Group 1

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

Group - I
June 2022
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
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revision test paper. In case students need any clarification, creative
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test papers, or any error or omission in this revision test papers, they
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RTP CAP II June 2022 ©The Institute of Chartered Accountants of Nepal
Contents
PAPER 1: Advanced Accounting ……………………………03
PAPER 2: Audit and Assurance……………………………...23
PAPER 3: Corporate and Other Laws……………………..…43
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PAPER 1: ADVANCED ACCOUNTING
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REVISION QUESTIONS:
1. Statement of Cash Flow (NAS 7)

An entity has entered into a factoring arrangement and received money from the factor.
Examine the said transaction and state how should it be presented in the Statement of Cash
Flows?
2. NAS 21 - The Effects of Changes in Foreign Exchange Rates

DND Limited is a listed company, having its operations within Nepal. During the year ended
December 31, 2016, the company contracted to purchase plants and machineries from a US
Company. The terms and conditions thereof are given below:
(i) Total cost of contract = US$ 100,000.
(ii) Payment to be made in accordance with the following schedule:
Payment Dates Amount Payable

On signing the contract July 01, 2016 US$ 20,000
On shipment* September 30, 2016 US$ 50,000
After installation and test run January 31, 2017 US$ 30,000
*(risk and rewards of ownership are transferred on shipment)
The contract went through in accordance with the schedule and the company made all the
payments on time. The following exchange rates are available:
Dates Exchange Rates
July 1, 2016 US$ 1 = Rs. 60.50
September 30, 2016 US$ 1 = Rs. 61.00
December 31, 2016 US$ 1 = Rs. 61.20
January 31, 2017 US$ 1 = Rs. 61.50
Required Prepare journals to show how the above contract should be accounted for under NAS
21.
3. Accounting Policies, Changes in Accounting Estimates and Errors ~ NAS 8

Duncan Company has previously written off any expenditure on borrowing costs in the period
in which it was incurred. The company has appointed new auditors this year. They have
expressed the view that the previous recognition of borrowing costs in the statement of profit or
loss was in error.
The company has decided to correct the error retrospectively in accordance with NAS 8. The
financial statements of 2014 and 2015, both reflecting the old policy, shows following.
Statement of Changes in Equity (extract)
2014 2015
Retained Earnings Retained Earnings
$000 $000
Opening Balance 22,500 23,950
Profit after tax for the period 3,200 4,712
Dividends paid (1,750) (2,500)
Closing balance 23,950 26,162
Borrowing costs written off were $500,000 in 2014 and $600,000 in 2015.
The directors have calculated that borrowing costs, net of depreciation which should have been
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included in property, plant and equipment had the correct policy been applied, are as follows.
$000
At 30 December 2013 400
Had the correct policy been in force, depreciation of $450,000 would have been charged in 2014
and $870,000 in 2015.
Required
Show how the change in accounting policy must be reflected in the statement of changes in
equity for the year ended 31 December 2015. Work to the nearest $000.
4. Substance Over Form

X is an advertising agency. It acts as intermediary in arranging magazine advertisements. A
single page display in a nationally distributed women’s magazine cost Rs. 3,000. The magazine
publisher invoices the agency Rs. 3,000 less the agency’s commission of 15%: the net amount
of the invoice received by X is, therefore, Rs. 2,550 (Rs. 3,000 less commission of Rs.450).
X sends an invoice to the advertiser for the full cost of the magazine page, that is, Rs. 3,000.
There is a related cost of Rs. 2,550 payable to the magazine publisher.
How much revenue should be recognized by X?
5. Ratio Analysis
Boom Limited (BL) is a manufacturer of sports goods. Following financial statements for the
year ended 31 December 2017 have been submitted to the Chief Executive Officer (CEO).
Statement of profit or loss Rs. in ‘000
Revenues 21,000
Cost of sales (17,500)
Gross profit 3,500
Operating expenses (1,900)
Finance cost (450)
Profit before tax 1,150
Taxation (345)
Profit after tax 805
Statement of financial position Rs. in ‘000
Property, plant and equipment 7,500
Current assets 1,500
9,000
Share capital 4,000
Reserves 1,000
Non-current liabilities 3,000
Current liabilities 1,000
9,000
Although performance of BL has improved from the last year, CEO wants to compare the results
with other companies operating in sports manufacturing industry. In this respect, following
industry data has been gathered:
Gross profit margin 23.5%

Net profit margin 7.7%
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Current ratio 2.75

Gearing ratio 50:50
Return on non-current asset 32.9%
Return on capital employed 27.4%
Return on equity 31.3%
Required:
(a) Compute BL’s ratios for comparison with the industry.
(b) For each ratio, give one possible reason for variation from the industry.
6. Bad and Doubtful Debts

Following information pertains to Global Network Supplies (GNS) for the year ended 30 June
2017:
Rs. in '000
Trade debtors – as at 1 July 2016 55,975
Transactions for the year ended 30 June 2017:
– Sales (including cash sales which is 20% of credit sales) 540,000
– Sales returns pertaining to credit sales 6,300
– Collection from credit customers (including Rs. 8.1 million
from customers who availed 10% discount) 438,000
GNS maintains specific provision for doubtful debts on the basis of assessment of its debtors. In
addition, a general provision is maintained at 4% of the remaining customers’ balances.
The status of debtors being considered for the purpose of specific provision is as under:
Customer’s Balance as on Balance as on Specific Adjustments required
name 1 July 2016 30 June provision as as at 30 June 2017
2017# at
1 July 2016
Mehran 400 320 65 Mehran Link is facing severe cash
Link flow difficulties; therefore, a
provision at 30% of the outstanding
balance is required.
Bolan 480 480 240 The entire amount needs to be
Dialing written-off as Bolan Dialing has
been declared bankrupt.
Khyber 135 90 95 The balance is in respect of old
Cables disputed invoices and needs to be
written-off.
Ravi Rays 460 460 - Ravi Rays has stopped buying from
GNS. It has been decided to set-off
Rs. 120,000 payable by GNS to Ravi
Rays and make provision at 25% of
the remaining balance.
1,475 1,350 400
#
Before Adjustment
Required:
Prepare following ledger accounts for the year ended 30 June 2017:
(a) Trade debtors
(b) Provision for doubtful debts
(c) Bad debt expense
7. Profit or Loss Pre and Post Incorporation
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SALE Limited was incorporated on 01.08.20X1 to take-over the business of a

partnership firm w.e.f. 01.04.20X1. The following is the related information for the
year ended 31.03.20X2:
Particulars Amount (Rs)
Gross Profit (A) 6,00,000
Expenses: Salaries 1,20,000
Rent, Rates & Taxes 80,000
Commission on Sales 21,000
Depreciation 25,000
Interest on Debentures 32,000
Director Fees 12,000
Advertisement 36,000
(B) 3,26,000
Net Profit for the Year (A less B) 2,74,000
(i) SALE Limited initiated an advertising campaign which resulted increase in
monthly average sales by 25% post incorporation.
(ii) The Gross Profit Ratio post incorporation increased to 30% from 25%.
You are required to apportion the profit for the year between pre-incorporation
and post-incorporation.
8. Partnership
A, B, C, and D sharing profits in the ratio of 4:3:2:1 decided to dissolve their
partnership on 31st March 20X1 when their balance sheet was as under:
(Amount in Rs)
Liabilities Assets
Creditors 15,700 Bank 535
Employees Provident Fund 6,300 Debtors 15,850
Capital Accounts: Stock 25,200
A 40,000 Prepaid Exp 800
B 20,000 P&M 20,000
Patents 8,000
C’s Capital 3,200
D’s Capital 8,415
82,000 82,000
Following information is given to you: -
1. One of the creditors took some of the patents whose book value was Rs. 5,000 at a valuation
of Rs. 3,200. Balance of the creditors was paid at a discount of
Rs. 400.
2. There was a joint life policy of Rs. 20,000 (not mentioned in the balance sheet)
and this was surrendered for Rs. 4,500.
3. The remaining assets were realized at the following values: Debtors
Rs. 10,800; Stock Rs. 15,600; Plant and Machinery Rs. 12,000; and Patents at 60% of their
book-values. Expenses of realization amounted to Rs. 1,500.
D became insolvent and a dividend of 25 paise in a rupee was received in respect of

the firm's claim against his estate. Prepare necessary Ledger Accounts.
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9. Investment
Mr. X acquires 200 shares of a company on cum-right basis for Rs. 70,000. He
subsequently receives an offer of right to acquire fresh shares in the company in
the proportion of 1:1 at Rs. 107 each. He does not subscribe but sells all the rights
for Rs. 12,000. The market value of the shares after their becoming ex-rights has also
gone down to Rs. 60,000. What should be the accounting treatment in this case?
10. Banking
What is the Capital Adequacy Ratio (CAR)?
11. Insurance Claim for Loss of Stock

A fire occurred in the premises of M/s Star & Sons on 21st March 2020. The concern had taken
Insurance Policy of Rs. 70,000 which was subject to average clause. From the books of
accounts, the following particulars are available relating to the period 1st April 2019 to March
21st 2020:
(i) Stock as on April 1st 2019: Rs. 1,50,500
(ii) Purchases (including purchase of Rs. 40,000 for which purchase invoices had not been
received from suppliers, though goods have been received in godown): Rs. 3,17,000
(iii) Cost of goods distributed as, samples for advertising from April 1st 2019 to the date of fire,
included in above purchases: Rs. 32,000
(iv) Sales (excluding goods sold on approval basis having sale value Rs. 35,000): Rs. 4,55,000
Approval has been received for all goods sold on approval basis, before the date of fire.
(v) Purchase return : Rs. 15,000
(vi) Wages (including salary of Manager Rs. 10,000): Rs. 65,000
(vii) Average Rate of Gross Profit @ 20% on sales.
(viii) Cost of goods salvaged: Rs. 12,000
You are required to calculate the amount of claim to be lodged to Insurance Company.
12. Accounting for Government Grants

A fixed asset is purchased for Rs. 30 lakhs. Government Grant received towards it is
Rs. 12 lakhs. Residual Value is Rs. 6 lakhs and useful life is 4 years. The company
charges depreciation based on Straight-Line Method. Asset is shown in the balance
sheet, net of Grant. After 1 year, Grant becomes refundable to the extent of Rs. 7.5 lakhs
due to non-compliance with certain conditions. You are required to give necessary
journal entries for second year.
13. Framework for Preparation and Presentation of Financial Statements

What is meant by ‘Measurement’? What are the bases of Measurement of Elements of Financial
Statements? Explain in brief.
14. The Effects of Changes in Foreign Exchange Rates

Mona Ltd. purchased a plant for US$ 1,00,000 on 01 December 2020, payable after three
months. Company entered into a forward contract for three months @ 49.15 per dollar.
Exchange rate per dollar on 01 December was Rs. 48.85. How will you recognize the profit or
loss on forward contract in the books of Mona Ltd for the year ended 31st March, 2021?
15. Property, Plant and Equipment

Trozen Ltd. operates a major chain of supermarkets all over India. It acquires a new store in
Pune which requires significant renovation expenditure. It is expected that the renovations will
be done in 2 months during which the store will be closed. The budget for this period, including
expenditure related to construction and remodeling costs (Rs 18 lakhs), salaries of staff (Rs 2
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lakhs) who will be preparing the store before its opening and related utilities costs (Rs 1.5
lakhs), is prepared. The cost of salaries of the staff and utilities are operating expenditures that
would be incurred even after the opening of the supermarket. What will the treatment of all
these expenditures in the books of accounts?
16. Liquidation of Company

The position of Neha Ltd. on its liquidation is as under:
5,000, 10% Preference Shares of Rs. 100 each Rs. 60 paid up
2,000, Equity shares of Rs. 75 each, Rs. 50 paid up
Unsecured Creditors Rs. 99,000
Liquidation Expenses Rs. 1,000
Liquidator is entitled to a commission of 2% on the amount realized from calls made on
contributories.
You are required to prepare Liquidator’s Final Statement of Account if the total assets realized
is Rs. 380,400.
17. Branch Accounting

Al – Farid Limited, a private company in Karachi, is engaged in the business of super stores. Al
– Farid Limited has opened branches in different cities of Pakistan. Major purchases are made at
the Head Office, while branches also purchase the goods as per customers’ requirements, which
are maintained at cost. All expense relating to the branches are paid by the Head Office directly
and all collections are deposited into the Head Office bank account.
The following data related to Lahore Branch for the month of January 2017:
(Amount in Rupees)
Inventory at branch on January 01, 2017 68,750
Debtors balance on January 01, 2017 65,000
Goods sent to branch by Head office 511,500
Goods purchased by branch 250,000
Goods returned by branch to Head Office 30,250
Goods returned by debtors 20,000
Credit sales 885,000
Cash sales 45,000
Discount allowed 5,000
Cash received from debtors 745,000
Inventory at branch on January 31, 2017 110,000
Expenses paid by the Head Office for branch for the month of January 2017:
Salaries 55,000
Rent 25,000
Other expenses 10,000
The beginning and ending inventories include 80% and 60% of the goods received from the
Head office respectively.
Required:
Prepare Lahore Branch Account for the month of January 2017 in the books of Head Office.
18. Write short notes on Triple Entry Accounting

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19. Lease
Lodhi Textile Mills Limited is facing severe financial difficulties. To improve the cash flows,
the management has decided to sell and lease back three power generators of the company
under three different sales and lease back arrangements which were signed on August 15, 2015.
The company has assessed that all the leases shall qualify as finance leases. The related
information as on August 15, 2015 is given below
(Amount in Rs)
Cost Book Value Fair Value Value in Use Amount of
Financing
Generator A 10,000 7,500 6,000 6,500 6,000
Generator B 12,000 6,000 4,000 5,000 6,000
Generator C 10,000 7,000 10,000 12,000 8,000
Required:
Prepare the accounting entries that should be recorded by the company on August 15, 2015 in
respect of the above transactions. Note: Ignore tax and deferred tax implications, if any.
20. Construction Contracts

SHL builds bridges. The projects generally take number of months to complete. The company
has three contracts in progress at the year ended 30 April:
A B C
$m $m $m
Costs incurred to date 200 90 600
Costs to complete 200 110 200
Contract price 600 300 750
Progress billings 40 70 630
SHL calculates the percentage of completion by using the costs incurred compared to the total
costs?
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Suggested Answers /Hints:
1. Answer as per Statement of Cash Flow Nepal Accounting Standards (NAS) -7)
Under factoring arrangement, it needs to be assessed whether the arrangement is recourse or
non-recourse.
Recourse factoring: The cash received is classified as a financing cash inflow as the entity
continues to recognize the receivables and the amount received from the factor is indeed a
liability. The substance of the arrangement is financing, as the entity retains substantially all of
the risk and rewards of the factored receivables.
When the cash is collected by the factor, the liability and the receivables are de -recognized. It is
acceptable for this to be disclosed as a non -cash transaction, because the settlement of the
liability and the factored receivables does not result in cash flows. The net impact of these
transactions on the cash flow statement is to present a cash inflow from financing, but there is
no operating cash flow from the original sale to the entity‘s customers.
Non-recourse factoring: Where an entity de-recognizes the factor receivables and receives
cash from the factor, the cash receipt is classified as an operating cash inflow. This is because
the entity has received cash in exchange for receivables that arose from its operating activities.
2. Answer as per NAS 21 - The Effects of Changes in Foreign Exchange Rates

Date Description Dr. Rs. Cr. Rs.
1-Jul-16 Advance to suppliers 1,210,000
Cash 1,210,000
(Amount paid on signing the contract. Exchange rate was Rs. 60.5/US$)
30-Sep-16 Advance to suppliers 3,050,000

Cash 3,050,000
(Amount paid on delivery. Exchange rate was Rs. 61/US$)
30-Sep-16 PPE in transit/ CWIP 6,090,000

Advance to suppliers 4,260,000
Payable to suppliers 1,830,000
(Recording of asset on the delivery date as risk and rewards are transferred to the company)
31-Dec-16 Exchange loss 6,000
Payable to suppliers 6,000
(Adjustment of exchange rate as of reporting date. Exchange rate was Rs. 60.5/US$)
31-Jan-17 Property, plant and Equipment 6,090,000
PPE (In transit/ in progress) 6,090,000
(Transfer the new plants and machineries to Property, Plant and Equipment)
31-Jan-17 Payable to suppliers 1,836,000
Exchange loss (Bal.) 9,000
Cash 1,845,000
(Final payment to supplier. Exchange rate was Rs. 61.5/US$1)
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3. Answer to Accounting Policies, Changes in Accounting Estimates and Errors ~

NAS 8
Duncan
Statement of Changes in Equity (Extracts)
For the year ended June 30, 2015
2015 $000 2014 $000
Opening balance as reported 22,500
Change in accounting policy W2 400
Restated balance 24,400 22,900
Profit after tax for the year W1 4,442 3,250
Dividend paid (2,500) (1,750)
Closing balance 26,342 24,400
Workings:
W1 – Revised Profit 2015 $000 2014 $000
Given 4,712 3,200
Add back: Expenditure for the year 600 500
Less: Depreciation (870) (450)
Revised Profit 4,442 3,250
W2 – Impact of prior period adjustment 2015 2014 2013

B/d Impact 450 400
Borrowing cost 600 500
Depreciation (870) (450)_______
180 450 400
4. Substance Over Form

There are two possibilities depending upon whether or not X is classed as an agent:
1. Revenue of Rs. 3,000 is recognized, together with related costs of Rs. 2,550 (presentation of
turnover as a principal).
2. Revenue of Rs. 450 is recognized (presentation of turnover as an agent). Clearly, there is
quite a significant distinction between the two modes of presentation. In determining which
mode is appropriate for X, we can examine the transaction from the risks and benefits
perspective. A principal is exposed to all the risks and benefits associated with the selling
price of goods and services. Where, by contrast, a seller acts as an agent, it would not
normally be associated with the majority of the risks and benefits of the transaction.
In the example of X, the selling price of the services (the cost of a one page display
advertisement) is determined by the magazine publisher, not by the advertising agency. The
relationship of X to the publisher and to the advertiser appears to be one of agency, and the
principles of substance over form would appear to require that X recognizes only Rs. 450 of
revenue in respect of this transaction.
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5. Ratio Analysis
Boom Limited
Comparison of BL's ratios with Industry average and possible reasons for variation
Ratios a. Calculation Industry b. Reasons for variation from Industry
Ratios
Gross 16.67% 23.50% Lower than Industry
profit  Purchase of raw material at higher prices as
margin (3,500/21,000)x100 compared to its competitors
 Inability to obtain economies of scale in
production as compared to its competitors
Higher production costs due to inefficiencies
 Deliberately keeping selling prices lower to
gain the market share
Net 3.83% 7.70% Lower than Industry
profit  BL’s gross profit margin is 6.8% lower than
margin (805/21,000)x100 Industry (16.6% Vs 23.5%) whereas net profit
margin is only 3.9%lower which indicates that
BL’s operating expenses as a percentage of
sales are approximately 2.9% lower than the
industry
Current 1.50 2.75 Lower than Industry
ratio  BL might have obtained running finances as
1,500/1,000 compared to long-term financing by the
Industry or availed extended credit terms from
suppliers
 Low inventory levels are maintained by BL
 Shorter credit terms are given to debtors
Gearing 37.5: 62.5 50 : 50 Lower than Industry
ratio  Difficulty in raising long-term finance from
3,000/ banks due to low profits
(4,000+1,000+3,000)  Running finance or extended credit terms
from suppliers are available for BL
Return 21.33% 32.90% Lower than industry
on  Lower profit margins
non- ((1,150+450)/7,500)  Relatively newer non-current assets have
current x100 higher carrying value
assets
Return 20.00% 27.40% Lower than Industry
capital ((1,150+450)/  High shareholder’s equity
employed 4,000+1,000+3,000)
x100
Return 16.10% 31.30% Lower than Industry
equity (805/(4,000+1,000))  Higher shareholder’s equity/low gearing ratio
x100
6. Bad and Doubtful debts

Trade Receivables A/c (Rs. 000)
Balance b/d 55,975 Sales return 6,300
Credit Sales 450,000 Bank 438,000
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(540,000 x 100/ 120)

Discount allowed 900
(8,100 x 10 / 90)
Trade payables (Contra) 120
Bad debts – Bolan Dialing 480
Bad debts – Khyber Cables 90
Balance c/d 60,085
505,975 505,975
Provision (allowance) for doubtful debts A/c (Rs. 000)

Bad debts 40 Bal b/d W1 2598
Bal C/d W1 2558
2598 2598
Bad debts A/c (Rs. 000)

Receivables – Bolan Dialing 480 Provision for doubtful debts 40
Receivables – Kyber Cables 90 530
570 570
W1: Calculation of doubtful debts 2017 Rs. 2016 Rs.

Receivable after bad debts 60,085 55,975
Less: Specific doubtful debts
Mehran Link 320 x 30% (96) (65)
Bolan Dialing - (240)
Khyber Cables - (95)
Ravi Rays 460 – 120 = 340 x 25% (85) -
(181) (400)
Less: Good debts
Mehran Link 320 x 70% ; 400 – 65 (224) (335)
Bolan Dialing 480 – 240 - (240)
Khyber Cables 135 - 95 - (40)
Ravi Rays 460 – 120 = 340 x 25% (255) -
(479) (615)
59,425 54,960
% of General Allowance 4% 4%
General Allowance 2,377 2,198
Specific Allowance 181 400
Allowance Aequired (Closing Balance) 2,558 2,598
Less: Allowance (Opening Balance) 2,598
Increase / (Decrease) (40)
7. Profit or Loss Pre and Post Incorporation

Statement showing the calculation of Profits for the pre-incorporation and
post-incorporation periods
Particulars Total Basis of Pre- Post-

Amount (Rs) Allocation Incorporation(Rs) Incorporation Rs
Gross Profit (W.N.2) 6,00,000 1:3 1,50,000 4,50,000
Less: Salaries 1,20,000 Time 40,000 80,000
Rent, rates and taxes 80,000 Time 26,667 53,333
Sales’ commission 21,000 Sales (2:5) 6,000 15,000
Depreciation 25,000 Time 8,333 16,667
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Interest on debentures 32,000 Post 32,000

Directors’ fee 12,000 Post 12,000
Advertisement 36,000 Post 36,000
Net profit 2,74,000 69,000 2,05,000
Working Notes:
1. Sales Ratio
Let the monthly sales for first 4 months (i.e. from 1.4.20X1 to 31.7.20X1) be = x
Then, sales for 4 months = 4x
Monthly sales for next 8 months (i.e. from 1.8.X1 to 31.3.20X2)
= x + 25% of x= 1.25x
Then, sales for next 6 months = 1.25x X 8 = 10x
Total sales for the year = 4x + 10x = 14x
Sales Ratio = 4x: 10x i.e. 2:5
2. Gross Profit Ratio

From 1.4.20X1 to 31.7.20X1 Gross Profit is 25% of sales
Then, 25% of 4x= 1x
Gross Profit for next 8 months (i.e. from 1.8.X1 to 31.3.20X2) is 30%
Then, 30% of 10x = 3x
Therefore Gross Profit ratio will be 1:3
3. Time Ratio
1st April, 20X1 to 31st July, 20X1: 1st August, 20X1 to 31st March, 20X2
= 4 months: 8 months = 1:2
Thus, Time Ratio is 1:2.
8. Partnership
Realization Account
Particulars Amount Particulars Amount
To Sundry Assets By Creditors 15,700
Debtors 15,850 By Employee PF 6,300
Stock 25,200 By Bank Ac
Prepaid Expenses 800 JLP 4,500
P&M 20,000 Debtors 10,800
Patents 8,000 Stock 15,600
69,850 P&M 12,000
Patents
To Bank- Creditors 12,100 (8000-5000)* 60% 1,800
15700-3200-400
To Bank 6,300 By Loss Transferred
Employee PF A's Capital 9,220
B's Capital 6,915
To Bank Expenses 1,500 C's Capital 4,610
D's Capital 2,305
Total 89,750 Total 89,750
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Capital Ac
Particulars A B C D Particulars A B C D
To Bal B/d - - 3,200 8,415 By Bal B/d 40,000 20,000
By Bank
To Realization 9,220 6,915 4,610 2,305 Realization Loss 9,220 6,915 4,610 -
To D's Capital By Bank -
deficiency 5,360 2,680 Recovery 2,680
To Bank 34,640 17,320
By A 's Capital 2/3 5,360
By B 's Capital 1/3 2,680
By Bank 3,200
Total 49,220 26,915 7,810 10,720 Total 49,220 26,915 7,810 10,720
Bank Account
Particulars Particulars
To Balance b/d 535 By Realization A/c 12,100
To Realization A/c 44,700 By Realization A/c 6,300
To A’s Capital A/c 9,220 By Realization A/c 1,500
To B’s Capital A/c 6,915 By A’s Capital A/c 34,640
To D’s Capital A/c 2,680 By B’s Capital A/c 17,320
To C’s Capital A/c (4,610 + 3,200) 7,810
71,860 71,860
Working Note
D’s loss will be borne by A and B only because only solvent partners having credit
balance has to bear the loss on account of insolvency. C will bring his share of loss in
cash
9. Investment
Where the investments are acquired on cum-right basis and the market value of investments
immediately after their becoming ex-right is lower than the cost for which they were acquired, it
may be appropriate to apply the sale proceeds of rights to reduce the carrying amount of such
investments to the market value. In this case, the amount of the ex-right market value of 200
shares bought by X immediately after the declaration of rights falls to Rs 60,000. In this case, out
of sale proceeds of Rs. 12,000, Rs. 10,000 may be applied to reduce the carrying amount to bring
it to the market value and Rs 2,000 would be credited to the profit and loss account.
10. Banking - Capital Adequacy Ratio

The Capital Adequacy Ratio set standards for banks by looking at a bank’s ability to pay
liabilities, and respond to credit risks and operational risks. A bank that has a good CAR has
enough capital to absorb potential losses. Thus, it has less risk of becoming insolvent and losing
depositors’ money. After the financial crisis in 2008, the Bank for International Settlements
(BIS) began setting stricter CAR requirements to protect depositors.
The CAR formula is:

CAR = (Tier 1 Capital + Tier 2 Capital) / Risk-Weighted Assets
The Bank for International Settlements separates capital into Tier 1 and Tier 2 based on the
function and quality of the capital. Tier 1 capital is the primary way to measure a bank’s
financial health. It includes shareholder’s equity and retained earnings, which are disclosed on
financial statements.
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As it is the core capital held in reserves, Tier 1 capital is capable of absorbing losses without
impacting business operations. On the other hand, Tier 2 capital includes revalued reserves,
undisclosed reserves, and hybrid securities. Since this type of capital has lower quality, is less
liquid, and is more difficult to measure, it is known as supplementary capital.
The bottom half of the equation is risk-weighted assets. Risk-weighted assets are the sum of a
bank’s assets, weighted by risk. Banks usually have different classes of assets, such as cash,
debentures, and bonds, and each class of asset is associated with a different level of risk. Risk
weighting is decided based on the likelihood of an asset to decrease in value.
Asset classes that are safe, such as government debt, have a risk weighting close to 0%. Other
assets backed by little or no collateral, such as a debenture have a higher risk weighting. This is
because there is a higher likelihood, the bank may not be able to collect the loan. Different risk
weighting can also be applied to the same asset class. For example, if a bank has lent money to
three different companies, the loans can have different risk weighting based on the ability of
each company to pay back its loan.
11. Insurance Claim for loss of stock

Books of M/s Star & Sons
Memorandum Trading Account
For the period 1st April, 2019 to 21st March, 2020
(Amount in Rs)
To Opening Stock 1,50,500 By Sales (4,55,000 + 35,000) 4,90,000
To Purchases 3,17,000
Less: Returns (15,000) By Closing Stock (Bal.fig.) 83,500
Goods distributed
as samples (32,000) 2,70,000
To Wages 55,000
To Gross Profit 98,000
(20% of Sales)
573,500 573,500
Amount in Rs
Value of stock destroyed by fire 83,500
Less: Salvaged Stock 12,000
Loss of stock 71,500
Note: Since policy amount is less than value of stock on date of fire, average clause will apply.
Therefore, claim amount will be computed by applying the formula.
Claim=Insured value ×Loss suffered

Total cost
Claim Amount = Rs 71,500X Rs70,000/ Rs83,500= Rs59,940 (rounded off)
17 | P a g e
12. Accounting for Government Grants

Year Particulars In lakhs (Dr.) In lakhs (Cr.)
2nd Fixed Asset Account Dr. 7.5

To Bank Account 7.5
(Being government grant on asset partly refunded which increased the cost of
fixed asset)
Depreciation Account (W.N.) Dr. 5.5
To Fixed Asset Account 5.5
(Being depreciation charged on SLM on revised value of fixed asset
prospectively)
Profit & Loss Account Dr. 5.5
To Depreciation Account 5.5
(Being depreciation transferred to Profit and Loss Account at the end of year 2)
(Amount in lakhs)
Working Note:
Depreciation for Year 2
Cost of the Asset 30
Less: Government grant received (12)
18
Less: Depreciation for the first year 18-6
4 3
15
Add: Government grant refundable 7.5
22.5
Depreciation for the second year 22.5-6
3 5.5
13. Framework for Preparation and Presentation of Financial Statements
Measurement is the process of determining money value at which an element can be recognized
in the balance sheet or statement of profit and loss. The framework recognizes four alternative
measurement bases for this purpose. These bases can be explained as:
Historical cost
This is the Acquisition Price. According to this, assets are recorded at an amount of cash and
cash equivalent paid or the fair value of the assets at time of acquisition.
Current Cost
Assets are carried out at the amount of cash or cash equivalent that would have to be paid if the
same or an equivalent asset was acquired currently. Liabilities are carried at the undiscounted
amount of cash or cash equivalents that would be required to settle the obligation currently.
Realizable (Settlement) Value

For assets, amount currently realizable on sale of the asset in an orderly disposal. For liabilities,
this is the undiscounted amount expected to be paid on settlement of liability in the normal
course of business.
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Present Value
Assets are carried at present value of future net cash flows generated by the concerned assets in
the normal course of business. Liabilities are carried at present value of future net cash flows
that are expected to be required to settle the liability in the normal course of business.
14. The Effects of Changes in Foreign Exchange Rates

Forward Rate Rs 49.15
Less: Spot Rate (Rs 48.85)
Premium on Contract Rs 0.30
Contract Amount US$ 1,00,000
Total Loss (1,00,000 x 0.30) Rs 30,000 to be recognized in year ended 31.3.2021.
15. Property, Plant and Equipment

Trozen Ltd. should capitalize the costs of construction and remodeling the supermarket, because
they are necessary to bring the store to the condition necessary for it to be capable of operating
in the manner intended. The supermarket cannot be opened without incurring the remodeling
expenditure. Therefore, this construction and remodeling expenditure of Rs 18 lakh should be
considered as part of the cost of the asset. However, the cost of salaries of the staff Rs 2 lakh
and utilities cost Rs 1.5 lakh are operating expenditures that would be incurred even after the
opening of the supermarket. Therefore, these costs are not necessary to bring the store to the
condition necessary for it to be capable of operating in the manner intended by the management
and should be expensed to the Profit or Loss.
16. Liquidation of Company Neha Limited

Liquidator’s Final Statement of Account
Receipts Rs. Payments Rs.
Assets realized 3,80,400 Liquidation Expenses 1,000
Call on contributories: 2,000 20,000 Liquidator’s Remuneration 400
Equity Shares @ 10 per share Unsecured Creditors 99,000
(W.N.) Preference Shareholders 3,00,000
4,00,400 4,00,400
Working Notes:
(Amount in Rs)
(i) Calculation of Shortage of funds `
Total Amount Available 3,80,400
Less: liquidation Expenses (1,000)
Balance 3,79,400
Less: Unsecured Creditors (99,000)
Balance 2,80,400
Less: Pref. Shareholders (3,00,000)
Shortage of Funds 19,600
(ii) Calculation of funds required to meet shortage and commission payable on Calls to be made
(to be called from equity shareholders)
Shortage of funds × 100
100 - Rate of Commission
19600× 100
100 - 2
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(iii) Uncalled Capital @ 25 on 2,000 shares = Rs 50,000
(iv) Amount of Calls to be made from equity shareholders (least of funds required and uncalled
capital) i.e. 20,000 i.e. Rs 10 per Share
(v) Commission on Call = 20,000 x 2/100 = Rs 400
17. Branch Accounting

A1
Lahore Branch account (debtor system at cost)
(Amount in Rs)
Dr Cr
B/d Balances
Inventory (Head office) 80% 55,000
Inventory (Purchases locally) 20% 13,750
Receivables 65,000
133,750
Goods sent to branch 511,500 Goods returned from branch 30,250
Cash paid (for purchases) 250,000 Cash received – cash sales 45,000
Cash received - debtors 745,000
Cash paid (salaries) 55,000
Cash paid (rent) 25,000 C/d balances
Cash paid (other expenses) 10,000 Inventory (Head office) 60% 66,000
Inventory (locally) 40% 44,000
Receivables 180,000
290,000
Branch profit 125,000
1,110,250 1,110,250
Memo: Branch debtors account

B/d 65,000 Sales return 20,000
Sales 885,000 Discount allowed 5,000
Cash received 745,000
C/d 180,000
950,000 950,000
18. Triple Entry Accounting

Triple entry accounting can be thought of as a way of agreeing on the objective. Triple-entry
accounting is an enhancement to the traditional double-entry system in which order counting
entries involving outside parties are cryptographically sealed by a third entity thus placed side
by side to the bookkeeping entries of both parties. Transactions of a third entry in the system
entered into the blockchain is both a receipt and a transaction's proof that something happened
between two parties which goes beyond the receipts that each party holds in a double-entry
system. Since the entries are distributed and cryptographically sealed, falsifying them or
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destroying them to conceal activity is practically impossible. A seller books a debit to account
for cash received while a buyer books a credit for cash spent in the same transaction but in
separate sets of accounting records and instead of these entries being recorded separately in
independent sets of ledgers, they occur in the form of a transaction between the sender and
receiver in the same distributed ledger creating an interlocking system of permanence and
objective account records.
The idea about triple-entry accounting is, instead of each firm having their own books, the
transaction will go through a software program running autonomously which includes
everything about that transaction. This may record what the product was, the prices, who the
seller is, who is the buyer is, all digitally signed. This can also have a hash that links to further
public documents so the books are now linked together by this third entry. The other exciting
aspect is that this third entry could also be potentially be viewed for external reviewing or
auditing purposes.
Triple entry is quite a confusing term because we're not creating a third entry we're just linking
the separate double entries. The advantages of a triple entry system are enormous in terms of
reconciliation, transparency, trust and auditing. Triple-entry accounting allows us to reconcile
the balance of transactions and reporting processes so the organizations can trust their own
books.
Typically, each party is responsible for maintaining their own financial records however this has
often led to fraud or other errors. The use of triple-entry accounting reduces this risk by creating
non-biased records. Many blockchains are publicly viewable or easily exposed to external
viewing making them transparent with blockchain networks. The entry is the transaction
because the assets are on the blockchain, in other words, the ledger is not an account of what
happened, it is literally what happened and as the ledger is immutable, this makes it highly
trustworthy for auditing.
19. Lease
Dr. Cr.
Date Particulars
$ 000 $ 000
15.08.1
5 Impairment loss 2,000
Generator A (7,500 CA and RA 6,500) 1,000
Generator B (6,000 CA and RA 5,000) 1,000
(Impairment loss on generators recognized)
15.08.
15 Bank 6,000
Profit or loss 500
Generator A 6,500
(Sale of generator A recognized)
15.08.
15 Bank 6,000
Deferred income 1,000
Generator B 5,000
(Sale of generator B recognized)
15.08.
15 Bank 8,000
Deferred income 1,000
Generator C 7,000
(Sale of generator C recognized)
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15.08.
15 Generator A 6,000
Generator B 6,000
Generator C 8,000
Liability under finance lease 20,000
(finance leaseback recognized)
20. Construction Contracts
Statement of Profit or loss

A B C Total
$m $m $m $m
Revenue (β) 300 135 550 985
Cost [TC x %] (200) (90) (600) (890)
Profit/(loss) 100 45 (50) 95
Statement of Financial Position

A B C Total
Gross amounts from and $m $m $m $m
to Customers:
Contract cost incurred 200 90 600 890
Recognized profits (losses) 100 45 (50) 95
to date
Progress billings (40) (70) (630)………………
Due from customers 260 65 - 325
Due to customers - - (80) 80
(Contract Liability)
Workings (in $m):

A B C
1. Total Estimated Costs $200 + 200 $90 + 110 $600 + 200
= $400 = $200 = $800
2. Percentage Completion 200 /400 90 / 200 600 / 800

= 50% = 45% = 75%
3. Contract Outcome
Contract revenue 600 300 750
Cost to date (200) (90) (600)
Cost to complete (estimated) (200) (110) (200)
Total estimated profit (loss) 200 100 (50)
4. Profit (Loss) Recognized 100 45 (50)
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PAPER 2: AUDIT AND ASSURANCE
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Revision Questions
Principle and Concept of Assurance
Question No. 1
Why auditor cannot give an absolute assurance? What are the inherent limitations of audit?
Ethics
Question No. 2
Mr. Bin is appointed as an auditor of Perthwile Textile Industries Pvt. Ltd. for the F.Y .2078-79. While
obtaining an appointment Mr. Bin agreed that the audit fee that he will charge will be 2% of the turnover of
the Company. Does the Auditor have complied with the Code of Ethics issued by The Institute of Chartered
Accountants of Nepal? Mr. Harry who is one of the shareholders of the Company knows about the issue and
wants to file an complain against the auditor Mr. Bin on behalf of the Company. What punishment can be
given to Mr. Bin by the Disciplinary Committee?
Regulatory
Question No. 3
What are the functions, duties and power of auditor as per the Banks and Financial Institutions Act 2073?
Planning an Assurance Engagement

Question No. 4
You are appointed as an auditor of Commonwealth Industries Ltd. You made an audit programme for the
audit of the Commonwealth Industries Ltd. Explain the importance, advantages and disadvantages of audit
programme to your audit staffs.
Question No. 5
What is audit risk? What are the different components of audit risk?
Question No. 6
You are appointed as an auditor of Surya Nepal Pvt. Ltd. The Company works in an IT environment and all
the processes are automated. As an auditor what information will you obtain before starting the audit related
to IT and what are the risks that can be resulted from the IT environment of the Company?
Question No. 7
You are appointed as an external auditor of Mero Mobile Pvt. Ltd. for the F.Y. 2077-78. PQR and Associates
was appointed as an Internal Auditor for the same year. As an External Auditor can you rely on the work of
Internal Auditor?
Question No. 8
Write short note on Audit Note Book.
Question No. 9
What is transaction cycle? Why is it important to understand the revenue cycle as an auditor?
Vouching
Question No. 10
As an auditor ,how would you vouch the following transactions?
a) Goods sent on Consignment
b) Sales Commission
c) Foreign Travel Expenses
d) Research and Development Expenses
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Verification of Assets and Liabilities

Question No. 11
What is Contingent Liability? As an auditor what steps will you take to verify the Contingent Liabilities?
Company Audit
Question No.12
What is the provision related to disqualification of an Auditor as per the Companies Act, 2063?
Question No. 13
What are the provisions related to Share Certificates as per the Companies Act, 2063?
Audit of Special Sector

Question No. 14
You are appointed as an auditor of Women Nepal an NGO for the F.Y. 2078-79. Write an audit programme
for Women Nepal.
Question No. 15
You are appointed as an auditor of MAW Leasing Co. for the F.Y. 2078-79. How will you audit the leasing
Company?
Government Audit
Question No. 16
What do you mean by Propriety Audit?
Audit Evidence and Internal Audit

Question 17
Describe Analytical procedures.

Question 18
Write short notes on Internal Check.
Completing and Reporting on an Assurance Engagement

Question 19
What are the basic elements of the Auditor’s Report?

Question 20
What are the types of Audit Opinion?
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Suggested Answers/Hint:
Answers
Principle and Concept of Assurance
Answer No. 1
NSA 240 provides that an auditor cannot obtain an 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.
We must emphasize that auditor needs to be reasonably sure and not absolutely sure. There is a big
difference between absolutely sure about something and reasonably sure. Making two level of assurances
easy to understand in context of financial statements and audit engagements or other assurance engagements,
absolute assurance means that there is absolutely no misstatement in the financial statement and thus
financial statements are absolutely reliable and relevant for the user of financial statements. On the other
hand, reasonable assurance is also a high level of assurance but it means that auditor has conducted the
engagement in a way that he is reasonably i.e., to the best possible extent, provided the circumstances,
auditor is reasonably sure that financial statements are free from material misstatement but there might be
some misstatements that might go undetected.
Further, the process of auditing is such that it suffers from certain inherent limitations, i.e., the limitation
which cannot be overcome irrespective of the nature and extent of audit procedures. It is very important to
understand these inherent limitations of an audit since understanding of the same only would provide clarity
as to the overall objectives of an audit. The factors due to which limitations of audit might arise, as
recognized by NSA 200 and NSA 240 are:
i. Use of Testing and Judgment: Auditor’s work involves exercise of judgment, for example, in deciding
the extent of audit procedures and in assessing the reasonableness of the judgment and estimates made
by the management in preparing the financial statements. Further, much of the evidence available to the
auditor can enable him to draw only reasonable conclusions there from.
ii. Inherent Limitation of Internal Control:The entire audit process is generally dependent upon the
existence of an effective system of internal control. Further, it is clearly evident that there always be
some risk of an internal control system failing to operate as designed. No doubt, internal control system
also suffers from certain inherent limitations. Any system of internal control may be ineffective against
fraud involving collusion among employees or fraud committed by management.
iii. Persuasive evidence rather than conclusive: Persuasive evidence is evidence that has the power to
influence or persuade someone to believe in its truth. For example: Your job is to check the receivable
account balance, to accomplish this you send confirmation mail to the big clients and the sum of these
clients is almost 75 % of the total percentage, if all customers replies with positive responses, then you
have enough persuasive evidence to issue an opinion on the accuracy of overall receivable account.
Conclusive evidence is solid evidence after which no further proof or inquiry is required & evidence in
itself is complete. Conclusive evidence would be if you sent confirmation letter to all customers and
pursued all customers until they respond which is not practical in audit.
Ethics
Answer No. 2
Mr. Bin is appointed as an auditor of Perthwile Textile Industries Pvt. Ltd. for the F.Y 2078-79.
During his appointment he agreed that audit fee that he will charge will be 2% of the turnover of the
Company which is a violation of the Code of Ethics issued by The Institute of Chartered Accountants of
Nepal (ICAN).
Code of ethics issued by the ICAN has outlined the detail of ethics that Members holding Certificate of
Practice shall not base their remuneration as a percentage on the profit or on any other uncertain results.
26 | P a g e
Perthwile Textile Industries Pvt. Ltd. can lodge complaint to the ICAN against member Mr. Bin for not
upholding the Code of Ethics as per Chartered Accountants Act, 2053. The Council of ICAN if finds the
complaints convincing, the complaint is placed in the Disciplinary Committee for further investigation 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. Bin, 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.
Regulatory
Answer No. 3
As per section 66 of Bank and Financial Institutions Act 2073, the functions, duties and powers of the
auditor shall be as follows:
a. To conduct auditing of accounts and financial statements,
b. To prepare audit report by including audited accounts, balance-sheet, and profit and loss accounts
and to produce it before the Board of Directors of the bank or financial institution,
c. If it is found that there are irregularities committed in the activities of the bank or financial
institution or works are not being carried out in appropriate manner and such matters will cause
harms or loss to the bank or financial institution, to inform the same to the Board of Directors,
d. To inform the Rastra Bank, if any of the following situation is likely to emerge:-
1. 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,
2. To cause adverse effect on regular activities of the bank or financial institution,
3. To prohibit the auditor to submit the audit report or asking to prepare false audit report.
The auditor has authority to examine all documents and records concerning accounts including ledger,
books, account, voucher, at any time and the auditor can demand necessary information and explanation
from officer of a bank or financial institution on matters required by him/her in the course of performing
his/her duties and carrying out his/her functions in appropriate manner.
The auditor shall have to include the following matters in his/her report clearly: -
a. Whether or not replies to the queries as asked by him or her were given,
b. Whether or not the balance sheet, off-balance sheet transactions, profit and loss account, cash flow
statement and other financial statements, as well, have been prepared in such format and in
accordance with such procedures as prescribed by the Rastra Bank, and whether or not they matched
with the accounts, records, books and ledgers maintained by the bank and financial institution,
c. Whether or not the accounts, records, books and ledgers have been maintained accurately in
accordance with the laws in force
d. Whether or not any officer of the bank or financial institution has done any act contrary to the laws
in force or committed any irregularity or caused any loss or damage to the bank or financial
institution,
e. Whether or not credits have been written off as per the Credit Write-off Byelaws or Directives of the
Rastra Bank,
f. Whether or not the transactions of the bank or financial institution have been carried on in a
satisfactory manner as prescribed by the Rastra Bank,
g. Matters which should be made known to the shareholders,
27 | P a g e
h. Matters prescribed by the laws in force and other matters as prescribed by the Rastra Bank as
required to be mentioned in audit report by the auditor,
i. Other suggestions, which the auditor deems necessary to be furnished.
Upon receipt of the audit report, the Rastra Bank may order the auditor of the bank or financial institution to
carry out the following additional functions: -
a. To submit additional information as required by the Rastra Bank in regards to auditing,
b. To expand the areas of auditing of transactions of the bank or financial institution or its subsidiary
company,
c. To conduct other examinations as recommended to the bank or financial institution or as required by
the Rastra Bank in any particular subject.
Planning an Assurance Engagement

Answer No. 4
Audit Programme is a list of examination and verification steps to be applied in a way that inter-relationship
of one step to another is clearly shown and designed. Audit programme helps to complete the examination
and verification process more easily.
The audit programme is helpful both in planning and performance stages of audit:
i. The audit programme lists down areas of audit before commencement.

ii. The audit timing is built there in, thereby it becomes a schedule of audit plan.
iii. The staffs who are entrusted with the audit assignment is also specified. It is a plan of resource
allocation of the firm.
iv. It specifies the procedures to be checked during the audit.
v. As the audit work is split into various elements of procedures to be performed, the audit programme
acts as a guiding chart or check list during the performance of audit.
vi. Since the staff in charge of each work is specified and they sign the programme, it extracts the
responsibility from the audit assistants.
vii. The working papers of the audit staff can be reviewed against the audit programme which helps a
base of reference for evaluation of the performance before reporting on the financial statements.
viii. It also helps in preparing a diary of the performance and plan and also base for billing the clients for
the time and manpower involved in the audit.
Advantages of Audit Program:

 Total and clear set of working is seen.
 A properly drawn audit program serves as evidence in the event of any charges of negligence
against the auditor.
 Helps in efficient utilization of assistants.
 Helps in controlling the progress of audit.
 It serves as guide for audit to be carried in succeeding period.
Disadvantages of Audit Program:

 More complexity in work.
 May bring rigidity in work and inflexibility to the changed situation.
 Inefficient assistants may take shelter behind the programme.
 Hard and fast audit program may kill the initiative and creativity of efficient assistants.
Answer No. 5
Audit risk means the risk that the auditor gives an inappropriate audit opinion when the financial statements
are materially misstated. Thus, it is the risk that the auditor may fail to express an appropriate opinion in an
audit assignment. An auditor may consider audit risk both at overall financial statement level as well as at the
level of individual account balances or classes of transactions. This means that at overall level the auditor
28 | P a g e
applies their professional judgment to determine the extent of risk which he considers to be an acceptable
level. At account balance level, audit risk refers to the risk that error in monetary terms exists beyond a
tolerable error limit in the account balances or class of transaction which the auditor fails to detect. The
auditor should obtain an understanding of the accounting and internal control systems sufficient to plan the
audit and develop an effective audit approach. The auditor should use professional judgment to assess audit
risk and to design audit procedures to ensure it is reduced to an acceptably low level.
Components of Audit Risk are as follows:

i. Inherent Risk
ii. Control Risk
iii. Detection Risk
i. Inherent Risk
It is the susceptibility of an account balance or class of transactions to misstatement that could be material,
individually or when aggregated with misstatements in other balances or classes, assuming that there were no
related internal controls.
To assess inherent risk, the auditor uses professional judgment to evaluate numerous factors, examples of
which are:
a. At the Financial Statement Level:
 The integrity of management.
 Management experience and knowledge and changes in management during the period, for example, the
inexperience of management may affect the preparation of the financial statements of the entity.
 Unusual pressures on management, for example, circumstances that might predispose management to
misstate the financial statements, such as the industry experiencing a large number of business failures or
an entity that lacks sufficient capital to continue operations.
 The nature of the entity’s business, for example, the potential for technological obsolescence of its
products and services, the complexity of its capital structure, the significance of related parties and the
number of locations and geographical spread of its production facilities.
 Factors affecting the industry in which the entity operates, for example, economic and competitive
conditions as identified by financial trends and ratios, and changes in technology, consumer demand and
accounting practices common to the industry.
b.At the Account Balance and Class of Transactions Level:

 Financial statement account balances are likely to be susceptible to misstatement, for example, accounts
which required adjustment in the prior period, or which involve a high degree of estimations.
 The complexity of underlying transactions and other events which might require using the work of an
expert.
 The degree of judgment involved in determining account balances.
 Susceptibility of assets to loss or misappropriation, for example, assets which are highly desirable and
movable such as cash.
 The completion of unusual and complex transactions, particularly at or near period end.
 Transactions not subjected to ordinary processing. Accounting and Internal Control Systems.
ii. Control Risk

It is the risk that a misstatement that could occur in an account balance or class of transactions and that
could be material individually or when aggregated with misstatements in other balances or classes, will not
be prevented or detected and corrected on a timely basis by the accounting and internal control systems.
The preliminary assessment of control risk is the process of evaluating the effectiveness of an entity’s
accounting and internal control systems in preventing or detecting and correcting material misstatements.
There will always be some control risk because of the inherent limitations of any accounting and internal
control system. After obtaining an understanding of the accounting and internal control systems, the auditor
should make a preliminary assessment of control risk, at the assertion level, for each material account
balance or class of transactions. The auditor ordinarily assesses control risk at a high level for some or all
assertions when:
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a. The entity’s accounting and internal control systems are not effective; or
b. Evaluating the effectiveness of the entity’s accounting and internal control systems would not be efficient.
The preliminary assessment of control risk for a financial statement assertion should be high unless the
auditor:
a. Is able to identify internal controls relevant to the assertion which are likely to prevent or detect and
correct a material misstatement; and
b. Plans to perform tests of control to support the assessment. Documentation of Understanding,
identification and assessment of control risk.
The auditor should document in the audit working papers:

a. The understanding obtained of the entity’s accounting and internal control systems; and
b. The assessment of control risk. When control risk is assessed at less than high, the auditor would also
document the basis for the conclusions.
iii. Detection Risk

It is the risk that an auditor’s substantive procedures will not detect a misstatement that exists in an account
balance or class of transactions that could be material, individually or when aggregated with misstatements
in other balances or classes. The level of detection risk relates directly to the auditor's substantive
procedures. The auditor's control risk assessment, together with the inherent risk assessment, influences the
nature, timing and extent of substantive procedures to be performed to reduce detection risk, and therefore
audit risk, to an acceptably low level.
Some detection risk would always be present even if an auditor were to examine 100 percent of the account
balance or class of transactions because, for example, most audit evidence is persuasive rather than
conclusive. The auditor should consider the assessed levels of inherent and control risks in determining the
nature, timing and extent of substantive procedures required to reduce audit risk to an acceptably low level.
In this regard the auditor would consider:
a. The nature of substantive procedures, for example, using tests directed toward independent parties outside
the entity rather than tests directed toward parties or documentation within the entity, or using tests of
details for a particular audit objective in addition to analytical procedures;
b. The timing of substantive procedures, for example, performing them at period end rather than at an earlier
date; and
c. The extent of substantive procedures, for example, using a larger sample size.
Answer No. 6
As an auditor of Surya Nepal Pvt. Ltd., I will obtain the following information:
i. Understanding of the information system, including the related business processes, relevant to
financial reporting,
ii. The classes of transactions in the company's operations that are significant to the financial
statements;
iii. The procedures, within both automated and manual systems, by which those transactions are
initiated, authorized, processed, recorded, and reported;
iv. The related accounting records, supporting information, and specific accounts in the financial
statements that are used to initiate, authorize, process, and record transactions;
v. How the information system captures events and conditions, other than transactions, that are
significant to the financial statements, and
vi. The period-end financial reporting process.
Further, as an auditor, I will also obtain an understanding of how IT affects the company's flow of
transactions. The identification of risks and controls within IT is not a separate evaluation. Instead, it is an
integral part of the approach used to identify significant accounts and disclosures and their relevant
assertions and, when applicable, to select the controls to test, as well as to assess risk and allocate audit
effort.
A company might use automated procedures to initiate, record, process, and report transactions, in which
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case records in electronic format would replace paper documents. When IT is used to initiate, record,
process, and report transactions, the IT systems and programs may include controls related to the relevant
assertions of significant accounts and disclosures or may be critical to the effective functioning of manual
controls that depend on IT.
As an auditor I will obtain an understanding of specific risks to a company's internal control over financial
reporting resulting from IT. Examples of such risks include:
 Reliance on systems or programs that are inaccurately processing data, processing inaccurate data, or
both;
 Unauthorized access to data that might result in destruction of data or improper changes to data, including
the recording of unauthorized or non-existent transactions or inaccurate recording of transactions
(particular risks might arise when multiple users access a common database);
 The possibility of IT personnel gaining access/privileges beyond those necessary to perform their
assigned duties, thereby breaking down segregation of duties;
 Unauthorized changes to data in master files;
 Unauthorized changes to systems or programs;
 Failure to make necessary changes to systems or programs;
 Inappropriate manual intervention; and
 Potential loss of data or inability to access data as required.
Answer No. 7
As an external auditor of Mero Mobile Pvt. Ltd., I will use the work of an Internal Auditor, PQR and
Associates. Auditor alone cannot wholly and completely perform all the auditing activities. They must rely
and get their work done by some other auditors, experts, valuators and other professionals.
Also, mandatory use of actuarial valuation in insurance companies has extended the use of work of other
experts. In this regards, professional auditor can consider the work of others in following ways:
 Using the work of another auditor

 Considering the work of internal auditor
 Using the work of an expert
The external auditor should evaluate the internal audit function to the extent he/she considers that it will be
relevant in determining the nature, timing and extent of his compliance and substantive procedures.
Depending upon such evaluation, the external auditor may be able to adopt less extensive procedures than
would otherwise be required. By its very nature, the internal audit function cannot be expected to have the
same degree of independence as is essential when the external auditor expresses his/her opinion on the
financial information. The report of the external auditor is his/her sole responsibility, and that responsibility
is not by any means reduced because of the reliance he/she places on the internal auditor’s work.
The external auditor’s general evaluation of the internal audit function will assist him/her in determining the
extent to which he can place reliance upon the work of the internal auditor. The external auditor should
document his/her evaluation and conclusions in this respect. The important aspects to be considered in this
context are:
2. Organizational Status: Whether internal audit is undertaken by an outside agency or by an internal

audit department within the entity itself and the internal auditor reports to the management. In an ideal
situation, he reports to the highest level of management and is free of any other operating responsibility.
Any constraints or restrictions placed upon his work by management should be carefully evaluated. In
particular, the internal auditor should be free to communicate fully with the external auditor.
3. Scope of Function: The external auditor should ascertain the nature and depth of coverage of the
assignment which the internal auditor discharges for management. He should also ascertain to what
extent the management considers, and where appropriate, acts upon internal audit recommendations.
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4. Technical Competence: The external auditor should ascertain that internal audit work is performed by
persons having adequate technical training and proficiency. This may be accomplished by reviewing the
experience and professional qualifications of the persons undertaking the internal audit work.
5. Due Professional Care: The external auditor should ascertain whether internal audit work appears to be
properly planned, supervised, reviewed and documented. An example of the exercise of due professional
care by the internal auditor is the existence of adequate audit manuals, audit program, and working
papers.
Having decided in principle that he intends to rely upon the work of the internal auditor, it is desirable that
the external auditor ascertains the internal auditor’s tentative plan for the year and discusses it with him at as
early a stage as possible to determine areas where he considers that he could rely upon the internal auditor’s
work. Where internal audit work is to be a factor in determining the nature, timing and extent of the external
auditor’s procedures, it is desirable to plan in advance the timing of such work, the extent of audit coverage,
test levels and proposed methods of sample selection, documentation of the work performed, and review and
reporting procedures.
Coordination with the internal auditor is usually more effective when meetings are held at appropriate
intervals during the year. It is desirable that the external auditor is advised of, and has access to, relevant
internal audit reports and in addition, is kept informed, along with management, of any significant matter that
come to the internal auditor’s attention and which he believes may affect the work of the external auditor.
Similarly, the external auditor should ordinarily inform the internal auditor of any significant matters which
may affect his work.
Answer No. 8
An audit notebook is a book in which a large variety of matters observed during the course of audit are
recorded. It is thus a part of the permanent record of the auditor available for reference later on, if required.
The audit note book also provides a valuable help to the auditor in picking up the links of work when the
concerned assistant is away or the work is stopped temporarily because in it are recorded along with
observations, the various queries, explanations obtained and evidence seen, while queries remaining
undisposed of would be noted for follow up. It is more satisfactory in some ways, however, to use loose
sheets for entering queries and notes which, subsequently, on being punched, may be filed in a special query
file maintained for each client or along with the clients’ accounts and papers, separately for each year.
Significant matters observed during the course of audit, a record of which should be kept in the Audit Note
Book are:
a. Audit queries not cleared immediately.

b. The mistakes or irregularities observed during the course of audit.
c. Unsatisfactory book-keeping arrangements, costing method, internal or financial administration or
organization.
d. Important information about the company which is not apparent from the accounts.
e. Special points requiring consideration at the time of verification of final accounts.
f. Important matters for future reference.
The audit notes constitute important evidence of matters considered by the auditor during the course of the
audit. Audit notes can be an important defense tool for the auditor in the event of an action for negligence in
the discharge of his duties being subsequently brought against him.
Answer No. 9
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 a Statement of Financial
Position account 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
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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
Revenue cycle transactions include all the processes ranging from the initiation of a sales transaction to
distribution of a product, billing the customer, and collecting cash for the sale. Sales transactions are always
material to a company’s financial statements and often are subject to manipulation. Many audit failures have
been characterized by misstatement of sales. Because sales are often subject to misstatement, special
attention is paid to the control environment and to management’s motivation to “stretch” accounting
principles to achieve desired revenue reporting. When examining sales transactions, the auditor also gathers
evidence on proper credit authorization and the proper valuation of the recorded transactions. Further, review
of sales contracts provides evidence to analyze the adequacy of the client’s warranty expenses and related
liability. Revenue transactions often serve as a basis for computing commissions for sales staff. Sales
information is used for strategic long-term decision making and marketing analysis. Thus, the accuracy of
accounting in the revenue cycle is important for management decisions as well as for the preparation of
financial statements. The sales process differs with each client, but the commonalities of the revenue cycle
can be used to develop audit programs for most organizations. For example, a sale of a consumable goods in
a department store differs from a sale of construction equipment, and both of these differ from a catalog sale
of a lamp placed over the internet. Some organizations generate paper-based sales documentation; others
maintain an audit trail only in computerized form. The control concepts are similar, but the means to
implement and document the transactions differ. These control objectives of sales and debtors include:
a. Customers' orders should be authorized, controlled and recorded in order to execute them promptly.
b. Goods shipped and work completed should be controlled to ensure that invoices are issued and
revenue recorded for all sales.
c. Goods returned and claims by customers (for example, in respect of damaged goods) should be
controlled in order to determine the liability for goods returned and claims received.
d. Invoices and credits should be appropriately checked for accuracy and should be authorized before
being entered in the receivables' records.
e. Authorized customer transactions, and only those transactions, should be accurately entered in the
accounting records.
f. There should be procedures to ensure that sales invoices are subsequently paid by customers and that
doubtful amounts are identified in order to determine any provisions or write offs required.
Vouching
Answer No. 10 (a)
Goods sent on Consignment can be vouched as follow:
 Verify the ‘Accounts Sales’ submitted by the consignee showing goods sold and stock of goods in hand;
 Reconcile the figure of the goods on hand, as given in the last Accounts Sales, with the Proforma
Invoices and Accounts Sales received during the year. If any consignment stock was in the hands of the
consignee at the beginning of the year, the same should be taken into account in the reconciliation;
 Obtain confirmation from the consignee for the goods held on consignment on the Statement of
Financial Position date. Verify the terms of agreement between the consignor and the consignee to check
the commission and other expenses debited to the consignment account and credited to the consignee’s
account. The Accounts Sales also must be correspondingly checked;
 Ensure that the quantity of goods in hand with the consignee has been valued at cost plus proportionate
non-recurring expenses, such as, freight, dock dues, customs due, etc., unless the value is immaterial. In
case net realizable value is lower, the stock in hand of the consignee should be valued at net realizable
value. Also, see that the allowance has been made for damaged and obsolete goods while computing the
valuation; &
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 See that goods in hand with the consignee have been shown distinctly under stocks.
Answer No. 10 (b)

Vouching procedure for Sales Commission is as follow:
 Review the rules, regulation, policies and manual of the organization in respect of sales commission.
 Ascertain agreement, if any, in respect of sales transaction actually occurred during the year carried out
by authorized parties on its behalf. Sales commission on such transaction should be in accordance with
the terms and conditions as specified.
 Check evidence of services rendered by the party to whom commission is paid with reference to
correspondence etc.
 Ensure that the sales in fact have taken place and the same has been charged to Statement of Profit or
Loss.
 Compare the amount incurred in previous years with reference to total turnover.
Answer No. 10 (c)

Audit of Foreign Travel Expenses shall be done as follow:
 Examine Travelling Allowance (T. A.) bills submitted by the employees stating the details of tour, details
of expenses, etc.
 Verify that the tour programme was properly authorized by the competent authority through travel order
(TO).
 Check the T. A. bills along with accompanying supporting documents such as air tickets, travel agents
bill, and hotel bills with reference to the internal rules for entitlement of the employees and also make
sure that the bills are properly passed.
 See that the tour report accompanies the T. A. bill. The tour report will show the purpose of the tour.
Satisfy that the purpose of the tour as shown by the tour report conforms to the authorization for the tour.
 Check the regulations relating to foreign exchange provided by Nepal Rastra Bank.
Answer No. 10 (d)

Audit of expenditure incurred for Research and Development expenses can be done as follow:
 Ascertain the nature of research and development work at the outset and enquire whether separate
Research and Development Department exists.
 See allocation of expenses under revenue and deferred revenue. Ensure that expenses which are routine
development expenses are charged to Statement of Profit or Loss.
 Check whether the concerned research activity is authorized by the Board and has relevance to the
objectives of the company.
 Examine that research expenses for developing products or for inventing a new product are treated as
deferred revenue expenditure to be written off over a period of three to five years, if successful. In case it
is established that the research effort is not going to succeed, the entire expenses incurred should be
written off to the Statement of Profit or Loss.
 Ensure that if any machinery and equipment have been bought specially for the purpose of research
activity, the cost thereof less the residual value should be appropriately debited to the Research and
Development Account over the years of research.
Verification of Assets and Liabilities

Answer No. 11
NAS 37 defines the contingent liability as:
a. A possible obligation that arises from past events and whose existence will be confirmed only by the
occurrence or non-occurrence of one or more uncertain future events not wholly within the control of
the entity; or
b. A present obligation that arises from past events but is not recognized because:
i. It is not probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; or
ii. The amount of the obligation cannot be measured with sufficient reliability.
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A contingent liability will be known or determined only on the occurrence or non-occurrence of one or more
uncertain future events. The uncertainty as to whether there will be any legal obligation distinguishes a
contingent liability from an actual liability. An obligation may be a contingent liability when the very basis
of the obligation is contested. For example, when a claim is made against a company in respect of
infringement of a patent and the suing company does not possess a legitimate title. Some examples of
contingent liabilities include claims against the company not acknowledged as debts, arrears of fixed
cumulative dividends, etc. NAS 37 requires that in case there is a probability that a loss may be incurred and
a reasonable estimate of the amount can be made, then such contingent liability must be adjusted in the
financial statements. Otherwise, disclosure will have to be made describing nature of the event, uncertainties
affecting the event and estimate of the financial effect or a statement that such an estimate cannot be made.
The auditor may take following steps to verify the contingent liabilities:
i. Inspect the minute books of the company to ascertain all contingent liabilities known to the
company.
ii. Examine the contracts entered into by the company and the likelihood of contingent liabilities
emanating there from.
iii. Scrutinize the lawyer’s bills to track unreported contingent liabilities.
iv. Examine bank letters in respect of bills discounted and not matured.
v. Examine bank letters to ascertain guarantees on behalf of other companies or individuals.
vi. Discuss with various functional officers of the company about the possibility of contingent liability
existing in their respective field.
vii. Obtain a certificate from the management that all known contingent liabilities have been included in
the accounts and they have been properly disclosed.
viii. Ensure that proper disclosure has been made as per NAS 12, Provisions, Contingent Liabilities and
Contingent Assets.
Company Audit
Answer No. 12:
Section 112 of the Companies Act deals with the provisions regarding disqualification of an auditor.
1. None of the following persons or the firms or companies in which such persons are partners shall be
qualified for appointment as auditor and shall, despite appointment as auditor, continue to hold office:
a. Any director, any advisor appointed with entitlement to regular remuneration or cash benefit, any
person or employee or worker involved in the management of the company or a partner of any of
them and/or employee of any of such partners or a close relative of a director or partner, and/or
employee of such relative;
b. A debtor who has borrowed money from the company in any manner, or a person who has failed to
pay any dues payable to the company within the time limit and is in such arrears or close relative of
such person;
c. A person who has been sentenced to punishment for an offense pertaining to audit and a period of
three years has not elapsed thereafter;
d. A person who has been declared insolvent;
e. A substantial shareholder of the company or a shareholder holding one percent or more of the paid-up
capital of the company or his close relative;
f. A person who has been sentenced to punishment for an offense of corruption, fraud or a criminal
offense involving moral turpitude and a period of five years has not elapsed thereafter;
g. A person referred to in Sub-Section (3) of Section 111;
h. In the case of a public company, any person who works, whether full time or part time, for any
governmental body or anybody owned fully or partly by the Government of Nepal or any other
company or a partner of such person or a person who is working as an employee of such partner or a
person who is authorized to sign any documents or reports to be prepared by the management of the
company;
i. A company or corporate body with limited liability;
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j. A person having interest in any transaction with the company or his/her close relative or a director,
officer or substantial shareholder of another company having any interest in any transaction with the
company.
2. The auditor shall, prior to his/her appointment, give information in writing to the company that he/she is
not disqualified pursuant to Sub-Section (1).
3. Where any auditor becomes disqualified to audit the accounts of a company or there arises a situation
where he/she becomes disqualified for appointment or can no longer continue to act as an auditor of the
company, he/she shall immediately stop performing audit which is required to be performed or is being
performed by him/her and give information thereof to the company in writing.
4. An audit performed by an auditor who has been appointed in contravention of this Section shall be invalid.
Answer No. 13
Section 33 of the Companies Act sets out the provisions related to Share Certificates which are as follows:
1. A share certificate in the prescribed format shall be issued to every shareholder in respect of each share
subscribed by him/her, within two months after the allotment of shares; the share certificate shall bear
the signature of any two out of a director or chief executive of the company or the company secretary, in
the case of a public company, and the signature of the person as mentioned in the articles of association
or consensus agreement, in the case of a private company, and also bear the seal of the company, if any.
2. While issuing a share certificate in respect of any shares held jointly by two or more persons, the share
certificate may be issued to any one of them, by mentioning their names in the certificate. However, the
names of all shareholders shall be mentioned in the shareholder register.
3. If a share certificate is lost or destroyed because of a divine act or otherwise, the shareholder shall give
information thereof to the registered office the company immediately when he/she knows that the share
certificate has been so lost or destroyed because of the divine act or otherwise.
4. If any application made pursuant to Sub-Section (3), the company shall, if the matter contained in the
application seems to be reasonable after inquiring into all necessary matters relating thereto, issue
another share certificate to the applicant, by collecting the duplicate fees for duplicate copy as prescribed
in the articles of association; and this matter shall also be recorded in the shareholder register.
5. Notwithstanding anything contained elsewhere in this Section, if a listed company has caused a register
to be maintained, pursuant to Sub-Section (6) of Section 46, by the securities registrar authorized to
provide securities deposit service under the prevailing law, provision may be made to issue to the
shareholder a securities deposit passbook or any other certificate certifying him/her to be a shareholder,
instead of a share certificate.
6. A certificate issued by a company, signed by its competent officer and under the seal of the company, if
any, to be used by it, specifying the number of shares or debentures held by any shareholder or
debenture-holder shall be prima facie evidence of his/her title to such shares or debentures.
7. If any company allots any shares or debentures or transfers such shares or debentures to a representative
of a body licensed under the prevailing law to carry on securities dealings, the provision of Sub-
Section(1) shall not apply to such shares or debentures.
Audit of Special Sector

Answer No. 14
As an auditor of Women Nepal, I will make an Audit programme which will include in a sequential order for
all assets, liabilities, income and expenditure ensuring that no material item is omitted for each of the
following items:
i. Corpus Fund: The contributions/grants received towards corpus are vouched with special reference to the
agreements/letters from the donor(s). The interest income is checked with Investment Register and
Physical Investments titles documents in hand.
ii. Reserves: Vouch transfers from projects / programmes with donors' letters and Board resolutions of
NGO. Also check transfer of gross value of asset sold from capital reserve to general reserve and
adjustments during the year.
iii. Ear-marked Funds: Check requirements of donor institutions, Board resolution of NGO, rules and
regulations of the schemes of the ear-marked funds.
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iv. Project/Agency Balances: Vouch disbursements and expenditure as per agreements with donors for each
of the balances.
v. Loans: Vouch loans with loan agreements, receipt counter-foil issued.
vi. Fixed Assets: Vouch all acquisitions/sale or disposal of assets including depreciation and the
authorizations for the same. Also check donor's letters/agreements for the grant. In the case of
immovable property, check title, etc.
vii. Investments: Check Investment Register and the ownership documents of investments ensuring that
investments are in the name of the NGO. Verify further investments and disinvestments for approval by
the appropriate authority and reference in the bank accounts for the principal amount and interest.
viii. Cash in Hand: Physically verify the cash in hand and imprest balances, at the end of the year and
whether it tallies with the books of account.
ix. Bank Balance: Check the bank reconciliation statements and ascertain details for old outstanding and
unadjusted amounts.
x. Stock in Hand: Verify stock in hand and obtain certificate from the management for the quantities and
valuation of the same.
xi. Programme and Project Expenses: Verify agreement with donor/contributor(s) supporting the particular
programme or project to ascertain the conditions with respect to undertaking the programme / project and
accordingly, in the case of programmes/ projects involving contracts, ensure that income tax is deducted
at source, deposited and returns filed and verify the terms of the contract.
xii. Establishment Expenses: Verify that provident fund, gratuity, life insurance premium, employee’s
insurance as per employee’s byelaws and their administrative charges are deducted, contributed and
deposited within the prescribed time. Also check other office and administrative expenses such as
postage, stationery, travelling, etc.
Answer No. 15
In respect of leasing transactions entered into by a MAW Leasing Company involved in the leasing capital
goods, I as an auditor will check/verify the following:
1. The objective of the leasing company to ascertain if company can undertake leasing activities. Further,
whether company can undertake financing activities or not.
2. Whether there exists a procedure to ascertain the credit analysis of lessee like lessee’s ability to meet the
commitment under lease, past credit record, capital strength, availability of collateral security etc.
3. The lease agreement should be examined and the following points may be noted:
a. The description of the lessor, the lessee, the equipment and the location where the equipment is to be
installed. (The stipulated time that the equipment shall not be removed from the described location
except for repairs. For the sake of identification, the lessor may also require plates or markings to be
attached to the equipment).
b. The tenure of lease, dates of payment, lease charges, deposits or advance etc. should be noted.
c. Whether the equipment shall be returned to the lessor on termination of the agreement and the cost
shall be borne by the lessee.
d. Whether the agreement prohibits the lessee from assigning or subletting the equipment and authorizes
the lessor to do so.
4. Examine the lease proposal form submitted by the lessee requesting the lessor to provide him the
equipment under lease.
5. Examine the lease proposal form submitted by the lessee requesting the lessor to provide him on lease
the equipment.
6. Ensure that the invoice is retained safely as the lease is a long-term contract.
7. Examine the acceptance letter obtained from the lessee indicating that the equipment is received in order
and is acceptable to the lessee,
8. Check the Board resolution authorizing a particular director to execute the lease agreement has been
passed by the lessee.
9. See that the copies of the insurance policies have been obtained by the lessor for his records.
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Government Audit
Answer No. 16
According to propriety audit, the auditors try to bring out cases of improper, avoidable, or infructuous
expenditure even though the expenditure has been incurred in conformity with the existing rules and
regulations. A transaction may satisfy all the requirements of regularity audit insofar as the various
formalities regarding rules and regulations are concerned, but may still be highly wasteful. A building may
be constructed for installing a telephone exchange but may not be used for the same purpose resulting in
infructuous expenditure or a school building may be constructed but used after five years of its completion, a
case of avoidable expenditure.
Audit should, therefore, try to secure a reasonably high standard of public financial morality by looking into
the wisdom, faithfulness and economy of transactions. There are some general principles, legally or
otherwise, which have for long been recognized as standards of financial propriety. Audit against propriety
seeks to ensure that expenditure conforms to following principles:
1. The expenditure should not be prima facie more than the occasion demands.
2. Every public officer is expected to exercise the same vigilance in respect of expenditure incurred from
public moneys as a person of ordinary prudence would exercise in respect of expenditure of his own
money.
3. No authority should exercise its powers of sanctioning expenditure to pass an order which will be directly
or indirectly to its own advantage.
4. Public moneys should not be utilized for the benefit of a particular person or section of the community
unless:
i. the amount of expenditure involved is insignificant; or
ii. a claim for the amount could be enforced in a Court of law; or
iii. the expenditure is in pursuance of a recognized policy or custom; and
iv. the amount of allowances, such as travelling allowances, granted to meet expenditure of a particular
type should be so regulated that the allowances are not, on the whole, sources of profit to the
recipients.
Section 9 of Audit Act, 2075 requires the Auditor General to audit following matters considering the
propriety thereof:
i. On the propriety of any expenditure and its authorization, if in the opinion of the Auditor General such
expenditure is a reckless one or is an abuse of national property, whether movable or immovable,
despite that the expenditure confirms to the authorization, and
ii. On the propriety of all authorizations issued in respect of any grant of national property whether
movable or immovable, fixed or current, or underwriting of any revenue, or any contract, license or
permits relating to mining, forest, water resources, etc. and any other act of abandoning movable or
immovable, assets of the nation.
iii. On propriety of public construction, repair and maintenance, procurement and supply, contracts related
to consultancy services, services flow, public expenditure, government revenue operation and other
financial transactions

Answer No. 17
Auditor should obtain sufficient and appropriate audit evidences and test them before framing an opinion
about the assertions, the financial statements reveal. Audit evidence to draw reasonable conclusions on
which to base the auditor’s opinion is obtained by performing Risk Assessment Procedures. Audit
procedures to obtain audit evidence can include Analytical Procedures.
Analytical procedure involves evaluations of financial information through analysis of plausible relationships
among both financial and non-financial data. Analytical procedures also encompass such investigation as is
necessary of identified fluctuations or relationships that are inconsistent with other relevant information or
that differ from expected values by a significant amount.
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
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procedures may be applied to consolidated financial statements, components and individual elements of
information. The application of analytical procedures is based on the expectation that relationships among
data exist and continue in the absence of known conditions to the contrary. The presence of these
relationships provides audit evidence as to the completeness, accuracy and validity of the data produced by
the accounting system.
Types of Analytical Procedures

i. Ratio Analysis
ii. Trend Analysis
iii. Reasonable Tests
iv. Model-Based Procedures
Purpose of Analytical procedures: Analytical procedures are used throughout the audit process and are
conducted for three primary purposes:
i. Preliminary Analytical Review- Risk Assessment

ii. Substantive Analytical Procedures
iii. Final Analytical Review
One of the objectives of NSA 520 is that relevant and reliable audit evidence is obtained when using
substantive analytical procedures. The primary purpose of substantive analytical procedures is to obtain
assurance, in combination with other audit testing (such as tests of controls and substantive tests of details),
with respect to financial statement assertions for one\ or more audit areas. Substantive analytical procedures
are generally more applicable to large volumes of transactions that tend to be more predictable over time.
Audit Procedure to Obtain Audit Evidence

Answer No. 18
Internal Checks and Internal Audit are important constituents of Accounting Controls. Internal check system
implies organization of the overall system of book-keeping and arrangement of staff duties in such a way that
no person can carry through a transaction and record every aspect thereof. It is a part of overall control
system and operates basically as a built-in-device as far as organization and job-allocation aspects of the
controls are concerned. The system provides existence of checks on the day-to-day transactions which
operate continuously as part of the routine system whereby the work of each person is either proved
independently or is made complimentary to the work of another. The following are the objectives of the
internal check system:
i. To detect errors and frauds with ease.
ii. To avoid or atleast minimize the possibility of commission of errors and frauds by any staff.
iii. To increase the efficiency of the staff working within the organization.
iv. To locate the responsibility area or the stages where actual fraud and error occurs.
v. To protect the integrity of the business by ensuring that accounts are always subject to proper
scrutiny and check.
vi. To prevent and avoid the misappropriation or embezzlement of cash and falsification of accounts.
The effectiveness of an efficient system of internal check depends on the following considerations:
a. Clarity of Responsibility
b. Division of Work
c. Standardization
d. Appraisal
The scope of statutory audit is limited by both time and cost. Therefore, it is increasingly being recognized
that for an audit to be effective especially in case of large organization, the existence of a system of internal
check is essential.
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Answer No. 19
The auditor’s report shall be in writing. A written report encompasses reports issued in hard copy and those
using an electronic medium. The auditor's report includes the following basic elements, ordinarily in the
following layout:
1 Title
2 Addressee
3 Auditor’s Opinion
4 Basis for Opinion
5 Going Concern (where applicable)
6 Key Audit Matters (For listed entities)
7 Other Information (For listed entities)
8 Responsibilities for the Financial Statements
9 Auditor’s Responsibilities for the Audit of the Financial Statements
10 Other Reporting Responsibilities
11 Name of the Engagement Partner
12 Signature of the Auditor
13 Auditor’s Address
14 Date of the Auditor’s Report
15 UDIN
Brief descriptions of the above elements are as follows:
Sections Purposes
1 Title To differentiate the audit report from the rest of the financial
statements and other matters included and to focus on word
independent.
2 Addressee To specify the addressee of the report, clarify its intended user.
Law, regulation or the terms of the engagement may specify to
whom the auditor’s report is to be addressed in that particular
jurisdiction. The auditor’s report is normally addressed to those
for whom the report is prepared, often either to the shareholders
or to those charged with governance of the entity whose financial
statements are being audited.
3 Auditor’s Opinion States whether or not the financial statements show a true and fair
view of the performance and position of the company. Also
identify the title of each statement comprising financial
statements, specify date/period covered of the entity.
4 Basis for Opinion To provide a description of the professional standard applied
during the audit to provide confidence to users that the report can
be relied upon.
5 Going Concern (where To ensure going concern basis of accounting is appropriate or
applicable) break value required.
6 Key Audit Matters (For listed To draw attention to any other significant matters of which the
entities) users should be aware to aid their understanding of the entity.
7 Other Information (For listed To clarify that management is responsible for the other
entities) information. The auditor’s opinion does not cover the other
information and the auditor’s responsibility is only to read the
other information and report as per NSA 720.
8 Responsibilities for the To clarify that management is responsible for preparing the
Financial Statements financial statements and for the internal control. Included to help
minimize the expectation gap.
9 Auditor’s Responsibilities for To clarify that auditor is responsible for expressing reasonable
the Audit of the Financial assurance only and has assessed risks, internal control, going
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Statements concern and accounting policies. Included to help minimize the

expectation gap.
10 Other Reporting To highlight any additional reporting responsibility, if applicable.
Responsibilities
11 Name of the Engagement To identify the person responsible for the audit report in case of
Partner (For listed entities) queries.
12 Signature of the Auditor To show the engagement partner or fifi rm accountable for the
opinion.
13 Auditor’s Address To identify the specific office of the engagement partner in case
of any queries.
14 Date of the Auditor’s Report To identify the date up to which the audit wok has been
performed. Postdate information has not been considered by
auditor.
15 UDIN Unique Document Identification Number for verification and
certification of the documents and for securing documents and
authenticity thereof by Regulators.

Answer No. 20
1. Unqualified Opinion/Clean Opinion:

An unqualified opinion should be expressed when the auditor concludes that the financial statements
give a true and fair view.
This opinion should indicate that
 The financial statements have been prepared using the generally accepted accounting principles,
which have been consistently applied.
 The financial statements comply with the relevant statutory requirements and regulations.
 There is adequate disclosure of all material matters.
2. Modified Opinion
There are the following situations of modifying the auditor’s report
As per NSA 705 Modifications to The Opinion, in the Independent Auditor’s Report, the auditor shall
modify the opinion in the auditor’s report when:
a. The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole
are not free from material misstatement; or
b. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.
i. In case of matters that do not affect the auditor’s opinion

 Emphasis of Matter
NSA 706 Emphasis of Matter Paragraphs and Other Matter(s) Paragraphs in the Independent
Auditor’s Report deals with the auditor’s consideration of the inclusion in the auditor’s report of:
a. An Emphasis of Matter paragraph to draw users’ attention to a matter presented or disclosed
in the financial statements that the auditor judges important to their understanding of the
financial statements; or
b. An Other Matter(s) paragraph to draw users’ attention to any other matter that
ii. In respect of the matter that do affect the auditor’s opinion

 Qualified Opinion
A qualified opinion should be expressed when the auditor concludes that an unqualified opinion
cannot be expressed but the effect of any disagreement with management, or limitation on scope
is not so material and pervasive so as to require an adverse opinion or a disclaimer of opinion. A
qualified opinion should be expressed as being ‘except for’ the effects of the matter to which the
qualification relates.
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 A Disclaimer Opinion
A disclaimer of opinion should be expressed when the possible effect of a limitation on scope is
so material and pervasive that the auditor is unable to obtain sufficient appropriate audit
evidence and is thus unable to express on the financial statements.
 An Adverse Opinion
An adverse opinion should be expressed when the disagreement with the management is so
material and pervasive to the financial statements that the auditor concludes that a qualification
of the report is inadequate to disclose the misleading or incomplete nature of the financial
statements.
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PAPER 3: CORPORATE AND OTHER LAWS
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Revision Questions
NEPAL CHARTERED ACCOUNTANT ACT, 2053 AND RULES 2061
Question No. 1
Mr. Rajesh Khatri, a member in practice, name was removed from the membership register of the Institute of
Chartered Accountants of Nepal. On inquiry with the Institute he was informed that his name has been
removed since he has not paid the fee for renewal of membership. After knowing the reasons for removal of
his name from membership register he paid the required fee to the institute and applied to reinstate his
membership. Can he do so? Answer it in the light of Nepal Chartered Accountants Act, 2053.
COMPANIES ACT, 2063

Question No. 2
Empire Cement Ltd. a public company have issued and paid-up share capital of 20 crores after issuing 5 lakh
units of equity shares having face value of Rs 100 per share to general at Rs 300 per share. The premium
collected amounting to NRs.10 crores is deposited in share premium account of the company. The company
has earned profit for continuous five years with free reserve amounting to NRs.1 crores and general reserve
Rs 2 crores as on 31st Ashad 2078. The board of directors of Empire Cement Ltd. wants to propose bumper
dividend to the shareholders of the company in the form of cash dividend at the rate of 25% and stock
dividend at the rate of 25%.
Mr. Ramesh Dhimal, managing director of the company wants to know whether the company can distribute
the above-mentioned dividend to the shareholders. Comment.
Question No. 3
The Board of Directors of Platinum Suppliers Ltd.. at a meeting held on 15.01.2078 resolved to borrow
overdraft loan of NRs.10 crores from a commercial bank. Subsequently the said amount was received by the
company. One of the Directors, who opposed the said borrowing as not in the interest of the company has
raised an issue that the said borrowing is outside the powers of the Board of Directors.
The Company seeks your advice and the following data is given for your information:
(i) Paid up Share Capital NRs.10 crores
(ii) Free Reserve NRs.4 crores
(iii) Share Premium NRs.2 crores
(iv) Trust Receipt Loan (3 months) NRs.5 crores
(v) Long Term Loan NRs.5 crores
Advise the management of the company.
Question No. 4
Neon Venture Private Limited is a company in which there are eight shareholders. One of the shareholders
named Mr. Tilak Ram holding one-fifth of the paid-up share capital makes an application to the company
setting out reasons to call extra ordinary general meeting of the company. The board of directors did not call
the extra ordinary general meeting saying that the application does not fulfill the condition specified in
Companies Act, 2063. Comment.
Question No. 5
In the annual general meeting of XYZ Ltd., while discussing on the matter of appointment of director of Mr.
X, allegations of fraud and financial irregularities were levelled against him by some members. This resulted
into chaos in the meeting. The situation was normal only after the Chairman declared about initiating an
inquiry against the director, Mr. X, however, was appointed in the meeting. The matter was published in the
newspapers next day. The managing director of the company wants to know your view on the appointment
of Mr. X. Please suggest with reference to the provisions of the Companies Act, 2063.
SECURITIES ACT, 2063

Question No. 6
Mr. Raman Das, a member of Securities Board of Nepal, representing the Institute of Chartered Accountants
of Nepal was in board since 15th Mangsir 2078. He is a Chartered Accountant in practice and a disciplinary
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action was initiated against him on 25th Posuh 2078 for misconduct. The Council decided to take disciplinary
action against Mr. Raman Das on 5th Falgun, 2078 and prohibit him to carry on auditing for the period of 1
year and revoked his license.
You being the legal consultant of Securities Board, advise whether Mr. Raman Das may continue to be the
member of the Board. Please comment in accordance with the Securities Act, 2063.
BANKS AND FINANCIAL INSTITUTIONS ACT, 2073

Question No. 7
Referring to the provisions of the Banks and Financial Institutions Act, 2073, state the circumstances under
which the Nepal Rastra Bank may refuse to issue a license to any bank or financial institutions to carry on
banking and financial transactions.
Question No. 8
The board of directors of Rolex Bank Ltd. has appointed Mr. Surya Narayan Yadav as an independent
director through its 123rd Board Meeting. The number of directors according to articles of association in the
board of the company is seven. Some of the shareholders of the company are against the decision of the
board to appoint independent director with the contention that independent director should be appointed only
from general meeting. Advise the company clearly stating the provision regarding the appointment of
independent director in the board and number of directors.
NEPAL RASTRA BANK ACT, 2058

Question No. 9
State the function, duties and powers of Nepal Rastra Bank in accordance with the provision of Nepal Rastra
Bank Act, 2058.
INSURANCE ACT, 2049

Question No. 10
State the difference between re-insurance and double insurance.
INDUSTRIAL ENTERPRISES ACT, 2076

Question No. 11
Ms. Jigmi Lobsang, a Chinese citizen wants to carry on business of organic fertilizer factory by
incorporating a company in Butwal with foreign investment of Rs 10 crores. For the purpose of establishing
a factory, he met the Minister relating to Economic Affairs of Lumbini Province and requests him to
facilitate for registration. Mr. Jigmi requests you to prepare the documents for registering the industry at
Department of Industry, Lumbini Province. You being the consultant of Mr. Jigmi advise him whether the
proposed company can do business by registering at respective department of Lumbini province as provided
under Industrial Enterprises Act, 2076.
Question No. 12
Janaki Sugar Mills Ltd. wants to establish a sugar factory at Birgunj and require land area of 100 bigha
(above land ceiling limit) for the company. The company wants exemption on land ceiling and wants to
acquire the required land for the proposed factory. Whether the company can do so? Comment in accordance
with Industrial Enterprises Act, 2076?
LABOUR ACT, 2074

Question No. 13
Ms. Dikshya Sapkota, working as an employee of Venus Decorators Pvt. Ltd. has accumulated home leave
of 100 days and sick leave of 50 days at the end of financial year 2077-78. Her last drawn basic salary for the
month of Ashad, 2078 was basic salary Rs 30,000 and allowance Rs 20,000. She asked management of the
company to pay her the en-cashable leave money with respect to accumulated home leave and sick leave as
on 31st Ashad 2078, however the management refuses to pay. As a friend of Ms. Dikshya, advise whether she
is eligible to en-cash money of unused home leave and sick leave in accordance with the provision of the
Labour Act, 2074.
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Question No. 14
Kulekhani Resort Nepal Pvt. Ltd. is running its hotel and restaurant business since five years. The
management of the company wants to know about the time period of providing notice during the termination
of employment contract by employer as well as labour in accordance with the labour act, 2074.
BONUS ACT, 2030

Question No. 15
Enumerate the various characteristics where the payment of bonus to the employees is restricted under the
provision of Bonus Act, 2030.
NEGOTIABLE INSTRUMENT ACT, 2034

Question No. 16
What are the essential characteristics of Negotiable Instruments?
Question No. 17
On a Bill of Exchange for NRs.1 lakh, X’s acceptance to the Bill is forged. ‘A’ takes the Bill from his
customer for value and in good faith before the Bill becomes payable. State with reasons whether ‘A’ can be
considered as a ‘Holder in due course’ and whether he (A) can receive the amount of the Bill from ‘X’.
SOCIAL WELFARE ACT, 2049

Question No. 18
Mr. Jenith Lee, a citizen running his non-profit organization in France for the welfare of children. While
visiting Nepal with his family he noticed that children in rural areas are not even getting basic necessities. He
now wants to know open international non-profit organization in Nepal and wants to know from you about
the permission and agreement to be made by his proposed organization. Advise.
WTO AND NEPAL LAWS

Question No. 19
What are the major functions of the World Trade Organization as envisaged in its Charter?
MULUKI DEWANI SAMHITA AIN, 2074

Question No. 20
Falano, Somesh and Jagat jointly borrowed Rs. 50 million for a business project from a common friend
Kamal. They jointly promised to repay the borrowed amount. Under the provisions of the Muluki Dewani
(Samhita) Ain, 2074, in the absence of express agreement, what would be the rights and liabilities of joint
promisors? Also explain their rights and liabilities if Kamal releases Jagat from the joint liability. Please
Comment.
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Suggested Answer / Hints:

NEPAL CHARTERED ACCOUNTANT ACT, 2053 AND RULES 2061
Answer No. 1
According to sec 22(1) of Nepal Chartered Accountant Act, 2053, the Council may issue an order to remove
the name of any member from the membership register, in any of the following circumstances:
a) If the member is punished by a court for a criminal offence involving moral turpitude;
b) If the member fails to pay the fees required to be paid to the institute;
c) If the member fails to abide by the professional conduct referred to in this act and the rules framed
under this act;
d) If the member becomes insane; or
e) If the member dies.
Further, if a person whose name has been removed from membership register makes an application,
accompanied by a reasonable ground to obtain the membership again, the Council may decide to grant
membership, by re-registering his or her name, upon receipt of the fees as prescribed.
In the given case, Mr. Rajesh Khatri, a member of the Institute fails to pay the renewal fees to the Institute
which falls under the conditions for removal of his name from the membership register. After knowing the
reasons for his removal from list of members, Mr. Rajesh Khatri has paid the renewal fee for membership
and again applied for obtaining the membership.
Hence, payment of fees due to the Institute falls under reasonable ground to again obtain the membership.
On receipt of proper application and payment of fees to the Institute, the Council may decide to grant
membership and incorporate his name in the register of member.
COMPANIES ACT, 2063

Answer No. 2
According to Sec 29(2) of the Companies Act, 2063, where the shares are sold at a premium, a sum in excess
of the face value, out of the proceeds thereof, shall be deposited in a premium account to be opened to that
effect. Further, as per sec 29(3), the company may use the share premium account for following purpose:
a) Issue of fully paid bonus shares,
b) Premium payable on redemption of redeemable preference shares,
c) Writing off preliminary expenses,
d) Expenses or commission paid or discount allowed on issue of shares.
In the given case, the total reserve and surplus of Empire Cement Ltd. amounts to NRs.15 crores which
consists of free reserve amounting to NRs.1 crores, general reserve of NRs.2 crores and share premium of
NRs.10 crores. The company has proposed the dividend of 50% which consists of 25% cash dividend
amounting to NRs.5 crores and 25% cash dividend amounting to NRs.5 crores.
Besides, the company can distribute bonus shares/stock dividend amounting to NRs.5 crores from share
premium account whereas it can only distribute cash dividend of 3 crores out of free reserve and general
reserve. Share premium cannot be used for the distribution of cash dividend whereas it can be used for issue
of bonus shares.
Thus, due to shortfall of free reserve and general reserve by NRs.2 crores, Empire Cement Ltd. will not be
in position to distribute 25% cash dividend rather it can only distribute maximum 15% cash dividend to its
shareholders. However, it can distribute 25% stock dividend/bonus shares to its shareholders by utilizing the
share premium account.
Answer No. 3
According to the provisions of Section 105(1)(b) of the Companies Act, 2063, there are restrictions on the
borrowing powers to be exercised by the Board of Directors. According to the said section, the Board of
Directors of a public company, or of a private company receiving loans from any bank or financial
institution, shall not, borrow money where the money to be borrowed will exceed the aggregate of the paid
up capital and free reserves except with a special resolution being adopted by the general meeting.
While calculating the limit, the short-term loans with a term less than six months obtained by the company
from a bank or financial institutions in the ordinary course of business transaction will be excluded.
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In the given case, looking at financial position of the Platinum Suppliers Ltd., the sum of paid up capital and
free reserve amounts to NRs. 14 crores and the borrowings of the company at present is NRs. 5 crores in the
form of long-term loan and proposed additional borrowings amounts to NRs.10 crores. Trust Receipt Loan of
three-month maturity period shall not be added while calculating borrowed money. The proposed total
borrowings for the purpose of this section amounts to NRs. 15 crores which is in excess of paid-up share
capital and free reserve. Thus, the borrowing will be beyond the powers of the Board of directors.
Hence, the management of Platinum Suppliers Ltd., should take steps to convene the general meeting and
pass a special resolution by the members in the meeting as stated in Section 105(1)(b) of the Companies Act,
2063. Afterwards, the borrowing will be valid and binding on the company and its members.
Answer No. 4
According to Section 82(3) of the Companies Act, 2063, the Board of Directors of shall call extra ordinary
general meeting, if the shareholders holding at least 10% shares of the paid–up capital of a company or at
least 25% shareholders of the total number of shareholders make an application, setting out the reasons
therefore, to the registered office of the company for calling an extra-ordinary general meeting. Further, as
per section 82(4), if the Board of Directors does not call the extra-ordinary general meeting within 30 days
from the date on which an application is made, the concerned shareholders may make a petition to the Office
setting out the matter; and if such petition’s is made, the Office may cause to call such meeting.
In the given case, one shareholder holding 20% shares has made an application to the company setting out
reasons to call extra ordinary general meeting. Even single shareholder holding shares of 10% or more may
file an application to call extra ordinary general meeting. The application made by Mr. Tilak Ram is valid
since he has fulfilled the condition laid down in companies act asking the board to call extra ordinary general
meeting.
Hence, The Board of Directors of Neon Venture Pvt. Ltd. shall call extra ordinary general meeting within 30
days of receipt of application from Mr. Tilak Ram. Where the board fails to call the extra ordinary general
meeting of the company, Mr. Tilak Ram may file a petition to the office to call the meeting; in such a case
office may cause the board of directors to call the extra ordinary general meeting.
Answer No. 5
According to Sec 89(1)(e) of the Companies act, 2063, any person shall not be eligible to be appointed for
the post of director, who is convicted for an offense of theft, fraud, forgery or embezzlement or misuse of
goods or funds delegated to him, in an authorized manner, and sentenced in respect thereof, a period of 3
years has not elapsed from the expiry of the sentence.
In the given case, Mr. X is alleged of fraud and financial irregularities against him by some of the
shareholders. Mr. X however was appointed in the annual general meeting of XYZ Ltd. while initiating an
inquiry against the director. Fraud and irregularities were leveled against Mr. X by some members however
he is not convicted and not been sentenced thereof.
Thus, Mr. X will be eligible to be appointed in the post of director since he is not convicted for fraud and
financial irregularities and not been sentenced thereof.
SECURITIES ACT, 2063

Answer No. 6
According to sec 12(2)(d) of the Securities Act, 2063, the Chairperson and the member shall be removed
from the securities board, if one has been held disqualified to carry on any occupation or business by the
reason of misconduct and his certificate has been revoked or he has been restricted to carry on a business.
Further, as per section 12(1), the Government of Nepal shall remove the Chairperson or the Member, where
there occurs a circumstance for removal. Provided that prior to making such a removal, the Government of
Nepal shall not deprive the concerned person of a reasonable opportunity to defend himself.
In the given case, Mr. Raman Das is nominated by institute of chartered accounts of Nepal as a member of
the securities board. He was found guilty of misconduct and action against him was taken by the council of
institute of chartered accountants of Nepal and his license has been revoked. The punishment against him
fulfills the condition to disqualify Mr. Raman Das to continue as a member of the securities board.
Thus, Mr. Raman Das may not continue to be the member of the board and Government of Nepal shall
remove Mr. Raman Das for being disqualified to continue as a member of Securities Board. However,
opportunity of being heard shall be provided to Mr. Raman Das before his removal.
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BANKS AND FINANCIAL INSTITUTIONS ACT, 2073

Answer No. 7
In accordance with Section 35 of the Banks and Financial Institutions Act, 2073, notwithstanding anything
contained in condition for issuance for license, the Nepal Rastra Bank may, in any of the following
circumstances, refuse to issue a license to any bank or financial institution to carry on the banking and
financial transactions:-
a) If it causes adverse effects on the stability, fair competition and credibility of the financial system of
Nepal,
b) If it is not reasonable and appropriate to issue license for operation of financial transaction for protection
of interests of depositors,
c) If the infrastructure to operate banking and financial transactions are not completed,
d) If other particulars or conditions pursuant to this Act are not found to be completed.
If there exists a situation where the license to carry on the banking and financial transactions cannot be
issued, the Nepal Rastra Bank shall give a notice thereof, accompanied by the reason for the same, to the
concerned bank or financial institution within 90 days from the date of application.
Answer No. 8
According to Sec 14(3) of Banks and Financial Institutions Act, 2073, a bank or financial institution shall
have a Board of Directors comprising of at least five directors and not exceeding seven directors. Further as
per Sec 14(3), the Board of Directors shall appoint at least one independent director from among the persons
possessing qualifications and experience pursuant to Section 17 and information thereof shall be furnished to
the first general meeting to be held after such appointment.
Provided that the promoter, director or shareholder possessing more than 0.1% share of the bank and
financial institution and his/her member of family shall not be allowed to become independent director.
In the given case, Surya Narayan Yadav has been appointed as independent director of Rolex Bank Ltd. by
the board of directors. The board of directors shall appoint one independent director from amongst the person
having experience and qualification as prescribed by Banks and Financial Institutions Act, 2073. Board
meeting is required for the appointment of independent director instead of General Meeting.
Hence, the appointment of Mr. Surya Narayan Yadav by the board of directors of the company is valid and
the contention of the disagreed shareholders is invalid. However, the information about the appointment of
Mr. Surya Narayan Yadav should be provided at first general meeting held after the appointment of such
director.
NEPAL RASTRA BANK ACT, 2058

Answer No. 9
According to Sec 5 of Nepal Rastra Bank Act, 2058, to achieve the objective of Nepal Rastra Bank,
following function, duties & powers of NRB has been prescribed:
a) To issue bank notes and coins;
b) To formulate necessary monetary policies in order to maintain price stability and to implement or cause
to implement them;
c) To formulate foreign exchange policies and to implement or cause to implement them;
d) To determine the system of foreign exchange rate;
e) To manage and operate foreign exchange reserve;
f) To issue license to commercial banks and financial institutions to carry on banking and financial
business and to regulate, inspect, supervise and monitor such transactions;
g) To act as a banker, advisor and financial agent of Government of Nepal;
h) To act as the banker of commercial banks and financial institutions and to function as the lender of the
last resort;
i) To establish and promote the system of payment, clearing and settlement and to regulate these activities;
(i1) To operate open market transaction for managing liquidity using required instruments; and
(j) To implement or cause to implement any other necessary functions which the Bank has to carry out in
order to achieve the objectives of the Bank under this Act;
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INSURANCE ACT, 2049

Answer No. 10
Following are the difference between re-insurance and double insurance:
Particulars Reinsurance Double Insurance
Meaning - The insurance company gets part - When a person gets his life or goods
of the risk insured with another insured with more than one insurance
insurance company, to avoid heavy company is double insurance.
financial losses is called as
reinsurance.
Status - Reinsurance is between insurance - Situation in which the same risk is
companies only. insured by two overlapping but
independent insurance policies.
Nature of Policy - The reinsurance may be for full - A person can get two or more
amount or for a part of it. policies for same risk.
Claim against loss - In case of loss the first company - In case of non-life insurance, Insured
will get compensation from the can claim the amount for actual loss
second company. suffered in the same proportion the
insurer share total premium. In case
of life insurance, the insurer gets
claim from all the policy as an
independent policy.
From whom the - The insured will be concerned only - When a person purchases two or
claim be made with the company from which it more policies for his risk, he can
purchased the insurance policy. claim the loss from different
companies.
Benefits - Re-insurance spreads out the risk - Buying two or more policies can
so that one company won’t go only be made “whole” not better
bankrupt with huge loss. after a loss.
INDUSTRIAL ENTERPRISES ACT, 2073

Answer No. 11
According to section 4(1) of Industrial Enterprises Act, 2076, following industry shall be registered with
Department of Industry:
a) Industry requiring permission before registration as mentioned in Annexure 1,
b) Industry established with Foreign Investment,
c) Industry based on subject matter stated in under schedule 5 subject of Constitution of Nepal,
d) Industry with working place in two or more than two provinces,
e) Industries providing educational consultancy services in relation to diplomatic affairs.
Further, as per section 4(2) & (3), the registration, renewal and regulation of all industries which do not fall
under the jurisdiction of department of industry, would fall under the jurisdiction of Provincial Government.
However, industries subjected to obtain prior approval are not excluded from obtaining the required
approval. The Department of Industries (“DOI”), shall continue to be responsible for registration, renewal
and regulation until the provincial governments make necessary arrangement through introduction of
provincial laws.
In the given case, Mr. Jigmi Lobsang, a Chinese citizen wants to open organic fertilizer factory with foreign
investment of 10 crores. Since, the industry established with foreign investment shall have to register and
carry on all administration activities from Department of Industry. All the documents and information shall
be submitted to department of industry for the process of registration and approval.
Hence, Mr, Jigmi Lobsang shall register his organic fertilizer factory at department of industry instead of
respective Department of Industry at Lumbini province.
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Answer No. 12
According to Sec 32 of Industrial Enterprises Act, 2076, if any industry requires such land that exceeds the
ceiling of land allowed [Land ceiling limit for a person or family is 10 bigha in the Tarai, 25 ropani in
Kathmandu valley and 70 ropani in hilly regions as per Section 7 of the Land (Eighth Amendment) Act,
2020] under the prevailing law, the industry may make an application to the industry registration body to
have exemption from the ceiling with respect to the land exceeding the ceiling.
The industry registration body shall examine, as required, the application received and submit a report along
with its opinion to the Ministry. On receipt of the application, the Government of Nepal may, subject to the
prescribed criteria, grant exemption so that the industry can hold land exceeding the ceiling, according to the
need of, and as mentioned in the approved scheme or project proposal of, the industry.
The land so exempted from the provision of ceiling may not be used for purpose other than for which it has
been exempted. The quantity of maximum land allowed to be held by an industry is on the basis of the need,
capital and nature of the industry.
In the given case, Janaki Sugar Mills Ltd. wants to acquire the required land for the purpose of running the
sugar industry which seems reasonable. On receipt of the application from Janaki Sugar Mills Ltd., the
Government of Nepal may grant exemption to hold 100 bigha land by prescribing certain conditions to be
used in accordance with project proposal of the industry.
Hence, it should file an application to body registering the industry to have exemption from ceiling to
acquire the land exceeding the limit that can be purchased. The Government of Nepal may prescribe certain
condition and grant exemption for acquiring the land exceeding the limit.
LABOUR ACT, 2074

Answer No. 13
According to section 49 of the Labour Act, 2074, a labour is entitled to accumulate the home leave and the
sick leave for up to 90 days and 45 days respectively. Where a labour is relieved from the service for any
reason or dies, she or such family member of her as prescribed shall get the lump sum amount to be set by
the last basic remuneration being drawn by her for her accumulated home leave and sick leave. A labour
whose accumulated leave exceeds the period specified i.e. 90 days for home leave and 45 days for sick leave,
shall, at the end of each year, get the amount to be calculated by her basic remuneration for the leave of such
excess period.
In the given case, Ms. Dikshya Sapkota has accumulated home leave of 100 days and sick leave of 50 days at
the end of financial year 2077-78. Her last drawn basic salary in the month of Ashad, 2078 is 30,000. She
will be eligible to en-cash, if it exceeds 90 days against home leave and 45 days against sick leave so she can
en-cash money against excess home leave of 10 days and sick leave of 5 days.
Total en-cashable Amount = Last drawn basic salary x (no. of en-cashable home leave + no. of en-cashable
sick leave) = 30,000 x (10 days + 5 days) / 30 days = 15,000/-
Hence, Ms. Dikshya Sapkota, will be eligible to en-cash 15,000 from the company and the refusal of
company management to pay the eligible leave encashment money is invalid.
Answer No. 14
According to section 144 of the Labour Act, 2074, prior to terminating the employment relation in any
circumstance except when employment is terminated upon action taken for misconduct, the employer or
labour shall give a notice as follows to each other:
a) Prior to at least one day, in the case of employment for a maximum of four weeks,
b) Prior to at least seven days, in the case of employment for a period of four weeks to one year, and
c) Prior to at least thirty days, in the case of employment for a period of more than one year.
Where the employer terminates employment without giving the notice mentioned above, the employer shall
pay the amount equal to the remuneration for the period requiring the notice to be given to the concerned
labour.
Where the labour terminates employment without giving a notice to the employer as mentioned above, the
employer may deduct the amount equal to the remuneration for the period requiring the notice to be so given
from the remuneration payable to the concerned labour.
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BONUS ACT, 2030

Answer No. 15
According to Section 8 of Bonus Act, 2030, notwithstanding anything contained in Section 6, an employee
shall not be entitled to obtain bonus under this Act, if he/she is punished or dismissed from service for
committing any act as follows:
a) Theft of the property of the enterprise or any damage to such property.
b) Illegal strike or abetment to other for such strike,
c) Riots or breaching of discipline.
Provided that, this Section shall not be deemed to be prejudiced to obtain bonus in the case of the bonus for a
period before committing such a punishable act.
NEGOTIABLE INSTRUMENT ACT, 2034

Answer No. 16
Following are the essential characteristics of the Negotiable Instruments:
a) It must be payable to order or bearer.
b) Every negotiable instrument must be in writing. There cannot be any instrument made in oral form.
c) Every negotiable instrument is presumed to have been made, drawn, accepted, endorsed, negotiated or
transferred for consideration.
d) An instrument payable to order is negotiated by endorsement and delivery and an instrument payable to
bearer is negotiable by mere delivery.
e) Every holder of a negotiable instrument is presumed to be holder in due course.
f) A holder in due course (i.e. the person who became the possessor of negotiable instrument before
maturity for valuable consideration and in good faith) gets the instrument free from all defects in the
title of the transferor.
g) The negotiable instrument should be unconditional.
h) Every negotiable instrument must consist of the time and the title.
i) Holder of the instrument is presumed to be the owner.
Answer No. 17
According to section 2(o) of the Negotiable Instruments Act, 2034, ‘holder in due course’ means a person
having entitlement upon the Negotiable Instrument according to law, in the case of a Negotiable Instrument
payable to a bearer, and the Payee or a person endorsed by him, in the case of a Negotiable Instrument
payable to the ordered person.
Provided that, such entitlement must have received or endorsed before the maturity of such Negotiable
Instrument without having sufficient cause to believe that any defect existed in the title of the person from
whom he derived his title.
Since, ‘A’ in this case became a possessor of the bill for value and in good faith before the bill became
payable, he can be considered as a holder in due course.
But, where a signature on the negotiable instrument is forged, it becomes a nullity. The holder of a forged
instrument cannot enforce payment thereon. In the event of the holder being able to obtain payment in spite
of forgery, he cannot retain the money. The true owner may sue on tort the person who had received. This
principle is universal in character, by reason where of even a holder in due course is not exempt from it. A
holder in due course is protected when there is defect in the title. But he derives no title when there is entire
absence of title as in the case of forgery.
Hence ‘A’ cannot receive the amount on the bill.
SOCIAL WELFARE ACT, 2049

Answer No. 18
According to section 12 of Social Welfare Act, 2049, any foreign non-government organization if willing to
work within Nepal, before starting the work shall submit an application to the Council for permission.
The Council, after receiving an application may give permission deciding within three months. The
permitted foreign non-government organization, before operating the work within Nepal, shall have to reach
in an agreement with the Council.
Thus, Mr. Jenith Lee have to obtain permission from council and before carrying welfare activities in Nepal
52 | P a g e
his international non-profit organization shall have to reach an agreement with the council.
WTO AND NEPAL LAWS

Answer No. 19
The major functions of the WTO as envisaged in its Charter are as follows:
a) Administer and implement the trade agreements
b) Act as a forum for multilateral trade negotiations
c) Seek to resolve trade disputes
d) Oversee national trade policies
e) Cooperate with other international institutions involved in global economic policy making
f) Maintain trade related database. Members are required to notify in detail various trade measures and statistics
g) Act as watchdog of international trade, constantly examining the trade regimes of individual members
h) Act as a management consultant for world trade
i) Provide technical assistance and training for developing countries
MULUKI DEWANI SAMHITA AIN, 2074

Answer No. 20
(a) Any one of Joint promisors may be compelled to perform
As per sub section 4 of section 529 of Muluki Dewani (Samhita) Ain, 2074, except as otherwise provided for
in the contract, in case two or more person have jointly signed a contract with any other party, any of or all
persons jointly signing the contract shall fulfill or cause to do so for the fulfillment of the liability under the
contract.
In the given case, Kamal may compel any of or all joint persons namely Falano, Somesh and Jagat to fulfill
the liability under the contract. Each joint promisor (Falano/Somesh/Jagat) may compel every other joint
promisor to contribute equally with himself to the performance of the promise. If anyone of joint promisor
(Falano/Somesh/Jagat) or more of them makes default in such contribution, the remaining joint promisors
must bear the loss arising from such default in equal share.
(b) Effect of release of one joint promisor
As per sub section 6 of section 529 of Muluki Dewani (Samhita) Ain, 2074, where two or more than two
person sign a joint contract, and any party gives concession to any person belonging to the other party from
the liabilities of his share, the other person shall not be free from the remaining liabilities of the contract.
In the given case, if Kamal releases Jagat, it will not discharge the other joint promisors Falano and
Somesh; neither would it free Jagat from responsibility to Falano and Somesh.
THE END
53 | P a g e

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CHARTERED ACCOUNTANCY PROFESSIONAL II (CAP-II)

Revision Test Paper

PAPER 1: Advanced Accounting ……………………………03

PAPER 2: Audit and Assurance……………………………...23

PAPER 3: Corporate and Other Laws……………………..…43

PAPER 1: ADVANCED ACCOUNTING

1. Statement of Cash Flow (NAS 7)

2. NAS 21 - The Effects of Changes in Foreign Exchange Rates

Payment Dates Amount Payable

3. Accounting Policies, Changes in Accounting Estimates and Errors ~ NAS 8

4. Substance Over Form

How much revenue should be recognized by X?

Gross profit margin 23.5%

Current ratio 2.75

6. Bad and Doubtful Debts

7. Profit or Loss Pre and Post Incorporation

SALE Limited was incorporated on 01.08.20X1 to take-over the business of a

D became insolvent and a dividend of 25 paise in a rupee was received in respect of

11. Insurance Claim for Loss of Stock

12. Accounting for Government Grants

13. Framework for Preparation and Presentation of Financial Statements

14. The Effects of Changes in Foreign Exchange Rates

15. Property, Plant and Equipment

16. Liquidation of Company

17. Branch Accounting

18. Write short notes on Triple Entry Accounting

20. Construction Contracts

Suggested Answers /Hints:

2. Answer as per NAS 21 - The Effects of Changes in Foreign Exchange Rates

30-Sep-16 Advance to suppliers 3,050,000

30-Sep-16 PPE in transit/ CWIP 6,090,000

3. Answer to Accounting Policies, Changes in Accounting Estimates and Errors ~

W2 – Impact of prior period adjustment 2015 2014 2013

4. Substance Over Form

6. Bad and Doubtful debts

(540,000 x 100/ 120)

Provision (allowance) for doubtful debts A/c (Rs. 000)

Bad debts A/c (Rs. 000)

W1: Calculation of doubtful debts 2017 Rs. 2016 Rs.

7. Profit or Loss Pre and Post Incorporation

Particulars Total Basis of Pre- Post-

Interest on debentures 32,000 Post 32,000

2. Gross Profit Ratio

10. Banking - Capital Adequacy Ratio

The CAR formula is:

11. Insurance Claim for loss of stock

Claim=Insured value ×Loss suffered

Claim Amount = Rs 71,500X Rs70,000/ Rs83,500= Rs59,940 (rounded off)

12. Accounting for Government Grants

2nd Fixed Asset Account Dr. 7.5

13. Framework for Preparation and Presentation of Financial Statements

Realizable (Settlement) Value

14. The Effects of Changes in Foreign Exchange Rates

15. Property, Plant and Equipment

16. Liquidation of Company Neha Limited

(iii) Uncalled Capital @ 25 on 2,000 shares = Rs 50,000

(v) Commission on Call = 20,000 x 2/100 = Rs 400

17. Branch Accounting

Memo: Branch debtors account

18. Triple Entry Accounting

20. Construction Contracts

Statement of Profit or loss

Cost [TC x %] (200) (90) (600) (890)

Profit/(loss) 100 45 (50) 95