken back, calculated in (i) above 1,96,000

Hence, loss to hire purchaser on cars taken back by hire vendor

= Rs 2,56,000 – Rs 1,96,000 = Rs 60,000

11.
In the books of Mr. Thulo
Trading Account for the year ended 31.3.2077

Rs Rs
To Opening Stock 2,02,500 B Sales 13,50,000
y
To Purchases 9,67,500 B Closing Stock at cost 2,70,000
y
To Gross Profit 4,50,000 (2,43,000 × 100/90 )

16,20,000 16,20,000

Memorandum Trading A/c

for the period from 1 4.2077 to 02.06.2077

Rs Rs
 To Opening Stock (at cost) 2,70,000 By Sales 7,20,000
To Purchases 3,37,500 Less: Goods not
Add: Goods dispatched 1,12,500 6,07,500
received But invoice 45,000
not received
3,82,500 By Closing stock(Balancing 2,25,000
figure)
Less: Machinery 22,500 3,60,000
To Gross Profit (Refer W.N.) 2,02,500
8,32,500 8,32,500

Calculation of Insurance Claim

Claim subject to average clause = (Actual loss of stock/Closing stock) X Amount of Policy

180,000 X (225,000/225,000) = 180,000

Working Note:
GP Ratio = (450,000/13,500,00) X 100 = 33.33%
Amount of Gross Profit = 607,500 X 33.33% = 202,500

12.
Trading and Profit and Loss Account of Mr. X
st
for the year ended 31 Ashad 2077
Particulars Rs Particulars Rs
To Opening stock 1,60,000 B Sales 13,71,000
To Purchases (W.N.5) 9,12,000 y (W.N.11)
B Closing stock 1,40,000
Less: Advertisement(18,000) 8,94,000 y
To Gross profit c/d 4,57,000
15,11,000 15,11,000
To Expenses (W.N.7) 3,44,000 B Gross profit b/d 4,57,000
To Discount allowed (W.N.9) 32,500 y Discount received 16,000
B (W.N.10)
y
To Advertisment 18,000 By Interest on Govt. 4,000
Securities (W.N.8)
To Depreciation on furniture 13,000 By Miscellaneous 10,000
(W.N.1) income
To Net profit 79,500
4,87,000 4,87,000

Balance Sheet of Mr. X as on 31st Ashad, 2077

Liabilities Rs Assets Rs
Capital (W.N.6) 3,76,000 Furniture 1,27,000
Add: Additional capital 1,72,000 4% Government Securities 1,92,000
(W.N.2) Accrued interest on Govt.
Add: Profit during the 79,500 securities (W.N.8) 4,000
year
6,27,500 Debtors (W.N.3) 2,99,000
Less: Drawings (1,40,000) 4,87,500 Bills Receivable (W.N.4) 35,000
Creditors 3,00,000 Stock 1,40,000
Outstanding expenses 36,000 Prepaid expenses 14,000
Cash on hand 3,000
Bank balance 9,500
8,23,500 8,23,500
Working Notes:
1. Furniture account
Rs Rs
To Balance b/d 1,20,000 By Depreciation (bal.fig.) 13,000
To Bank 20,000 By Balance c/d 1,27,000
1,40,000 1,40,000

2. Cash and Bank account

Rs Rs
To Balance b/d By Creditors 7,84,000
Cash 4,000 By Drawings 1,40,000
Bank 20,000 By Furniture 20,000
To Debtors 11,70,000 By 4% Govt. 1,92,000
securities
To Bill Receivable 1,22,500 By Expenses 3,50,000
To Miscellaneous income 10,000 By Balance c/d
To Additional Capital 1,72,000 Cash 3,000
(bal.fig.)
Bank 9,500
14,98,500 14,98,500

3. Debtors account
Rs Rs
To Balance b/d 3,20,000 By Cash and Bank 11,70,000
To Creditors (Bills 8,000 By Discount 30,000
receivable
dishonoured)
To Sales (W.N.11) 13,71,000 By Bills Receivable 2,00,000
By Balance c/d (bal.fig.) 2,99,000
 16,99,000 16,99,000
4. Bills Receivable account
Rs Rs
To Debtors 2,00,000 By Bank 1,22,500
By Discount 2,500
By Creditors 40,000
By Balance c/d (bal. fig.) 35,000
2,00,000 2,00,000
5. Creditors account
Rs Rs
To Bank 7,84,000 By Balance b/d 2,20,000
To Discount 16,000 By Debtors (Billsreceivable 8,000
dishonoured)
To Bills receivable 40,000 By Purchases (bal.fig.) 9,12,000
To Balance c/d 3,00,000
11,40,000 11,40,000
6. Balance Sheet as on 1st Shrawan, 2076
Liabilities Rs Assets Rs
Creditors 2,20,000 Furniture 1,20,000
Outstanding expenses 40,000 Debtors 3,20,000
Capital (balancing figure) 3,76,000 Stock 1,60,000
Prepaid expenses 12,000
Cash 4,000
Bank balance 20,000
6,36,000 6,36,000
7. Expenses incurred during the year
Rs
Expenses paid during the year 3,50,000
Add: Outstanding expenses as on 31.3.2077 36,000
Prepaid expenses as on 31.3.2076 12,000 48,000
3,98,000
Less: Outstanding expenses as on 31.3.2076 40,000
Prepaid expenses as on 31.3.2077 14,000 (54,000)
Expenses incurred during the year 3,44,000

8. Interest on Government securities

(192,000/0.96) = 200,000 (Face Value)

Interest for 6 months = (200,000 X 4%) X 6/12 = 4,000
 9. Discount allowed
Rs
Discount to Debtors (1,170,000/97.5%) X 2.5% 30,000

Discount on Bills Receivable (122,500 X 98%) X 2%

2,500
32,500

10. Discount allowed

Rs
Discount to Debtors (784,000/98%) X 2% 16,000

11. Credit Sales

Cost of Goods sold = Opening stock + Net purchases – Closing stock
= Rs 1,60,000 + Rs (9,12,000 – 18,000) – Rs 1,40,000 = Rs 9,14,000

Sales Price = 914,000 X 3/2 = 1,371,000

13.
The liability will be initially recognised at the net proceeds received:
Rs
Face value 50,000
Less: 16% discount (8,000)
Less: Issue costs (2,000)
Initial Recognition of liability 40,000

The liability is then measured at amortised cost:

Year Opening Balance Finance Cost Cash Payments Closing Balance
(Liability x 12%) (Rs 50,000 x 5%)
Rs Rs Rs Rs
1 40,000 4,800 (2,500) 42,300
2 42,300 5,076 (2,500) 44,876
3 44,876 5,385 (2,500) 47,761
4 47,761 5,731 (2500) 50,992
5 50,992 6,119 (2500) 54,611
27,111 (12,500)
Charged to Reflected in Shown in
Statement of statement of Statement of
Profit Loss cash flows financial
Position
14.
Kalanki Development Bank Limited
Computation of Risk Weighted Exposure of Credit Risk
S.N Particulars Gross CRM Net Risk Risk
Amount Amount Weight Weighted
Exposure
1 Claims on 0%
government &
Central Bank
2 Claims on other 8,031,605 8,031,605 20% 1,606,321
official entities
3 Claims on banks 6,583,790 6,583,790 20% 1,316,758
4 Claims on corporate 28,995,269 28,995,269 100% 28,995,269
& securities firms
5 Claims on regulatory 1,486,089 1,486,089 75% 1,114,567
retail portfolio
6 Claims secured by 1,153,690 1,153,690 60% 692,214
residential properties
7 Claims secured by 5,418,812 5,418,812 100% 5,418,812
commercial real
estate
8 Past due claims 53,175 (3,175) 53,175 150% 75,000
9 High risk claims 3,362,105 (362,105) 3,362,105 150% 4,500,000
10 Other assets 1,568,969 1,568,969 100% 1,568,969
11 Off balance sheet 20,373,804 (373,804) 20,373,804 50% 10,000,000
items
(739,084) 76,288,224 55,287,910
Total 77,027,308

125,000
Add: 10% of the amount of loan provided in excess of SOL (1,250,000*10%)
51,252
1% of contract amount of credit sales with recourse facility
55,464,162
Total Risk Weighted Exposure for Credit Risk
15.
Contract Account
Particular Rs Assets Rs
To material 100,000 By Work in progress
To wages (45,000+ 5,000) 50,000 Work certified 200,000
To General Expenses 10,000 Work Uncertified 15,000
To Depreciation on Plant 5,000 Contract escalation 5,000
(Working note 1)
To P&L A/c (WN 2) 20,000 By material in hand 25,000
To Balance taken to WIP 60,000 By materials on hand 25,000
245,000 245,000
Working Notes:
1. Escalation Charges:
a) Materials
Effect of increase in price of materials
Total increase Upto 5% Rs. Beyond
75,000*25/125 75,000*5/125
=15,000 =3,000 =12,000
b) Wages
Effect of increase in Wage rate
50,000*25/125 50,000*5/125
=10,000 =2000 =8,000
c) Total increases a) + b) =25000 =5,000 =20,000
d) Increase in Contract Price 20,000 *25/100 =Rs 5000

2. Computation of profit transferred to Profit & Loss Account:

Since more than 1/4th but less than ½ of the contract has been completed 1/3 of the profit earned
as reduced on cash basis has been transferred to Profit & Loss Account.
80,000* 1/3*(150,000/200,000) =Rs 20,000

16.
Life Insurance Business: It means the business relating to a contract regarding to the life of any person
under which he/she or his/her heir in the event of his/her death, will be paid a particular amount in case a
specified amount is paid in installment on the basis of his/her age.

The Insurer may operate the following Insurance Business under the Life Insurance Business:
a. Whole Life Insurance
b. Endowment Life Insurance
c. Term Life Insurance

Non-Life Insurance Business: It means other Insurance Business other than the Life Insurance Business.
The Insurer may operate the following Insurance Business under the Non-Life Insurance Business:
a. Fire Insurance
b. Motor Insurance
c. Marine Insurance
d. Engineering and Contractor’s Risk Insurance
 e. Aviation Insurance
f. Miscellaneous Insurance

17.
Receipts and Payments Account

For the year ended 31-3-2077

To Subscription A/c (W.N.1) 67,050 By Balance b/d (Bank

To Donation A/c 5,000 overdraft) 15,000
To Entrance Fees A/c 4,000 By Salary
Add: Outstanding of last year 19,500
To Furniture A/c (Sale of Less: Outstanding of this year 1,200
furniture) (7,000 – 2,500) 4,500 (350) 20,350

By Rent
4,500
Add: Outstanding of last year 500
Less: Outstanding of this year (800) 4,200
By Printing 750
By Insurance
500
Add: Prepaid in this year By
150 650
By Audit Fees
750
Add: Outstanding of last year
500
Less: Outstanding of this year
(750) 500
By Games & Sports
3,500
By Miscellaneous Expenses 14,500
By Sports Equipment
(Purchased) (W.N. 2) 5,000
By Furniture (Purchased)(W.N.3)
8,000
By Balance c/d
Cash 850
Bank (bal. fig.) 7,250

80,550 80,550
Working Notes:
1. Calculation of subscription received during the year 2076-2077
Rs Rs
Subscription as per Income & Expenditure A/c 68,000
Less: Arrears of 2076-2077 3,700
1,000 (4,700)
Advance in 2076-2077
 63,300
Add: Arrears of 2075-2076 2,600
Advance for 2077-2078 1,500 4,100
67,400
Less: Written off during 2076-2077 (350)
67,050

2. Calculation of Sports Equipment purchased during 2076-2077

Sports Equipment A/c

Rs Rs
To Balance b/d 25,000 By Income & Expenditure A/c 6,000
To Receipts & Payments 5,000 (Depreciation)
A/c (Purchases) (bal. fig.) By Balance c/d 24,000
30,000 30,000

3. Calculation of Furniture purchased during 2076-2077

Furniture A/c

Rs Rs
To Balance b/d 30,000 By Receipts & Payments A/c By 4,500
To Receipts & Payments 8,000 Income & Expenditure A/c 2,500
A/c (Loss on sale)
(Purchases)(Bal.fig.) By Income & Expenditure A/c

(Depreciation) 3,100
By Balance c/d 27,900
38,000 38,000

18.
Bottlers Ltd.
Segmental Report
(Rs.000)

Particulars Forging Bright Fittings Inter Total

Shop Bar Segment
Elimination
Segment Revenue
Sales
Domestic 90 - - - 90
Export 6,135 300 270 - 6705
 Subsidiary Associate Entity Director Key
having Management

External Sales 6225 300 270 - 6795

Inter Segment Sales 4575 45 - 4620 -
Total Revenue 10,800 345 270 4620 6,795

Segment Result (given) 240 30 -12 258

Head Office Expenses -144
Pre-Tax Operating 114
Interest Expenses -16
Profit before tax 98
Bottlers Ltd.
Segmental Report
Information in relation to assets and liabilities:
(Rs.‟000)

Particulars Forging Bright Fittings Inter Total

Shop Bar Segment
Elimination
Fixed Asset 300 60 180 540
Net Current Assets 180 60 135 375
Segment Assets 480 120 315 - 915
Unallocated corporate Assets (75+72) 147
Total Assets 1062
Segment Liabilities 30 15 180 225
Unallocated corporate Liabilities 57
Total Liabilities 282

Sales Revenue by geographical market

Rs “000

Home Sales Export Sales Export to Export to India Total

(by forging Ruwanda
shop division)
External Sales 90 6,135 300 270 6,795

19.
The related parties comprise a subsidiary, an associated undertaking/an entity having significant
influence, director and key management personnel. Aggregate transactions with related parties are as
follows:
 significant Personnel
influence
Rs Rs Rs (Million) Rs (Million) Rs (Million)
(Million) (Million)
Transaction
Sales 500
Sales Discount 25
Sales return 5.5
Purchase pf Raw material 5
Purchase of Equipment 3
Purchase of machinery 14

Balances
Advances
At the Beginning of the year 1.4
Repaid During the year 0.3
At the end of the year 1.1
(i) Sales discount represents a special discount which is not usually allowed to other customers.
(ii) All transactions with related parties have been carried out on commercial terms and
conditions.

20.
The PFM and budgetary policies of the Nepal Government during the Nineties were directed towards
economic liberalization, privatization, poverty reduction and decentralization. Policies and programs of
the budget were mainly concerned with agriculture, modernization, employment promotion, women’s
empowerment, financial sector reform, government expenditure management, tax reform, good
governance, social service and the development of basic and physical infrastructure. PFM system of
Nepal, like most developing countries, continued to be dominated by the traditional objectives of control
and accountability rather than a concern for allocating limited public sector resources to well defined
programs and projects that were intended to serve a set of national objectives.
The extension of the budget coverage involved a combination of formal and informal incorporation of
expenditure activities. The other formal extension involved the incorporation of foreign assistance
programs, which were previously outside the budget. Planning the allocation of scarce resources was not
given due priority. The pattern of government expenditure followed more or less the uniform course till
the 1990s. Public expenditure and revenue both increased; but the expenditure increase trend was greater
than the revenue. The inadequate mobilization of domestic resources through government revenue
resulted in a serious problem of widening resource gap in Nepal. Foreign aid was the main source of
development financing and deficit financing continued to increase. Planning, budgeting, and
implementation had inherent problems such as lack of capacity, co-ordination and monitoring. In spite of
a number of initiatives taken, one of the main problems of Nepal has been the lack of proper domestic
resource mobilization.
Several factors have contributed in varying degrees to the lack of effectiveness of public spending in
Nepal. The institutional factors played major role in the over programming (having too many programs in
scarce resources) of the budget, its lack of focus and prioritization and implementation problems. The
lack of ownership of projects/ programs at various levels and the absence of accountability, also
undermined the quality and effectiveness of public spending. Managing the national budget became
increasingly difficult for Nepal Government to further their objectives of poverty alleviation.
21.
(i)
In general terms, ‟convergence with IFRS‟ means to achieve harmony with IFRS. In precise terms,
convergence can be considered as "to design and maintain national accounting standards in a way that
financial statements prepared in accordance with national accounting standards draw unreserved
statement of compliance with IFRSs". In this context, attention is drawn to paragraph 14 of International
Accounting Standard (IAS) 1, Presentation of Financial Statements, which states that financial statements
shall not be described as complying with IFRSs unless they comply with all the requirements of IFRSs. It
does not imply that financial statements prepared in accordance with national accounting standards draw
unreserved statement of compliance with IFRSs only when IFRSs are adopted word by word.

(ii)
Working capital efficiency ratios measure the efficiency with which the entity has managed its
receivables, inventory and trade payables. The ratios are usually measured in terms of an average number
of days. The working capital ratios are a useful measure of whether the entity has too much or too little
invested in working capital.
Excessive investment in working capital is indicated by a long cash cycle (a long working capital
cycle) that appears to be getting even longer. When too much is invested in working capital, the return on
capital employed and ROSC will be lower than they should be.
Under-investment in working capital is an indication of possible liquidity difficulties. When working
capital is low in comparison with the industry average, this might indicate that current assets are being
financed to an excessive extent by current liabilities, particularly trade payables and a bank overdraft.

(iii)
Financial statements are historical, which means that they are backward looking. Since the return an
investor obtains from holding a share (or continuing to hold a share rather than selling it) comes from
future returns rather than past returns, arguably historical data is of little or no relevance to equity investor
users. A problem with estimates about future performance is that although they may be relevant to users,
they are unreliable. Conversely, historical information may be irrelevant, but it is reliable. To try to solve
this core dilemma in financial reporting, a number of disclosure based accounting standards exist, which
attempt to enhance the predictive value of the financial statements. Predictive value is one of the
qualitative characteristics that make financial information useful to users, according to the Framework
document. It is a concept of great importance and hence it silently underpins the logic of a number of
accounting standards
(iv)
Government Accounting System in Nepal is generally on Cash Basis. It has set chart of accounts
under which revenue and expenditure are accounted for. It follows double entry system; however,
do not follow the mercantile system of accounting. Government accounting system broadly
classifies expenditure into administrative and development expenses. Accounting system followed
by the government differentiates Capital expenditures and revenue expenditure in its subsidiary
records. Office of the Financial Comptroller General specifies the chart of accounts under which
all the government revenue and expenditure are to be accounted for.
(v)
As per NAS 41 Biological asset is a living animal or plant. Biological assets include the following. •
Sheep, pigs, beef cattle, poultry and fish. • Dairy cows. • Trees in a forest. • Plants for harvest (for
example, wheat and vegetables). • Trees, plants and bushes from which agricultural produce is harvested
(for example, fruit trees, vines and tea bushes).
As per NAS 41 Agricultural produce is the harvested product of the entity’s biological assets. The
produce or harvest from a biological asset (for example, milk, tea leaves and lumber) is inventory. The
harvested produce is transferred to inventory at fair value less costs to sell; it is thereafter accounted for in
accordance with NAS 2, ‘Inventories’. However, while the produce is still growing or still attached to the
biological asset, its value forms part of the value of the biological asset as per NAS 41.

22.
As per NAS 17 “Leases”, the lessee should recognize the lease as an asset and a liability at the
inception of a finance lease at an amount equal to the fair value of the leased asset at the inception of
lease. However, if the fair value of the leased asset exceeds the present value of minimum lease
payment from the standpoint of the lessee, the amount recorded as an asset and liability should be the
present value of minimum lease payments from the standpoint of the lessee.
Value of machinery
In the given case, fair value of the machinery is Rs 10, 00,000 which is more than net present value of
minimum lease payments of Rs 9,98,835 (Refer working Note). Hence, the machine and the
corresponding liability will be recorded at value of Rs 9,98,835 in the books of ABC Ltd.

Year Finance Payment Reductio Outstanding

charge n in liability
outstandi
ng
liability
1st year beginning - - - 9,98,835

End of 1st year 1,63,809 3,50,000 1,86,191 8,12,644

End of 2nd year 1,33,274 3,50,000 2,16,726 5,95,918
End of 3rd year 97,731 3,50,000 2,52,269 3,43,649
End of 4th year 56,358 4,00,000* 3,43,642 7**

Calculation of finance charges for each year

Working Note:

Present value of minimum lease payments

 Annual lease rental x PV factor
3,50,000 x (0.8591+ 0.7381+ 0.6341+ 0.5447) Rs 9,71,600
Present value of guaranteed residual value
50,000 x (0.5447) Rs 27,235
Rs 9,98,835

* includes guaranteed residual value of Rs. 50,000 (considered to be paid).

** it should be nil, difference of Rs. 7 due to approximations.
23.
According to NAS 10 ‘Events after the Balance Sheet Date’, adjustments to assets and liabilities are
required for events occurring after the balance sheet date that provide additional information
materially affecting the determination of the amounts relating to conditions existing at the balance
sheet date. However, adjustments to assets and liabilities are not appropriate for events occurring after
the balance sheet date, if such events do not relate to conditions existing at the balance sheet date.
(i) Fire has occurred after the balance sheet date and also the loss is totally insured. Therefore, the
event becomes immaterial and the event is non- adjusting in nature.
(ii) The contingency is restricted to conditions existing at the balance sheet date. However, in the
given case, suit was filed against the company’s advertisement by a party on 10th Shrawan for
amount of Rs 20 lakhs. Therefore, it does not fit into the definition of a contingency and hence
is a non-adjusting event.
24.
As per paragraph 15 of NAS 16, an item of property, plant and equipment that qualifies for recognition as
an asset shall be measured at its cost. Further paragraph 16, inter alia, states that, the cost of an item of
property, plant and equipment comprises, any costs directly attributable to bringing the asset to the
location and condition necessary for it to be capable of operating in the manner intended by the
management.
In view of the above, the cancellation fees incurred is not directly attributable costs as they are not
directly related to the acquisition of the equipment and are not required to bring the item to the location
and condition necessary for it to be capable of operating in the manner intended by management. Hence,
the cancellation fee should not be capitalised as part of the cost of the equipment purchased from another
supplier, instead it should be expensed off as and when incurred.
25.
ABC Ltd. should recognise the grants in the following manner:
• Rs 20 lakhs has been received for immediate start-up of business. This should be recognised in
Statement of Profit and Loss immediately as there are no conditions attached to the grant.
• Rs 50 lakhs should be recognised in profit or loss on a systematic basis over the periods which the
entity recognises as expense the related costs for which the grants are intended to compensate
provided that there is reasonable assurance that ABC Ltd. Will comply with the conditions
attached to the grant.
• Land hould be recognised at fair value of Rs 10 lakhs and government grants should be presented
in the balance sheet by setting up the grant as deferred income.
 • Rs 2 lakhs should be recognised as deferred income and will be transferred to profit and loss over
the useful life of the asset. In this cases, Rs 40,000 [Rs 2 lakhs/5] should be credited to profit and
loss each year over period of 5 years.

26.
Changing the classification of an item of expense is an example of a change in accounting policy, in
accordance with NAS 08 Accounting Policies, Changes in Accounting Estimates and Errors. Such a
change should only be made where it is required by an NFRS/NAS, or where it would lead to the
information in the financial statements being more reliable and relevant. It may be that this change does
represent an example of the latter, although it is arguable that amortized development costs should
continue to be included in cost of sales as amortization only occurs when the benefits from the related
project(s) come on-stream. If it is accepted that this change does constitute a change of accounting policy,
then the proposed treatment by the directors is acceptable; however, the comparative results for the year
ended 31 Ashadh 2073 must be restated as if the new policy had always been applied (known as
retrospective application).
27.
The loss of Rs 7 500 000 suffered by the company must be included in the determination of the profit or
loss for the period.
The effects of an entity’s various activities, transactions and other events differ in frequency, risk and
predictability, and the disclosure of the elements of financial performance assists in the understanding of
the financial performance achieved and in making projections of future results. Additional line items are
included on the face of the statement of comprehensive income, and the descriptions used and the
ordering of items are amended when it is necessary to explain the elements of financial performance.
Factors considered include materiality and the nature and function of the components of income and
expenses, (NAS 1, paragraph 85 and 86).
The nature and amount of items of income and expenses that are material shall be disclosed separately
(NAS 1, paragraph 97).
An item is material if its omission or misstatement could influence the economic decisions of users
(Framework, paragraph 30).
On the assumption that the nature or amount is considered material to the users of Full Stop Limited, the
Rs 7 500 000 used in cleaning the factory and replacing the plant and machinery would therefore need to
be disclosed as an additional line item (either on the statement of comprehensive income or in the note
describing profit before tax).
PAPER 2: AUDIT AND ASSURANCE
Questions
Principle and Concept of Assurance
Question No. 1
State the auditor’s responsibility in detection of fraud and error.
Ethics
Question No. 2
PQR and Associates was appointed as a statutory auditor of ABC Bank Ltd. for the F.Y. 2077-
78. ABC Bank Ltd. was also listed in the stock market. Mr. P is an engagement partner for the
audit of the bank. During the audit he found that the bank was distributing a cash dividend of
50% and bonus of 50% as well. He then disclosed this information to one of his friends and his
friend bought a share of that bank in secondary market. Does the Auditor has complied with the
principle of confidentiality stated in code of ethics issued by The Institute of Chartered
Accountants of Nepal? In which circumstances does the auditor can disclose the confidential
information? What remedies are available to the bank to file a complaint against the auditor Mr.
P and what punishment can be given to Mr. P by the Disciplinary Committee?
Regulatory
Question No. 3
Mr. Baral who owns 0.5% of total paid up capital of Merchant Bank Ltd. has been appointed as a
statutory auditor of the bank for the F.Y. 2077-78. Is the appointment of the auditor valid? During
the audit he found that most of the major loans were disbursed to the board of directors and their
family. Upon submission of the audit report management tells him not to disclose the loan amount
taken by the board of directors and their family. What should auditor Mr. Baral do in such case?
Planning an Assurance Engagement
Question No. 4
Elucidate the matters to be considered by the auditor in developing overall audit plan for the
conduct of an audit.
Question No. 5
Discuss how analytical procedures, observations and inspections can be used as risk assessment
procedures by the auditor?
Question No. 6
Elucidate different aspects of an audit where Professional Skepticism may be used by an auditor.
Question No. 7
You are appointed as an auditor of Goodway Biscuits Ltd. All the transactions are recorded in
ERP software. As an auditor what are the risk that you find in the internal control system in EDP
environment? What points will you consider for evaluating the reliability of Computerized
Information System (CIS)?
Question No. 8
Write short note on Materiality and Audit Risk.
Question No. 9
You are appointed as an auditor of Water Balls Ltd. for the F.Y. 2077-78. How will you guide
your article and audit staff about maintaining the audit working papers?
Question 10
How does transaction cycle help auditors to organize accounting transactions for audit testing
and evaluation?
Vouching
Question No. 11
As an auditor how would you vouch the following transactions?
a) Purchase Returns
b) Good sent out on sale or return basis
c) Amount due to Subsidiary Companies
d) Expenditure incurred for promotion of a product

Verification of Assets and Liabilities

Question No. 12
What is an Accounting Estimate? What are the techniques to obtain audit evidence regarding the
appropriateness of using the right estimate by management?
Company Audit
Question No.13
What is the provision related to appointment of Auditor as per the Companies Act, 2063?
Question No. 14
What are the provisions related to Prohibition on purchase of own shares by Company?
Audit of Special Sector
Question No. 15
What are the special features of Cooperative Audit?
Government Audit
Question No. 16
What do you mean by Performance Audit?
Audit Evidence and Internal Audit
Question 17
What are the audit assertions related to Presentations and Disclosures?
Audit Procedure to Obtain Audit Evidence
Question 18
What do you mean by Analytical Procedure? What are the types of Analytical Procedure?
Written Representation
Question 19
ABC & Associates are an auditor of PKM Bank Ltd. ABC & Associates has requested a Written
Representation from PKM Bank Ltd. Can a written representation be used as audit evidence and
who is responsible to provide Written Representation?
Internal Audit & Corporate Governance
Question 20
ABC & Associates are appointed as Internal Audit of PQM Trading Ltd. What is the role of
internal audit in Corporate Governance?
Answer No. 1

An auditor conducting an audit in accordance with NSAs is responsible for obtaining reasonable
assurance that the financial statements taken as a whole are free from material misstatement,
whether caused by fraud or error. In order to achieve this responsibility auditors are required to
identify and assess the risks of material misstatement of the financial statements due to fraud.
The auditor will need to obtain sufficient appropriate audit evidence regarding the assessed risks
of material misstatement due to fraud, through designing and implementing appropriate
responses. In addition, the auditor must respond appropriately to fraud or suspected fraud
identified during the audit.

The primary responsibility for the prevention and detection of fraud rests with both those
charged with governance of the entity and the management. An auditor cannot obtain absolute
assurance that material misstatements in the financial statements will be detected. Owing to the
inherent limitations of an audit, there is an unavoidable risk that some material misstatements of
the financial statements will not be detected, even though the audit is properly planned and
performed in accordance with NSAs.

When obtaining reasonable assurance, the auditor is responsible for maintaining professional
skepticism throughout the audit, considering the potential for management override of controls
and recognizing the fact that audit procedures that are effective in detecting error may not be
effective in detecting fraud.

To ensure that the whole engagement team is aware of the risks and responsibilities for fraud
and error, NSA 315 requires that a discussion is held within the engagement team. For members
not present in the discussion the engagement partner should determine which matters are to be
communicated to them.

Answer No. 2

Mr. P is an engagement partner for the audit of ABC Bank Ltd. for the F.Y .2077-78. During
the audit he discloses the confidential information to his friend violating the code of ethics
issued by the ICAN.
Code of ethics issued by The Institute of Chartered Accountants of Nepal has outlined the detail
of ethics that Professional accountants have an obligation to respect the confidentiality of
information about a client’s affairs acquired in the course of professional services. The duty of
confidentiality continues even after the end of the relationship between the professional
accountant and the client or employer. When changing employment or acquiring a new client,
the accountant is entitled to use prior experience but shall not use or disclose any confidential
information acquired or received as a result of a professional or business relationship.

However, Mr. P can disclose confidential information of the client ABC Bank Ltd. only when:
a. Disclosure is required by law, for example:
 i. Production of documents or other provision of evidence in the course of legal
proceedings;
ii. Disclosure to the appropriate public authorities of infringements of the law that come
to light;
b. Disclosure is permitted by law and is authorized by the client or the employing
organization; and
c. There is a professional duty or right to disclose, when not prohibited by law:
i. To comply with the quality review of a professional body;
ii. To respond to an inquiry or investigation by a professional or regulatory body;
iii. To protect the professional interests of a professional accountant in legal proceedings;
or
iv. To comply with technical and professional standards, including ethics requirements.

In deciding whether to disclose confidential information, factors to consider, depending on the

circumstances, include:
a. Whether the interests of any parties, including third parties whose interests might be
affected, could be harmed if the client or employing organization consents to the
disclosure of information by the professional accountant.
b. Whether all the relevant information is known and substantiated, to the extent practicable.
c. The proposed type of communication, and to whom it is addressed.
d. Whether the parties to whom the communication is addressed are appropriate recipients.

ABC Bank Ltd. can lodge complaint to the ICAN against member Mr. P for not upholding the
code of ethics by paying a fee of Rs. 100. The council of ICAN if finds the complaints
convincing, the complaint is placed in the disciplinary committee for further discoveries and
recommendation.

The Disciplinary committee shall have the authority, similar to a judicial court, in respect of
summoning concerned person and investigating evidences and witnesses.
The Disciplinary committee shall recommend to the Council, along with its opinion and finding,
for necessary action against a member Mr. P, if found guilty, and the council may, considering
such a recommendation, impose any of the following punishment according to the degree of
offence:
a. Reprimanding,
b. Removing from the membership for a period up to five years,
c. Prohibiting from carrying on the accounting profession for any particular period,
d. Cancellation of the Certificate of Practice (COP) or membership.

Answer No. 3
Appointment of Mr. Baral as an auditor of Merchant Bank Ltd. is valid as per the Bank and
Financial Institutions Act 2073. As per section 64 of BAFIA, persons or any firm, company or
institution in which such person is a promoter or partner shall not be eligible to be appointed as
an auditor of a bank or financial institution if a person, firm, company or institution having
subscribed one percent or more shares of the bank or financial institution. In the given case Mr.
Baral has subscribed only 0.5% of the shares of Merchant Bank Ltd. thus his appointment is
valid.
According to section 66 of BAFIA, the auditor shall inform the Rastra Bank if any of the
following situation is like to emerge:
a. Violation of the terms and conditions as prescribed by the Rastra Bank during issuance of the
license or this Act or Rules, Byelaws, Directives framed under this Act,
b. To cause adverse effect on regular activities of the bank or financial institution,
c. To prohibit the auditor to submit the audit report or asking to prepare false audit report.

Thus, Mr. Baral should inform Nepal Rastra Bank that the directors of Merchant Bank Ltd. is
prohibiting him to issue the audit report which contains about the loan utilized by the Board of
Directors and their family members.

Answer No. 4

Audit planning is a major part of audit works for both internal and external audits. A good audit
planning will help the auditor to minimize its risks, improve audit efficiency, and meet its
objective at the minimum effort. An audit plan is the specific guideline to be followed when
conducting an audit. It helps the auditor obtain sufficient appropriate evidence for the
circumstances and helps keep audit costs at a reasonable level. The record of the overall audit
plan will need to be sufficiently detailed to guide the development of the audit program; its
precise form and content will vary depending on the size of the entity, the complexity of the
audit and the specific methodology and technology used by the auditor. Matters to be considered
by the auditor in developing the overall audit plan includes:

a. Understanding of the Entity and Its Environment including knowledge of the industry, nature
of ownership, management and operations of the entity to be audited.
b. Understanding the internal control system of the entity.
c. The expected assessments of audit risks and the identification of significant audit areas.
d. The setting of materiality levels for audit purposes.
e. The possibility of material misstatement, including the experience of past or fraud.
f. The identification of complex accounting areas.
g. Nature, Extent and Timing of procedures.
h. Possible change of emphasis on specific audit areas.
i. The effect of information technology on the audit
j. The work of internal auditors and the extent of their involvement, if any, in the audit.
k. The involvement of other auditors in the audit of components or subsidiaries or the branches
of the entity.
l. The involvement of experts.
m. The number of locations.
n. Establishing and coordinating staffing requirements.
o. The going concern assumption related questions.
p. Conditions requiring special attention, such as the existence of related parties.
q. The terms of the engagement and any statutory responsibilities and
r. The nature and timing of reports or other communication with the entity.

Answer No. 5

Analytical procedures performed as risk assessment procedures may be helpful in identifying the
existence of unusual transactions or events, and amounts, ratios, and trends that might indicate
matters that have financial statement and audit implications. In performing analytical procedures
as risk assessment procedures, the auditor develops expectations about plausible relationships
that are reasonably expected to exist. When comparison of those expectations with recorded
amounts or ratios developed from recorded amounts yields unusual or unexpected relationships,
the auditor considers those results in identifying risks of material misstatement.

Observation and inspection may support inquiries of management and others, and also provide
information about the entity and its environment that includes:
i. Observation of entity activities and operations.
ii. Inspection of documents (such as business plans and strategies), records, and internal
control manuals.
iii. Reading reports prepared by management (such as quarterly management reports and
interim financial statements) and those charged with governance (such as minutes of
board of directors’ meetings).
iv. Visits to the entity’s premises and plant facilities.
v. Tracing transactions through the information system relevant to financial reporting (walk-
through).

When the auditor intends to use information about the entity and its environment obtained in
prior periods, the auditor should determine whether changes have occurred that may affect the
relevance of such information in the current audit. For continuing engagements, previous
experience of the auditor with the entity contributes to the understanding of the entity and its
environment. For example, audit procedures performed in previous audits ordinarily provide
audit evidence about the entity's organizational structure, business, and controls, as well as
information about past misstatements and whether or not they were corrected on a timely basis,
which assists the auditor in assessing risks of material misstatement in the current audit.
However, such information may have been rendered irrelevant by changes in the entity or its
environment. The auditor should make inquiries and perform other appropriate audit procedures,
such as walk through of systems, to determine whether changes have occurred that may affect
the relevance of such information.
 Answer No. 6

NSA 200 requires the use of professional skepticism as a means of enhancing the auditor’s
ability to identify risks of material misstatement and to respond to the risks identified.
Professional skepticism is closely related to fundamental ethical considerations of auditor
objectivity and independence. Professional skepticism is also linked to the application of
professional judgment by the auditor. An audit performed without an attitude of professional
skepticism is not likely to be a high-quality audit. Professional skepticism includes being alert to,
audit evidence that contradicts other audit evidence, conditions that may indicate possible fraud
and information that brings into question the reliability of documents.
The auditor is likely to apply professional skepticism at various stages from client acceptance
and at various points during the audit process, and some examples are given below:
i. When assessing engagement acceptance: at this stage the auditor should consider whether the
management of the intended audit client acts with integrity and whether there are any matters
that may impact on the auditor being able to act with professional skepticism if they accept
the engagement, such as ethical threats to objectivity.
ii. When performing risk assessment procedures: an auditor should be skeptical when
performing risk assessment procedures at the planning stage of the audit. For example, when
discussing the results of analytical procedures with management, the auditor should not
accept management’s explanations at face value and should obtain corroboratory evidence
for the explanations offered.
iii. When obtaining audit evidence: the auditor should be ready to challenge management,
especially on complex and subjective matters and matters that required a degree of judgment
to be exercised by management. The reliability and sufficiency of evidence should be
considered, especially where there are risks of fraud. There may also be specific issues
arising during an audit which impacts on professional skepticism – for example, if
management refuses the auditor’s request to obtain evidence from a third party. The auditor
will have to consider how much trust can be placed on evidence obtained from management
– for example, evidence in the form of enquiry with management or written representations
obtained from management. NSA 200 states that ‘a belief that management and those
charged with governance are honest and have integrity does not relieve the auditor of the
need to maintain professional skepticism or allow the auditor to be satisfied with less than
persuasive audit evidence when obtaining reasonable assurance’.
iv. When evaluating evidence: the auditor should critically assess audit evidence and be alert for
contradictory evidence that may undermine the sufficiency and appropriateness of evidence
obtained.
v. Accounting estimates: this includes fair value accounting estimates, the use of significant
assumptions by management in developing accounting estimates, and reviewing the
judgments and decisions used by management for management bias in developing
accounting estimates.
vi. Going concern: the auditor should review management’s assessment of going concern and
feasibility of management’s plans, this being particularly important where there is a
significant doubt over the entity’s ability to continue as a going concern.
vii. Related party relationships and disclosures: it can be difficult to obtain information on related
parties, as knowledge may be confined to management meaning that the auditor may have to
rely on management to identify all related parties. The auditor should also be skeptical when
assessing the business rationale behind related party transactions.
viii. Consideration of laws and regulations: the auditor should be alert throughout the audit for
indications that there may have been a suspected non-compliance with laws and regulations.

Answer No. 7

The auditor, in forming his opinion on financial information, needs reasonable assurance that
transactions are properly authorized and recorded in the accounting records and that transactions
have not been omitted. Internal controls, even if fairly simple, may contribute to the reasonable
assurance the auditor seeks. The auditor’s objective in studying and evaluating internal controls
is to establish the reliance he can place thereon in determining the nature, timing and extent of
his substantive auditing procedures. Scope of an audit does not change in an Electronic Data
Processing (EDP) environment. However, the use of a computer changes the processing and
storage of financial information and may affect the organization and procedures employed by the
entity to achieve adequate internal control. Accordingly, the procedures followed by the auditor
in his study and evaluation of the accounting system and related internal controls and nature,
timing and extent of his other audit procedures may be affected by an EDP environment. Audit
in an EDP environment is different from normal audit because of its reliability, nature of risk and
the internal control and the characteristics of CIS environment.

As I am appointed as an auditor of Goodway Biscuits Ltd., I will list out the following points as
a risk in internal control system in EDP environment:
i. If the transaction trail is provided or not by the software. Generally, OLRT system does
not provide the transaction trail.
ii. Due to lack of segregation of function no person can be made responsible for error and
fraud.
iii. Because of uniform processing of all transaction there may be programming error.
iv. Documents for automated transaction can’t be found
v. Manual works are also dependent on computer processing hence error and fraud in
computer processing may affect the manual procedure too.
vi. Although processing is done electronically, human effort is needed in input controlling,
development, maintenance and execution. In those stages chances of human errors lies.
vii. Due to electronic form of data, CAAT may be easily applied and sometimes auditor may
be compelled to use them.

As an auditor following points are to be considered, to know the reliability of CIS whether it;
i. Provides authorized, correct and complete data to processing center.
ii. Provides for detection of errors on timely basis.
iii. Has data recovering arrangement so that incase of interruption due to power mechanical
or processing failures, the system restarts without loss of entries or records.
iv. Ensure that output is correct and complete.
 v. Ensure that there is adequate data security against fire and other calamities, wrong
processing and fraud etc.
vi. Ensure that amendments to the programs are properly authorized.
vii. Ensure safe custody of the application software and the data files.

Answer No. 8
The concept of materiality is applied by the auditor both in planning and performing the audit,
and in evaluating the effect of identified misstatements on the audit and of uncorrected
misstatements, if any, on the financial statements and in forming the opinion in the auditor’s
report. In conducting an audit of financial statements, the overall objectives of the auditor are to
obtain reasonable assurance about whether the financial statements as a whole are free from
material, whether due to fraud or error, thereby enabling the auditor to express an opinion on
whether the financial statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and to report on the financial statements, and
communicate as required by the NSA’s, in accordance with the auditor’s findings. The auditor
obtains reasonable assurance by obtaining sufficient appropriate audit evidence to reduce audit
risk to an acceptably low level. Audit risk is the risk that the auditor expresses an inappropriate
audit opinion when the financial statements are materially misstated. Audit risk is a function of
the risks of material misstatement and detection risk. Materiality and audit risk are considered
throughout the audit, in particular when:

i. Identifying and assessing the risks of material misstatements;

ii. Determining the nature, timing and extent of further audit procedures;
iii. Evaluating the effect of uncorrected misstatements, if any, on the financial statements and
in forming the opinion in the auditor’s report.

Answer No. 9

As an auditor of Water Balls Ltd. I will train my audit staff about the types and importance of
audit working papers in the following manner.
As per NSA230, Audit documentation means the record of audit procedures performed, relevant
audit evidence obtained, and conclusions the auditor reached.
The audit working papers constitute the link between the auditor’s report and the client’s records.
Working papers are considered as the property of the auditor. Audit Working papers provides
for:

i. means of controlling current audit work;

ii. evidence of audit work performed;
iii. schedules supporting or additional item in the accounts; and
iv. information about the business being audited, including the recent history.

All significant matters, which require the exercise of judgment, together with the auditor's
conclusion thereon, should be included in the working paper for providing overall understanding
of the audit. The audit plan, the nature, extent and timing (net) of auditing procedures performed
and the conclusions drawn from the evidence obtained should be recorded in working papers.
However, the extent of documentation is a matter of professional judgments.

In case of recurring audits, some working paper files may be classified as "permanent" audit files
as distinct from “current” audit files. Some of the documents of Permanent and Current working
files are as follows:
Permanent Working File
a. Legal and organizational structure
b. Legal documents, agreements and minutes
c. Evaluations control systems
d. Financial statements of previous years
e. Analysis of significant ratios and trends
f. Management letters issued
g. Communication with the retired auditor
h. Significant accounting policies and
i. Major audit observations of earlier years

Current Working File

a. Appointment correspondence
b. Minutes of board and general meeting
c. Audit planning and audit programme
d. Analysis of transactions and balances
e. Nature, extent and timing of audit procedures
f. Supervision and review of assistants
g. Communication with third parties
h. Correspondence with client
i. Letter of representation of confirmation from client
j. Financial information being reported on and the related audit reports

Working papers are the property of the auditor. Although portions of or extracts from the
working papers may be made available to the client at the discretion of the auditor.
The auditor should adopt appropriate procedures for maintaining the confidentiality and safe
custody of the working papers and for retaining them for a period sufficient to meet the needs of
the practice and in accordance with legal and professional requirements of record retention.

Importance of Working Paper

• It provides guidance to the audit staff with regard to the manner of checking.
• The auditor is able to fix responsibility on the staff member who signs each schedule
checked by him.
• It acts as evidence in the court of law when a charge of negligence is brought against
the auditor.
• It acts as the process of planning for the auditor so that he can estimate the time that
may be required for checking the schedules
Answer No. 10

Typical accounting transactions follow a defined cycle for any organization. For example, we
tend to view the transactions related to revenue to flow from an initial sale through to the
collection of the proceeds from the sale. The cycle concept helps the auditor visualize both the
income, expense and Statement of Financial Position accounts related to most day-to-day
transactions of the organization and thus provides a convenient way to organize accounting
transactions for audit testing and evaluation. Thus, the cycle concept presents a framework for
viewing the interrelationship between accounts affected by the same transaction or business
activity. We use the term cycle to refer to the processing of important transactions as these
transactions update all the related account balances associated with the transaction. The nature of
transactions varies with the organization, but most organizations process transactions that can be
classified into the following cycles:

• Revenue
• Purchase and payment of goods and services
• Payroll and related compensation
• Financing: debt and capital
• Capital Expenditure

The cycle approach is one way, but not the only way, to assist the auditor in focusing on all
important account balances surrounding a transaction to ensure that sufficient audit evidence is
gathered, evaluated, and used in reaching conclusions about the correctness of recorded balances.
The control objectives in the transaction cycle are the same as those developed in general
operation of organization. The auditor should determine that the design of the system and the
implemented control procedures ensure that:
• All recorded transactions have occurred.
• All of the transactions that took place are recorded.
• The transactions have been recorded accurately.
• The transactions have been recorded in the correct accounting period.
• The transactions have been recorded in the proper accounts.

Answer No. 11 (a)

Purchase Returns can be vouched as follow:
• Examine debit note issued to the supplier along with the credit note issued by the supplier
acknowledging the same.
• Cross verify the rates and other charges with the supplier’s original invoices and check
the calculation. Verify by reference to relevant corresponding record in good outward
book or the stores records.
• Examine in depth to eliminate the possibility of fictitious purchase returns for covering
bogus purchases recorded earlier when such returns outwards are in substantial figure
either at the beginning or end of the accounting year;
 • Cross-check with reference to original invoices any rebates in price or allowances if any
given by suppliers on strength of their Credit Notes.

Answer No. 11 (b)

Vouching procedure for Good sent out on sale or return basis is as follow:
• Check whether a separate memorandum record of goods sent out on sale or return basis is
maintained. The party accounts are debited only after the goods have been sold and the
sales account is credited;
• See that price of such goods is unloaded from the sales account and the debtor’s record.
Refer to the memoranda record to confirm that on the receipt of acceptance from each
party, his account has been debited and the sales account correspondingly credited.
• Ensure that the goods in respect of which the period of approval has expired at the close
of the year either have been received back subsequently or customers’ accounts have
been debited.
• Confirm that the stock of goods sent out on approval basis has been included in the
closing stock, if the period of approval had not expired till the close of the year lying with
the party.

Answer No. 11 (c)

Audit of amount due to subsidiary companies shall be done as follow:
• Examine whether the subsidiary company is authorized by its memorandum of
association to advance loan to its holding company.
• In the absence of such a power, see whether such power could be inferred from the other
objects of the company.
• Verify the interest rate and particulars of security, if any, furnished.
• Inspect the documents executed by the holding company.
• Verify the loan agreement and see that terms of loan have been duly complied with.
• Verify that the loan has been properly reflected in the Statement of Financial Position.

Answer No. 11 (d)

Audit of expenditure incurred for promotion of the product can be done as follow:
• The auditor should vouch the authority and accuracy of the transactions. He should read
the contract with advertisement agencies, promotional policies decided by the
management from the board minutes etc.
• He should check the amounts paid to the agencies from bank book. He should check the
accuracy for ascertainment of income tax withholding in accordance with the tax law
provisions if any applicable in this regard.
• He should check whether the unpaid amounts and accrued liability towards promotional
advertisement contracts had been duly provided for in the accounts.
• The provision for fringe benefit tax in regard to sales promotion expenditure must be
ascertained.
• The huge expenditure should not be treated as deferred revenue expenditure. According
to NAS, these are not intangible assets that may be carried over the periods of
accounting. These must be expensed with in the year in which these arise.
Answer No. 12

“Accounting estimate” means an approximation of the amount of an item in the absence of a

precise means of measurement. Accounting estimates are made in conditions of uncertainty and
involve the use of judgment. The use of reasonable estimates is an essential part of the
preparation of financial statements. Estimation requires revision when the circumstances on
which the estimation was based got changed. Estimation of accounting information is the
responsibility of the management. The auditor has to assess reasonableness of accounting
estimates made by the management.

Following are some of the examples of accounting estimates:

i. Allowances to reduce inventory and accounts receivables to their estimated realizable
value.
ii. Provision to allocate the cost of fixed assets over their estimated useful life–i.e.
depreciation.
iii. Accrued income.
iv. Provision for taxation.
v. Provision to meet warranty claims.
vi. Provision for retirement benefits in the financial statements of employers.

The auditor should obtain sufficient appropriate audit evidence as to whether an accounting
estimate is reasonable in the circumstances and, when required, is appropriately disclosed. The
auditor should adopt one or a combination of the following approaches in the audit of an
accounting estimate:
• Review and test the process used by management to develop the estimate;
• Use an independent estimate for comparison with that prepared by management;
• Review subsequent events which confirm the estimate made.

Reviewing and Testing the Process Used by Management

The steps ordinarily involved in reviewing and testing of the process used by management are:
• Evaluation of the data and consideration of assumptions on which the estimate is based;
• Testing of the calculations involved in the estimate;
• Comparison, when possible, of estimates made for prior periods with actual results of
those periods; and
• Consideration of management’s approval procedures.

Use of an Independent Estimate

The auditor may make or obtain an independent estimate and compare it with the accounting
estimate prepared by management. When using an independent estimate, the auditor would
ordinarily evaluate the data, consider the assumptions and test the calculation procedures used in
its development. It may also be appropriate to compare accounting estimates made for prior
periods with actual results of those periods.

Review of Subsequent Events

Transactions and events which occur after period end, but prior to completion of the audit, may
provide audit evidence regarding an accounting estimate made by management. The auditor’s
review of such transactions and events may reduce, or even remove, the need for the auditor to
review and test the process used by management to develop the accounting estimate or to use an
independent estimate in assessing the reasonableness of the accounting estimate.

Answer No. 13

Section 111 of the Company Act states the provision of appointment of auditor in following
ways:

1. The auditor of accompany shall be appointed, from amongst the auditors licensed to carry out
audit under the prevailing law, by the general meeting, subject to Chapter-18 in the case of a
public company, and, in accordance with the provision as contained in the memorandum of
association, articles of association or consensus agreement, if any failing such provision, by
the general meeting in the case of a private company; and his/ her name shall be forwarded to
the Company Registrar Office within fifteen days from the date of such appointment.
Provided, however, that the board of directors may appoint the auditor prior to the holding of
the first annual general meeting,

2. The auditor appointed pursuant to Sub-Section (1) shall hold office only until the next annual
general meeting.

3. No auditor or his/her partner or ex-partner or employee or ex-employee shall be appointed as

auditor for more than three consecutive terms to perform the audit of a public company.
Provided, however, that this restriction shall not apply to any partner who ended partnership
or any employee who left the service of such auditor three years before.
Answer No. 14
Section 61 of Company Act prohibits on purchase by company of its own shares:

1. No company shall purchase its own shares (buy-back) or lend money against security of its
own shares.
2. Notwithstanding anything contained in Sub-Section (1), in the following circumstances, a
company may buy back its shares out of its free reserves available for being distributed as
dividends, by giving information to the Office:
a. Where the shares issued by the company are fully paid up;
b. Where the shares issued by a public company have been listed in the Securities Board;
c. Where the buy-back of shares is authorized by the articles of association of the concerned
company;
 d. Where a special resolution has been adopted at the general meeting of the concerned
company authorizing the buy-back;
e. Where the ratio of the debt owed by the company is not more than twice the capital and
general reserve fund after buy-back of shares;
f. Where the value of shares to be bought back by a company is not more than twenty
percent of the total paid up capital and general reserve fund of that company;
g. Where the buy-back of shares is not in contravention of the directives issued by the
Company Registrar Office in this respect.
3. A resolution to be presented at the general meeting pursuant to Clause (d) of Sub-Section (2)
shall state the following matters:
a. The reason and necessity for the buy-back of shares;
b. A statement of the evaluation of possible impacts of the financial situation of the
concerned as a result of the buy-back of shares,
c. The class and number of shares intended to be bought back;
d. The maximum or minimum amount required to buy back shares as referred to in Clause
(c) and financial source of such amount;
e. The time limit for the buy-back of shares;
f. The mode of the buy-back of shares;
g. Such other necessary matters as specified by the Office and as required to be disclosed
under the prevailing law, in respect of the buy-back of shares.
4. Where a special resolution as referred to in Sub-Section (3) is adopted by the general
meeting, the concerned company may buy back its shares in any of the following manners
within a period of twelve months of the adoption of that resolution:
a. Purchasing from the stock exchange;
b. Purchasing from the concerned employee of the company the shares allotted to
him/her,
c. Purchasing from the existing shareholders on a proportionate basis.
5. Where a company buys back its own shares pursuant to Sub-Section (4), it shall file with the
Company Registrar Office a return containing the number of shares bought back, amount
paid for the same and other necessary details within thirty days of the date of such buy-back.
6. There shall be established a separate capital redemption reserve fund, to which a sum equal
to the nominal value of the shares bought back pursuant to Sub-Section (4) shall be
transferred; and the amount of such fund shall be maintained as if it were the paid-up capital.
7. Where a company buys back its shares pursuant to Sub Section (4), it shall cancel the shares
so bought back within one hundred twenty days of the date of such buy-back.
8. Once a company buys back any class of shares pursuant to this Section, the company shall
not re-issue the shares of that class prior to the expiration of two years after such buy-back,
except for the issue of bonus shares or payment of its liability.
9. Notwithstanding anything contained elsewhere in this Section, no public company shall buy
back its shares in a manner that such minimum number of shareholders or minimum paid-up
capital as required to be maintained by that company becomes less or lower.
10. Other conditions where a company cannot buy back its shares and other terms required to be
complied with in the buying back of its shares shall be as prescribed.
Answer No. 15

There are certain special features of co-operative audit to be borne in mind other than general
process of audit involved in audit work (such as checking of posting, ascertainment of
arithmetical accuracy, vouching, verification of assets and liabilities and final scrutiny of
financial statements).

Some of the special features are:

a. Examination of overdue debts, whether classified properly as loan not overdue, loan
overdue within 12 months and loan overdue for more than 12 months and whether proper
provision for doubtful debts has been made.
b. Ensure whether overdue interest has not been capitalized in outstanding loan.
c. Regarding valuation of assets and liabilities, there are no specific provisions or
instructions under the Act and Rules and thus general principles of accounting and
auditing standards shall be adopted.
d. Adherence to cooperative principles shall be ascertained by the auditor in general, how
far the objects, for which co-operative organization is established, have been achieved.
The assessment should not necessarily be in terms of profit but in terms of bestowing
benefits to the members.
e. Observations of provisions of acts and rules and point out the infringement with
provisions therein. The financial implications of such infringements should be properly
assessed and reported by the auditor.

Answer No. 16

The scope of audit has been extended to cover an economy, efficiency and effectiveness (3Es)
aspects which are commonly known as performance audit or Value for money audit.
International Organization of Supreme Audit Institutions (INTOSAI) describes performance
audit as an independent examination of the economy, efficiency and effectiveness of government
undertakings, programs or organizations, with due regard to economy, and the aim of leading to
improvements.

“Economy” means the acquisition of the appropriate quality and quantity of human, financial,
physical and information resources at the appropriate times and at the lower cost. It is
minimizing the cost of resources used for an activity (input), having due regard to appropriate
quality.

“Efficiency” means the use of human, financial, physical and information resources such that the
output is maximized for any given set of resource inputs, or input is minimized for any given
quantity and quality of output.

“Effectiveness” means the achievement of the objectives or other intended effects of activities. It
addresses whether policy objectives or goals have been met and whether this can be attributed to
the policy pursued.
Performance audit is the outcome of the important efforts directed to improve the system of
management to ensure genuine output from resources employed. The concept of performance
auditing emerged in response to:

• increasing demand for information on efficiency and economy in managing resources

and the effectiveness with which objectives are met;
• need to determine whether
➢ the operations of audit entities were conducted in a way that ensures the best
possible use of resources or considering the 3Es;
➢ officials in the public sector have met their accountability obligations;
➢ reporting on performance is credible and adequate.

Answer No. 17

Audit assertions related to Presentations and Disclosures are as follow:

1. Occurrence: Transactions and events disclosed in the financial statements have occurred
and relate to the entity.
2. Completeness: All transactions, balances, events and other matters that should have been
disclosed have been disclosed in the financial statements.
3. Classification and Understandability: Disclosed events, transactions, balances and other
financial matters have been classified appropriately and presented clearly in a manner
that promotes the understandability of information contained in the financial statements.
4. Accuracy & Valuation: Transactions, events, balances and other financial matters have
been disclosed accurately at their appropriate amounts.

Answer No. 18

Analytical procedures are the processes of evaluating financial information through trend, ratio
or reasonableness of data in relation to other financial and non-financial data. Analytical
procedures also encompass such investigation as is necessary of identified fluctuations or
relationships that are inconsistent with other relevant information or that differ from expected
values by a significant amount. In this case, auditors perform data analysis to examine whether it
is consistent with other relevant information and whether the fluctuation is within their
expectation. If the auditors identify any irregular fluctuation or find that data relationship is
inconsistent with their expectations or other information, they will investigate further on the
discrepancy that exists. In this case, the investigation might require them to perform further
substantive tests, such as inquiry management about the course of variance and inspecting the
supporting document on management’s explanation.

Various methods may be used to perform analytical procedures. These methods range from
performing simple comparisons to performing complex analyses using advanced statistical
techniques. Analytical procedures may be applied to consolidated financial statements,
components and individual elements of information.
Following are the basic types of analytical procedure.

1. Ratio Analysis
Ratios are expressed as one financial statement data in relation to another. For example,
current ratio is calculated by dividing current assets with current liabilities. Auditors use
Ratio analysis in their audit to compare ratios for the current year with ratios for a prior
year, Budget or an industrial average. Any material differences in the ratios must be
explained by the auditors.

2. Trend Analysis
Trend analysis refers to the comparison of a current balance with a previous year's
balance. An auditor may choose to use either the diagnostic or casual approach. The
diagnostic approach is used to evaluate if a balance of a current account deviates
significantly from the trend established in the previous year's balances for that account. In
the casual approach, the auditor calculates a balance expected for the account then
compared to the actual amount.
3. Reasonable Tests
Non-financial data for the current period is used to calculate an expected amount for the
account balance. This procedure does not use previous period events; rather, it uses
operating data for the period under consideration for the audit. These procedures are
therefore more applicable to income statements because data for current period may be
easier to attain than previous years' data. The calculated amount is then used to check for
reasonableness in the account balances under audit.

4. Model-Based Procedures
Model-based procedures use client-operating data and external data, such as industry and
economic information, to predict account balances for items under audit. These models
also use financial and non-financial data as well. The most commonly used procedure is
regression analysis, which is used for income statements using monthly data for the past
three years. The 36 monthly observations are used to establish a relationship that is used
to predict current account balances.

Answer No. 19

Written statement by management provided to the auditor to confirm certain matters or to

support other audit evidence is known as Written Representation. Written representations in this
context do not include financial statements, the assertions therein, or supporting books and
records. Written representations are necessary information that the auditor requires in
connection with the audit of the entity’s financial statements. Accordingly, similar to responses
to inquiries, written representations are audit evidence. Written Representations are an important
source of audit evidence. If management modifies or does not provide the requested written
representations, it may alert the auditor to the possibility that one or more significant issues may
exist. Although written representations provide necessary audit evidence, they do not provide
sufficient appropriate audit evidence on their own about any of the matters with which they deal.
Furthermore, the fact that management has provided reliable written representations does not
affect the nature or extent of other audit evidence that the auditor obtains about the fulfillment of
management’s responsibilities, or about specific assertions. Thus, ABC and Associates can use
written representation from PKM Bank Ltd. as audit evidence.

The auditor shall request written representations from management with appropriate
responsibilities for the financial statements and knowledge of the matters concerned. Those
individuals may vary depending on the governance structure of the entity, and the relevant law or
regulation; however, management (rather than those charged with governance) is often the
responsible party. Written representations may, therefore from the entity’s chief executive officer
and chief financial officer, or other equivalent persons in entities that do not use such titles. In
some circumstances however, other parties, such as those charged with governance, are also
responsible for the preparation of financial statements.

Answer No. 20

Corporate governance broadly refers to the mechanisms, processes and relations by which
corporations are controlled and directed. A governance structure identifies the distribution of
rights and responsibilities among different participants in the corporation (such as the board of
directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and
includes the rules and procedures for making decisions in corporate affairs. Corporate
governance includes the processes through which corporations' objectives are set and pursued in
the context of the social, regulatory and market environment. Governance mechanisms include
monitoring the actions, policies and decisions of corporations and their agents.

Internal auditing activity as it relates to corporate governance has in the past been generally
informal, accomplished primarily through participation in meetings and discussions with
members of the Board of Directors. Corporate governance is the policies, processes and
structures used by the organization’s leadership to direct activities, achieve objectives, and
protect the interests of diverse stakeholder groups in a manner consistent with ethical standards.
The internal auditor is often considered one of the "four pillars" of corporate governance, the
other pillars being the Board of Directors, management, and the external auditor.

A primary focus area of internal auditing as it relates to corporate governance is helping the
Audit Committee of the Board of Directors (or equivalent) perform its responsibilities
effectively. This may include reporting critical management control issues, suggesting questions
or topics for the Audit Committee's meeting agendas, and coordinating with the external auditor
and management to ensure the Committee receives effective information. In recent years, the
advocacy for assigning internal auditor for formal evaluation of corporate governance,
particularly in the areas of board oversight of enterprise risk, corporate ethics, and fraud.
PAPER 3: CORPORATE AND OTHER LAWS
Questions:

NEPAL CHARTERED ACCOUNTANT ACT, 2053 AND RULES 2061

Question No. 1
Mr. Lokesh carries out audit of Laxmi Investment Pvt. Ltd. without obtaining professional certificate
from Institute of Chartered Accountants of Nepal. What is the procedure to take action against him and
what penalty may be imposed to him? Answer with the relevant provision of Nepal Chartered
Accountants Act 2053.
COMPANIES ACT, 2063
Question No. 2
Excel Limited (EL) is due to conduct its first annual general meeting in Mangsir, 2077. EL wants to
appoint R. H. & Associates, Chartered Accountants, as the auditors of the company for the next term, in
place of the existing auditors, J. B. & Associates, Chartered Accountants.
Under the Companies Act, 2063:
(a) Identify who has the right to appoint auditors of Excel Limited.
(b) What will be the term of the auditors appointed in the first annual general meeting of Excel Limited?
Briefly state the situations under which the auditors may be removed from his office before the
completion of audit of the company.

Question No. 3
Mr. Rikesh and Mr. Prabesh wants to incorporate a new company for carrying trading business of
garments. The proposed name of the company is ‘Himalayan Traders Pvt. Ltd.’ and applied to the
company's registrar's office (CRO) for its registration. Few days after filing the application, the CRO
refused its registration. Now in this context, answer the following questions in the light of the Companies
Act, 2063.
i) State the circumstances under which the CRO may refuse registration of the prospective company
'Himalayan Traders Pvt. Ltd.'.
ii) Have the promoters of the prospective company 'Himalayan Traders Pvt. Ltd.' has any legal remedy
against such refusal of registration?

Question No. 4
Asian Techno Limited (ATL), a listed company, has two classes of ordinary shares i.e. Class A and Class
B. In order to attract foreign investors, the directors intend to issue a new class of ordinary shares i.e.
Class C, with no voting rights. Currently ATL’s memorandum and articles of association do not contain
such class of shares. Under the provisions of the Companies Act, 2063 briefly describe the steps which
the directors should take prior to issuance of Class C shares.
(Procedure for issuance of shares is not required)

SECURITIES ACT, 2063

Question No. 5
What are the various types of securities business that can be carried out in accordance with section 63 of
Securities Act, 2063?

Question No. 6
Write short notes on formation of Nepal Securities Board in accordance with Securities Act, 2063.
BANKS AND FINANCIAL INSTITUTIONS ACT, 2073
Question No. 7
The directors of Kamal Pokhari Bank Ltd. intend to please the shareholders of the bank by ensuring that
they distribute all the profits of the bank as dividends without any allocation to general reserve. They plan
to do that, so that shareholders may vote to retain them in office. The bank’s paid up capital is less than its
reserve. As the Company Secretary of Kamal Pokhari Bank Ltd., with knowledge of the Bank and
Financial Institutions Act, 2073, advise the bank on maintaining general reserve funds.
Question No. 8
Mr. Rajaram has been appointed as a director of Himal Bank Ltd. since last year. Due his personal
reasons he wants to discontinue the post of director. You being the advisor to Mr. Rajaram, state the
circumstance in which a director shall not continue to hold the office of director as per Banks and
Financial Institution Act, 2073?
NEPAL RASTRA BANK ACT, 2058
Question No. 9
Function, duties of powers of governor is mentioned in section 30 of Nepal Rastra Bank Act, 2058. State
any eight functions, duties and powers of the governor.
INSURANCE ACT, 2049
Question No. 10
East Nepal Ltd. has insured its property and assets with Progressive Insurance Ltd. since years. On the
due date of renewal of the policies, the bank account signatories of East Nepal Ltd. were out of the
country and hence the company was not in a position to pay the premium on time. Advise the Finance
Manager of East Nepal Ltd. as to whether he can get the policies renewed without paying the premium on
the due date.

INDUSTRIAL ENTERPRISES ACT, 2076

Question No. 11
Ms. Rima Pokharel wants to register an industry along with her friend Ms. Pooja Ale. She wants to know
the benefits to be provided under Industrial Enterprises Act, 2076 that will only be provided to industry
under the ownership of woman entrepreneurs.

Question No. 12
What are the functions, duties and powers of One Stop Service Centre under Industrial Enterprises Act,
2076?

LABOUR ACT, 2074

Question No. 13
Mr. Dipak Baskota, single shareholder of Jupiter Capital Pvt. Ltd. is facing shortage of employees to run
his organization in easy manner. He is thinking for appointment of MBA college students to work as an
Intern as an Apprentice in this company. In this regards you are required to advise him on the following
queries according to the provisions of Labour Act, 2074
a) What are the conditions to be fulfilled before hiring an Intern?
b) Whether Intern shall be treated as labour ?
c) Whether Intern can be employed overtime?
d) What is the provision regarding healthy and safety arrangement of Intern?
Question No. 14
Employment contract is between the employer and the employee. You are required to state the duties of
the employer towards the employees in respect of occupational safety and health.

BONUS ACT, 2030

Question No. 15
Mr. Roshan Mahat, a worker with Hamro Technical Services Ltd. is unsatisfied with the bonus calculation
made by the General Manager of the Company. Mr. Roshan wants to know the procedure for the
settlement of the dispute between him and the management of the company. Advise.

NEGOTIABLE INSTRUMENTS ACT, 2034

Question No. 16
In view of the provisions of the Negotiable Instruments Act, 2034 comment on the type and validity of
each of the following instruments signed by Rahul:
(i) Niraj please pay to Manish Rs. 100,000.
(ii) Niraj, I shall be highly obliged if you make it convenient to pay Rs. 100,000 to Manish.
(iii) I acknowledge myself to be indebted to Niraj in Rs. 100,000 to be paid on demand, for value
received.
(iv) I promise to pay Manish or order Rs. 100,000 six days after Niraj’s death.

Question No. 17
A delivers a bill of exchange to C under which B was ordered to pay C the sum of one lakh rupees. C
endorses the bill to D. When D presents it before B for acceptance, B dishonors the same. When the
instrument has been noted or protested for non-acceptance, Mr. X who not being a party already liable
thereon, with the consent of the D, accepts the bill for the honor of B. Can Mr. X be held liable on the
instrument? Assume that Mr. X paid the said amount to Mr. D. Can he recover the amount from any party
to the instrument? Discuss with the relevant provision of the Negotiable Instrument Act, 2034.

SOCIAL WELFARE ACT, 2049

Question No. 18
What is social welfare programme? What are the areas in which government of Nepal may operate social
welfare programme relating to social welfare activity and social service?

WTO AND NEPAL LAWS

Question No. 19
What are the major objectives of world trade organization?

MULUKI DEWANI SAMHITA, 2074

Question No. 20
Mr. Samir gave a loan of Rs. 100,000 to Mr. Hari carrying a mark-up of 10% per annum for one year. Mr.
Amir and Mr. Roshan agreed to act as Mr. Hari’s sureties. In the light of Muluki Dewani Samhita, 2074
determine, along with reasons, how much each surety would be liable (in Rupees) in the following
independent scenarios:
(i) Mr. Hari defaulted and Samir being aware of weak financial position of Mr. Roshan, asked Mr. Amir
and Mr. Roshan to pay 75% and 25% of the default respectively.
(ii) Mr. Samir without discussing with Mr. Roshan released Mr. Amir from the suretyship. Mr. Hari
defaulted and Mr. Samir asked Mr. Roshan to pay the entire amount.
Answers
Answer No. 1
As per sec 41(1) of Nepal Chartered Accountant Act, 2053, a person, who carries out audit without
obtaining a professional certificate, pursuant to this act, shall be liable of punishment with a penalty of
maximum two thousand rupees or with an imprisonment for a maximum period of three months or with
both.
Further, as per sec 14(1) of Nepal Chartered Accountant Act, 2053, a Disciplinary Committee will be
constituted to recommend the Council to take necessary actions against any member. However, as per sec
41(6) of Nepal Chartered Accountant Act, 2053, where such complaints are made to the council, against
any member pursuant to Section 35, the cases other than those to be dealt with under Section 14, shall be
instituted in the concerned High Court.
In the given case, disciplinary proceedings under section 14 of the act shall be carried only against the
member. Mr. Lokesh is not member of Institute of Chartered Accountants of Nepal.
Hence, the case shall be instituted in concerned high court against him.

Answer No. 2
(a) Following authority have the right to appoint auditors for excel limited, after obtaining consent from
the proposed auditor:

(i) General Meeting

The auditor of the company shall be appointed by the general meeting, from among the recommended
names of potential auditors by the audit committee of the public company.
(ii) Board of directors

The board of directors may appoint the auditor prior to the holding of the first annual general
meeting.
(iii) Office of Company Registrar

The Office of Company Registrar may, at the request of the board of directors of the company,
appoint another auditor in any of the following circumstances

→ Where the annual general meeting of a company fails to appoint an auditor for any reason; or

→ Where the annual general meeting itself cannot be held; or

→ Where the auditor appointed pursuant to this Act ceases to continue his/her office for any
reason.
 (b) In accordance with sub section (2) of section 111, auditor of the company shall hold office only
until the next annual general meeting. Here, the auditors appointed in the first annual general
meeting of Excel Limited shall retire on the conclusion of the next annual general meeting.

Auditor shall not be removed pending the completion of audit of accounts of financial year for which he
was appointed. Following are the grounds in which auditor of the company may be removed before
completion of audit of accounts:-
i) Auditor breaches the code of conduct of auditors or;
ii) Does any act against the interest of the company which has appointed him as the auditor or;
iii) Commits any act contrary to the prevailing law

Answer No. 3
i) Section 6(1) of Companies Act, 2063, company registrar office may refuse to register a company in
any of the following circumstances:

a) If the name of the proposed company in identical with the name by which a company in existence
has been previously registered or so resembles the name of that company as it might cause
misleading,

b) If the name or objective of the proposed company is contrary to the prevailing law or appears to
be improper or undesirable in view of public interest, morality, decency, etiquette etc. or reflects
criminal motive ,

c) If the name of the proposed company is identical with the name of a company of which
registration has been cancelled pursuant to this Act or that of a company which has been insolvent
under the prevailing law or so resembles such name as it might cause misleading and a period of
five years shall not expired after such cancellation of registration or insolvency,

d) If the requirements for the incorporation of a company under this Act are not fulfilled.

ii) Office of Company Registrar shall inform the applicant within 15 days from the date of application
for registration along with reasons; if refusal is due to circumstances as mentioned in sec 6(1). Where
the promoters/applicants are unsatisfied with the refusal for registration, such person may file a
complaint at the commercial bench of court as prescribed by Government of Nepal within 15 days of
refusal notice.

Answer No. 4
According to Section 30 of the Companies Act, 2063, the company may issue various classes of shares
with different rights attached thereto, by making provisions to that effect in its memorandum of
association and articles of association.
Except as otherwise provided in the articles of association of the company, approval of the shareholders
of any particular class shall be required to make any alteration in the rights of those shareholders of that
class. Provided, however that, no alteration may be made in the rights of the shareholders of any
particular class in a manner to adversely affect the rights of the shareholders of any other class.
In the given case, there is no alteration in rights of existing shareholders since the class C shares will
become fresh class of shares. Further, the issuance of Class C with no voting rights shares does not
prejudice the rights of existing class of shareholders.
Hence, ATL can only issue new class C shares only if it is permitted by the memorandum and articles of
association. Since ATL’s articles and memorandum lack any such classification, the directors are first
required to alter the provisions of ATL’s articles of association and memorandum of association by
passing a special resolution. After, making provision of class C shares, ATL will be allowed to issue new
class of ordinary shares i.e. class C. ATL shall also follow the provision to issue new ordinary shares as
prescribed by the Companies Act, 2063.
Answer No. 5
As per section 63 of Securities Act, 2063, the securities business shall be divided into the following
types:-
i) Securities brokerage,

ii) Securities trade,

iii) Issue and sales management,

iv) Investment management,

v) Investment consultancy service,

vi) Collective investment fund management,

vii) Securities registration or securities central deposit service or custodial service,

viii) Service relating to the settlement of the account of securities transactions,

ix) Market maker,

x) Such other business as may be specified by the board to be a securities business.

Answer No. 6
The Securities Board to be established under Securities Act, 2063 shall consist of following members:
a) A person appointed by the Government of Nepal -Chairperson

b) Joint Secretary, Ministry of Finance -Member

c) Joint Secretary, Ministry of Law, Justice and Parliamentary Affairs -Member

d) Representative, Nepal Rastra Bank -Member

 e) Representative, Institute of Chartered Accountants of Nepal -Member

f) Representative, Federation of Nepalese Chambers of Commerce and Industries -Member

g) A person nominated by the Government of Nepal from amongst the experts who have obtained at
least master's degree in economics, management, finance, commerce or law from a recognized
university and gained at least seven years of experience in stock exchange, management, capital
market development, finance and economic sector -Member

Provided however that,

→ The tenure of office of the chairman shall be 4 years.

→ The tenure of office of the nominated expert member shall be 3 years.

→ The concerned organization shall, in nominating its representative pursuant to Clauses (e)
and (f) of Sub-section (2), nominate a person who has obtained at least bachelor's degree
and gained at least 7 years of experience in accounts, industry, commerce, finance,
banking, economics or law matters.

→ If the Board thinks it necessary, it may invite any native or foreign expert, adviser to
attend its meeting as an observer.

Answer No. 7
In accordance with section 44 of Banks and Financial Institutions Act, 2073, a bank or financial
institution must maintain a general reserve fund. The BFI’s must credit at least 20% of the net profits of
each fiscal year to such fund until the amount of such fund doubles the paid-up capital and after such fund
doubles the paid-up capital at least 10% of the net profits shall be credited to such fund in the later fiscal
years. The amount credited to the general reserve fund may not be invested or transferred to any other
head without the prior approval of the Rastra Bank.
Kamal Pokhari Bank Ltd. will violate Section 44 of the Banks and Financial Institutions Act, 2073, by
paying out all its profits to its shareholders. By virtue of the provision above, every licensed bank must,
out of its annual net profits and before dividends are declared, transfer not less than 20% of its profits to

its reserve fund until such fund doubles the paid up capital of the Kamal Pokhari Bank Ltd. Further,
Kamal Pokhari Bank Ltd. shall credit 10% of its net profits to general reserve fund after such fund
doubles the paid up capital of the bank.
Hence, Kamal Pokhari Bank Ltd., shall compulsorily allocate 20% of net profit of current financial year
to general reserve fund before distribution of dividends to the shareholders of the Bank.
Answer No. 8
As per section 19 of Banks and Financial Institutions Act, 2073, no person shall continue to hold the
office of a director in a bank or financial institution, in any of the following circumstances:-
a) Not having qualification pursuant to section 16 or 17 or not being qualified under section 18,
 b) If shareholders holding at least 51% share of a group, passes a resolution in the general meeting
to remove the director who was nominated as a director from the same group.

Explanation: For the purpose of this section "Group" means group of promoter and public shareholders.
c) If the resignation tendered by the director is accepted,

d) If he does any act prohibited by this act or by Rastra Bank from being done by as a director,

e) If the Rastra Bank directs to remove the director for being disqualified to remain in the post of
director because of his activity against the interest of depositor or bank or financial institution.

In the given case, Mr. Rajaram can tender the resignation to the company board citing personal reasons
for not being able to continue in the post of director. On acceptance by the company, Mr. Rajaram will be
released from the post of director and discontinue to hold the office.
Answer No. 9
The functions, duties and powers of the Governor as per section 30 of Nepal Rastra Bank Act, 2058 shall
be as follows:-
a) To implement the decisions made by the Board;

b) To operate and manage the Bank;

c) To systematize the functions to be carried out by the Bank;

d) To represent and cause to represent on behalf of the Bank in international

organizations and associations;

e) To implement and cause to implement the policies relating to monetary and foreign
exchange matters;

f) To formulate necessary policy on rates of interest for deposits and loan with
commercial banks and financial institutions;

g) To formulate necessary policies with regard to the rates of interest to be paid by

commercial banks and financial institution on deposit and loan or the rate of interest
to be charged by them on deposits and loan;

h) To formulate necessary policies relating to liquidity to be maintained by commercial

banks and financial institutions;

i) To make necessary arrangement with regard to the basis, amount, methods,

conditions and duration of compulsory deposit to be maintained by commercial banks
and financial institutions, and its use;

j) To fix the terms and conditions relating to adequacy of the capital fund of
commercial banks and financial institutions;
 k) To take decision with regard to the procedures and terms and conditions to be
followed while purchasing and selling gold and other precious metals;

l) To fix the charge on the services to be provided by the Bank;

m) To take decision for opening and closing branch offices and other offices of the Bank
as may be necessary;

n) To establish and close the agency of the Bank;

o) To make necessary arrangement for development and operation of information

system of the Bank;

p) To make necessary arrangement for supervision of commercial banks and financial

institutions;

q) To take decision with regard to revocation of the license provided to commercial

banks and financial institutions;

r) To take decisions on any other matters subject to the powers delegated by the Board
of Directors.

(Write any eight of them)

Answer No. 10
Section 27 of Insurance Act, 2049, prescribed that, no Insurer shall hold the insurance risk of any
category of Insurance Business, until it receives the premium of the Insurance to be obtained by it. It shall
be deemed that the Insurer has undertaken the Insurance Business only after receiving the Insurance
premium by it for holding the risk.

Provided that, if any practical difficulty arises due to any reason for paying the amount, this section shall
not be deemed to be prohibited to issue an Insurance Policy on the guarantee of a bank or guarantee of
Nepal Government for to the payment of the outstanding amount within a specified time.
In the given case, East India Ltd. has not paid the insurance premium in stipulated time for renewal.
Further, the company has not provided bank guarantee or Nepal government guarantee for the payment of
premium in stipulated time in case of practical difficulty.
Hence, it is advised to renew the insurance policy by furnishing bank guarantee in the name of
progressive insurance ltd. citing the bank account signatories is out of the country.
Answer No. 11
As per section 27 of Industrial Enterprises Act, 2076, following are the additional benefits and
concessions to be provided to industries registered under the ownership of female entrepreneurs:
a) 35% exemption in existing industry registration fees where the industry is registered under
the sole ownership of female entrepreneur,
 b) 20% exemption in existing rate of registration of industrial property used inside the industries
where the industry is registered under the sole ownership of female entrepreneur,

c) Female entrepreneur shall be given priority while allocating the areas inside industrial estate
or industrial area.

d) If an industry with the sole ownership of female entrepreneur request loan for exporting
produced goods, export finance will be provided to the industry depending upon the financial
status of the transaction of the industry through banking channel from the “Financing Female
Entrepreneurs Fund”.

Answer No. 12
As per section 38 of Industrial Enterprises Act, 2076, following are the function, duties and powers of one
stop service centre:
a) To carry out tasks related to the administration of registration, approval, renewal, transaction
approval, capacity enhancement and cancellation of a company (except insolvency),

b) To Perform activities related to approval of foreign investment as per existing law,

c) To Perform activities related to labor approval and work agreement as per existing law,

d) To Perform activities related to visa as per existing law,

e) To evaluate IEE and EIA under existing legislation,

f) To act as a focal point for basic essentials for the operation of an industry,

g) To perform activities related to approval of foreign currency exchange in accordance with

prevailing law,

h) To provide permanent accounting number (PAN) as per prevailing legislation,

i) To ease the operation of bonded warehouse,

j) To perform various activities in order to ease the industrial business,

k) To perform delegated functions, rights and duties of Board,

l) To coordinate activities to provide approval for excavation and related activities for
industries if required,

m) To accept the required documents for industry registration via electronic medium and
develop an electronic system to monitor works between the authorities,

n) To provide necessary coordination and providing land above the ceiling required for
industries,

o) To provide approval on import or refer so to the concerned authority if required.

 p) To establish and operate the investment portal and provide investment related notifications
and information via same,

q) To implement the directives and decisions issued by the Ministry and Board.

r) To provide such other activities as notified by Government of Nepal in Nepal Gazette.

Answer No. 13
a) Any enterprise may, by making an agreement with any educational institute, employ any person
as an apprentice in accordance with the approved curriculum of such an institute.

Provided that if the person is employed contrary to the approved curriculum, he or she shall be deemed to
be a labour in the regular employment
b) The apprentice referred to in section 16(1), shall not be deemed to be a labour for the purpose of
the labour act.

c) While employing an apprentice as an Intern, he or she shall not be engaged in work for more than
eight hours a day and forty-eight hours a week. Hence, Intern cannot be employed overtime by
the company.

d) The provisions relating to occupational health and safety shall apply to the apprentices as if they
were labours. Where an apprentice meets with an accident in the course of performing the work
of the enterprise, the enterprise shall, unless otherwise agreed between the enterprise and the
educational institute, have medical treatment of such an apprentice, and provide compensation to
him or her if he or she suffers grievous hurt, as if he or she were a labour.

Answer No. 14
Following are the duties of employers towards the workers in respect of Occupational Safety and Health,
which are as follows:
i) Ensure safe environment by making appropriate safety and health provisions at the
workplace;

ii) Make necessary provision for the use, operation, storing or shifting of chemical, physical
or bio-degradable material or equipments so that the safety and health of the workers are
not affected adversely;

iii) Provide necessary information, notice or training relating to the safety and health to the
workers;

iv) Provide necessary training and information in an appropriate language to the workers in
relation to the equipments and use or operation of chemical, physical or biodegradable
material for the work;

v) Make proper arrangement for the safe entry and exit from the workplace; and
 vi) Provide necessary personal safety equipments to the workers.

Answer No. 15
Section 16 of Bonus Act, 2030, prescribes the procedure for settlement of bonus dispute between
employees and management with respect to bonus payable. Following are the procedure for bonus dispute
settlement:
Resolving dispute by negotiations in presence of Labour Office {Sec 16(1)}
If any dispute arises between employee and management with respect to the bonus to be payable under
this act, the Labour Office shall resolve such dispute by negotiations having invited both the parties
Resolving dispute on the basis of documents and statements by Labour Office {Sec 16(2)}
If the dispute could not be resolved by negotiations pursuant to section 16(1), the Labour Office shall ask
to the concerned enterprise and employees to produce necessary documents and statements of accounts
and shall give a decision on the basis of such documents and statements.
Appeal to Labour Court if dissatisfied with decision of Labour Office
The party dissatisfied with the decision of Labour Office made pursuant to section 16(2), may appeal to
the Labour Court within 35 days of receipt of such notice and the decision made by the Labour Court
shall be final.

Answer No. 16
(i) It is a valid bill of exchange as it contains an unconditional order to pay.

(ii) It is in the nature of bill of exchange but it is not a valid bill of exchange as it contains only
request to pay and not an order to pay.

(iii) It is a valid promissory note containing all the essential elements.

(iv) It is a valid promissory note. It is not considered to be conditional, as it is certain that Niraj
will die, though the exact time of his death is uncertain.

Answer No. 17
As per section 92 of Negotiable Instruments Act, 2034, when a bill of exchange has been noted or
protested for non-acceptance or for better security, any person not being a party already liable thereon
may, with the consent of the holder, by writing on the bill accept the same for the honor of any party
thereto.
Further, as per section 94 of Negotiable Instruments Act, 2034, an acceptor for honour binds himself to all
parties subsequent to the party for whose honor he accepts to pay the amount of the bill, if the drawee
does not pay at its maturity date and such dishonour has been protested by the notary public.
The acceptor for honour is entitled to recover the amount paid by him from the party for whose honour
the bill was accepted; and from all the parties prior to such party (for whom acceptance for honour is
made).
But, an acceptor for honour is not liable for the bill of exchange, if such bill of exchange is not presented
to him.
In the given case, Mr. X can be held liable on the instrument being the acceptor for honour. Since, Mr. X
had paid the said amount to Mr. D, he may recover from Mr. B and all prior parties are liable to him.
Answer No. 18
Government of Nepal, by means of different activities relating to the social welfare work, to support the
overall development of the country may operate the social welfare programme through the concerned
Ministry and Social organizations and institutions.
Government of Nepal may operate special programmes, relating to the social welfare activity and social
service, in the following matters:
a) To serve interest and render welfare to the children, old age, helpless or disabled people.

b) To foster participation in development and to promote and protect the welfare, rights and
interest of the women.

c) To rehabilitate and help to lead a life of dignity to the victims of social mischief's and also to
juvenile delinquency, drug addicts and similar people involved in other kind of addictions.
d) To help to lead a life with dignity to the jobless, poor and illiterate people.
e) To manage religious places and the activities of the trust Guthi institutions.
f) To take effective management and actions for the welfare of the backward communities and
classes.

Answer No. 19
Following are the important objectives of world trade organization:
a) To improve the standard of living of people in the member countries.
b) To ensure full employment and broad increase in effective demand.
c) To enlarge production and trade of goods.
d) To increase the trade of services.
e) To ensure optimum utilization of world resources.
f) To protect the environment.
g) To accept the concept of sustainable development.
Answer No. 20
(i) When two or more persons are co-sureties for the same debt or liability, either jointly or severally, in
the absence of any contract to the contrary, they are liable, as between themselves, to pay an equal
share of the whole debt, or of that part of it which remains unpaid by the principal debtor. The
Creditor shall not have power to increase or decrease the liabilities of co-sureties on its own.

Accordingly, Samir does not have power to decrease the liability of Mr. Roshan citing the weak
financial position and increase the liability of Amir. The total liability payable after one year will be
divided in ratio of 50:50 and not 75:25. Amir and Roshan would be liable for Rs. 55,000 each since
the total liability payable Rs.1,10,000.
(ii) Where there are co-sureties, a release by the creditor of one of them does not discharge the other;
neither does it free the surety so released from his responsibility to the other sureties. When one
surety pays more than his share to the creditor, he has right of contribution from the co-sureties, who
are equally liable to pay. The Creditor shall not have power to increase or decrease the liabilities of
co-sureties on its own.

Accordingly, Mr. Amir and Mr. Roshan will still be liable for Rs. 55,000 each. Mr. Roshan will not
be liable to pay the entire amount unless Mr. Amir is insolvent. Although, Mr. Roshan had paid the
entire liability, he has right to recover Rs. 55,000 from Mr. Amir.