Professional Documents
Culture Documents
SECTION A
Q.1 The following information pertains to a listed company, Lahore Qalandars (Pakistan) Limited:
(i) Shareholders’ equity as at 1 January 2013:
Share capital (Rs. 10 each) Rs. 116 million
Retained earnings Rs. 58 million
(ii) Profit after tax for the year ended 31 December 2013 amounted to Rs. 47 million. (2012: Rs. 38
million)
(iii) Depreciation expense for the year ended 31 December 2013 included incremental depreciation
amounting to Rs. 6.5 million on account of revaluation surplus. Revaluation surplus relating to
land and building arose during the year amounted to Rs. 20 million.
(iv) In May 2013 the management discovered that inventories costing Rs. 18 million have been
misappropriated. The entire loss has been recorded in 2013. However, it is estimated that
inventories costing Rs. 13 million and Rs. 5 million were misappropriated in the years 2012 and
2013 respectively.
(v) Subsequent to preparation of the draft financial statements, an error has been detected in the
financial statements for the year ended 31 December 2012 whereby the accounting depreciation
on an assembly plant was mistakenly accounted for at Rs. 21.8 million instead of Rs. 12.8
million. The assembly plant was installed on 1 January 2011 at a cost of Rs. 80 million and is
depreciated at 20% per annum using the diminishing balance method.
(vi) Right shares were issued on 15 September 2013 at Rs. 12 per share in the ratio of 1 right share
for every 4 shares held by the shareholders of the company.
(vii) Dividend information is as under:
2013 2012 2011
Cash dividend – Interim *18% - 10%
Cash dividend – Final 14% 15% -
Bonus shares – Final - - 16%
* interim dividend was announced before the issue of right shares.
11
Q.2 On 1st July 2019, a company received a grant of Rs. 25 million from the State Government for
the purchase of a new manufacturing Plant in Sahiwal. The plant was purchased for Rs. 80
million. Further cost of Rs. 5 million was incurred on its installation. During its installation,
there was a short circuit occurred in the factory due to which some part of plant suffered a break
down. Rs. 1 million was incurred on its repair and plant was fully installed and available for
use on 30 October 2019.
The plant has an estimated useful life of 12 years and it will be depreciated on straight line method.
One of the terms of grant is to provide 60% paid training internships to the graduates of National
Residents of the Sahiwal City for the period of 4 years. Otherwise it would trigger repayment
of grant on a sliding scale as follows:
On May 30, 2022 there was a reduction in utilization of plant due to obsolescence of the plant which
resulted in reduction of sales.
Due to underutilization of plant, the company decided to take an impairment review on 30 June,
2022. Results of impairment shows Rs. 12 million recoverable amount as on 30 June, 2022.
Initially 60% of the trainees were hired but due to certain reasons, this condition was breached in
2023 and grant was repaid on June 30, 2024.
Required:
Pass the journal entries for the year ending June 30, 2019, 2020, 2021, 2022 and 2023 if grant is kept
safely as deferred income. (09)
Rs. in million
Building 240 36
(ii) On 1 April 2022 (NL) acquired a specialized machine for its production department. The
available information isas follows:
Rupees
List price of machine
8,500,000
Freight charges 295,000
Electrical installation cost 415,000
Staff training for use of machine 350,000
Pre-production testing 193,000
Purchase of a two year maintenance contract 450,000
Estimated residual value 285,000
(iv) On 1 August 2022, a new equipment was acquired by making payment of Rs.80 million to the
supplier. An old equipment was also given in exchange to the supplier. The fair values of the old
and new equipment were assessed at Rs.27 million and Rs.96 million respectively. The old
equipment had been acquired at a cost of Rs.45 million on 1 November 2018. Cost incurred on
installing the new equipment amounted to Rs.8 million.
(v) NL has building with remaining useful life of 10 years. NL uses cost modelunder IAS 16 for its
properties.
On 31 October 2022, building was vacated, and management decided to use building on rent
from now own wards.. At this date the fair value was Rs. 195.million. NL uses fair value model
under IAS 40.
On 31 December 2022, the value of property has increased to Rs. 198 million. Transfer from
revaluation surplus toretained earnings is made at the time of disposal only.
Further Rental earned during the year is amounting to Rs. 2.5 million per month.
(vi) Depreciation will be charged on plant and machinery (other then specialized machinery) at 15%
on cost while depreciation on equipment is 20%.on cost .
Required:
Prepare notes on ‘Property, Plant and Equipment’ ‘Investment Property’ and Borrowing Cost , for
inclusion in NL’s financial statements for the year ended 31 December 2022. (19)
Q.4 Select the most appropriate answer from the options available for each of the following Multiple
Choice Questions (MCQs).
Q.5 Telepath acquired an item of plant at a cost of Rs. 800,000 on 1 April 2020 that is used to produce
and package pharmaceutical pills. The plant had an estimated residual value of Rs. 50,000 and an estimated
life of five years, neither of which has changed. Telepath uses straight-line depreciation. On 31 March 2022,
Telepath was informed by a major customer (who buys products produced by the plant) that it would no
longer be placing orders with Telepath. Even before this information was known, Telepath had been having
difficulty finding work for this plant. It now estimates that net cash inflows earned from the plant for the
next three years will be:
On 31 March 2025, the plant is still expected to be sold for its estimated realizable value. Telepath has
confirmed that there is no market in which to sell the plant at 31 March 2012. Telepath’s pre-tax and post-
tax cost of capital is 10% and 8.6% respectively.
Required:
Calculate carrying amount of plant at 31 March 2022. (04)
Q.6 Following is the receipt and payment account for the year December 31, 2019 of Islamabad
United, a non-profit organization, which is engaged in providing technological education.
Islamabad United
Receipts And Payments Account
For The Year Ended December 31, 2019
Receipt Rupees Payments Rupees
Opening Balance 125,000 Electricity 184,000
Subscription 650,000 Rent Of Premises 57,000
Debtors 63,000 Repairs And Maintenance 47,000
Sale of equipment on Mar 31, 2019 124,000 Miscellaneous Expenses 425,000
Sales of Merchandise 132,000 Wages and Salaries 38,000
Contributions Received 514,000 Creditors 98,000
Investment Income – Endowment 15,000 Office Supplies 181,000
Utilities 132,000
Furniture – June 30 2019 128,000
Transportation in for Merchandise 6,500
Closing Balance 249,000
Purchase of Merchandise 78,000
1,623,500 1,623,500
Additional Information
i) The Composition of accumulated funds at January 1, 2019 is as follows
Type Remarks Amount
General Fund It is an unrestricted fund used for the general operations of the 350,000
Organization
Techno Fund It is a restricted fund used for a technologically equipped laboratory 180,000
for students, an annual subscription of Rs. 1,000 has to be paid for
using the laboratory
Endowment Fund The fund is used to finance the education of meritorious Students 120,000
650,000
ii) Islamabad United had following assets appearing in its balance sheet as at 31 December 2018
Assets NBV Rate Method
Vehicle 588,000 10% WDV
Furniture 385,000 8% WDV
Equipment 642,000 15% WDV
Buildings 284,000 12% WDV
Sold Equipment had a NBV of Rs 142,000 at the time of sale.
iii) Islamabad United Operates a canteen on its premises for its members as well as public which is
operated by volunteers and maintains a margin of 30%, The details of canteen operations were as
follows:
Particulars Opening Balance Closing Balance
Inventory 34,000 42,000
Debtors 32,000 43,000
Creditors 64,000 48,500
Rs. 12,000 worth of debtors were written off as non-recoverable
Q.7 The following information relates to Qazi Limited (QL) for the year ended 31 December 2011:
(i) Issued share capital on 1 January 2011 consisted of 80 million ordinary shares of Rs. 10 each.
(ii) Profit after tax amounted to Rs. 170 million.
(iii) On 30 September 2011, QL issued 20% right shares at a price of Rs. 11 per share. The market
value of the share immediately before the right issue was Rs. 12.50 per share.
(iv) There are 25,000 share options in existence. Each option allows the holder to acquire 120 shares
at a strike price of Rs. 10 per share. The options have already vested and will expire on 30 June
2013. The average market price of ordinary shares in 2011 was Rs. 12 per share.
(v) QL had issued debentures in 2008 which are convertible into 6 million ordinary shares. The
debentures shall be redeemed on 31 December 2012. The conversion option is exercisable during
the last six months prior to redemption. The interest on debentures for the year 2011 amounted to
Rs. 11 million.
(vi) Preference shares issued in 2009 are convertible (at the option of the preference shareholders)
into 4 million ordinary shares on 31 December 2013. The dividend paid on preference shares
during 2011 amounted to Rs. 5.75 million.
(vii) The company is subject to income tax at the rate of 35%.
Required: Prepare extracts from the financial statements of Qazi Limited for the year ended 31
December 2011 showing all necessary disclosures related to earnings per share. (Ignore
comparative figures) (11)
Q.8
Rs. in (000)
Kashmir Strikers Limited (KSL)
Statement of comprehensive income
For the year ended 30th September, 2020
Revenue 44,900
Cost of sales (31,300)
Gross Profit 13,600
Distribution Cost (2,400)
Administrative expenses (7,850)
Investment property
- Rental received 250
- Fair value changes (700)
Income from Government Grant 100
Finance cost (600)
Profit before tax 2,400
Income Tax (600)
Profit for the year 1,800
Other comprehensive income (1,300)
Total comprehensive income for the year 500
2020 2019
Additional information: -
1. On 1st July 2020, KSL acquired a new investment property at a cost of Rs. 1.4 million. On this
date,it also transferred one of its other investment properties to property, plant and equipment at its fair
value of Rs. 1.6 million as it became owner - occupied on that date. KSL adopts the fair value model for
its investment properties.
2. KSL also has a policy of revaluing its other properties (included as property, plant and equipment)
to market value at the end of each year. Other comprehensive income and the revaluation surplus both relate
to these properties.
3. Depreciation of property, plant & equipment during the year was Rs. 1.5 million. An item of plant
with a carrying amount of Rs. 2.3 million was sold for Rs. 1.8 million during September 2020.
4. At start of the year two right shares were issued for every five shares and on 1st April 2020 there
was a 10% bonus (script) issue of equity shares utilizing retained earning account.
5. Trade debts written off during the year amounting to Rs. 250,000. It is the policy of the
company tomaintain the allowance for doubtful debts at 10% of trade debts.
6. Trade & other payables include accrued financial charges amounting to Rs. 100,000 (2019 Rs.
50,000).
7. Government grant received was to cover the expenses for ecological measures during 2020 – 2025
and will be recognized as income to match the expenses over the period.
Required:
Prepare the statement of cash flows for Kashmir Strikers Limited for the year ended 30th September, 2020
accordance with IAS - 7 Statement of Cash flows using the indirect method. (17)
Good Luck
SOLUTION # 01
(a)
Lahore Qalandars (Pakistan) Limited ------------------ Rs. in ‘million’ ------------------- Marks
Statement of Changes in Equity Share Share Revaluation Retained 0.5
For the year ended December 31, 2013 capital premium Surplus earnings Total
Opening 1.1.12 (W-3):(W-2) 100.00 36.00 36.00 0.75
Final Bonus dividend for 2011 (116/116 16) 16.00 (16.00) - 0.5
Total comprehensive income for 2012
34.00 34.00
(38 - 13 + 9) – Restated 1.25
Closing 31.12.12 (restated) 116.00 54.00 170.00
Final dividend for 2012 (116 15%) (17.40) (17.40) 0.5
Interim dividend for 2013 (116 18%) (20.88) (20.88) 0.5
Right issue (W-4) 29.00 5.80 34.80 1.25
Total comprehensive income for 2013
20.00 58.20 78.20
(47 + 13 - 1.8) 1.25
Transfer to retained earnings (6.50) 6.50 - 0.5
Closing 31.12.13 145.00 5.80 13.50 80.42 244.72
WORKINGS
(W-1) Journal entries (By opening books of each year)
2012 2013
Particulars Dr. Cr. Particulars Dr. Cr.
Misappropriation 13 Inventory 13
Inventory 13 Misappropriation 13
PPE (12.80 - 21.80) 9 Depreciation 1.8
Depreciation 9 PPE (10.24 - 8.44) 1.8
(W-2) Calculation of opening retained earnings on 1.1.12
0.5
Dr. Retained earnings A/c Cr.
1.1.12 b/d (bal.) 36
Bonus 2011 (116/116 16) (W-3) 16 Profit after tax 38
31.12.12 c/d 58
1
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
(W-5) Calculation of depreciation of each year on assembly plant
Wrong Correct 1
01-Jan-11 Cost 80.00 80.00
31-Dec-11 Depreciation (80 x 20%) (16.00) (16.00)
31-Dec-11 Book value 64.00 64.00
31-Dec-12 Depreciation (given in question); (64 20%) (21.80) (12.80)
31-Dec-12 Book value 42.20 51.20
31-Dec-13 Depreciation (42.20 20%); (51.20 20%) (8.44) (10.24)
31-Dec-13 Book value 33.76 40.96
9
(b) Marks
Lahore Qalandars (Pakistan) Limited
Notes to the financial statements
For the year ended December 31, 2013
1 Correction of errors
1.1 In May 2013 the management discovered that inventories costing Rs. 18 million have been
misappropriated. The entire loss has been recorded in 2013. However, it is estimated that
inventories costing Rs. 13 million and Rs. 5 million were misappropriated in the years 2012 and
2013 respectively. 0.5
1.2 An error has been detected in the financial statements for the year ended 31 December 2012 0.5
whereby the depreciation on an assembly plant was mistakenly accounted for at Rs. 21.8 million
instead of Rs. 12.8 million.
1.3 The effect of above corrections on relevant line items of financial statements are follows:
Items affecting statement of comprehensive income 2012 1.5
Increase in misappropriation expense 13
Decrease in depreciation expense 9
Decrease in profit (-13 + 9) 4
SOLUTION # 02
Date Description Debit Credit Marks
07/01/2019 Cash/Bank 25 0.5
Deferred Income 25
07/01/2019 Plant (80+5) 85 0.5
Cash/Bank 85
31/10/2019 Repair expense 1 0.5
Cash/Bank 1
30/06/2020 Depreciation Expense (85/12) 8/12 4.72 0.5
Accumulated Depreciation 4.72
30/06/2020 Deferred Income (25/12) 8/12 1.39 0.5
Grant Income (P/L) 1.39
30/06/2021 Depreciation Expense (85/12) 7.08 0.5
Accumulated Depreciation 7.08
30/06/2021 Deferred Income (25/12) 2.08 0.5
Grant Income (P/L) 2.08
30/06/2022 Depreciation Expense (85/12) 7.08 0.5
Accumulated Depreciation 7.08
30/06/2022 Deferred Income (25/12) 2.08 0.5
2
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Grant Income (P/L) 2.08
30/06/2022 Impairment Loss (P/L) 54.11 1
Accumulated Impairment Loss 54.11
30/06/2023 Depreciation Expense (12/9.33) 1.29 0.5
Accumulated Depreciation 1.29
30/06/2023 Deferred Income (Balancing) 10.69 1.5
P/L (13.75/12) 2.667 3.06
Payable to Government (25 55%) 13.75
SOLUTION # 03
10.1. Revaluation of Property was performed by an independent valuer as on 31 October 2022. 0.50
3
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
10.2. Manufacturing plant was constructed during the year. The cost includes Rs. 43.31 million
(W-2) capitalized for borrowing cost.
10.3. Movement of revaluation surplus 0.50
Opening Balance -
Revaluation surplus / (loss) 8
Transfer to retained earnings (incremental depreciation) -
Closing balance 8
WORKINGS
(W-1) Cost of asset
1.50
Rs in Million
List price 8.50
Less: Trade discount (9,200 5%) 0.425
8.08
Less: Settlement discount (8.075 3%) -0.24
Freight charges 0.30
Electrical installation 0.42
Pre-production testing 0.19
8.74
(W-2) Borrowing cost to be capitalized
Rs. in million 1.25
Payments 650
Borrowing cost:
Interest cost (550×19%×7.5÷12) 65.31
Investment income -22
693.31
(W-3) Exchange of Assets - Journal Entry
Rs. in million
Dr. Cr. 1.50
Asset-New (W.3.1) 115
Acc Dep-Old (40-24.96) (W-3.2) 37.5
Gain on Disposal 20
Asset-Old 45
Cash (80 + 8 installation) 88
4
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
(W.3.1) Asset-New Cost
19.00
5
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
SOLUTION # 04
Marks
Advice given by government increase productivity, its not a government grant
(i) Option d 1
as it improve general trading (as the beneficiary is the whole industry.
(ii) Option d Rs. 8.12 1.5
(iii) Option c 8.5 million under cost Model and 2 Million under Fair value model 1.5
(iv) Option b Rs 474,500 1
(v) Option c Solved question by using periodic inventory system 1
(vi) Option c Both are correct 1
Always remember that due to increase in volume sales and cost of sales both
(vii) Option a & b will be changed in equal proportion, so there's no impact on gross profit due to 1
change in volume.
(viii) Option c Rs. 560,000 1
(ix) Option a Always remember that in Financial Capital Maintainance (real terms), 1
Purchasing power capacity is constant.
Workings are only for understanding of students and are not required in paper
(ii)
Diluted EPS Numerator (A) Denominator (B) EPS (A/B)
Basic 400,000 50,000 8
Preference Shares 22,000 2000 11
422,000 52,000 8.12
(iii)
Under Cost Model Date Description Amount
01/01/2018 Cost 35
31-12-2018 Accumulated Dep (35/30) 3 3.50
31-12-2018 Book Value 31.50
Gain=Sales proceed - Book Value
Gain = 40 - 31.50
Gain = 8.5
Under Fair Value Model Increase in Fair Value is Rs.2m (42 - 40)
Profit under Physical Cap maintenance Profit under historical - (Opening capital 17%)
670000-(1150000 17%)
Rs. 474,500
It should be kept in mind that in physical capital maintenance we should use specific price indices.
6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
SOLUTION # 05
SOLUTION # 06
Expenses
Misc Expenses (425,000 in 20:80) (85,000) 0.25
Wages and salaries (47,000 [W-12] in 40:60) (18,800) 0.25
7
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Islamabad United General Techno Endowment
Total
Statement of changes in net assets Fund Fund Fund 0.5
For the year ended 31.12.19
Opening 50,000 180,000 120,000 650,000 1
Surplus / (Deficit) (276,362) (276,362) 0.5
Subscription income (W-1) 633,000 633,000 1
Contributions 179,900 102,800 282,700 0.5
Investment income (W-8) 17,000 17,000 0.25
Expenses / payments (766,841) (766,841) 0.25
Expenses
Misc Expenses (425,000 in 20:80) 340,000 0.25
Wages and salaries (47,000 [W-12] in 40:60) 28,200 0.5
Office supplies 181,000 0.25
Utilities (132,000 in 50:50) 66,000 0.25
Electricity (192,800 [W-9] in 75:25) 48,200 0.5
Rent (66,800 [W-10] in 70:30) 20,040 0.5
Depreciation: in 60:40
Vehicle (588,000x10%)=58,800 23,520 0.25
Furniture = 35,920 (W-6) 14,368 0.25
Eqipment = 79,703 (W-6) 31,881 0.25
Building (284,000 x 12%) = 34,080 13,632 0.25
766,841
16
c/d 48,500
8
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
(W-5) Canteen Trading
Sales (132,000 + 86,000) 218,000
Less: COS (159,000)
G.P 59,000
Less: Bad debt written off (12,000)
N.P 47,000
(W-6) Depreciation on furniture
On opening (385,000 x 8%) 30,800
On add.(128,000 x 8% x 6/12) 5,120
35,920
Depreciation on equipment
On op.(642,000-147,532)x15% 74,170
On disp. (W-6.1) 5,532
79,703
(W-7) Disposal a/c
Equipment 142,000
R/P 124,000
Loss(Bal) 18,000
c/d 36,000
(W-9) Electricity a/c
b/d 134,000
R/P 184,000 I&E (Bal) 192,800
c/d 125,200
c/d 84,500
(W-11) Repair a/c
b/d 27,600
R/P 47,000 I&E (Bal) 50,400
c/d 31,000
(W-12) Wages and salaries exp a/c
b/d 46,000
I&E (Bal) 47,000 R/P 38,000
c/d 55,000
(W-6.1) Opening BV and dep of disposal
% Rs.
1.1.19 BV 100.00 147,532
31.3.19 Dep (3.75) 5,532
31.3.19 BV 96.25 142,000
9
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
SOLUTION # 07
Marks
Qazi Limited
Statement of Comprehensive Income (Extracts) 0.25
Fot the year ended 31.12.11 Notes Rs. in million
Profit after tax 70 0.5
Basic Earnings per share 33.1 1.99 0.25
Diluted Earnings per share 33.2 1.85 0.25
Qazi Limited
Notes to the Financial Statements 0.25
Fot the year ended 31.12.11
33. Earnings per share
33.1 Basic Earnings per share
Earnings attributable to ordinary shareholders (A) 170.00 0.5
Weighted average number of ordinary shares (B) 85.22 0.5
(A/B) 1.99
33.2 Diluted Earnings per share
Earnings attributable to ordinary shareholders
Weighted average number of ordinary shares (A) 182.90 0.5
(B) 95.72 0.5
(A/B) 1.91
0.5
Before 100 12.50 1,250
New 20 11.00 220
After 120 12.25 1,470
10
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
(W-2) Ranking
Change in Incremental 1.25
Change in denomintor Ranking
numerator EPS
Options 0 0.5 0 I
(0.025 million x 120 x 2 / 12)
Debentures 7.15 6 1.19 II
(11 million x 65%)
Preference shares 5.75 4 1.44 III
SOLUTION # 08
Kashmir Strikers Limited
Statement of Cash Flow
For the year ended 30 September, 2020
Marking
Scheme
Rs.000 Rs.000
Cash flow from opiating Activities
Profit before tax 2,400 0.5
Add: Finance cost 600 0.5
Add: Depreciation for the year 1,500 0.5
Less: Income from government grant (100) 0.5
Add: Loss on sale of PPE (2300 - 1800) 500 1.0
Add: Fair value changes 700 1.0
Less: Rent of investment property (250) 1.0
Operating profit before working capital changes 5,350 0.5
Add: Decrease in inventory 800 0.50
Add: Decrease in net trade debtors (N - 1) 400 0.50
Add: Increase in trade payables 300 0.50
Cash generated from operations [A] 6,850
Interest paid (550) 0.50
Income tax paid (1,950) 0.50
Dividend paid W-5 (5,600) 1.00
Net cash flow from operating activities (1,250) 0.5
Cash flow from investing activities [B]
Disposal proceeds from PPE 1,800 1.00
Acquisition of PPE W-1 (5,000) 2.00
Purchase of investment property W-2 (1,400) 1.00
Investment property rentals received 250 0.50
Cash received from government grants W-3 1,100 0.50
Net cash flow from investing activities (3,250)
Cash flow from financing activities [C]
Proceeds from issue of shares incl. 1.00
11
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
share premium W-4 5,000
Repayment of loan (1,000) 0.50
Net cash flow from financing activities [A + B + C] 4,000
Net decrease in cash & cash equivalents during the year (500)
Opening balance of cash & cash equivalents 300 0.50
Closing balance of cash & cash equivalents (200) 0.50
17.00
N-1 Alternatively increase/decrease of gross trade debtors can be taken then increase/ decrease in
provision for doubtful debts would be adjusted in profit before tax.
WORKINGS
(W-1) Property plant & equipment
b/d 25,200 Disposal 2,300
Transfer from investment property 1,600 Depreciation expense 1,500
Cash (bal.) 5,000 Revaluation loss 1,300
(W-2) Investment Property
b/d 5,000 Transfer to P. P. E 1,600
Fair value loss 700
Cash (bal.) 1,400 c/d 4,100
(W-3) Deferred income
P&L 100 b/d 1,100
C/d 1,000
(W-4) Share capital
b/d 12,000
Right issue including share premium (Bal.) 5,000
Bonus issue 1,400
c/d 18,400
(W-5) Retained earning
Bonus issue 1,400 b/d 11,700
Dividend (balancing) 5,600 PAT 1,800
c/d 6,500
13,500 13,500
12
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Certificate in Accounting and Finance Stage Examination
August 19 ,2023
3 hour – 100 marks
Additional Reading Time – 15 minutes
Page 1
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Question-2
King and Lamda (equal partners) are running a partnership firm in Pakistan since long named KL
Enterprise. Both Mr. King and Mr. Lamda are UK nationals. During current tax year King did not
visited Pakistan, however Lamda visited Pakistan twice for 10 days for taking business decisions.
Following information is extracted from KL‘s records for year ended 30 June 2016:
Rs.
Sales 90,000,000
Profit before taxation 45,385,000
Administrative and selling expenses include the following:
(i) Marketing expense of Rs. 90,000 in total paid to 10 persons equally in cash.
(ii) Legal expenses of Rs.1,000,000 in respect of a dispute over territorial rights.
(iii) Rs.3,000,000 paid in respect of an unsuccessful court case filed by customer.
(iv) Rs.2,600,000 contributed to a foreign pension fund maintained for employees.
(v) Rs.1,800,000 on 1.11.2015 to improve features of production department software. Life is
indefinite.
(vi) Rs.650,000 in respect of the cost of two ramps. The ramps were built for disabled persons.
(vii) Accounting depreciation and amortization amounts to Rs. 1,875,000.
(viii) Motor expenses as follows:
Total Cost of running Lamda‘s car. (It is used 70% for private journeys) 50,000
Cost of running another motor car used by the production manager 80,000
Parking fines paid to Government on production manager car 30,000
Financial charges include the following:
(i) Mark-up of Rs.1,200,000 paid on a loan from bank for advancing loans to employees.
(ii) Mark-up of Rs.9,000,000 on short term loan obtained for working capital.
Other income includes the following:
(i) Gain on sale of 30,000 shares in Blue listed company. These are sold for Rs.120 per share in
March 2016. KL purchased these shares in May 2015 at a cost of Rs.35 per share.
(ii) Rs. 0 gain for sale of vehicles to employees. Rs.2,450,000 is received from employees. The FMV
and tax WDV of cars was Rs.5,250,000 and Rs.3,320,000 respectively. These are sold at
accounting WDV.
(iii) Gain on sale of shares in ML (Pvt.) company. On 1.7.12 KL acquired 200,000 shares at Rs.50
per share. On 1.9.15 KL sold 100,000 shares at price of Rs.85 per share to a foreign investor. The
market value at that time was Rs.80 per share. On 1.2.16 KL sold remaining shares for Rs.75 per
share to a local investor. The market value at time of sale was Rs.78 per share. The gain recorded
in books is equal to actual sale proceeds less cost.
(iv) Bad debt recovery of Rs. 90,000 which was not previously allowed as deduction.
(v) Foreign source business income of Rs. 600,000.
Other information:
1. The assessed losses brought forward from tax years 2014 and 2015 were as follows:
2015 2014
-----Rupees-----
Business loss before depreciation 2,900,000 3,550,000
Unabsorbed tax depreciation 2,550,000 -
2. Tax paid on foreign income is Rs. 70,000.
3. Tax depreciation and amortization (except software and ramps) for TY 2016 is 1,500,000.
Required: Calculate income and tax payable by KL for year ended June 30, 2016. (show exclusions) (20)
Page 2
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Question-3
a) Specify with reasons, whether the following independent acts may be considered as a tax evasion
or tax avoidance:
(i) In order to reduce his tax liability, Mr. Jaffer, a resident individual, paid a donation of
Rs. 100,000 to non-profit organanisation.
(ii) Sakhi Limited (SL) paid 50% of Ahmad‘s salary i.e. Rs. 50,000 in cash whereas the
remaining 50% of his salary was credited to his bank account. SL claimed Rs. 50,000 as
admissible deduction in its return of income.
(iii) In order to reduce her tax liability, Mrs. Shamim who runs her own business, paid higher
salary to her self, keeping in view that lower slab rates are applicable on salary income as
compared to income from business. (4.5)
b) Explain the provisions in constitution relating to Natural gas and hydro-electric power. (3.5)
Question-4
Khalida and Nasreen (K&N) is running business to manufacture beauty soaps and detergents with the
capital of Rs. 60 million. Khalida and Nasreen will share profits in the ratio of 70:30 respectively.
Following information is extracted from the records of K&N for financial year ended 30 June 2023.
Rupees in mill.
Total turnover (Excluding sales tax) 400
Cost of sales (180)
Gross profit 220
Operating expenses (78)
Interest expense (10)
Donation (12)
Other income 4
Profit before tax 124
(i) All sales are made to sales tax registered distributors except a sale of Rs. 157.3 million (inclusive
of sales tax @ 18% and further tax @ 3%) to Kabir Limited, an un-registered distributer.
(ii) Operating expenses include:
salary of Rs. 5 million to Nasreen.
Rs. 8 million loss on disposal of a machine. Machine was imported in TY 2021 for
Rs. 30 million (including Rs. 10 million custom duty and Rs. 5 million withholding tax).
A loan of 80,000 Pound was obtained on 1 March 2021 to finance the purchase and it
was fully repaid in same year on 1 May 2021. The disposal transaction took place on 1
March 2023 and the consideration received on disposal comprise of Rs. 20 million in
cash and a piece of land having fair value of Rs. 3 million. The fair value of machine at
time of disposal was Rs. 21 million.
(iii) Interest expense represent amount payable to Khalida on a loan utilized for business under an
agreement.
(iv) 20% Donations were made to charitable educational institutes, included in the Thirteenth
schedule of the Income Tax Ordinance, 2001. Remaining amount was given to Baji Saira a mutal
friend of the two who will help earthquake affected people in Turkey.
(v) Relevant exchange rates were as follows:
1 March 2021 1 Pound = PKR 315
1 May 2021 1 Pound = PKR 330
30 June 2021 1 Pound = PKR 325
Required: Calculate taxable income and tax payable by AOP for year ended 30 June 2023. Your
computation should start from sales figure. (10)
Page 3
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Question-5
Under the provisions of the Income Tax Ordinance, 2001 briefly describe the following:
(i) Mr. Amjad has received a show cause notice under section 122 and has filed an offer of
settlement. The oversight committee has decided the case and the taxpayer is satisfied
with the Committee decision.
Required: What action is now required at taxpayer‘s end? (4)
(ii) There is a dispute of ownership regarding a house owned by Mr. Kamran. The rental
income earned from renting out the house is Rs. 6,000,000 in TY 2012. The Civil court
decided on 15 May 2020 that it the property of Kamran. Commissioner issued an
assessment order on 12March 2021.
Required: Is Commissioner justified in issuing the notice after lapse of so much time? (2)
(iii) High Court has decided a question of law in favour of tax payer. The Commissioner has
some of the years pending in respect of same issue. Later on in April 2020 supreme Court
decided the case against taxpayer.
Required: What is the power available to Commissioner in this regard relating to
pending year and by which date Commissioner can exercise this power? (2)
Question-6
In December 2016, Kamran signed a future contract with Anjum for the purchase of 500 shares of PEL at Rs.
32 per share. The delivery was expected to be made in March 2017. Anjum also agreed to repurchase the entire
lot at the price prevailing on the date of sale.
In March 2017 price of PEL shares decreased to Rs. 29 per share and Kamran sold the entire lot to Anjum
without taking delivery.
Calculate gain/(loss) and specify head of income in the books of Kamran? (3)
Question-7
i. Explain the provisions relating to limitation on setoff and carry forward of losses? (3)
ii. Whether an agent will be considered as ―permanent establishment‖ under Income Tax
Ordinance, 2001? (3)
iii. If a leasing company disposes off an asset to lessee how it will calculate the consideration
received? (1)
Page 4
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Question-8
Ghumman Associates (GA), a sole proprietor business, is registered under the Sales Tax Act, 1990 and is
engaged in multiple businesses. GA has a factory located in Faisalabad. GA has allocated 20% of its
factory area for the residences of its workers. Following information has been extracted from GA‘s
records for the month of February 2023:
Rupees
Supplies
Taxable goods to registered customers 5,000,000
Exempt goods to registered customers 800,000
Taxable goods to un-registered customers 1,500,000
Exports of taxable goods to South Africa 1,800,000
Exports of exempt goods to Malaysia 500,000
Purchases
Taxable goods from registered suppliers 1,900,000
Taxable goods from un-registered suppliers 900,000
Imports (exclusive of 20% custom duty) 4,000,000
Additional information:
(i) Supplies of taxable goods to registered customers include:
80 units of product Alpha sold to a registered customer on 5 February 2023 at a price of
Rs. 500 per unit but after 3 days a dispute arose and GA agreed to:
- Accept the return of 30% of goods on 12 Feb and
- Reduce the price of remaining units by Rs. 80 per unit
20 cartons of 40 Kg tea to a registered customer for Rs. 150 per kg. The customer will
pay cheque of Rs. 40,000 and hand over a license having fair value of Rs. 65,000.
Goods worth Rs. 450,000 were supplied to Shaukat Industries at a trade discount of 15%.
GA normally provides discount at same percentage.
Goods worth Rs. 200,000 were supplied to un-registered distributor, Abbas. However,
his NTN/NIC was not demanded from him at the time of sale.
(ii) Supplies of taxable goods to unregistered customers include sales of Rs. 250,000 to a person who
will use these goods for decorative purposes in his house.
(iii) Purchases from registered suppliers include:
Goods worth Rs. 500,000 purchased from Jatt Brothers. The goods were delivered to GA
on 15 December 2022. However, input could not be claimed in December due to non-
availability of invoice. The invoice was received on 5 February 2023.
Purchase of sulphuric acid worth Rs.100,000 which is used in exempt goods exported to
Malaysia.
Purchase of electronic items amounting to Rs. 70,000. 30% were of inferior quality and
were returned.
(iv) Rs. 90,000 of balances had been outstanding since 12 August 2022. 70% of these were settled on
15 February 2023 and the remaining will be paid on 15 March 2023.
(v) A debit note of Rs. 230,000 was issued to a supplier from whom purchases of Rs. 800,000 were
made on 12 March 2022.
(iv) A machine was acquired for Rs. 2,800,000. The machine is solely used for making exempt goods
for local sale.
(v) Sales tax of Rs. 150,000 has been paid for the supply of electricity to the factory of GA.
(vi) Construction material of Rs. 2,000,000 has been purchased during the month. 60% of the
material was used for renovation of the factory building and the remaining was sold at a mark-up
of 20% on cost. The goods are ready; however the customer has not yet picked up the goods due
to an emergency.
All the above figures are exclusive of sales tax, except where it is specified otherwise. Sales tax is payable
at 18%.
Page 5
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Required:
In the light of the provisions of the Sales Tax Act, 1990 and Rules made thereunder, compute the amount
of sales tax payable by or refundable to GA and input tax to be carried forward, if any, for the tax period
February 2023. (17)
Question-9
Queen Limited (QL), a registered importer, exporter and manufacturer, is primarily engaged in the
manufacture and export of a wide range of goods. Following activities were carried out by the company
during the year:
(i) 60,000 kg of chemical, sold at a price of Rs. 140 per kg. The value of chemical fixed by the
Federal Board of Revenue (FBR) was Rs. 135.
(ii) Import of 1,000 kg of un-manufactured goods from Brazil. The value assessed by the customs
authorities at import stage amounted to Rs. 880,000. The Federal excise tax paid on import is
Rs. 30,000.
(iii) Storage batteries purchased at a price of Rs. 650,000. QL paid the amount via online transfer of
money into supplier‘s business bank account. However, this account has not yet been declared by
the supplier to the Commissioner Inland Revenue.
(iv) QL being exporter for sales tax purposes, filed an application for refund of Rs. 186,000 on
account of input tax paid on raw material exported to Iran. The refund is expected to be received
soon. QL is also required to pay a default surcharge of Rs. 25,000 to the income tax department
for late filing of monthly withholding tax statement.
(v) In July 2017 QL sold certain taxable goods worth Rs. 535,000 to an un-registered wholesaler at a
wholesale price of Rs. 50 per pack and collected further tax at the rate of 3% of the value of
supplies. In November 2017, the internal auditor pointed out that these goods had an actual sale
price of Rs. 65 per pack to which customer agreed also.
Required:
In the light of the provisions of Sales Tax Act, 1990 advise the management of the company as to the
chargeability/ adjustment of sales tax in each of the above situations. (10)
Page 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Rates of Tax for Individuals andAssociation of Persons
(1) The rates of tax imposed on income of every individual and association of persons
except a salariedindividual shall be as set out in the following Table, namely:—
S. No Taxable Income Rate of Tax
1. Where taxable income does not exceedRs. 600,000 0%
2. Where taxable income exceeds Rs. 600,000 5% of the amount exceeding Rs. 600,000
but does not exceed Rs. 800,000
3. Where taxable income exceeds Rs. 800,000 Rs. 10,000 + 12.5% of the amount
but does not exceed Rs. 1,200,000 exceeding Rs. 800,000
4. Where taxable income exceeds Rs. 60,000 + 17.5% of the amount
Rs. 1,200,000 but does not exceedRs. exceeding Rs. 1,200,000
2,400,000
5 Where taxable income exceeds Rs. 2,400,000 Rs. 270,000 + 22.5% of the
but does not exceedRs. 3,000,000 amount exceeding Rs. 2,400,000
6 Where taxable income exceeds Rs. 405,000 + 27.5% of the
Rs. 3,000,000 but does not exceedRs.4,000,000 amount exceeding Rs. 3,000,000
7. Where taxable income exceeds Rs. 680,000 + 32.5% of the
Rs. 4,000,000 but does not exceed amount exceeding Rs. 4,000,000
Rs.6,000,000
Where taxable income exceeds Rs. 1,330,000 + 35% of the
8.
Rs.6,000,000 amount exceeding Rs. 6,000,000
(2) Where the income of an individual chargeable under the head ―‗salary‖ exceeds seventy-
five per cent of his taxable income, the rates of tax to be applied shall be as set out in the
following Table, namely:—
S. No Taxable Income Rate of Tax
(1) (2) (3)
Where taxable income does not exceed Rs. Rs. 0
1.
600,000
2. 2.5% of the amount exceeding
Where taxable income exceeds Rs. 600,000 but
does not exceed Rs. 1,200,000 Rs. 600,000
3. Where taxable income exceeds Rs. 1,200,000 but Rs. 15,000 + 12.5% of the
does not exceed Rs. 2,400,000 amount exceeding Rs. 1,200,000
4. Where taxable income exceeds Rs. 2,400,000 but Rs. 165,000 + 20% of the
does not exceed Rs. 3,600,000 amount exceeding Rs. 2,400,000
5. Where taxable income exceeds Rs. 3,600,000 but Rs. 405,000 + 25% of the
does not exceed Rs. 6,000,000 amount exceeding Rs. 3,600,000
6. Where taxable income exceeds Rs. 6,000,000 but Rs. 1,005,000 + 32.5% of the
does not exceed Rs. 12,000,000 amount exceeding Rs. 6,000,000
7. Rs. 2,955,000 + 35% of the
Where taxable income exceeds Rs. 12,000,000
amount exceeding Rs. 12,000,000
Page 7
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Rates of tax for immoveable property
Gain
S.No. Holding Period Open Constructed Flats
Plots Property
(1) (2) (3) (4) (5)
1. Where the holding period does not exceed one 15% 15% 15%
year
2. Where the holding period exceeds one year but 12.5% 10% 7.5%
does not exceed two years
3. Where the holding period exceeds two year but 10% 7.5% 0
does not exceed three years
4. Where the holding period exceeds three year 7.5% 5% -
but does not exceed four years
5. Where the holding period exceeds four years 5% 0 -
but does not exceed five years
6. Where the holding period exceeds five years but 2.5% - -
does not exceed six years
7. Where the holding period exceeds six years. 0% - -
Depreciation Rate
Assets Rate of
depreciation
Buildings (All types) 10%
Furniture and fittings, Plant and machinery – general, Motor vehicles and ships, 15%
Technical and professional books
Computers and allied items including printer, monitor and IT related plant and 30%
machinery
Aircrafts and aero engines 30%
Page 8
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Suggested Solution CAF-02
Answer-1 Marks
Mr. Iqbal
Taxable Income and Tax thereon 0.25
TY 20X4
Income from salary (W-1) 6,866,000 0.25
Income from capital gain – FSI (W-3) 4,686,000 0.25
Income from property (W-2) 389,000 0.25
Income from other source - Foreign source dividend (W-6) 3,960,000 0.25
Income from other source (W-4) 862,000 0.25
Taxable income 16,763,000
Share of profit from AOP (W-5.2) 1,250,000 0.25
Taxable Income for rate purpose 18,013,000
Tax on above (1,330,000 + 35% x 12,013,000) 5,534,550 0.5
Actual tax (5,534,550 / 18,013,000) x 16,763,000 5,150,484 0.5
Page 1
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Suggested Solution CAF-02
Share of profit
Iqbal Elder Brother Total
Salary (50,000 x 5) 250,000 - 250,000 0.25
Profit share (Equal Share) 1,000,000 1,000,000 2,000,000 0.5
Total 1,250,000 1,000,000 2,250,000
Page 2
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Suggested Solution CAF-02
Answer-2
King and Lamda
Taxation of AOP (Resident) 0.5
Income and tax thereon
Rs in 000
Income from business Pakistan source (W-1) 34,452 0.5
Income from capital gain [S.37(3)] [100,000 x (85 – 50) + 100,000 x (78-50)] 6,300 1
Income from capital gain – separate block (W-1) 2,550 0.5
Income from business – FSI 600 0.5
Total Income 43,902
Less: Income from capital gain – separate block (2,550) 0.5
Taxable income 41,352
Page 3
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Suggested Solution CAF-02
Less: b/f business loss before depreciation [S.57] ( 3,550 + 2,900) (6,450) 0.5
38,615
Less: Depreciation and amortization c/y (W-3) (1,613) 0.25
37,002
Less: un- absorbed depreciation and amortization b/f (lower) (2,550) 1
- Actual 2,550
- 50% of 37,002
34,452
Answer-3
(a) (i) Mr. Jaffer paid charity to reduce the tax liability by availing tax credit available under
Income Tax Ordinance, 2001. Thus, this is tax avoidance.
(ii) Sakhi Limited paid 50% of the salary to Mr. Ahmed in cash, so that only 50% of salary
may be disclosed to tax authorities and tax burden on Mr. Ahmed may be reduced which
is against law. This is tax evasion.
(iii) Mrs. Shamim will pay lower rate tax on Income from Salary and will claim deduction of
salary under the head Income from business which is not allowed. This is tax evasion.
(1.5 marks each)
(b) Natural gas and hydro-electric power [161]
(i) (a) the net proceeds (receipts) of:
Federal excise duty on natural gas charged at well-head and
royalty collected by the Federal Government
shall not form part of the Federal Consolidated Fund and shall be paid to the Province
where well-head is located (1.5)
(b) the net proceeds of Federal excise duty on oil charged at well-head shall not form part of
the Federal Consolidated Fund and shall be paid to the Province where well-head is
located. (1)
(ii) The net profits earned from the bulk generation of power at a hydro-electric station shall be paid to
the Province. (1)
Explanation - "net profit" means revenue from supply of power less operating expenses (including taxes,
duties, interest, and depreciations and element of obsolescence).
Page 4
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Suggested Solution CAF-02
Answer-4
Khalida and Nasreen
Income and Tax Thereon
TY 2016 0.25
Rs. In 000
Income from business (W-1) 192.3 0.5
Taxable Income – NTR 192.3
Tax liability(Higher of)
- Tax under normal tax regieme (1,330,000 + 35% of 186,300,000) 66.5 0.5
Less: Tax credit = A/B x C = (66.5/192.3 x 2.4) (0.8) 0.75
C is lower of 2.4 and 20% of 192.3 0.25
65.7
Page 5
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Suggested Solution CAF-02
Answer-5
(i) Where the taxpayer is satisfied with the decision of Committee:
(a) the taxpayer shall deposit the tax (including penalty and default surcharge as per
Committee decision);
(b) Commissioner shall amend assessment according to Committee decision after tax
payment (including penalty and default surcharge) as per decision of the Committee;
(c) taxpayer shall waive right of appeal against such amended assessment; and
(d) no further proceedings shall be undertaken on issues decided by the Committee if the tax
has been deposited by the taxpayer. [S. 122A] 4 Marks
(ii) If there is a dispute in a Civil Court on ownership of a property whose income is chargeable, an assessment
order may be issued within 1 year of the end of the financial year in which Court decided the case.
The civil court has decided the case on 15 May 2020. It means that the Commissioner can issue the
assessment order by 30 June 2021. As the assessment order is issued 12 March 2021, the commissioner is
justified in issuing the assessment order as it is within the time limit i.e. 30 June 2021. [S. 125] 2 Marks
(iii) (1) Where a question of law has been decided by High Court or the Appellate Tribunal, the
Commissioner may, follow this decision for same taxpayer for other years pending before
him, even if Commissioner is going in an appeal against the order.
(2) In case the decision is reversed (means that now it is decided against taxpayer), the
Commissioner may modify all the assessments. This modification is to be made within 1
year of receipt of appellate order. In this case, the general limits for issuing assessment
order will not apply. So modification can be made by April 2021. [S. 124A] 2 Marks
Answer-6
Income from Business – Speculation 1
Share price of PEL shares in March 2017 (500 x 29) 14,500 1
Purchase price of PEL shares in December 2016 (500 x 32) (16,000) 1
Speculation loss (1,500)
Answer-7
i. A person who has succeeded another person in a business (except inheritance), he cannot set off (or
carry forward) the loss of other person. [S.59A] [Chapter 14]
In case of association of persons, any loss of AOP shall be set off or carried forward against the
income of the association. [S.59A] [Chapter 12]
A member of an AOP cannot setoff (or carry forward) the loss of AOP against his income.
[S.59A] [Chapter 12]
The loss due to depreciation, amortisation and initial allowance deductions (allowed under sections 22,
23 and 24) that has not been set off, it shall be set off against the income from business (after setting
off loss under sub-section (1)), in the following tax year and so on until completely set off. The
amount not setoff shall be added the relevant amounts in following years. [S.57 (4)]
If taxable income for current year is equal to or more than Rs.10 million than brought forward
depreciation, amortization and initial allowance shall be set off against 50% of income. [S.57 (4)] (3 Marks)
ii. a person acting in Pakistan (the agent) [other than an independent agent acting in the ordinary course
of business] on behalf of the person shall be considered as permanent establishment if the agent –
(i) - exercises an authority to conclude contracts on behalf of the other person or
- plays the principal role and conclude contracts without material modification and these
contracts are-
(a) in the name of the person; or
(b) for the transfer of ownership of (or granting of the right to use) property
owned by that enterprise; or
(c) for providing services by that person; or
(ii) has no authority but habitually maintains stock (merchandise) for regular deliveries on
behalf of the other person: 3 Marks
iii. The actual consideration received by a bank or leasing company (approved by the Commissioner) for
an asset leased by the company to another person shall be the residual value received on maturity of
Page 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Suggested Solution CAF-02
the lease agreement. The condition is that the residual value plus the amount realized during the term
of the lease of the asset is not less than the original cost of the asset. [S.77] 1 Mark
Answer-8
Ghumman Associates
Sales tax Liability
for the month of February 2023
0.5
Calculation of tax liability Rs. in “000” 0.5
Output tax (7,444 x 18%) 1,339.92 0.5
Less: Input tax (lower of)
- Actual input tax 955 0.5
b/f input ( not allowed) - 955
Page 7
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Suggested Solution CAF-02
(W-3) Taxable sale
Rs. „000‟
To Registered Customer:
Taxable supplies –registered (5,000 – 120 (20 x 40 x 150 ) - 450 – 200) 4,230 0.75
Sales return (80 x 30%) x 500 (12) 0.5
Price reduction (80 x 70%) x 80 (4.5) 0.5
Supply of tea (20 x 40 x 150) 120 0.75
Trade discount to Shaukat Industries (As per norms) 450 0.25
Supply of goods to end consumer 250 0.25
Sale of construction material (2,000 x 40%) = 800 (cost) /100 x 120 = 960 1
To Unregistered Customer:
Taxable supplies – un-registered (1,500 – 250) 1,250 0.75
To unregistered distributor, Abbas 200 0.5
1,450
7,444
Answer-9
(i) Value of supply shall be the price fixed by the Board. However if supply is made higher than value fixed by
Board the value shall be the actual price. Therefore value of supply will be Rs.140 per kg. [VOS defintion]
(ii) In case of imported goods, value of supply shall be the value determined under Customs Act including
custom duty and excise duty charged on it. Thus in this case, value of goods imported from Brazil shall be
Rs. 910,000 (Rs. 880,000 + Rs. 30,000). [VOS definition]
(iii) Payment must be made from business bank account of buyer to business bank account of the supplier. Bank
account of both buyer and supplier should be declared to Board at the time of registration/through change of
particulars subsequently. As above condition is not fulfilled QL will not be entitled to claim input tax.
[Section 73]
(iv) If a registered person is liable to pay any tax, default surcharge or penalty under any law administered by
Board, the refund under Sales Tax Act shall be made after adjustment of that amount. Thus Rs. 25,000
default surcharge shall be adjusted against exports refund of Rs. 186,000. [Section 10]
(v) The supplier (seller) shall issue a debit Note (in duplicate) where for any valid reason the value of supply
mentioned in invoice issued has increased. Thus QL shall issue a debit to increase the value from Rs. 535,000
to Rs. 695,500 (535,000 / 50 x 65). [Rule 21]
(Each point carry 2 Marks)
Page 8
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Certificate in Accounting and Finance Stage Examination
August 17 ,2023
3 hour– 100 marks
Additional Reading Time – 15 minutes
Products AR2, GL3 and HT4 are sold to Denver Limited’s customers. Product XY5 is a component that
is used in the manufacture of other products. Denver Limited manufactures a wide range of products in
addition to those detailed above.
Material R2, which is not used in any other of Denver’s products, is expected to be in short supply next
month due to industrial action at a major producer of the material. Denver Limited has just received
delivery of 5,500 kg of Material R2. This is expected to be the amount held in stock at the start of next
month. The company does not expect to be able to obtain further supplies of Material R2 unless it pays
the premium price. The normal marker price is Rs. 2.50 per kg.
Material R3 is available at a price of Rs. 2 per kg. Denver Limited does not expect any problems in
securing supplies of this material. Direct labor is paid at a rate of Rs. 4 per hour.
Helsinki Limited has recently approached Denver Limited with an offer to supply a substitute for Product
XY5 at a price of Rs. 10.20 per unit. Denver Limited would need to pay an annual fee of Rs. 50,000 for
the right to use this patented substitute.
Required:
(a) Determine the optimum production schedule for products AR2, GL3 and HT4 for the following
month on the assumption that additional supplies of Material R2 are not purchased. (8)
(b) If Denver Limited decides to purchase further supplies of Material R2 to meet demand for
Products AR2, GL3 and HT4, what should be the maximum price per kg that the company is
prepared to pay. (3)
(c) Discuss whether Denver Limited should manufacture Product XY5 or buy the substitute offered
by Helsinki Limited. Your answer should be supported by appropriate calculations. (7)
QUESTION-3
Air Sial is planning to launch a new flight route from Sialkot to New York & New York to Sialkot.
However, the management of Air Sial is concerned about the feasibility of this route.
The following information is relevant for this route:
The aeroplane, which will operate at this route, has the capacity of 500 passenger seats. Out of these total
seats, 10% seats are comprised of business class, 20% of the seats are of first class while remaining seats
are of economy class.
It has been expected that during each journey, all business class seats will be fully booked but only 70%
& 80% seats of first class and economy class will be booked respectively. It is further expected that each
day flight will complete one journey from Sialkot – New York – Sialkot. It is also expected that a total
number of 200 journeys will be completed in one year.
QUESTION-5
Suarez Engineering Company makes 40,000 units per year of a part, if uses in the manufacturing of its
product. The per unit manufacturing cost of this part is as follows:
Rs.
Direct materials 23.40
Direct labour 22.30
Variable manufacturing overhead 1.40
Fixed manufacturing overhead 24.60
Manufacturing cost per unit 71.70
An outside supplier has offered to sell the company all of these parts it needs for Rs. 59.20 a unit. If the
company accepts this offer, the facilities now being used to make the part could be used to make more
units of a product that is in high demand.
The additional contribution margin on this product would be Rs. 352,000 per year. If the part were
purchased from the outside supplier, all of the direct labour cost of the part would be avoided. However,
Rs. 21.90 of the fixed manufacturing overhead cost being applied to the part would continue even if the
part were purchased from the outside supplier. This fixed manufacturing overhead cost would be applied
to the company's remaining products.
Required:
(i) How much of the unit manufacturing cost of Rs.71.70 is relevant in the decision of whether to
make or buy the part? (02)
(ii) Calculate the net total benefit/ loss of purchasing the part rather than making it. (03)
(iii) Workout the maximum amount (per unit) the company would be willing to pay to an outside
supplier for the part, if the supplier commits to supplying all 40,000 units required each year. (02)
QUESTION-6
Sheikh Rasheed Limited manufactures a single product. Its work force consists of 10 employees, who
work a 36-hour week exclusive of lunch and tea breaks. The standard time required to make one unit of
the product is two hours, but the current efficiency (or productivity) ratio being achieved is 80%. No
overtime is worked, and the work force is paid Rs 40 per attendance hour.
Because of agreements with the work force about work procedures, there is some unavoidable idle time
due to bottlenecks in production, and about four hours per week per person are lost in this way.
The company can sell all the output it manufactures, and makes a 'cash profit' of Rs 200 per unit sold,
deducting currently achievable costs of production but before deducting labor costs.
An incentive scheme is proposed whereby the work force would be paid higher hourly rate in exchange
for agreeing to new work procedures that would reduce idle time per employee per week to two hours and
also raise the efficiency ratio to 90%.
Required:
Determine the maximum increase in hourly rate (in percentage) that can be offered for new work
procedure to maintain the current profitability. (8)
QUESTION-8
State the advantages and disadvantages of Absorption Costing System. (4)
QUESTION-9
a. Asif Co has credit sales of Rs. 45 million per year and on average settles accounts with trade
payables after 60 days.
One of its suppliers has offered the company an early settlement discount of 0.5% for payment
within 30 days .
Administration costs will be increased by Rs. 500 per year if the early settlement discount is
taken. Nesud Co buys components worth Rs. 1.5 million per year from this supplier.
From a different supplier, Asif Co purchased Rs. 2.4 million per year of component K at a price
of Rs. 5 per component.
Consumption of component K can be assumed to be at a constant rate throughout the year. The
company orders components at the start of each month in order to meet demand and the cost of
placing each order is Rs. 248.44. The holding cost for component K is Rs. 1.06 per unit per year.
BUSINESS LAW
Instructions to examinees:
(i) Answer all ELEVEN questions.
(ii) Answer in black pen only.
(iii) Attempt each part of the question on fresh page. MCQs can be attempted on the same page.
Q.1 Select the most appropriate answer from the options available for each of the following Multiple
Choice Questions (MCQs). Each MCQ carries ONE mark.
(i) If the Ordinance is not presented or passed by the National Assembly in case of money bill and by both houses if it
is other than money bill, it shall stand repealed after
(a) One hundred and twenty days
(b) Ninety days
(c) Sixty days
(d) One hundred days
(ii) Alex made a contract with Martin that he (Alex) would not marry Maria. This contract is:
(a) Valid
(b) Void
(c) Voidable
(d) Illegal
(iii) When undue influence is used in a contract by one party against the other, the contract becomes:
(a) Void
(b) Voidable
(c) Illegal
(d) None of these
(iv) A sent a proposal to B by post for the sale of his house. B accepted the offer by post. A may revoke his proposal at
any time before:
(a) B receives the letter of proposal
(b) B posts the letter of acceptance
(c) A receives the letter of acceptance
(d) None of these
(v) A and B enter into a contract in which A agrees to deliver milk to a restaurant. They forget to include a price in the
agreement. Court will:
(a) Refuse to enforce the agreement
(b) Select the lowest quoted price for milk and insert it into the contract
(c) Determine a reasonable price and insert it into the contract
(d) None of these
(vii) Which of the following language on an order will create a bill of exchange?
(a) “Pay X if you can”
(b) “I wish you would pay X”
(c) “Please pay X”
(d) None of these
(x) Nevin promises to sell his car to Mary on 10th March but before this date he sold out his car to Wicky. It will
discharge the contract as it is:
(a) Express breach
(b) Actual breach
(c) Implied breach
(d) None of these
(xi) At times a contract is discharged under the doctrine of frustration. Does it mean?
(a) Discharge by performance
(b) Discharge by agreement
(c) Discharge by breach
(d) Discharge by personal incapacity
(xii) In absence of contrary intention expressed in arbitration agreement, If the arbitrators have allowed their time to
expire without making an award:
(a) The matter shall be taken to the Court.
(b) The parties shall appoint other persons as arbitrators.
(c) The umpire shall forthwith enter on the reference in lieu of the arbitrators.
(d) None of above.
(xiii) Which of the following offence may result in imprisonment which may extend to 3 years or fine which may
extend to Rs. 1,000,000 or both under the provisions of Prevention of Electronic Crimes Act, 2016?
(a) Unauthorized copying or transmission of data
(b) Interference with information system or data
(c) Unauthorized access to critical infrastructure information system or data
(d) Unauthorized copying or transmission of critical infrastructure data
(xiv) The State Bank may revoke the designation of a Designated Payment System if it is satisfied that:
(a) the Designated Payment System has ceased to operate effectively as a Payment System
(b) the operator or settlement institution of the Designated Payment System is in the course of being wound up or
otherwise dissolved, whether in Pakistan or elsewhere
(c) the State Bank considers that it is in the public interest to revoke the designation
(d) Any one or more of the above reason(s).
(b) A, B and C were partners in a firm. A died. However, B and C continued the business
without settling the accounts of the deceased partner. A’s share on the date of his death
amounted to Rs. 1.2 million. After two years, the accounts were settled and the amount of Rs.
1.2 million was paid to the legal heirs. The legal heirs have now filed a suit claiming A’s share of
profit for the two years amounting to Rs. 100,000. B and C deny such share as A had ceased to
be a partner, from the date of his death.
Give your views on the above situation, based on the Partnership Act, 1932. (03)
Q.3 (a) Danish owes a sum of Rs. 100,000 to Adil against three different agreements. In March 2008,
Danish sent a cheque of Rs. 70,000 and Adil appropriated the amount in the following manner:
Year of agreement Amount Rupees Appropriation by Adil
The loan taken in 2006 has been guaranteed by Feroze who has demanded that Adil must
appropriate Rs. 40,000 against the debt guaranteed by him. Explain whether Adil is bound to
accept Feroze’s point of view. (04)
(b) State with brief reasons whether the following are promissory notes or not?
(i) “I am bound to pay Rs.1,000 which I have taken from you.”
(ii) “I promise to pay B Rs.1,000 when he delivers the goods.”
(iii) “I promise to pay B Rs.1,000 after deducting therefrom any money which he may owe me.”
(iv) “I promise to pay B 100 shares and 500 debentures of ABC Ltd.” (04)
Q.4 (a) The authority of a partner to bind the firm is called “Implied Authority.” List the acts which
cannot be exercised by a partner as his implied authority. (04)
(b) Asim, Abid and Akhtar are carrying on business in partnership. Asim sold his interest in the
firm to Basit. Abid refuses to accept Basit as partner. Basit claim that by acquiring the interest of
the Asim in the firm he has replaced him as partner and therefore has become the partner of the
firm.
Please comment on the following:
(i) Whether Basit has become the partner of the firm.
(ii) The rights of Basit. (03)
(c) Ali signed a contract with Ahmed to arrange a series of countrywide concerts. For this
purpose, Ahmed contracts with Atif and Jawad, popular singers to perform in the concerts and
obtained their firm commitment that during this period they will not perform in any other
concert.
Subsequently Ahmed comes to know that Atif and Jawad have contracted with two other parties
to perform in their events during the same period.
Moreover, Ali also cancelled few concerts taking place in two different cities, though Ahmed
had already made arrangements for those concerts.
Required:
Advise Ahmed regarding the remedies available to him against the following:
• Jawad and Atif (02)
• Ali (02)
Q.5 (a) Define Civil law. Give two examples of civil law. (02)
(c) If President returns a bill passed by both the houses for reconsideration, how such bill can
become Act/Law? Discuss briefly. (02)
Q.6 (a) Under what circumstances, State Bank of Pakistan may revoke license of a Designated
Payment System (DPS). (04)
(b) Sharing net profits usually creates a very strong inference that the parties have formed a
partnership. But in certain situations, the fact that the profits are shared or the parties have
agreed to share the profits will not by itself create a presumption that a partnership was
intended. List such situations as given in the Partnership Act, 1932. (02)
(c)
(i) Define “Sensitive Personal Data” under the Personal Data Protection Bill, 2020. (02)
(ii) State four agreements which are prohibited by Competition Act, 2010. (02)
Q.7 (a) Which operational arrangements are required to be made by and operator of Designated
Payment System (DPS)? (04)
(b) State the punishment of following offences under Prevention of Electronic Crimes Act, 2016:
(i) Unauthorized copying or transmission of data
(ii) Unauthorized access to critical infrastructure information system or data
(iii) Glorification of an offense (06)
Q.8 (a) Differentiate between “general crossing” and “special crossing”. Comment on the effect of
“Not negotiable crossing”. (06)
(b) What is meant by “blank endorsement”. What is the effect of such an endorsement. (02)
Q.9 (a) X and Y are in partnership for supplying meat to the government. Subsequently, it is found
out that X is engaged with Z in the supplying of meat to the same government.
Can he retain the profits made out of the second engagement? (02)
(b) A, B, C and D are partners in a firm of solicitors. A receives money from a client X for the
purpose of making a specific investment. A never invests it but applies it to his own use. The
other partners are not aware of this transaction. Is the firm liable for A’s act? (02)
(c) X, a resident in India and Y, a resident in Pakistan are partners. The firm is carrying on the
business of importing and exporting Commodity I and Commodity II. State whether the firm is
dissolved in each of the following alternative cases:
(i) If a war breaks out between India and Pakistan.
(ii) If a law is passed by which imports and exports of Commodity I are prohibited. (02)
(d) A cheque is drawn as "Pay to X or order the sum of ten thousand rupees". In the margin the
amount stated is Rs. 1,000. Discuss the legal position. (02)
(e) X draws a cheque for Rs. 2000 and Y, a holder without the consent of X alters the figure of
Rs. 2000 to Rs. 20000 and makes the instrument look like a cheque drawn for Rs. 20000. The
banker pays the cheque in due course. Discuss the legal position of the banker. (02)
Q.10 (a) X, Y and Z jointly promise to pay Rs. 9,000 to W. Can W compel X to pay him in full? (02)
(b) X owes Y three sums, one for Rs. 2,000 which is barred by limitation, second for Rs. 3,000
which is not barred, and third for Rs. 4,000 which is not barred. X sends Rs. 1,000 to Y.
Can Y appropriate Rs. 1,000 towards Rs. 2,000:
(i) if X gives no direction in this regard
(ii) if X asks Y to appropriate Rs. 1,000 towards the third debt of Rs. 4,000? (02)
(c)X contracts with Y to pay Rs. 1,000 if he fails to pay Y Rs. 500 on a given day. X fails to pay
Rs. 500 on that day. Can Y recover Rs. 1,000? (02)
(d) X supplied rice and wheat worth Rs. 20,000. Y supplied a mobile phone worth Rs. 30,000 and
Z lent Rs. 50,000 for the purchase of necessaries to the wife and children of M, a minor. M had
assets worth Rs. 1,00,000. Can X, Y and Z recover anything from M? (02)
(e)Talib was indebted to Bashir for Rs. 10,000. On Talib’s request Bashir agreed to accept
Jahangir as his debtor, in place of Talib. Jahangir failed to make payment on due date. Under the
provisions of Contract Act, 1872 you are required to explain whether Bashir can now demand
payment from Talib.
(02)
Q.11 M/s. JB Pakistan Ltd (JB) approached the Competition Commission of Pakistan with a
complaint that FG Pakistan Limited (FG) publicized its soap as "Pakistan's No. 1 rated Anti-
bacterial Soap" in violation of Competition Act 2010 as it lacks reasonable basis to substantiate
the claim.
Required:
Is the given scenario is in violation of the Act as complained by JB? Briefly explain the scenarios
which shall be deemed deceptive marketing practices under the Act. (07)
(THE END)
Answer # 1
Sr # Correct Option
(i) (a) One hundred and twenty days
(ii) (b) Void
(iii) (b) Voidable
(iv) (b) B posts the letter of acceptance
(v) (c) Determine a reasonable price and insert it into the contract
(vi) (b) Agent makes agreement on behalf of principal
(vii) (c) “Please pay X”
(viii) (d) Fraud/false representation
(ix) (c) Wagering contract
(x) (c) Implied breach
(xi) (d) Discharge by personal incapacity
(xii) (c) The umpire shall forthwith enter on the reference in lieu of the arbitrators.
(xiii) (c) Unauthorized access to critical infrastructure information system or data
(xiv) (d) Any of the reason(s).
(xv) (b) To claim interest @ 6% or as agreed upon
Answer # 2
(a) Statue is a law which is passed by Parliament (i.e. by both houses, and President).
Ordinance is the bill which is passed by President without involvement of both houses.
(b) Until accounts of a deceased partners are settled, his legal representatives are allowed to receive
either interest @ 6% on outstanding amount, or proportionate share of profit.
Therefore B & C will have to pay to legal representatives of deceased partner Rs. 100,000 as
profits of two years.
Answer # 3
(a) In the absence of any express intimation from the debtor, the creditor is entitled to apply the
payment to any of the debts.
As Danish has not made any appropriation, therefore, Adil is justified in making this
appropriation and Feroze cannot object.
(b) (i) It is not a promissory note as there is only an acknowledgement of indebtedness, not
promise to pay.
(ii) It is not a promissory note as it is conditional.
(iii) It is not a promissory note as the amount is uncertain.
(iv) It is not a promissory note as the payment is not in terms of money only.
Page 1 of 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 4: Business Law
Suggested Solution – Mock
Answer # 4
(a) According to Partnership Act 1932, a partner does NOT has following authorities/powers:
1. Submit a dispute of the firm to arbitration.
2. Open a bank account on behalf of the firm in his own name.
3. Compromise or relinquish any claim or portion of a claim by the firm.
4. Withdraw a suit or proceeding filed on behalf of the firm.
5. Accept any liability in a suit or proceeding against the firm.
6. Acquisition of immovable property on behalf of the firm.
7. Transfer immovable property belonging to the firm.
8. Enter into partnership on behalf of the firm.
(0.5 mark for each point)
(b) (i) Transferee of a partner’s interest does not become partner of the firm.
(ii) Transferee is entitled to receive the share of profits of the transferring partner.
Answer # 5
(a)
Civil Law
Civil Law deals with disputes in respect of
Definition rights and obligations between individuals and
organizations.
Business laws dealing with commercial
disputes (e.g. company law, contract act).
Property disputes
Family laws (e.g. divorce proceedings, child
custody proceedings).
Examples
Copyrights disputes
Employment laws (dealing with work
related issues).
Law of Tort (e.g. claims of defamation of
character, claim for negligent behavior).
Page 2 of 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 4: Business Law
Suggested Solution – Mock
(b) Following controls have been established to overcome the shortcomings of delegated legislation:
Parliamentary Control:
Parliament can control delegated legislation by restriction and defining the power to make rules.
Any new legislation created must be laid in front of Parliament for approval.
Judicial Control:
Delegated legislation can be challenged in Court if it is ultra-vires (i.e. beyond powers delegated
to them). Court may declare such legislation void if objection is valid.
(c) Parliament can again pass the bill after reconsideration. If bill is passed again after
reconsideration, President cannot refuse to assent the bill now.
Answer # 6
State Bank shall not revoke a designation without giving notice and hearing opportunity to Operator.
However, State Bank can suspend a designation (until final order is issued) without giving notice if
there is immediate systematic risk.
(b) Following are situations in which the parties are sharing profit but they are not partners i.e. the
receipt of such share of payment:
1. by a lender of money to persons engaged or about to engage in any business.
2. by a servant or agent as remuneration.
3. by the widow or child of a deceased partner as annuity.
4. by a previous owner or part owner of the business, as consideration for the sale of the goodwill
or share.
5. a minor who is admitted to the benefits of an existing partnership.
6. a transferee of a partners’ interest.
(c)
(i)
Sensitive Personal Data:
It means data relating to Access Controls (i.e. usernames and passwords) which provides access to:
Financial information (e.g. bank account, debit/credit card or other payment instruments).
Passport, Biometric Data
Medical Records (including physical, psychological or mental health records)
Religious beliefs, ethnicity.
Page 3 of 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 4: Business Law
Suggested Solution – Mock
(ii)
1. Dividing or sharing markets for the goods or services (e.g. by territories, by volume of sales, by
type of goods).
2. Fixing the quantity of production, distribution or sale.
3. Collusive tendering or bidding for sales or purchase.
4. Fixing the purchase or sale price or imposing other restrictive trading conditions.
5. Limiting technical development or investment with regard to production, distribution or sale of
goods/services.
6. Applying dissimilar conditions to equivalent transactions with other trading parties.
7. Making contract dependent on acceptance of supplementary unrelated obligations by other
parties.
(Any 04 examples)
Answer # 7
(a)
1. Rules and procedures setting out rights and liabilities of Operator and Participant.
2. Measures to ensure safety, security, operational reliability and contingency arrangements.
3. Rules and procedures for management of credit, liquidity and settlement risk (including time
when a payment is instructed and settlement is final).
4. Criteria for participation in DPS.
(b)
(i)
Imprisonment upto 6 months, and
Fine upto Rs. 100,000.
(ii)
Imprisonment upto 3 Years, and
Fine upto Rs. 1,000,000.
(iii)
Imprisonment upto 7 Years, and
Fine upto Rs. 10,000,000.
Answer # 8
(a)
Difference:
Page 4 of 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 4: Business Law
Suggested Solution – Mock
(b) If endorser signs his name only on instrument and does not specify the name of endorsee, it is
called blank endorsement.
Effect of a blank endorsement is that it becomes payable to bearer, although it was originally
payable to order.
Answer # 9
(d) Decision and reason: This cheque is not valid because bank will dishonour the cheque if there is
a discrepancy between the amount stated in figure and in words.
Page 5 of 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 4: Business Law
Suggested Solution – Mock
Answer # 10
(b) Decision:
Case (a) Y can appropriate ` 1,000 towards ` 2,000.
Case (b) Y cannot appropriate ` 1,000 towards ` 2,000. He must appropriate ` 1,000 towards `
4,000 only because the creditor is bound to follow the instruction of debtor regarding application
of the payment.
(c) Decision and Reason: Y is entitled to recover from X such compensation not exceeding ` 1,000 as
the court considers reasonable because in case of stipulation for penalty, the aggrieved party is
entitled to receive only reasonable compensation not exceeding the sum specified in the contract.
(d) Decision and Reason: X and Z can recover from the M's assets because X supplied necessaries
and Z lent for the purchase of necessaries but Y cannot recover anything because he has not
supplied necessaries.
(e) No. When parties to a contract agree to substitute it with a new contract, they can not demand
the performance of the original contract.
Answer # 11
Publicity by FG:
This depends on whether there has been any rating conducted by an independent organization.
If there has been any such rating activity and FG stood at No. 1 position, then it is not a
violation of competition law.
However, if there has been no such exercise, then this will be a violation of Competition Act.
(THE END)
Page 6 of 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Certificate in Accounting and Finance Stage Examination
August 14,2023
3 hours – (100 marks)
Additional Reading Time – (15 minutes)
Section A
Question-1
Following information has been gathered for preparing the disclosures related to taxation of Bed
Limited (BL) for the year ended 31 December 2020:
(i) Accounting profit before tax for the year amounted to Rs. 1,270 million.
(ii) On 1 May 2020, BL purchased 500 goats at a fair value of Rs. 70,000 per goat. Cost to sell is
3% whenever an animal is sold. Fair value per goat is Rs. 95,000 at 31 December 2020.
Under tax laws, animals are initially measured at cost and gain on animals is taxable at the
time of sale.
(iii) On 1 November 2020, BL sold a product for Rs. 30 million. As per the contract, Rs. 8
million would be paid immediately and the balance would be paid after 1 year. Discount
rate is 20%. Under tax laws, revenue is taxable on receipt basis.
(iv) On 1 October 2020, BL acquired 12 million debentures at Rs. 132 each whose par value is
Rs. 100 each. The coupon interest rate is 11% per annum payable annually in arrears. The
effective interest rate was worked out at 9.5%. As on 31 December 2020, the debentures
were quoted on Pakistan Stock Exchange at Rs. 140 each. Debentures are subsequently
measured at fair value through profit or loss. Under tax laws, interest based on coupon rate
is taxable @ 12% when earned. Capital gain income is taxable at 15%.
(v) Unused assessed tax losses were Rs. 1,200 million till 31 December 2019. However, deferred
tax asset was recognized only on tax losses of Rs. 40 million due to limited availability of
expected future taxable profits.
(vi) Applicable tax rate is 35% for 2020 and prior years. However, this rate has been reduced by
8% for 2021 and future years through the Finance Act enacted on 25 December 2020.
Required: Prepare a note on taxation for inclusion in BL’s financial statements for the year
ended 31 December 2020 and a reconciliation. (09)
Question-2
a) In the year ended 31 December 2015 claims in respect of faulty hair straighteners were made
from 2000 customers. The claims department has advised that 20% of these claims are
invalid. Of the remaining claims, 50% of the straighteners can be repaired at a cost Rs 1,800
per item, whilst the other 50% will need to be replaced at a cost of Rs. 4,000 per item. Rs.
2,000,000 was paid out in such claims during the year to 31 December 2015.
These payments have been debited to Admin expenses.
Required: Compute the change in net profit, assets and liabilities in the financial statements for
the year ended 31 December 2015. (04)
b) Door Limited (DL) is a listed company and is engaged in manufacturing of leather
products. DL generates 45% of its revenue from exports to Germany, out of which 20%
are made to only one customer i.e. Mr. Bitanco. 15% of entity’s revenue is form
Bangladesh.
20% of noncurrent assets are located in Germany.
Page 1
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Question Paper
Following disclosures have been extracted from DL's draft financial statements for the
year ended 30 June 2022:
39. OPERATING SEGMENTS
These financial statements have been prepared on the basis of single reportable
segment.
39.1 Revenue from leather bags represents 97% of the total revenue of the
Company.
39.2 Sales represents local sales and export sales.
39.3 The Company does not have any local major customer.
Required: Prepare list of errors and omissions in the above disclosure. (Redrafting of disclosure is
not required) (5)
Question-3
You are the Finance Manager of Dirham Limited (DL) which is involved in multiple businesses.
Your assistant has prepared draft financial statements of DL for the year ended 31 December 2018.
(i) The following extract is from the trial balance of DL at 31 December 2018.
-----Rs. in million----
Dr Cr
Revenue 175
Cost of sales 75
Operating expenses 36
Investment income 12
Fair value loss on investments classified under FVTOCI 11
Fair value gain on investment properties held under fair value model 3
(ii) Following adjustments need to be incorporated:
1. Animals born on 1 July 17 and 1 Jan 18 were not recorded in financials. Gain is to be
recorded in other income as it is not entity’s main source of income. Details of fair value less
cost to sell is as below:
Date Description Rs. in Date Description Rs. in
million million
01/07/17 New born animals 20 01/01/18 New born animals 25
31/12/17 0.5 year old 30 31/12/18 1 year old animals born 28
animals born on on 1/1/18
1/7/17
31/12/18 1.5 year old animals born 35
on 1/7/17
2. During 2018, it was discovered that inventory at 31 Dec. 2017 was overstated by Rs. 50 mill.
3. DL is being sued for Rs. 20 million for breach of contract in 2018. There is 20% chance that
DL will lose the case. Accordingly, DL has recorded provision Rs. 4 million in respect of the
claim. The unrecoverable legal costs of defending the action are estimated at Rs. 1 million.
These have not been provided for as the legal action will not go to court until next year.
4. DL sold goods to an overseas customer on 1 December 2018 for 2 million Kromits (Kr). No
entries have yet been made to record this sale. The amount remains unpaid at 31 December
2018. Relevant exchange rates are:
1 December 2018 Kr 1 : Rs. 6·0 31 December 2018 Kr 1 : Rs. 6·4
5. DL acquired Rs. 9 million 5% bonds at par value on 1 January 2018 to be classified under
amortized cost model. The interest is receivable on 31 December each year. DL incurred Rs.
0·4 million broker fees when acquiring the bonds, which has been expensed to operating
expenses. These bonds are repayable at a premium so have an effective rate of 8%. DL has
recorded the interest received on 31 December 2018 in investment income.
6. On 31 December 2018, DL revalued its head office for the first time, resulting in an increase
in value of Rs. 12 million which is not incorporated.
Required: Prepare a statement of profit or loss and other comprehensive income for the year ended
31 December 2018. (Ignore tax) (comparatives are not required) (10)
Page 2
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Question Paper
Question-4
a)
Fine Woods Limited (FWL) markets quality wood furniture through its sales offices located in major
cities of Pakistan. In March 2012, the management of FWL decided to introduce online sales through
its website. The expenses incurred in this regard during the year ended 31 December 2012 were as
follows:
i. Feasibility was prepared by a consulting firm for upgrading the existing website to
facilitate online sales, at a cost of Rs. 3.5 million.
ii. Purchase of hardware and operating software for Rs. 15 million and Rs. 8 million
respectively.
iii. Website was upgraded by FWL’s IT team. The directly attributable costs amounted to
Rs. 5 million.
iv. Online payment system was developed by external experts at a cost of Rs. 3 million.
v. IT personnel were trained to deal with security issues relating to online transactions at a
cost of Rs. 1.5 million. The promotion costs are Rs. 0.2 million.
Required:
Discuss the accounting treatment in respect of the above, in the financial statements of FWL for the
year ended 31 December 2012 (05)
b)
Curtain Limited (CL) is engaged in manufacturing of furniture products. Following disclosures
have been extracted from CL’s draft financial statements for the year ended 31 December 2022:
36. Related party
Following particulars relate to associated companies incorporated outside Pakistan with whom
the company had entered into transactions during the year:
Name of company Bosho Mosho Ltd.
Country of incorporation Not in Pakistan
Basis of association Associated undertaking
37. Number of employees
2022 2021
Total number of employees at end of the year 3,357 3,364
38. Royalty
The royalty of Rs. 50 million is paid to Bosho Mosho Ltd., NewYork, an associated company.
Required: Prepare list of omissions and list of additional/extra information provided in the
above disclosures assuming the company is listed and assuming the company is unlisted. (05)
Question- 5
a) On 1 January 2015 Gamow Ltd made a one-off sale to a customer in mainland Europe. The
sale was for €22,000 and a 120 day credit period was given to the customer. The sale was
recognised in revenue and receivables using the 1 January 2015 spot exchange rate. No other
accounting entries have been made. The cash from the customer was received on 1 May
2015. The spot exchange rates are as follows:
1 January 2015 €1:Rs. 85
31 March 2015 €1:Rs. 79
1 May 2015 €1:Rs. 80
Page 3
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Question Paper
Question-6
1. On 1 April 2015, Schrute purchased a flock of sheep for 100,000. At 31 March 2016 the flock
has a fair value less cost to sell of Rs. 120,000. Every time animals are sold there is a 5%
commission fee payable to the national farming agency. Wool harvested during the year
amount to Rs. 10,000.
In addition to this, specialized farm machinery cost Schrute 200,000 on 1 April 2012 and has a
10-year useful life.
What should be taken to Schrute’ statement of profit or loss for the year ended 31 March 2016
in respect of above?
(a) Rs. 10,000 Credit
(b) Rs. 4,000 Credit
(c) Rs. 10,000 Debit
(d) None of the above
(1.5)
2. On 30 June 20X4 GHI acquired 800,000 of JKL's 1 million shares.
GHI issued 3 shares for every 4 shares acquired in JKL. On 30 June 20X4 the market price of a
GHI share was Rs. 3.80 and the market price of a JKL share was Rs. 3.00.
GHI agreed to pay Rs. 550,000 in cash to the existing shareholders on 30 June 20X5. GHI's
borrowing rate was 10% per annum. NCI is measured at fair value.
GHI paid advisors Rs. 100,000 to advise on the acquisition.
What is the cost of investment that will be used in the goodwill calculation in the consolidated
accounts of GHI?
(1.5)
3. A US company has paid up capital equivalent of Rs. 500 million, turnover of Rs. 990 million
and 825 employees. How it shall be classified according to Companies Act, 2017?
(a) Pubic Interest Company
(b) Large Sized Company
(c) Medium Sized Company
(d) Small Sized Company
(1)
4. A contract modification is always treated as a separate contract for the purposes of IFRS15.
(a) True
(b) False
(1)
5. DML entered into a contract to supply bricks to a new, foreign customer on February 01,
2013. The order is for the supply of 10 million bricks per month from June 01, 2013 to
March 31, 2014, a total of 100 million bricks. A special order was placed for these bricks as
they are not standard bricks, but are to be used in the construction of a garden cottage for the
Prince of Mianwali. On February 01, 2013, DML estimated that the contract would cost Rs.
10 million. Penalty to cancel the contract amount to Rs. 2,000,000, payable immediately on
cancellation. Contract revenue is Rs. 1,500,000 per month.
Between February and December 2013, prices of supplies increased however DML honored
the contract till December 31, 2013. Now it estimated on 31 December 2013 that Rs.
8,000,000 would need to be spent to complete it till March 31, 2014.
The amount of provision to be recorded at 31 December 2013 is
Rs. _______? (3)
Page 4
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Question Paper
Section B
Question-7
a) Venture Group Limited is a multinational group engaged in various businesses across the
globe.
i) GymGo, a ‘pay as you go’ gym introduced a customer loyalty scheme whereby if a
customer pays for nine visits and has a loyalty card stamped, the tenth visit is
provided free of charge. During the year, customers visit the gym a total of 94,995
times, paying Rs. 1,000 per visit, earning the right to a maximum of 10,555
(94,995/9) free visits, each of which has an average stand-alone price of Rs. 1,000.
The gym expects 7,400 of the free visits to be claimed and by the year end, 4,350
have already been claimed.
ii) Leisure Inn has recently started issuing vouchers to customers when they stay in its
hotels. The vouchers entitle the customers to a Rs. 3,000 discount on a subsequent
room booking within three months of their stay. At the year-end there are vouchers
worth Rs. 20 million which are eligible for discount. Historical experience has
shown that only one in five vouchers are redeemed by the customer. The income
from room sales in current year is Rs. 300 million.
Required: Prepare journal entries assuming year end is 31 December 2020. (6)
Required: Discuss the recognition and amount of revenue under each of the above contracts
with customers assuming year end is 31 December 2020. Compute the amount of revenue,
wherever possible.
(8)
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Question Paper
Question-8
The following amounts are extracted from the records of Chair Limited (CL), Sofa Limited (SL) and
Table Limited (TL) for the year ended 31 December 2019:
CL SL TL
---------- Rs. in million ----------
Sales 800 315 132
Cost of sales (540) (180) (97)
Operating expenses (114) (60) (6)
Other income 41 - 8
Finance cost (20) (12) (5)
Taxation (25) (15) (5)
Surplus on revaluation of land * - 16 20
Gain on re-measurement of investment in 4 - 4
debentures of SL – OCI
Retained earnings as on 31 December 2019 1,294 350 55
* Revaluation is carried at end of year
Additional information:
(i) Details of CL’s investments are as follows:
Share capital Retained
Date of
Holding % Investee (Rs. 10 each) earnings
investment
of investee
1 October 2018 60% SL Rs. 700 million Rs. 150 million
1 April 2019 30% TL Rs. 500 million
(ii) Consideration for acquisition of SL’s shares comprises of:
▪ issuance of 2 shares of CL for every 5 shares of SL. The shares will be issued on 30 June
2019. The fair values of each share of CL was Rs. 25, Rs. 23 and Rs. 28 respectively on
1 October 2018, 31 December 2018 and 30 June 2019. The share issue by CL have not
yet been recorded in the books.
▪ An amount of Rs. 500 million payable on 1 Jan 2020 that was contingent upon the post-
acquisition performance of SL. Fair value of this consideration was estimated at Rs. 300
million on acquisition date. On 31 December 2018 its fair value was estimated at Rs. 280
million. However by 31 December 2019 it is clear that it would be paid at 90% of the
amount initially agreed. No entry for this has been made in the year 2019.
▪ Cash payment of Rs. 2 per share shall also be paid on 30 September 2019. The whole
payment is debited in admin expenses. Discount rate is 10%.
(iii) At the date of acquisition of SL, carrying value of its net assets was equal to fair value except
an intangible whose book value was understated by Rs. 20 million as compared to its fair
value. Its remaining useful life at the time of acquisition of SL was 10 years.
(iv) On 1 August 2018, CL purchased an investment property with a useful life of twenty years for
Rs. 50 million and rented out to SL on 1 November 2018 for Rs. 1 million per month and rent
is payable at the end of each quarter. The property was carried in CL’s books at fair value of
Rs. 52 million and Rs. 44 million on 31 December 2018 and 31 December 2019 respectively.
No accrual was booked by CL for rent of last 2 months of 2019.
(v) On 28 December 2019, SL and TL declared a 5% dividend which will be paid on 2 January
2020. CL recorded its share from SL but has not accounted for its share from TL.
(vi) The group follows the cost model for subsequent measurement of land.
(vii) On 1 August 2019, SL issued 1 million debentures of Rs. 100 each at a premium of Rs. 10
each. The coupon interest rate is 16% per annum payable annually at year end. CL and TL
each purchased 0.2 million of these debentures. The effective interest rate is 18% for all
entities.
Debentures are subsequently measured at amortized cost by SL and fair value through OCI by
CL and TL.
(viii) Goodwill is impaired by 10% in the year ended 31 December 2019.
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Question Paper
(ix) CL measures non-controlling interest at the proportionate share of acquiree’s identifiable net
assets.
Required:
Prepare CL’s consolidated statement of profit or loss and other comprehensive income for the year
ended 31 December 2019.
(17)
Question-9
CLASSIC CARS LIMITED (CCL) has identified a need for a manufacturing plant and new
automotive spray paint guns. Consequently, Classic Cars Limited entered into the following lease
agreements:
Lease of manufacturing plant
CCL entered into a lease agreement with ABC Ltd. for a non-cancellable period of ten years. The
following information is applicable:
1. The commencement date of lease is 1 April 2022 when the fair value of the machine is Rs
14,500,000.
2. On 1 April 2022, ABC Ltd. paid an amount of Rs. 20,000 to Classic Cars Limited as an
incentive and CCL paid a deposit of Rs. 107,000 to ABC Limited to secure the lease
agreement.
3. The external legal advisors of CCL invoiced on 1 April 2022, an amount of Rs. 15,000 and
was paid by CCL on 30 April 2022.
4. CCL has to return the plant to ABC Limited at the end of the lease term in its original
condition. On 1 April 2022, Classic Cars Limited estimated that the costs related to the
restoration of the plant would amount to Rs. 931,755 at the end of the lease term.
5. Lease rentals are Rs. 1,293,408 fixed annual lease payment for first 5 years in advance and
Rs. 1,000,000 fixed annual lease payment for next 5 years in arrears; and
4. The plant has an estimated remaining useful life of 15 years on 1 April 2022.
5. CCL and ABC Limited agreed, at commencement date, on a residual value guarantee of Rs
10,000,000. CCL estimated at commencement date that fair value will be Rs. 9,200,000. ABC
Ltd estimated that it would be able to sell it at the end of the lease for Rs. 8,000,000
6. ABC Ltd paid initial direct costs to its lawyers of Rs. 27,000 on 1 April 2022.
7. The incremental borrowing rate of Classic Cars Limited is 10.5% per annum. Lessor implicit
rate is not known to lessee.
Required:
Prepare journal entries for year ended 31 December 2022 and 31 December 2023 to record the above
transactions in the books of Classic Cars Ltd.
(17)
Page 7
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CAF-05 Mar 2023 Mock Solution
Answer-1
Bed Limited
Notes the Financial Statements 0.25
For the year ended 31 December, 2020
Rs. in million
1 – Taxation
Tax:
Current tax (W-1) 4 0.25
Deferred tax (W-8) (38.9 - 2.4) 36.5 0.25
40.5
1.1 - Reconciliation between accounting Profit before tax with tax expense
Rs. in
million
Profit before tax 1,270 0.25
Tax Rate 35% 0.25
Tax on above (1,270 x 35%) 444.5 0.25
Less: Effect of low rate on capital gain 96 × (35% - 15%) (19.2) 0.5
Less: Effect of low rate on interest income 33 × (35% - 12%) (7.6) 0.5
Less: Effect of rate change (W-7) (2.4) 0.25
Less: Effect of previously unrecognized deferred tax on unused tax (1,111 – 40) × 35% (374.8) 0.5
loss
40.5
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CAF-05 Mar 2023 Mock Solution
(W-3) Gain on measurement at year end
Opening value (FV – CTS) -
Purchases (FV – CTS) (500 x Rs. 70,000 x 97%) 34 0.25
Gain (bal.) 12.1 0.25
Closing (FV – CTS) (500 x Rs. 95,000 x 97%) 46.1 0.25
(W-4)
Date Description Debtor
01/11/20 Sale 26.3 8 + 22 x (1.2)-1 0.25
01/11/20 Cash (8) 0.25
01/11/20 Carrying amount 18.3
31/10/21 Interest income 3.7 (18.3 x 20%) 0.25
31/10/21 Carrying amount 22
(W-5)
Dr. Investment in debt instrument Cr.
Bank (12 mill x Rs. 132) 1,584
P/L (gain) (bal.) 96 0.5
c/d (12 mill x Rs. 140) 1,680
(W-6)
Computation of deferred tax liability / asset
As on 31 December 2020
Rs. in million
Description C.A T.B Diff. Rate % DTL/DT
A
Biological asset (W-3) 46.1 35 11.1 TTD 27% 3 DTL 0.5
Debtor (W-4)(18.3 + 3.7 x 2/12) 18.9 0 18.9 TTD 27% 5.1 DTL 0.5
Investment in debenture (W-5) 1,680 1,584 96 TTD 15% 14.4 DTL 0.5
Deferred tax Liability- Net 22.5 DTL
(W-7)
Computation of deferred tax liability / asset
As on 31 December 2019
Rs. in million
Description C.A T.B Diff. Rate DTL/ DTA
%
14 DTA 0.25
Unused tax losses (40x 35%)
Deferred tax 14 DTA
Page 2
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CAF-05 Mar 2023 Mock Solution
Answer-2
a)
Rs.
Impact on Net Total Total
Profit Assets Liabilities
- Increase in Expense (4,640 vs 2,000) (2,640,000) 0.5
- Increase in provision (4,640 – 2,000) 2,640,000 0.5
Increase/(decrease) (2,640,000) 2,640,000
(W-1)
Original
b)
1. Revenues from external customers (i) attributed to the entity’s country of domicile and (ii)
attributed to all foreign countries in total from which the entity derives revenues should be
disclosed separately. The required break-up has not been given in Note 39.2 (2)
2. Non-current assets (i) located in the entity’s country of domicile and (ii) located in all foreign
countries in total shall be disclosed. (1)
3. An entity shall provide information about the extent of its reliance on its major customers
whether local or foreign. (1)
4. Comparative information is not disclosed. (1)
Page 3
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CAF-05 Mar 2023 Mock Solution
Answer-3
Dirham Limited
Statement of Comprehensive Income
For the year ended December 31, 2018
0.5
Rs. in million
Revenue (175 + 12 (W-2)) 187 0.5
Less: Cost of sales [75 - 50 (adjustment 2)] (25) 0.5
Gross profit 162
Add: Other income (W-4) 49.1 1
Less: Operating expenses (W-5) (32.6) 1
Profit 178.5
Add: Other comprehensive income
Revaluation surplus on PPE 12 0.5
Change in fair value reserve (loss) on investment (11) 0.5
Total comprehensive income 179.5
Page 4
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CAF-05 Mar 2023 Mock Solution
Page 5
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF-05 Mar 2023 Mock Solution
Answer-4
a)
Upgrading of website and introduction of online sales (IAS 38 and SIC 32):
In accordance with IAS 38, accounting treatment of the costs incurred to introduce online sales through
its website by FWL is as under:
(i) Costs incurred in respect of feasibility, training of IT personnel and promotion amounting to Rs.
3.5, 1.5 and 0.2 million respectively should be expensed out when incurred. [2 marks]
(ii) Cost of hardware and its operating software should be capitalized as tangible asset in line with the
requirements of IAS 16 and depreciated over their estimated useful economic life. [2 marks]
(iii) Directly attributable costs of IT staff and experts hired externally for development of online
payment system amounting to Rs. 5 million and Rs. 3 million shall be recognized as an intangible
asset as the following required conditions are met by FWL:
It is probable that the expected future economic benefits that are attributable to the asset
will flow to FWL; and
The cost of the asset can be measured reliably. [2 marks]
b)
If the company is listed
Page 6
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CAF-05 Mar 2023 Mock Solution
Answer-5
a)
Rs. in “000”
Assets Liabilities Profit
Recording of exchange loss (W-1) (132) - (132) 2
Advance from customers - 100 (100) 1
b)
Documentation (0.5)
The chartered accountant is encouraged to document:
The facts. (0.5)
The accounting principles or other relevant professional standards involved. (0.5)
The communications and parties with whom matters were discussed. (0.5)
The courses of action considered. (0.5)
How the accountant attempted to address the matter (0.5)
Page 7
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CAF-05 Mar 2023 Mock Solution
Answer-6
1 (a) Amount to be taken to income is Rs. 10,000.
Rupees
Initial recognition loss on purchase (5,000)
{(100,000 -5% of 100,000) 95,000 - 100,000}
[1.5 Fair value gain at year end {120,000 - 95,000} 25,000
marks] Fair value gain on wool harvesting 10,000
Depreciation on machine (200,000/10) (20,000)
Total 10,000
2. Rs. (W-1.1) Cost of Investment Rs. in „000‟
2,780,000 Share Exchange [(800,000 x ¾) x Rs. 3.8 per share] 2,280
[1.5marks] -1
Deferred Consideration (550,000 x 1.1 ) 500
Total 2,780
Note: Rs. 100,000 paid to advisors on the acquisition should be ignored as it is
taken to expenses.
3. C Only turnover is relevant
[1 mark]
4. B False
[1 mark]
5. Rs. A provision should be raised for Rs. 2,000,000 on December 31, 2013.
2,000,000 Working
[3 marks] A provision must be raised immediately for the lower of following.
Loss on completion:
Rs. 4,500,000 (1,500,000 x 3) – 8,000,000 = - 3,500,000.
Costs to cancel: Rs. - 2,000,000
Page 8
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CAF-05 Mar 2023 Mock Solution
Answer-7
a)
i)
Debit Credit
Date Description
-------- Rupees in 000 --------
Entry on Cash 94,995
initial visits Revenue 88,130 1
Contract Liability 6,865
Upon free Contract Liability 4,037
visit claim Revenue (W-2) 4,037 1
W-1
Allocation of transaction price Standalone price T.P
Initial visit (94,995 x Rs. 1,000) 94,995 88,130 (94,995/102,395 x 94,995) 0.5
Free visits (7,400 x Rs.1,000) 7,400 6,865 (7,400/102,395 x 94,995) 0.5
102,395 94,995 (94,995 x Rs. 1,000)
(W-2)
Description 2020
Visits claimed (F.T.Y) 4,350 0.25
Total expected visits 7,400 0.25
Percentage (4,350/7,400) 58.8% 0.25
Revenue (As on) (6,865 x 58.8%) Rs. 4,037 0.25
ii)
Debit Credit
Date Description
-------- Rupees in 000 --------
Entry at Cash 300,000
initial room Revenue 296,053 1
sale Contract Liability 3,947
W-1
Allocation of transaction price Standalone price T.P
Page 9
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CAF-05 Mar 2023 Mock Solution
b)
Customer A
As per the criteria in para 15 of IFRS-15, when an entity receives consideration from the customer, the
entity shall recognise the consideration received as revenue when the contract has been terminated and the
consideration received from the customer is non-refundable. Hence ML shall recognize the Rs. 2 million
as revenue on 30 June 2020. [1.5 marks]
Customer C
The transaction price of the two units of Alpha sold includes an element of consideration which is
variable or contingent on future events. ML shall allocate the transaction price to each performance
obligation identified in the contract on a relative stand-alone selling price and hence it recognizes revenue
of Rs.19,047,619 (W-1). The allocated transaction price of Rs. 952,381 of the discount will be
recognized as a liability until the earlier of the expiry or exercise of the discount. [1.5 marks]
W-1
Allocation of transaction Stand-alone Transaction
price selling price price
Customer E
ML determines that the requirements of (Para 35) IFR-15 are met because the entity’s performance does
not create an asset with an alternative use to the entity and the entity has an enforceable right to payment
for performance completed to date and hence the performance obligation is satisfied over time. The entity
shall recognize revenue over time by measuring the progress towards complete satisfaction of that
performance obligation.
As per the terms of the contract, ML has an enforceable right to payment for performance completed to
date, therefore ML shall recognize a revenue of the amount of the performance completed to date.
The commission paid of Rs. 200,000 to the sales employees would be capitalized as it would be an
incremental cost of obtaining a contract with the customer. This cost shall also be amortized over the
period of the contract (two years).
Hence a revenue of Rs. 2.6 million (20% of 13,000,000) shall be recognized by ML in the current year
(and cost to fulfill of Rs. 11 million and cost to win of Rs. 200,000 will be amortised on 20%). [2 marks]
Customer F
ML determines that the contract contains two performance obligations that are satisfied at the points in
time at which the products are delivered to F. Allocated revenue is Rs. 10 million and Rs. 5 million
respectively. ML concludes that the contract contains a significant financing component
At contract inception, a contract liability of Rs. 15 million is recognized for both of the products. At the
year end interest expense relating to both obligations will be recognized with resulting increase in
liability.
No revenue will be recorded in current year as none of the goods are delivered. [2 marks]
Page 10
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CAF-05 Mar 2023 Mock Solution
Answer -8
Chair Limited 0.5
Consolidated Statement of Comprehensive Income
For the year ended December 31, 2019
Rs. In “million”
Sales [ 800 + 315 ] 1,115 0.5
Less: Cost of sales [ 540 + 180 ] (720) 0.5
Gross profit 395
Operating exp. [114 + 60 + (W-1.2) 170 – (W-1.3) 84 +2 (W-5) (269.8) 2.5
– 8 (iv) – 12 (iv) + 2.5 (iv) – (vii) 1.7 + (viii) 27)]
Other income [41 + (iv) 2 – (iv) 12 – (v) 21] 10 1
Finance cost [20 + 12 + (W-1.3) 7.6 x 9/12 – (vii) 1.7 (36) 1
Share of profit from Associate (W-5.1) 6.1 0.25
Profit before taxation
Less: Taxation (25 + 15) (40) 0.5
Profit after taxation 65.3
Add: Other comprehensive income
Share of OCI from associate (W-5.3) 7.2 0.25
72.5
Page 11
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CAF-05 Mar 2023 Mock Solution
(W-1.1)
Investment Rs in mill.
Shares to be given (70 million x 60%) = 42 mill. Shares x 2/5 = 16.8 mill x Rs. 25/share 420 0.5
Contingent consideration (at FV) 300 0.25
Deferred consideration 42 mill. Shares x Rs. 2 = Rs. 84 x 76.4 0.5
796.4
(W-1.2)
Contingent consideration (Opening balance on 1 Jan 2019) 280
Contingent consideration (Closing balance on 31 Dec 2019) (500 x 90%) 450
Expense to be recorded F.T.Y 170 0.5
(W-1.3)
Date Description Payable 0.5
Page 12
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CAF-05 Mar 2023 Mock Solution
Answer-9
CLASSIC CARS LIMITED (CCL) 0.5
Journal entries
For Year ended 31 December 2022
Rs. in “000”
Date Particulars Dr. Cr.
1-Apr-22 Right of use 8,002 0.5
Lease liability (PV of LP) 8,002
Right of use 15
0.5
Payable (IDC) 15
Right of use 343 0.5
Provision for restoration 343
1-Apr-22 Lease liability 1,380
Cash 1,380 0.5
1-Apr-22 Payable 15
Cash 15 0.5
31-Dec-22 Interest expense [695 x 9/12] 521
Interest Payable 521 0.5
31-Dec-22 Depreciation expense (8,360-800)/10 x 9/12 567
Accumulated depreciation 567 0.5
31-Dec-22 Finance Cost (36 x 9/12) 27
Provision for restoration 27 0.5
Page 13
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CAF-05 Mar 2023 Mock Solution
Lease of manufacturing plant Rs in “000”
(W-1) Calculation of PV of LP
= (1,293 +107 -20) + 1,293 {1- (1 + .105 )-4 } + 1,000 x {1- (1 + .105 )-5 } x (1.105)-5 + *800 x (1.105)-10
0.105 0.105 2.5
= 1,380 + 4,055 + 2,272 + 295
= 8,002
Page 14
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Certificate in Accounting and Finance Stage Examination
16 August, 2023
3 hours – 100 marks
Additional reading time: 15 minutes
Section A
Q. 1 Select the most appropriate answer from the options available for each of the following Multiple
Choice Questions. Each question carries one mark, except # vii and xiii which carry 2 marks.
(ii) Which of the following variables are not directly affected by marketing mix?
(a) Product
(b) Place
(c) Process
(d) Promotion
(iii) Given: risk-free rate of return = 5 % market return = 10%, cost of equity = 15%.
Value of beta (β) is:
(a) 1.9
(b) 1.8
(c) 2.0
(d) 2.2
(iv) Which of the following is not Michael Porter’s five competitive forces?
(a) New entrants
(b) Rivalry among existing firms
(c) Bargaining power of unions
(d) Bargaining power of suppliers
(vi) The emphasis on product design is very high, the intensity of competition is low, and the market
growth rate is low in the ______ stage of the product life cycle.
(a) Maturity
(b) Introduction
(c) Growth
(d) Decline
(vii) The directors of Blaina Packaging Co. (BPC), a well-established manufacturer of cardboard boxes
is considering whether to enter the cardboard tube market. Cardboard tubes are purchased by
customers and these products are of various sizes, ranging from large tubes which are used for carpets
to small tubes which are used for films and paper. Another company, Plastic tubes Co. (PTC),
produces narrow, but increasing, range of plastic tubes which are capable of housing small products
such as film and paper-based products. This is considered as which of the following Porter’s force for
BPC?
(a) Threat of new entrant
(b) Threat of substitutes
(c) Bargaining power of customers
(d) Bargaining power of suppliers
(viii) Assume cash outflow equals Rs. 1,20,000 followed by cash inflows of Rs. 25,000 per year for 8
years and a cost of capital of 11%. What is the Net present value?
(a) (Rs. 38,214)
(b) Rs. 9,653
(c) Rs. 8,653
(d) Rs. 38,214
(ix) Nicole has inherited a restaurant from her uncle. The restaurant had been under-performing and
was closed six months ago. Nicole wants to begin a new restaurant in the premises with a new name
and new cuisine.
The following are primary activities of the value chain that Nicole should consider except:
(a) In bound logistics: side of local, high quality produce for ingredients
(b) Outbound logistics: consider delivery of the bound to table
(c) Marketing: Presentation of meals
(d) Technology: Advanced cooking equipment
(x) While evaluating investments, the release of working capital at the end of the projects life should be
considered as,
(a) Cash in flow
(b) Cash out flow
(c) Having no effect upon the capital budgeting decision
(d) None of the above.
(xi) The Specialist Clothing Company (SCC) is a manufacturer of a wide range of clothing. Fashion is
one of the five divisions of SCC. Fashion is operating in a market with high growth and is a market
leader. By the next year, it is predicted to have 10% of the market share in a growing market. Fashion
should be classified as which of the following according to the BCG matrix.
(a) Star
(b) Dog
(c) Cash cow
(d) Question mark
(xii) ABC is a marketing consultancy business. ABC’s most recent corporate analysis has identified that
three new businesses have recently entered its market and started aggressively targeting ABC’s key
client. As part of ABC’s corporate analysis, these three new businesses would be a
(a) Strength
(b) Opportunity
(c) Weakness
(d) Threat
(xiii) NS is the market leader in sportswear in Beeland, selling a variety of sportswear products. The
board has recently instituted a review of the competitive position of NS by commissioning a SWOT
analysis.
Match the columns in respect of the following elements of SWOT analysis:
Column A Column B
(1) Excellent brand awareness of NS (i) Strength
(2) New product to be introduced by NS in the market for new sport
(ii) Weakness
at the world championship
(3) Child labour scandal in the sportswear industry which may
cause a negative impact on the image of NS due to growth of social (iii) Opportunities
media
(4) Loss of key brand ambassador of NS (iv) Threats
Q. 2 An industry comprises of only two firms-Aftab Ltd. and Chand Ltd. From the following information
relating to Aftab Ltd., prepare BCG Matrix:
Percentage
Revenues Percent Profits Percent Percentage
Product Industry
(in Rs. ) Revenues (in Rs.) Profits Market Share
Growth rate
A 6 crore 48 120 lakh 48 80 + 15
B 4 crore 32 50 lakh 20 40 + 10
C 2 crore 16 75lakh 30 60 -20
D 50 lakh 4 5 lakh 2 5 -10
Total 12.5 crore 100 250 lakh 100
(08)
(b) Gennex is a company that designs, manufactures and sells computer hardware and software.
Gennex is well known for its innovative products that has helped the company to have advantage over
its competitors. It also spends on research and development and concerned with innovative softwares.
Often the unique features of their product, that are not available with their competitors helps them to
gain competitive advantage. Gennex using the strategy is consistently gaining its position in the
industry over its competitors.
Identify and explain the Porter’s generic strategy which Gennex has opted to gain the competitive
advantage. (04)
Q. 4 Railway Development Co (RDC) was considering two options for a new railway line connecting two
towns in the country of Zeeland.
Route A involved cutting a channel through an area designated as being of special scientific
importance because it was one of a very few suitable feeding grounds for a colony of endangered birds.
The birds were considered to be an important part of the local environment with some potential
influences on local ecosystems.
The alternative was Route B which would involve the compulsory purchase and destruction of Eddie
Krul's farm. Mr Krul was a vocal opponent of the Route B plan. He said that he had a right to stay on
the land which had been owned by his family for four generations and which he had developed into a
profitable farm. The farm employed a number of local people whose jobs would be lost if Route B went
through the house and land. Mr Krul threatened legal action against RDC if Route B was chosen.
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Managerial and Financial Analysis | Page 4 of 7
An independent legal authority has determined that the compulsory purchase price of Mr Krul's farm
would be $1 million if Route B was chosen. RDC considered this a material cost, over and above other
land costs, because the projected net present value (NPV) of cash flows over a ten-year period would be
$5 million if Route A were chosen. The NPV would be reduced to $4 million if Route B were chosen.
The local government authority had given both routes provisional planning permission and offered no
opinion of which it preferred. It supported infrastructure projects such as the new railway line,
believing that either route would attract new income and prosperity to the region. It took the view that
as an experienced railway builder, RDC would know best which to choose and how to evaluate the
two options. Because it was very keen to attract the investment, it left the decision entirely to RDC.
RDC selected Route A as the route to build the new line.
A local environmental pressure group, 'Save the Birds', was outraged at the decision to choose Route
A. It criticised RDC and also the local authority for ignoring the sustainability implications of the
decision. It accused the company of profiting at the expense of the environment and threatened to use
'direct action' to disrupt the building of the line through the birds' feeding ground if Route A went
ahead.
Required
Use Tucker's 'five question' model to assess the decision to choose Route A. (10)
Q. 5 You are a management accountant for an organic fruit farm in Teeland. The farm grows apples and
produces apple juice, both of which it sells at local markets and to retail companies.
Organic food must be produced using environmentally friendly farming methods, so no genetically
modified (GM) crops, growth enhancers or artificial pesticides and fertilisers may be used. Any farmer
claiming to be organic must be certified by a government-approved body, such as the Teeland Soil
Association. Food producers must also comply with government-approved regulations regarding the
production, packaging and labelling of food.
Regulatory bodies have the authority to forbid the use of misleading labels and product descriptions, and
can issue fines for inappropriate production. In extreme cases, regulatory bodies can close down
operations which regularly fail to comply with regulations for production, packaging and labelling of
their products.
Consumers increasingly want food that is healthy and is sourced both ethically and locally.
Consequently, although organic food was initially perceived as a luxury niche product, it is now
increasingly seen as a lifestyle choice by those consumers who regard non-organic products as more
harmful to health and the environment. Major supermarkets in Teeland have started to stock more
organic and locally grown food.
A key issue for all farmers is the weather, which significantly affects the volume (yield) and quality of a
crop and hence the market price. Organic farmers are unable to use artificial fertilisers or pesticides, so
have developed alternative high-tech farming methods to improve profitability and cash flow. Weather
information systems help plan planting, harvesting and irrigation. Climate-controlled growing tunnels
and stores provide a pest-free environment with temperature, light and humidity control. These methods
increase yields, extend the possible growing season and allow crops to be stored for longer before usage
or sale, with no loss of flavour or quality.
The farm's management team are considering its future strategy, and have asked for your help in
assessing its macro-environment.
Required
Using the information above, identify and explain the THREE key factors in the environment which are
likely to have most impact on the farm. (09)
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Managerial and Financial Analysis | Page 5 of 7
Section B
Rupees
Equity Share Capital 6,500,000
12% Preference Share Capital 1,200,000
15% Debentures 2,000,000
10% Bank Loan 800,000
The cost of equity capital for the company is 16.30% and Income Tax rate for the company is 30%. You
are required to calculate the Weighted Average Cost of Capital (WACC) of the company. (05)
Q. 7 A business is planning an investment in new equipment that would have an expected useful life of three
years. The cash flows from the project have been estimated as follows:
Year 0 1 2 3
Equipment cost/ residual value (50,000) 20,000
Sales revenue 25,000 25,000 20,000
Running costs (10,000) (10,000) (8,000)
The expected annual rates of inflation for the next three years are:
Equipment cost/residual value 5%
Sales revenue 4%
Running costs 7%
In addition, the project will require a working capital investment of Rs. 10,000 immediately, with an
increase to Rs. 11,000 at the end of Year 1 and a further increase to Rs. 12,000 at the end of Year 2.
This estimate includes effect of inflation. The weighted average cost of capital, which is the money cost
of capital, is 10%.
Required
Calculate the NPV of the project and recommend whether the project should be undertaken. (10)
Q. 8 M.A. Limited is commencing a new project for manufacture of a plastic component. The following cost
information has been ascertained for annual production of 12,000 units which is the full capacity:
The selling price per unit is expected to be Rs. 96 and the selling expenses Rs. 5 per unit, 80% of which
is variable.
In the first two years of operations, production and sales are expected to be as follows:
To assess the working capital requirements, the following additional information is available:
(a) Stock of materials 2.25 months’ average consumption
(b) Work-in-process Nil
(c) Debtors 1 month’s average sales.
(d) Cash balance Rs. 10,000
(e) Creditors for supply of materials 1 month’s average purchase during the year.
(f) Creditors for expenses 1 month’s average of all expenses during the year.
Q. 9 Shaheen Limited (SL) is engaged in manufacturing and selling textile products. SL procures the material
locally which is then manufactured and exported to customers. The management of SL is concerned over
high volatility in foreign exchange rates. The receipt of USD 50,000 from a customer is expected in three
months’ time and management is considering to hedge the foreign exchange risk.
SL’s bank has quoted the following exchange rates and annual interest rates:
USD 1
Buy Sell
Spot 178.650 179.800
1 month forward 177.745 178.795
3 months forward 177.555 178.555
Deposit % Borrowing %
USD 1.25 2.75
PKR 6.75 9.75
Required:
Determine which of the following options would be more beneficial for SL:
(a) Hedging through forward contract
(b) Hedging through money market
(c) No hedging. Assume that on the date of settlement of transaction, spot rate is USD 1 = PKR
178.15 (08)
Q. 10 Sadiq Limited (SL) is in the process of preparation of budget for the year ending 31 December 2018.
Following are the extracts from the statement of profit or loss for the year ended 31 December 2017:
Rs. in million
Sales (30% cash sales) 7,500
Cost of goods sold (4,000)
Gross profit 3,500
Operating expenses (1,250)
Net profit before tax 2,250
Raw material inventory as on 1 January 2017 amounted to Rs. 152 million. There were no opening
and closing inventories of work in process and finished goods. SL follows FIFO method for valuation
of inventories.
(ii) Ratio of manufacturing cost was 5:3:2 for raw material, direct labour and factory overheads
respectively.
(iii) All operating expenses and 20% of factory overheads are fixed. Total depreciation for the year
2017 amounted to Rs. 100 million and was apportioned between manufacturing cost and
operating expenses in the ratio of 7:3. Depreciation for the next year would remain the same.
(v) Raw material prices and direct labour rate would increase by 10% and 6% respectively.
(vii) The existing policy of payment to raw material suppliers in 30 days is to be changed to 15
days. Other costs are to be paid in the month of incurrence.
Required:
Compute the budgeted net cash inflows/(outflows) for the year ending 31 December 2018. (Assume
there are 360 days in a year) (16)
(THE END)
Answer # 1
(i) (a) Have an unlimited life, and voting rights and receive dividends
(ii) (c) Process
(iii) (c) 2.0
(iv) (c) Bargaining power of unions
(v) (c) Cost of Debentures,
(vi) (b) Introduction
(vii) (b) Threat of substitutes
(viii) (c) Rs. 8,653
(ix) (d) Technology: Advanced cooking equipment
(x) (a) Cash in flow
(xi) (a) Star
(xii) (d) Threat
(xiii) (c) (1)-(i), (2)-(iii), (3)-(iv), (4)-(ii)
Answer # 2
(1 mark for correct classification of product in BCG matrix and 1 mark for explanation)
Deduct 04 marks if answer is not in form of Matrix.
Answer # 3
(a)
Cost leadership emphasizes producing standardized products at a very low per-unit cost for consumers
who are price-sensitive.
Differentiation is a strategy aimed at producing products and services considered unique industry wide
and directed at consumers who are relatively price insensitive.
(b)
Gennex has opted differentiation strategy.
1. Its products are designed and produced to give the customer value and quality.
2. They are unique and serve specific customer needs that are not met by other companies in the
industry.
3. Highly differentiated and unique hardware and software enables Gennex to charge premium
prices for its products hence making higher profits and maintain its competitive position in the
market.
Page 1 of 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 6: Managerial and Financial Analysis
Suggested Solution – Mock
Answer # 4
Is it Profitable
Route A is a profitable choice. Projections demonstrate that its NPV is positive $5 million, $1 million
more than if Route B was chosen.
Is it Legal
The local government authority has given planning permission for Route A, so RDC seems to
have fulfilled its requirements. RDC does not appear to face the threat of legal action
with Route A that it could have faced if it had chosen Route B.
Is it Fair
RDC has had to decide between the conflicting claims of different stakeholders, the birds versus Eddie
Krul and his workers.
Choosing Route A ignores the birds' rights to access their feeding grounds and may threaten their
existence.
Choosing Route B means depriving Eddie Krul of a farm that he wants to keep and causing his
workers to lose their jobs.
Is it Right
From a social and economic viewpoint, however, the decision appears to be right as the line will
improve transport and boost economic activity and the construction work will provide employment
opportunities. Route A does not have the adverse consequences of closing the farm that Route B would
have had, including loss of employment.
However, from the viewpoint, of a deep ecologist, the decision is wrong because RDC should not disrupt
the existence of other species in any circumstances.
Is it Sustainable
The decision to choose Route A appears to be the less environmentally sustainable decision. It could
threaten the existence of an endangered species and disrupt the local ecosystems.
Summary
Whichever decision RDC chose would have had negative implications for some stakeholders. It chose to
prioritise profitability and minimising the impact on the local community over the effect on the birds and
the associated ecosystems.
Answer # 5
Social:
Consumers' attitudes to organic food are changing because of concerns about health and the
environment. Organic food is perceived as more socially responsible than non-organic alternatives.
These changing consumer attitudes will increase industry demand from organic farms. However,
farmers' accountability – and compliance with organic certification – is necessary to maintain consumer
confidence in buying organic produce.
Technological:
The industry needs to use technology (such as sophisticated weather management systems and
atmospherically controlled tunnels) to avoid using fertilisers and pesticides.
Technological developments will increase yields, and also reduce problems of seasonality and
perishability by extending the life of the product through storage. This will benefit farmers' cash flows.
Page 2 of 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 6: Managerial and Financial Analysis
Suggested Solution – Mock
Further technological advances may enable the industry to reduce costs further in future. If the price of
organic produce can also be reduced, this could make the products accessible to more consumers.
Legal (regulatory)
There is significant regulation in the food industry generally, and particularly in relation to organic
produce. Organic farms need to obtain the relevant certification before they can start selling produce as
organic; and then they need to comply with all the appropriate regulations regarding production,
packaging and labelling.
There are severe sanctions for breaching regulations. As a result, compliance is very important, and the
associated costs of compliance are likely to be high. Any changes in regulations or standards in the future
could lead to additional compliance costs.
Answer # 6
Outstanding Amount Cost of Component Weight Weighted Cost
Equity Share Capital 6,500,000 16.30% 0.62 10.09%
WACC = 14%.
Answer # 7
NPV 1,009
Conclusion:
The project has a positive NPV. The decision should therefore be to Invest.
Page 3 of 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 6: Managerial and Financial Analysis
Suggested Solution – Mock
Answer # 8
(a)
Year 1 Year 2
Sales 480,000 816,000
(5,000 * 96) (8,500 * 96)
Less: Cost of Goods Sold
Material Consumed 240,000 360,000
(6,000 * 40) (9,000 * 40)
Page 4 of 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 6: Managerial and Financial Analysis
Suggested Solution – Mock
(b)
Year 1 Year 2
Current Assets:
Current Liabilities:
Answer # 9
(a)
We will sell USD 50,000 to bank using 3 months forward Buy Rate (because bank will buy). Amount to
be received will be 50,000 * 177.555 = 8,877,750.
(b)
Step 1: Discount FCY Receivable
50,000 / 1 + (0.0275 * 3/12) = 49658.60
(c)
We will sell USD 50,000 to bank using spot rate on date of settlement of transaction. Amount to be
received will be 50,000 * 178.15 = 8,907,500.
Conclusion: Hence, Money Market Hedge is more beneficial because it will result in highest amount of
receipts.
Page 5 of 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 6: Managerial and Financial Analysis
Suggested Solution – Mock
Answer # 10
2018
FOH - Depreciation 30
FOH - Other Fixed [4,000 * 2/10 *0.20 - 30] *1.05 95
FOH - Variable [4,000 * 2/10 *0.80*1.065*1.05] 716
840
= Cost of Sales 4,513
(THE END)
Page 6 of 6
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Certificate in Accounting and Finance Stage Examination
18 August 2023
3 hours – 100 marks
Additional reading time – 15 minutes
COMPANY LAW
Instructions to examinees:
(i) Answer all THIRTEEN questions.
(ii) Answer in black pen only.
(iii) Attempt each part of the question on fresh page. MCQs can be attempted on the same page.
Q.1 Select the most appropriate answer from the options available for each of the following Multiple
Choice Questions (MCQs). Each MCQ carries ONE mark.
(i) The Commission shall be entitled to present a petition for the winding up of a company without an investigation into
the affairs of the company:
(a) If the company is carrying on a business not authorised by its memorandum.
(b) If sole business of the company is the licensed activity and that licence is revoked.
(c) If the business of company is being conducted in a manner oppressive to any of its members or persons concerned in
the formation of the company
(d) The management of the company might be guilty of fraud, misfeasance or other misconduct towards the company
or towards any of its members
(ii) The registrar shall register the memorandum of association of a company if following conditions are fulfilled:
(i) Company is being formed for lawful purposes
(ii) None of the object stated is inappropriate, insufficiently expressive or deceptive
(iii) All legal requirements regarding registration are duly complied with
(iv) The company has obtained confirmation from the Commission for registration of memorandum
(iv) A preference share normally carries as prior right (ahead of ordinary shares) to
(a) Receive a salary which is normally a fixed amount each year
(b) Receive a repayment of capital in the event of winding up
(c) Vote in the general meeting
(d) None of the above
(vii) Suarez Limited last held an AGM on 31 October 2007 for the year ended 30 September 2007. When must the
company hold its next annual general meeting (AGM)?
(a) by 30 September 2008.
(b) by 31 October 2008
(c) by 31 December 2008
(d) by 28 January 2009
(ix) Ali the Chief Executive of Xyz Fast Foods Ltd. has vast experience of Fast Food Industry.
(a) he cannot carry out the business of Fast food of his own
(b) he can setup a business of fast food for his spouse
(c) he can setup a business of fast food as father and trustee for his minor children
(d) none of the above
(x) The quarterly financial statements of a listed company shall be transmitted electronically to
(a) The Commission
(b) The Securities exchange
(c) The Registrar
(d) All of the above
(xi) A provisional manager was appointed on 24th October 2021 and winding up order was issued by the Court on 3
January 2022, from whom he cannot require the statement (of affairs) in prescribed form?
(a) General Manager (operations) whose last day of employment with the company was 26 December 2020.
(b) Chief Operating Officer whose last day of employment with the company was 12 January 2021.
(c) Senior Manager (logistics) whose last day of employment with the company was 18 February 2021.
(d) Chief Financial Officer whose last day of employment with the company was 30 September 2020.
(xiii) Casual vacancy in the office of directors of a listed company shall be filled by
(a) By members within 30 days of occurrence
(b) By directors within 30 days of occurrence
(c) By directors within 60 days of occurrence
(d) By directors within 90 days of occurrence
(xv) In case of any material irregularity in the election of the directors, members having 10% or more voting power may
apply to the court within
(a) 14 days of election
(b) 21 days of election
(c) 30 days of election
(d) None of the above is correct
(15)
Q.2 (a) Raja and Rehan two senior cricketers want to establish a Cricket Academy to explore and
train new talent. One of their friends advised them to register a company for this purpose. Advise
Raja & Rehan about restrictions, privileges and obligations if they register a company as an
association not for profit. (04)
(b) Pluto (Private) Limited (PPL), having paid-up capital of Rs. 7.5 million, has laid its annual
financial statements for approval at PPL’s annual general meeting. Under the provisions of the
Companies Act, 2017 advise the company secretary about the requirements for filing the financial
statements with reports and other documents, if any. (02)
Q.3 (a) Describe the term “associated company” in accordance with the Companies Act, 2017. (03)
(b) RBC Limited and KBC Limited are associated companies having share capital of Rs 60.0
million and Rs 15.0 million respectively. The companies’ reserves equal 10% of their share
capital. RBC Limited produces and supplies a component ‘X’ to KBC Limited. KBC Limited has
been facing liquidity problems as a result of which its production and sales had been suffering.
Consequently, there has been a significant decline in the sale of component ‘X’ by RBC Limited.
The directors of RBC Limited wish to support KBC Limited by way of the following:
− Advancing loan of Rs 5.0 million at an annual interest of 8%.
− Increasing the limit of trade credit from Rs 1.0 million to Rs 3.0 million.
Briefly state the conditions required to be fulfilled by the two companies while carrying out the
above transactions. (03)
Q.4 (a) M/s. Moon Light Limited (ML) is a public limited company listed on Karachi, Lahore and
Islamabad Stock Exchanges. The election of the directors of ML was held on June 30, 2014. A
group of shareholders holding 25% of the voting power decided on August 28, 2014 to challenge
the election on the ground that voting was not carried out properly.
Required:
Can the above shareholders challenge the election? (02)
(b) Lucky Transport Limited holds a Board of Directors’ meeting on last day of every month.
The company held four meetings during the period from July 2015 to October 2015. Mr. Afzal, a
Director of the company attended meeting held in the month of August 2015 only. In the month
of November 2015 Mr. Afzal intends to attend the Board of Directors’ meeting, but Chief
Executive Officer (CEO) of the company has objection that Mr. Afzal was remained absent from
three meetings i.e., July, September and October without leave of absence, so he shall ipso facto
cease to hold office of the director of the company.
Required:
Evaluate the above situation and describe whether the objection of CEO is valid or not. (02)
Q.5 The Annual General Meeting of Trade Limited was held at 9:15 a.m on 31 October 2012. Certain
shareholders of the company have lodged following complaints with the company’s secretary.
(i) Notice of the annual general meeting was not received by them although they are resident
in Pakistan and their registered addresses have also been provided to the company.
(ii) Since the meeting could not commence at the scheduled time i.e. 9:00 a.m; it became
invalid and should be called again.
(iii) A resolution passed in the meeting was approved by a show of hands. However, a poll
should have been carried out.
(iv) Mr. A who voted for a resolution was represented through a proxy which was deposited
at 5:01 p.m. i.e. after office hours on 29 October 2012. Further, since 30 October 2012
was a public holiday, the condition of depositing the proxy at least 48 hours before the
commencement of the meeting, was not met.
(v) Mr. G who holds 50,000 shares was represented by two proxies i.e. Mr. C (30,000 shares)
& Mr. D (20,000 shares). Only proxy with 30,000 shares was counted for the purpose of
voting.
(vi) JKM Limited holding 20,000 shares of the company was represented by Mr Waheed,
who is neither a director nor an employee of JKM Limited.
Comment on the validity of each of the above complaints in the light of Companies Act, 2017. (10)
Q.6 Ali is a shareholder of Allied Cement Limited (‘ACL’), a public listed company. ACL has made a
significant profit in the last financial year. The shareholders, including Ali, were expecting a
declaration of a substantial dividend of not less than Rs. 10 per share. However, the board of
directors of ACL proposed a dividend of only Rs. 5 per share. Ali rallied the shareholders and in
ACL’s annual general meeting (held two months ago), the shareholders approved a dividend of
Rs. 10 per share.
A few months ago, Ali had written a letter to the company secretary of ACL asking ACL to send
his due dividends to his son, Qadir, in Islamabad. The company secretary is of the view that,
since Qadir is not a shareholder, no dividends can be paid to him.
Due to these issues, the dividend amounts have not been paid and have been lying in ACL’s bank
account for the last two months.
Required:
Under the Companies Act, 2017 advise Ali on the legal consequences of these actions. (05)
Q.7 (a) The Companies Act, 2017 prescribes grounds for vacation of office by director. Can a
company provide additional grounds for vacation of office and if so, how? (02)
(b) Sedan Limited (SL), a company limited by guarantee having a share capital, has been
incurring losses for the last three years. Initially, SL had four directors (members) A, B, C and D.
On 1 July 2012, C had transferred all his shares to D. On 1 March 2013 A, B and D decided to
wind-up the company voluntarily.
Explain the liability of A, B, C and D. (03)
(c) State the percentage of shareholders’ votes required to approve the following resolutions. In
case any business does not pertain to shareholders, state who is empowered to approve the same.
(i) Incorporating increase in authorized capital in the memorandum and articles of
association.
(ii) Appointment of auditors.
(iii) Acquisition of fixed assets costing Rs. 2 Million.
(iv) Interim Dividend.
(v) Final Dividend.
(vi) Investment in a company
(03)
Q.8 (a) Explain the situation whereby a shareholders may call for fresh election of directors prior to
the end of the term of the present board. (02)
(b) Azad Limited (AL) is a listed company engaged in the business of manufacturing and supply
of electrical appliances. Mr. Majnou, a director of AL, has applied for an interest free loan from
the company to be repayable in five years.
In view of the provisions of the Companies Act, 2017 describe the circumstances under which AL
may grant loan to Mr. Majnou. (02)
(c) The shareholders of Ramadan Limited holding 20% of the voting power submitted a
requisition to hold an extraordinary general meeting (EOGM) to remove the auditor of the
company. The company neither called the EOGM nor allowed them to hold the meeting at the
company’s registered office. The said meeting was then held at some other place and resolution
for removal of the auditor was passed.
Discuss the validity of the said meeting and resolution passed therein. (02)
Q.9 (a) The Chief Executive of a Public Limited Company is out of country for some official
assignment. The annual accounts of the company have to be approved and signed. What must be
done to comply with the legal requirements? (02)
(b) UHY Limited intends to raise funds through issuance of shares to the public. Proceeds of the
issue would be utilized for installation of a new plant. The directors plan to issue the prospectus
on 10 September 2019. The subscription list will be opened in the second or the third week of
October 2019. An expert opinion would also be required to be included in the prospectus.
You are required to advise the company, based on the provisions of the Companies Act, 2017 in
respect of the following:
(i)Date of publication of the prospectus and the opening of subscription list. (02)
(ii)The places where UHY would be required to make available copies of its prospectus. (03)
Q.10 (a) The Directors of Sigma Limited wish to recommend a final dividend. Under the provisions of
the Companies Act, 2017 advise the directors about the restrictions, if any, with regard to the
declaration of dividend. (03)
(b) You are the Chief Financial Officer of a company listed on the Karachi Stock Exchange
having a share capital of Rs. 50 million. Mr. Wahid, who holds Rs. 5 million shares of the
company, has sent a written request to review the cash book of the company. Explain whether
you can refuse this request? (02)
(c) The annual general meeting of a company was held on October 31, 2009 but on account of
certain disagreements, the members did not adopt the audited financial statements for the year
ended June 30, 2009. In the above situation how would the company comply with the provisions
of the Companies Act, 2017 related to the filing of copies of annual accounts with the registrar of
companies? (03)
Q.11 (a) Who can demand a poll in the General Meeting? (01)
(b) Who is entitled to receive the notice of the meetings of a company? (02)
(c) The Board of directors of RS Limited wants to appoint Mr. Salahuddin, an employee of the
company, as Chief Executive of the company. You are required to explain the following:
(i) The minimum number of shares required to be acquired by Mr. Salahuddin.
(ii) The tenure of office for which Mr. Salahuddin may be appointed.
(iii) Will it be necessary to obtain members’ approval of the terms and conditions being
offered to him? (03)
Q.12 (a) RA Limited is a public limited company. It has two classes of shares namely ‘A’ and ‘B’. The
directors of the company have decided to restrict the voting rights of Class ‘A’ shareholders. In
lieu thereof, they shall be allowed to get preference in payment of dividend.
State the procedures through which the decision of directors can be put into effect. (03)
(b) Mr. Ahmed placed the initial capital for the formation of Mr. Kamal’s company and also
assisted in circulating the company’s prospectus. Company wishes to include a statement by Mr.
Ahmed as an expert regarding a technical issue. Can Mr. Ahmed issue such a statement? Please
reply in the light of provisions of the Companies Act, 2017. (03)
(c)The general meeting of VX Limited, a listed company, was convened on 30 May 2012.
However, only four shareholders turned up to attend the meeting.
Explain how VX Limited should deal with the above situation in the light of Companies Act,
2017. (03)
Q.13 (a) Define “Unlawful Activity” as per Companies Act, 2017. (03)
(b) Briefly describe the conditions under which Commission may apply to Court for winding up
of a company. (03)
(c) When is Official Liquidator required to report to Court. Also state any six (06) particulars of
such report. (04)
(THE END)
Answer # 1
Sr # Correct Option
(i) (a) If sole business of the company is the licensed activity and that license is
revoked.
(ii) (a) i, ii and iii
(iii) (d) Obtained a commencement of business certificate and certificate of
incorporation
(iv) (b) Receive a repayment of capital in the event of winding up
(v) (c) At least seven day and at most thirty days before the date of opening of
subscription list.
(vi) (d) Chairman of Board of Directors
(vii) (c) by 31 December 2008
(viii) (a) On the date of the first annual general meeting.
(ix) (a) he cannot carry out the business of Fast food of his own
(x) (d) All of the above
(xi) (d) Chief Financial Officer whose last day of employment with the company was
30 September 2020.
(xii) (c) CEO of the company
(xiii) (d) By directors within 90 days of occurrence
(xiv) (b) Creditors
(xv) (c) 30 days of election
Answer # 2
(a) Raja and Rehan should apply to Commission to get registered and work as a limited liability
company without using the word limited.
Restrictions
Such Association shall apply its profits, if any, or other income in promoting its objects,
and
Such Association shall prohibit the payment of any dividend to its members.
(b) Pluto (Pvt) Limited (PPL) is required to send at least two copies of its accounts as well as
auditors and directors report to the registrar within 30 days of the date of annual general
meeting in which these accounts were approved. These accounts shall be duly signed.
Page 1 of 7
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 07: Company Law
Suggested Solution – Mock
Answer # 3
(a) Any two or more companies or undertakings are associated if they are interconnected with each
other in following manner:
1) If a person who is the owner, partner, director or holder of 20% or more voting-power in a
company/undertaking is also the owner, partner, director or holder of 20% or more voting-
power in another company/undertaking. (01 mark)
2) If companies or undertakings are under common management or control, or one is the
subsidiary of another. (01 mark)
3) If the undertaking is a modaraba managed by the company (0.5 mark)
Provided that shares shall be deemed to be owned, held or controlled by a person if they are owned,
held or controlled by that person or by the spouse or minor children of the person. (01 mark)
Exceptions:
Following shall not be considered to determine status of Associate:
a director nominated by federal or provincial government or by financial institution owned
or controlled by such governments. (0.5 mark)
a director appointed as “Independent Director” (0.5 mark)
shares owned by National Investment Trust. (0.5 mark)
shares registered in the name of a central depository. (0.5 mark)
(subject to maximum of 03 marks)
Answer # 4
(a) Court may declare election of directors as invalid if member apply to Court within 30 days from
the date of election. As 30 days have passed since the date of meeting, members cannot challenge
the election.
(b) A director shall ipso facto cease to hold office if he absents himself from three consecutive
meetings.
Afzal is not disqualified as he remained absent from two consecutives meetings only
(September and October). He is entitled to attend board meeting of November.
Page 2 of 7
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 07: Company Law
Suggested Solution – Mock
Answer # 5
(i) A notice of general meeting is deemed to be duly sent if it is sent atleast 21 days before the
date of general meeting to members at their registered or communication address in Pakistan.
If notice has been duly served, then non-receipt of notice by any member shall not invalidate
the proceedings of meeting.
(ii) General Meeting becomes invalid if quorum is not present within 30 minutes. As meeting
started within 30 minutes, therefore it is valid.
(iii) At first instance, resolutions are passed by show of hands. Poll is conducted only if
chairman opts or members holding atleast 10% voting power demands Poll before conclusion
of general meeting. Therefore, resolution is valid, if poll was not demanded by specified
members.
(iv) As proxy form was not submitted atleast 48 hours before time of meeting, therefore proxy
is invalid. Mr. A was not entitled to attend and vote at general meeting.
(v) If
a member appoints more than one proxies, all proxy forms become invalid. Neither of the
proxies was entitled to attend and vote at general meeting.
(vi)A company may authorize (through Board Resolution) any individual to act as his
representative in general meetings Representative has not to be a directors, employee or
member of the company.
Answer # 6
Approval of dividend:
As per Companies Act, 2017, final dividend is recommended by Directors but
approved/declared by Members in general meeting. However, members cannot approve
dividend in excess of amount recommended by Directors. Therefore, approval of dividend by
shareholders in excess of proposed dividend is not in accordance with law.
Payment of Dividend:
As per Companies Act, 2017, dividend is paid to registered shareholder, or to his order, or to his
bankers, or to a financial institution nominated by him for the purpose. Therefore, view of
company secretary is incorrect. Dividend can be paid to a person who is not shareholder, on the
order of the member. As company has not paid dividend within 30 days of its declaration, chief
executive may be held responsible and may be punishable under the law.
Answer # 7
(a) A company can provide additional grounds for vacation of office of director. Company will have
to insert these grounds in articles of association.
(b) In case of a company limited by guarantee, a member is liable if company is wound up while he
is a member or within one year after he ceased to be a member.
In the given case, as company is being wound up within one year after C ceased to be a member,
therefore C is liable for the debts and liabilities of company contracted before he ceased to be a
member.
Page 3 of 7
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 07: Company Law
Suggested Solution – Mock
A, B and D are liable for all the debts and liabilities of company.
Answer # 8
(a) If a person gets required shareholding to become a director (01 mark), he may apply company to
hold fresh election of directors (01 mark).
(c) This meeting is valid, and resolution passed in the meeting is binding on company.
Companies Act, 2017 empowers member holding alteast 10% voting power to requisition
Extraordinary General Meeting. If directors fail to call EOGM within 21 days, such shareholders
may themselves call the meeting and all decisions taken in such a meeting shall be binding on the
company.
Answer # 9
(a) If chief executive is not for the time being in Pakistan, accounts shall be signed by at least two
directors alongwith a statement with accounts (signed by such directors) explaining that chief
executive in not in Pakistan.
(b)
(i)
1. A prospectus is required to be dated and that date shall be considered the date of its publication.
Therefore, the prospectus of UHY Limited should be dated September 10, 2012 as the
management plans to publish on that date. (01 mark)
2. The advertisement of a prospectus is required to be published in a newspaper not less than seven
days and not more than thirty days before the subscription list, is due to open. (01 mark)
3. As UHY Limited plans to publish the prospectus on 10 September 2012, it should open the
subscription list within 30 days, that is by 10 October 2012 and not by mid of October. (01 mark)
4. However, in case UHY Limited wishes to open the subscription list in the second or the third
week of October 2012, it would need to apply to the Commission and the Commission may for
special reasons, allow the company to publish the prospectus more than thirty days before the
subscription list is due to open. (01 mark)
(subject to maximum of 02 marks)
Page 4 of 7
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 07: Company Law
Suggested Solution – Mock
(ii)
From date of publication in newspaper till date of closing of subscription, prospectus of a company
shall be made available (free of cost), at following places:
1. At registered office of company.
2. At all stock exchanges of the Pakistan.
3. With all bankers to the issue.
4. With concerned share registrar.
5. With concerned ballotter.
6. With concerned credit rating agency (if any).
7. On website of the issuer.
(0.5 mark for each place, subject to maximum of 02 marks)
Answer # 10
(c) A company is required to file accounts (along with auditor’s report and directors’ report) with
register even if general meeting did not adopt the audited financial statements.
However, in such a situation a statement of the fact that the financial statements have not been
adopted giving reasons thereof shall have to be attached while filing the financial statements.
Answer # 11
(a) Members having atleast 10% (personally or through proxy) of voting power can demand a poll.
(c) (i) Mr. Salahuddin is not required to acquire any minimum number of shares for
appointment as Chief Executive.
(ii) Mr. Salahuddin shall hold office for three years from the date of appointment, or for
shorter period if fixed by directors at time of appointment.
Page 5 of 7
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 07: Company Law
Suggested Solution – Mock
(iii) The terms and conditions of appointment of a chief executive shall be determined by the
directors or the company in general meeting in accordance with the provisions in the
company's articles.
Answer # 12
(a) Rights of shareholders can be varied by alteration of articles of association by passing special
resolution. However, if such alteration affects the substantive rights or liabilities of a class of
members, it shall be carried out only if a majority of at least three-fourths of the class of members
affected by such alteration vote for such alteration.
(b) A prospectus shall not include a statement by an expert, unless the expert is not and has not
been, engaged or interested in the formation, promotion, or management of the company. As
Mr. Ahmed has been connected in formation of company and in circulating prospectus, he
cannot issue expert statement in prospectus.
(c) Quorum of a listed company is 10 members (present personally or via video-link) representing
25% voting power (including proxy). As only four shareholders attended meeting, therefore,
quorum is not present.
Answer # 13
(b)
1. If Commission has investigated, and it is revealed that:
Business of company is Unlawful or Fraudulent, or
Business of company is not authorized by Memorandum, or
Business is oppressive to any of its members or
Management is guilty of fraud or misfeasance or misconduct towards company or its
members.
Investigation is not necessary if sole-business of company is Licensed activity, and license has
been revoked.
2. Commission has given to company opportunity of representation and being heard.
Page 6 of 7
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 07: Company Law
Suggested Solution – Mock
(THE END)
Page 7 of 7
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Certificate in Accounting and Finance Stage Examination
21 August, 2023
3 hours – 100 marks
Additional reading time – 15 minutes
Q.1 (a) List the matters on which an external auditor is required to form an opinion for an unlisted
company, as required by the Companies Act 2017. (05)
(b) During the external audit of Bailey Ltd (Bailey) your firm has concluded that there is a
material uncertainty over whether Bailey is a going concern. State, with reasons, the
implications for the auditor's report. (04)
(c) You are assembling the final audit documentation on the audit of Green Pastures Ltd for
the year ended 30 June 2021.
Required:
List four examples of acceptable changes to the audit documentation during the final assembly
process. (02)
Q.2 Regional Assurance Partners (RAP) is a three-partner audit and assurance firm. The three
partners are Bob, Finlay and Shelley. RAP has been appointed as auditor of Exquisite
Accessories Limited (EAL), a metals processing firm. This is the first year that RAP is
undertaking the EAL audit.
The chief executive officer (CEO) of EAL is Ralph Trinket. Ralph’s wife is a well-known
jewellery designer who frequently produces pieces for fashion shows and other high-profile
media events. Ralph has been vocal about his wife’s successful jewellery business and has
offered to source some exclusive and limited-edition pieces for the audit team.
Owen Jackson, the CFO, and Bob have been friends for many years. Their families usually go
on holiday together once a year, and they frequently socialise with one another. Bob rates
Owen very highly as a CFO and he is confident that Owen will cooperate with the auditors.
Elspeth O’Keefe, a new audit manager at RAP, was previously employed by EAL, and she
prepared the EAL financial report for the period under audit.
Required:
(a) Identify and explain three threats to independence for RAP when performing the EAL
audit.
(b) For each threat identified in (a), state what actions RAP needs to implement to eliminate
or reduce the threat to an acceptable level. (06)
Q.3 You are an audit supervisor of Pluto & Co and are currently planning the audit of your client,
Venus Magnets Co (Venus) which manufactures decorative magnets. Its year end is 31
December 2021 and the forecast profit before tax is $9.6 million.
During the year, the directors reviewed the useful lives and depreciation rates of all classes of
plant and machinery. This resulted in an overall increase in the asset lives and a reduction in
the depreciation charge for the year.
Inventory is held in five warehouses and on 28 and 29 December a full inventory count will be
held with adjustments for movements to the year end. This is due to a lack of available staff on
31 December. In October, there was a fire in one of the warehouses; inventory of $0.9 million
was damaged and this has been written down to its scrap value of $0.2 million. An insurance
claim has been submitted for the difference of $0.7 million. Venus is still waiting to hear from
the insurance company with regards to this claim, but has included the insurance proceeds
within the statement of profit or loss and the statement of financial position.
The finance director has informed the audit manager that the October and November bank
reconciliations each contained unreconciled differences; however, he considers the overall
differences involved to be immaterial.
A directors' bonus scheme was introduced during the year which is based on achieving a target
profit before tax. In order to finalise the bonus figures, the finance director of Venus would
like the audit to commence earlier so that the final results are available earlier this year.
Required:
Describe FIVE audit risks, and explain atleast two audit procedures to address each risk in the
audit of Venus Magnets Co. (10)
Q.4 You are undertaking the audit of Precious Metals Ltd (PML) for the year ended 30 June 2021.
During the audit planning process, the following information is obtained:
(i) PML management’s remuneration is heavily weighted towards incentive-based
payments that rely on optimistic sales targets.
(ii) Recently, the human resources department of PML has been short staffed and has not
been able to provide training to new staff responsible for administrative and financial
processing functions. Generally, new staff members have experience within the
industry.
(iii) One of the outputs produced by PML is a titanium bolt, which is small but very
valuable. There is a high demand for these bolts in the construction industry.
(iv) Receivables are agreed to the sub-ledger, but there is no aging review completed, and
an increasing percentage of total receivables are falling into the 90 days+ category.
Required:
Identify and explain three key fraud risk factors within PML. (06)
Q.5You are the auditor of Knave Ltd and are in the process of completing the audit for the year
ended 30 June 2021. The following two outstanding matters have been highlighted in your
firm’s completion documentation:
(i) You have heard a rumour that Knave is planning to merge with a competitor, King Ltd. If
accurate, this will have disclosure implications. Management have advised you that although
they have had several meetings with the management of King Ltd, no such merger is currently
planned. Management have offered to make written representations confirming their
intentions.
(ii) The invoices to support the cost of a significant purchase of plant and machinery cannot be
traced. Management have offered to make written representations confirming the cost of the
plant and machinery.
Required:
Are the client’s written representations sufficient to resolve each of the two outstanding
Regards: Saboor
matters Ahmad,
noted above? Justify Senior Associate Tax at PwC (0302-9114479)(04)
your answer.
Audit and Assurance | Page 3 of 4
Q.6 (a) Briefly define any three examples of data validation controls. (03)
(b) Define intimidation threat. (02)
(c) Differentiate between test data and embedded audit facility. (04)
(d) Explain the terms “control environment” and “control procedures”. (04)
(e) Give four occasions when the NRV of inventory is likely to fall below cost. (02)
(f) Give two examples of the situations creating advocacy threat. (02)
Q.7 You are the audit senior responsible for the audit of Spectrum Ltd for the year ended 30 June
2021. During your initial planning meeting with Justin James, the chief financial officer
(CFO), he informs you of the following changes in the company’s operations.
(a) To help achieve budgeted sales for the year, Spectrum is about to introduce bonuses for
sales staff. The bonuses will be an increasing percentage of the gross sales made by each
salesperson above certain monthly targets.
(b) Spectrum plans to close an inefficient factory in country Tasmania before the end of 2021.
It is expected that the redeployment and disposal of the factory assets will not be completed
until the end of the following year. However, Justin is confident that he will be able to
determine reasonably accurate closure provisions.
(c) The chief executive officer (CEO), Geoff Alderton, has just returned from Italy, where he
signed a contract to import a line of clothing that has become the latest fashion fad there. The
company has not previously been engaged in the clothing industry.
Required:
For each of the scenarios provided, outline how the information affects inherent risk. (03)
(b) Jenny is the statutory auditor of Crystal Ltd, a diamond jewellery shop. Crystal Ltd has
engaged James, an expert, to value its diamond jewellery. While drafting the audit report, she
does not want to take responsibility for the work done by James. She wants to mention the
name of James in her audit report as she is relying on his work. She wants to give a modified
audit report.
Required:
Explain to Jenny the circumstances in which she can give a reference to an expert. (02)
(c) List the contents of typical terms of reference that should be agreed with an auditor's
expert. (02)
Q.9 As a result of work undertaken during the planning stage and audit evidence collected for the
tests of controls stage of the audit, the audit senior, Rose Chung, has determined that there is a
low risk of material misstatement for the following account balances:
(i) telephone
(ii) repairs
(iii) sales commission
(iv) wages and salaries.
Due to the expected reliability of these controls, Rose has undertaken extensive testing of the
controls regarding these account balances, and has concluded that the controls are reliable.
Required:
Identify one substantive procedure for each of the income statement account balances above
that will obtain sufficient appropriate audit evidence regarding the accuracy of that account
balance. (04)
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Audit and Assurance | Page 4 of 4
Q.10 (a) You are reviewing the audit working papers for Plastics Ltd, which have been prepared by
a junior audit team member. During your review, you noted that when testing the accuracy,
valuation and allocation assertion for the property, plant and equipment (PPE) account
balance, the junior team member tested the PPE additions and disposals during the year and
recalculated the depreciation. No discrepancies were found in the testing. The junior team
member concluded that PPE was appropriately valued. PPE is a material account balance to
Plastics Ltd.
Required:
Explain whether the junior audit team member has arrived at an appropriate conclusion. (04)
(b) You are the auditor of Critical Solutions Ltd (CSL) for the year ended 30 June 2018.
During your planning process you note that the human resources department of CSL has been
short staffed recently and has not been able to provide training to new staff responsible for
administrative and financial processing functions. Generally, new staff members have
experience within the industry.
While reviewing the accounting system you note that accounts receivable are agreed to the
sub-ledger, but there is no aging review, and an increasing percentage of total receivables are
falling into the 90 days+ category. Time sheets for processing staff are approved by
supervisors, then passed on to Susan Rogers in payroll. Susan prepares the pay sheet
information, which gets reviewed against the time sheets and approved by the CFO, Peter
Cummins, prior to payment being processed.
Access to the information technology (IT) system at CSL is controlled by usernames and
passwords, which are required to be changed regularly through a programmed system prompt.
Required:
Identify and explain two internal control strengths and two internal control weaknesses for
CSL. (04)
Q.11 Electro Ltd is a large Victorian manufacturer of electronic components, which it supplies to
the automobile industry. Electro maintains its inventory records on a computer inventory
system that includes the following details for each product:
stock code, which includes a physical location code
product description
quantity on hand
unit cost
total value on hand
date of last sale
quantity sold during the year
sales value of the stock sold during the year.
Required:
List five substantive tests that you could perform using generalised audit software in relation (05)
to the inventory for Electro.
Q.12
(a) Describe the purpose of performing analytical procedures at the planning stage of an audit.
(b) List four indicators of dominant influence being exerted by a related party. (02)
(c) Describe three types of enquiry that an auditor will make of management with regard to (02)
fraud.
(d) Provide four additional audit procedures that the auditor should perform when events or (03)
conditions are identified that call into question the ability of an entity to continue as a going
concern.
(e) Identify four factors that influence sample sizes for tests of controls. (04)
(f) If the evaluation of sample results suggests that there is material misstatement in the (02)
population, what courses of action are available to the auditor?
(g) Suppose that you are appointed as Quality Control Reviewer on audit of a listed company (02)
Mars Limited. Which procedures you should perform to discharge your responsibilities. (State
any four) (04)
Regards: Saboor Ahmad, Senior Associate (THE END) Tax at PwC (0302-9114479)
CAF 8: Audit & Assurance
Suggested Solution – Mock
Answer # 1
(a) Following are the matters on which an external auditor is required to form an opinion for an
unlisted company, as required by the Companies Act 2017:
1. Whether financial statements conform with the accounting and reporting standards as
applicable in Pakistan and give the information required by the Companies Act, 2017
and give true and fair view;
2. Whether proper books of account have been kept by the company as required by the
Companies Act, 2017;
3. Whether financial statements have been drawn up in conformity with the Companies
Act, 2017, and are in agreement with the books of account and returns;
4. Whether investments made, expenditure incurred and guarantees extended during the
year were for the purpose of the company’s business; and
5. Whether zakat deductible at source under the Zakat and Ushr Ordinance, 1980, was
deducted by the company and deposited in the Central Zakat Fund established under
that Ordinance.
(c) Examples of acceptable changes to the audit documentation during the final assembly process:
1. Deleting or discarding superseded documentation.
2. Sorting and cross-referencing working papers.
3. Signing off on completion checklists relating to the file assembly process.
4. Documenting audit evidence that auditor has obtained before the date of auditor’s report.
Page 1 of 9
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 8: Audit & Assurance
Suggested Solution – Mock
Answer # 2
Answer # 3
Page 2 of 9
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 8: Audit & Assurance
Suggested Solution – Mock
Accuracy and Completeness of Bank: Audit team should remain alert to fraud
Bank reconciliation is not being prepared throughout the audit.
monthly. This may result in errors/omissions, Management should be asked to prepare
which may become material when aggregated. reconciliation statements (particularly at year
Further, weakness in cash and bank areas indicate end).
risk of fraud. The reconciling items should be tested in
detail and agreed to supporting
documentation.
Risk at Financial Statements Level: Throughout the audit, the team will need to
Bonus scheme is based on achieving be alert to this risk and maintain professional
a target profit before tax. Directors can scepticism.
manipulate results to increase the bonus payment. Any journal adjustments affecting profit
should be tested in detail.
Detailed review and testing on judgmental
decisions, including treatment of provisions.
Strict Deadline: Management should be asked to extend the
A reduction in the audit time table will increase time.
detection risk. If not, auditor should consider to perform
Audit team may not have sufficient time to obtain interim audit.
sufficient appropriate audit evidence. Further,
period to review subsequent events may also be
reduced.
Answer # 4
Answer # 5
Page 3 of 9
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 8: Audit & Assurance
Suggested Solution – Mock
Answer # 6
Page 4 of 9
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 8: Audit & Assurance
Suggested Solution – Mock
Control Procedures:
Control procedures are the policies and procedures (other than control environment) to ensure
that entity’s objectives are achieved. (1.0 marks)
(e)
1. An increase in costs or a fall in selling price
2. Physical deterioration
3. Obsolescence of products
4. A marketing decision to manufacture and sell products at a loss
(0.5 mark for each reason)
Page 5 of 9
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 8: Audit & Assurance
Suggested Solution – Mock
Answer # 7
(a) Inherent risk is increased.
Tying bonuses to reported sales increases the risk that sales staff will process fictitious sales,
make sales to uncreditworthy customers or manipulate sales between periods to increase sales
and thereby their bonuses.
Answer # 8
(a) Relevance:
Relevance deals with the logical connection between audit evidence/procedure and assertion
being tested.
Examples:
1. If auditor wants to test Occurrence (i.e. overstatement), relevant procedure will be to test
recorded amounts.
2. However, if auditor wants to test Completeness (i.e. understatement), relevant procedure
will be to test information outside accounting system
3. A procedure relevant for one assertion may not be relevant for other e.g. inspection of
tangible assets may provide evidence for Existence, but not for Rights & Obligation.
4. Tests of controls are designed to evaluate the operating effectiveness of controls. Relevant
evidence would be conditions which indicate performance or deviation of control.
5. Substantive procedures are designed to detect misstatements in financial statements.
Relevant evidence would be conditions which indicate misstatement.
Marking plan: Q.8(a)
1.0 marks for definition, and 1.0 marks for each correct example; subject to maximum of 3.0
marks.
(b) Auditor shall not refer to the work of expert in auditor’s report unless:
1. it is required by Law or Regulation (1.0 marks), or
2. such reference is relevant to understand nature of modification to the auditor’s opinion.
In such circumstances, the auditor may need the permission of the auditor’s expert before
making such a reference (1.0 marks).
(c) The auditor shall agree, in writing when appropriate, on the following matters with the auditor’s
expert:
(i) The nature, scope and objectives of that expert’s work;
(ii) The respective roles and responsibilities of the auditor and that expert;
(iii) The nature, timing and extent of communication between the auditor and that expert,
including the form of any report to be provided by that expert; and
(iv) The need for the auditor’s expert to observe confidentiality requirements.
(0.5 marks for each matter)
Page 6 of 9
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 8: Audit & Assurance
Suggested Solution – Mock
Answer # 9
Marking plan:
1.0 marks for correct and relevant procedure in each area.
Answer # 10
(a) The junior audit team member’s conclusion is not correct (01 mark). Sufficient appropriate audit
evidence has not been obtained in relation to the accuracy, valuation and allocation assertion (01
mark)
. Further procedures will be needed to specifically cover the value of existing assets (01 mark); for
example, testing for indicators of impairment (01 mark).
Answer # 11
Possible substantive tests of inventory using CAATs would include the following:
1. The inventory list could be totalled and recalculated to check the mathematical accuracy.
2. Samples could be obtained for testing. Samples could include both items selected on a materiality
basis and a random basis.
3. Product wise analysis of sales can be performed to identify items that have not been sold in
recent months and may have become obsolete.
4. An NRV test (i.e. last sales price compared with the unit cost of the item) could be completed.
5. A number of other exception reports could be generated; for example,
a. where an item number appears twice,
b. where there are negative quantities or
c. where the recorded unit costs appear unusual.
Marking plan:
1.0 mark for correct and relevant procedure involving CAAT. Other suitable procedures will also be
marked as correct.
Page 7 of 9
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 8: Audit & Assurance
Suggested Solution – Mock
Answer # 12
(a) To obtain understanding of entity and its environment, (1.0 mark) and
To assess risk of material misstatement, so that procedures can be increased on high risk
areas (and vice-versa). (1.0 mark)
(c) ISAs require the auditor to make inquiries of management in respect of:
i. their process in place for identifying and responding to the risks of fraud.
ii. their assessment of the risk of fraud.
iii. any specific risks of fraud identified or likely to exist.
iv. any communications within the entity in respect of fraud (e.g. code of conduct).
(1.0 mark for each inquiry, subject to maximum of 3.0 marks)
(d) 1. Evaluating management’s plans for future action, and whether it is feasible. Obtain
representation from management/TCWG regarding future plans and their feasibility.
2. If management has prepared a cash flow forecast, evaluate:
a. Data used is reliable., and
b. Assumptions used are adequately supportable.
3. Consider effects of subsequent event on going concern assessment.
4. Read:
a. Minutes of the meeting of shareholders/directors regarding financial difficulties.
b. Loan agreements, and compliance with their terms.
c. Latest available financial information.
5. Inquire legal counsel regarding existence of litigations and claims.
(f) Sample has not provided a reasonable basis for conclusion about population that has been tested
(1.0 marks)
. Auditor shall perform further substantive procedures (1.0 marks).
Page 8 of 9
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
CAF 8: Audit & Assurance
Suggested Solution – Mock
(g) Firm shall establish policies and procedures to require quality control reviewer to:
Review financial statements and proposed report.
Discuss significant matters with engagement partner.
Review documentations relating to significant judgments and conclusions reached.
Evaluate conclusions reached and appropriateness of report.
(THE END)
Page 9 of 9
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)