Caf Pac Mock With Solutions Compiled by Saboor Ahmad

The Professionals’ Academy Of Commerce
Pakistan’s Leading Accountancy Institute

Certificate in Accounting and Finance Stage Examinations
23 August, 2023
3 hours – 100 marks
Additional reading time - 15 minutes
Tax Practices
Instructions to examinees:
(i) Answer all EIGHT questions.
(ii) Answer in black pen only.
(iii) Tax rates are given on the last page.
Q.1 Miss. Zukhruf planned to open a vocational institute in the rural area of Multan to provide free basic education
and skills of stitching garments to the needy women.
For this purpose:
(a) She purchased a building for Rs. 10 million (inclusive of cost of land Rs. 4,500,000) on July 02, 2023.
The payment was made through banking channel.
(b) She imported sewing machines from china on July 10, 2022 for Rs. 10,000,000. To finance these
machines, she obtained loan from a foreign bank of U.S dollar 30,000 on July 03, 2022 payable in four
equal installments starting from December 31, 2023. The rate of exchange on July 03, 2022 was 1USD =
Rs. 266 while the exchange rate on December 31, 2022 was 1USd = 260. Moreover, she received subsidy
amounting Rs. 2,000,000 from Local Government in this regard.
(c) Vocational institute was ready for operations on July 30, 2022. However, she could not start the
operations due to shortage of funds despite the fact that she obtained a loan of Rs. 500,000 in cash from
her friend Fatima. Therefore, she decided to give this institute on lease to her friend Saba against monthly
rent of Rs. 350,000 effective from August 01, 2022.
(d) Miss Zukhruf also owned two houses(House no. A/3 and A/4) located in Model town Lahore in same
block. Both the houses are given on rent (rent agreements date December 31, 2021).
House no. A/3 has been given at a monthly rent of Rs.100,000 with 10% increment after every year. She
also received non adjustable security deposit of Rs. 1,000,000.
House No. A/4 has been given to his cousin Shahir, who is lawyer, at monthly rent of Rs. 80,000. further,
no security deposit was received from him. She incurred following expenses in respect of these houses:
(i) Property tax paid Rs. 200,000.
(ii) Depreciation charged as per laws of Income Tax Ordinance, 2001 Rs. 1,250,000.
(iii) Legal charges incurred in defending the case relating the dispute over title of house no. A/4 Rs.
250,000.
(iv) Insurance premium paid for both houses Rs. 350,000.
(v) Salary paid to person appointed for collecting the rent Rs. 150,000.
(vi) Unpaid rent Rs. 800,000 relating tax year 2020 written off in the current year as it is no more
receivable despite all possible efforts.
(vii) Payment of interest amounting Rs. 100,000 paid to bank against amount borrowed for major
renovations of the both houses.
(e) During the tax year, she also contributed Rs. 450,000 towards approved pension fund.
(f) During the tax year, she received dividend amounting Rs. 240,000 (net off zakat Rs. 15,000 and
withholding tax @ 15%) from a public company.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made there under, compute under the
correct head of income the total taxable income and tax liability of Miss Zukhruf for the tax year 2023 (Initial
allowance rate is 25% for eligible depreciable asset and tax depreciation rate is 10% for building and 15% for
all other depreciable assets).
Note: Show all the relevant working notes, exemptions, exclusions and disallowances. (14)
Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)
Tax Practices | Page 2 of 9
Q.2
(a) Mr. and Mrs. Taha Hassan Hameed Butt are equal partners in "THHB" that is engaged in the manufacturing
and trading of shoes and other related items. Income statement of "THHB" for the year ended June 30, 2023
is as follows:
Rs. In thousands
Sales 156,000
Cost of sales (130,000)
Gross profit 26,000
Admin and selling expenses (10,000)
Financial charges (500)
Other charges (300)
Other income 600
Profit before tax 15,800
THHB got the approval from the Commissioner regarding the change of accounting method from "accrual
basis" to "cash basis" before the year end. However, above income statement has been prepared on accrual
basis. Other relevant information in this regard is as follows:
 The above figure of sales included account receivables amounting Rs. 6 million in respect of sales made
on credit that have not been received till the year end.
 Cost of sales and admin expenses included expenses of Rs. 2 million that were paid after the year end.
 Closing stock Rs. 2.5 million have been determined using absorption cost method whereas it could be Rs.
2 million if prime cost method was used. THHB intends to use absorption cost method in future as well.
(b) Other information is as follows:

(i) Cost of sales included demurrage paid to custom authorities Rs.1, 500,000 in respect of shoes and raw
material imported from Italy.
(ii) Cost of sales included a penalty of Rs. 125,000 on failure to deposit income tax withheld from the
salaries of factory staff.
(iii) Cost of sale included finished goods purchased amounting Rs. 20 million from various suppliers.
Payments were made via proper banking channel and tax was also deducted on payments made in this
regard except finished goods purchased from Mr. Ateeb amounting Rs. 2 million (THHB did not deduct
the tax at source which was required to be deducted under the provisions of Income Tax Ordinance,
2001 while making the payment to Mr. Ateeb at the request of Mr. Ateeb).
(iv) On January 01, 2023, Mr. Taha started using one of the office equipment at his residence. The market
price of the equipment at that time was Rs. 2.5 million whereas accounting WDV and tax WDV was Rs.
2.1 million and Rs. 2.2 million respectively. However, no adjustment made in this regard.
(v) Admin expenses included Rs. 400,000 paid by THHB to Industrial Welfare School that provides the
free education to the children of factory employees and workers of THHB.
(vi) Admin and selling expenses included Rs. 2,500,000 which was incurred in relation to an advertising
campaign launched prior to the introduction of a new product line in an effort to enhance public
awareness. The said expenditure was incurred on January 01, 2023. It is expected that said campaign
will provide benefit of more than one year.
(vii) Other income included gain on disposal of listed company securities amounting Rs. 500,000. The
aforesaid securities were purchased on 10th July 2022 and were disposed on the last day of the tax year.
(viii) Mr. Taha was doing part time job in a company from where he resigned on June 30, 2022. On July 10,
2022 Mr. Taha received received following amounts in final settlement:
 Salary Rs. 500,000 and
 Rs. 6,000,000 from unrecognized provident fund which included contributions made by Mr. Taha
amounting Rs. 2,000,000. Rest of the amount received represent the employer's contributions and
interest on provident fund balance.
(ix) During the year, Mr. Taha won prize of Rs. 300,000 on prize bond. Tax deducted u/s 156 amounted to
Rs. 45,000.
(x) During the year, Mr. Taha received digital watch (having FMV Rs. 250,000) from his friend as birthday
present.
(xi) During the year, Mr. Taha donated his four years old car to approved charitable institution which he
purchased for Rs. 1,000,000.
(xii) Mr. Taha has agricultural land situated in the nearby area of Sialkot which he has given on rent. Total
rent received during the year amounting Rs. 1,500,000.
(xiii) During the year, Mr. Taha received cash prize amounting Rs. 500,000 from President of Pakistan for his
contributions towards the welfare of the society.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made there under, compute under the
correct head of income the total income, the taxable income and tax liability of the following for the tax year
2023:
(a) THHB (11)
(b) Mr. Taha (09)
Note: Show all the relevant working notes, exemptions, exclusions and disallowances. Also compute
minimum tax u/s 133, if applicable.
Q.3
(a) Mr. Hamza, a Pakistani citizen, is working as a company secretary in Qaari Limited (QL), an un-listed public
company, engaged in the business of production and supply of olive oil. Following are the details of his
emoluments during the year ended 30 June 2023.
Rupees
Basic Salary (per month) 450,000
Medical allowance (per month) 50,000
(b) Other information is as follows:
(i) A 1800 CC company maintained Honda Civic car both for business and private use. The car was
purchased at the 1st day of tax year 2021 at a cost of Rs. 3,000,000. However, the current market
value of the car is Rs. 3,500,000.
(ii) A special payment of Rs. 75,000 in lieu of leave was made available to him. Mr. Hamza, however,
voluntarily waived his right to receive such payment.
(iii) Free provision of two cans of olive oil per month. The market value of each can was Rs. 15,000.
(iv) In July 2022, he was granted an employee stock option to purchase up to 15,000 shares in QL’s
holding company, Trio Limited, situated in Bermuda, at an option price of USD 3 per share. The
shares were required to be purchased within eighteen months from the option date. Mr. Hamza
exercised the option in September 2022 to purchase 6,000 shares when the market price of the shares
was USD 5 per share. After two months of the acquisition, Mr. Hamza sold 5,000 shares at a price of
USD 8.5 per share. (Assume the dollar rupee parity on the above dates was USD 1 = PKR 300).
(v) Received a fee of Rs. 200,000 for attending a directors’ meeting of QL’s associated company Molvi
(Pvt.) Limited held in July 2022.
(vi) Received a pension of Rs. 500,000 from his ex-employer.
(vii) Received a royalty of Rs. 3,000,000 from K Publishing on a book written on "Business & Money" .
Mr. Hamza completed the book in 26 months and all the costs relating to its publication were borne
by the publisher. The applicable tax rates in tax years 2021 and 2022 were 16% and 18% respectively.
Mr. Hamza do not want to include the whole amount in the current year taxable income.
(viii) There was a brought forward capital loss of Rs. 250,000. The loss was suffered by Mr. Hamza on sale
of shares in Ghareeb (Pvt.) Limited.
(ix) During the year, Mr. Hamza purchased a house in Bahria Town , Lahore from his friend at DC value
of Rs. 20 million whereas the FBR value of the aforesaid house was 25 million. The payment for the
house was made through bearer cheque. Mr. Hamza intended to gift this house to her wife on her
birthday to be celebrated in August 2023.
Required:
Compute the taxable income and tax liability of Mr. Hamza for the tax year 2023.
Note: Show all exemptions, exclusions, disallowances and working notes where relevant. (12)

Q.4 Mr. Ubaid Johny is the resident individual for the tax year 2023. Following are the details of his income for
the tax year 2023:
Loss
Pak/Foreign remained
Heads of income Taxable income
Tax paid unadjusted
last year
Pakistan Source:
*Non-Speculation business 8,000,000 120,000 -
Other sources- NTR 1,200,000 15,000 (250,000)
Foreign Source:
Salary 2,500,000 80,000 -
Speculation business (1,500,000) - -
Non-Speculation business 2,000,000 75,000 (1,200,000)
Additional information:
*The above figure of business income arrived after making following adjustments:
 On 1-1-2023, Mr. Ubaid entered into a forward contract with Anum Associates for the purchase of raw
material to be used in his business to guard against the loss though price fluctuations. On the date of
maturity of the contract, Mr. Ubaid did not take the delivery of the raw material but the contract was
settled by making a payment of Rs. 400,000 to Anum Associates.
 In August 2022, Mr. Ubaid signed a future contract with Ayesha Enterprises (AE) for the purchase of
600 metric tons of maize at Rs. 16,800 per metric tons. The delivery was expected to be made in
December 31, 2022. AE also agreed to repurchase the entire lot at the price prevailing on the date of
sale. On December 31, 2022, price of maize increased to Rs. 19,240 per metric ton and Mr. Ubaid sold
the entire lot to AE without taking delivery.
 On 1-3-2023, Mr. Ubaid made different forward contracts to reap the benefit of price fluctuations of tea
in local market. The settlement of these contracts were made on 29-06-2023 by paying Rs. 1,200,000
(without taking any actual delivery).
The foreign tax credit relating to income from speculation business which remained unadjusted during the last
tax year amounted to Rs. 75,000.
Required:
Under the Income Tax Ordinance, 2001:
You are required to compute the taxable income (under correct head of income), net tax liability and tax losses
to be carried forward to next year, if any of Mr. Ubaid Johny for the Tax Year 2023.
Note: Show all the relevant exemptions, exclusions and disallowances. (08)
Q.5 Respond to the following independent scenarios under the Income Tax Ordinance, 2001 and Rules made
thereunder:
(i) Where a taxpayer, in response to a notice for amendment of assessment, intends to settle his case, he
may file offer of settlement in the prescribed form before the assessment oversight committee
(Committee), in addition to filing reply to the Commissioner.
You are required to discuss the steps/procedures that are followed where the taxpayer is satisfied with
the decision of the Committee u/s 122D of Income Tax Ordinance, 2001. (03)
(ii) FBR has powers to enforce filing of returns u/s 114B of the Income Tax Ordinance, 2001.
You are required to explain the provisions to this effect. (04)
(iii) Identify the services that are covered under "IT Enabled Services" as per section 2 (30AE) of the
Income Tax Ordinance, 2001. (02)
Q.6
(a) Assume that you have tax consultancy firm and providing tax related services to various corporate and non-
corporate clients. Following are the some independent scenarios. Response to these scenarios in accordance
with the provisions of Sales Tax Act, 1990 and Rules made thereunder:
(i) Swera departmental store (a Tier-1 retailer) is registered under the Sales Tax Act 1990 and Rules made
thereunder. However it has not integrated his system with FBR despite multiple notices of integration
from the FBR. You are required to explain the consequences of failure of Swera departmental store to
integrate the system with FBR system. (02)
(ii) Saadi Associates (a registered manufacturer) supplied goods amounting Rs. 8 million to unregistered
distributor Mr. Mujtaba. However, sales tax invoice does not bear the NTN/CNIC of Mr. Mujtaba.
Explain the consequences of failure to disclose NTN/CNIC of distributor on invoice. (02)
(iii) The Federal Government is empowered to prescribe any higher rate of tax in respect of taxable goods
specified in third schedule and Federal Government has issued SRO 297(I)/2023 dated 08 March 2023
to this effect. You are required to prescribe higher rate of tax mentioned in aforesaid SRO, type of
supply on which such high rate shall apply and list down only six third schedule goods on which such
SRO is applicable. (04)
(b) Under section 2 (3) of the Sales Tax Act, 1990, an individual and a relative of the individual shall be
considered associates. You are required to explain term "relative" in this context. (02)
Q.7 Rabia Associates (RA) is registered under the Sales Tax Act, 1990, as manufacturer-cum-distributor -cum-
retailer. Following information has been extracted from its records for the month of June 2023:
Supplies:
Taxable goods to registered persons 20,500,000
Taxable goods to unregistered persons 14,000,000
Consumable items to PIA -International flight 4,000,000
Exempt supplies to:
Local market 2,500,000
Dubai 3,500,000
Purchases:
Taxable goods from registered suppliers 22,000,000
Taxable goods from registered suppliers (for making
normal/local taxable supplies only) 4,000,000
Taxable goods from unregistered suppliers 850,000
Exempt goods from registered suppliers 650,000
Fixed assets from registered supplier 4,500,000
The following additional information is available for June 2023:
(i) Supply of taxable goods to registered persons include the following:
 Supplies of Rs. 2,040,000 which were sold on installment basis to an industrial consumer at a
mark-up of 2%.
 Goods invoiced at Rs. 950,000 (net of discount of 5%) sold to a government official. Normally
RA allow 5% discount to all customers. However, amount of discount was not shown on sales tax
invoice at the request of recipient.
 Goods of Rs. 1,500,000 supplied to Minahil Associates (M.A), a registered manufacturer in
Export Processing Zone. M.A used these goods to manufacture zero rated supplie.
(ii) Taxable goods supplied to unregistered persons contained goods supplied to University of
Management and Technology (UMT) amounting Rs. 11,000,000. Rest of the goods were supplied to
multiple unregistered persons.
(iii) Taxable goods purchased from registered suppliers include:
 Goods amounting Rs. 1,500,000 purchased from Ali Associates who is temporarily registered
under Rule 5A of Sales Tax Rules, 2006.
 Rs. 158,000 was paid to a local beverage company for providing mineral water at RA’s annual
dinner arranged for its valued customers and employees.
 Goods of Rs. 390,000 and Rs. 1,200,000 purchased from Taiba Associate (TA) on 6 June 2023
and 20 June 2023 respectively. On 15 June 2023, the Commissioner suspended TA’s registration
for claiming fraudulent refunds.
 Printed stationery of Rs. 500,000 was purchased from "Maneeha Associates" for the maintenance
of factory records.

(iii) Fixed assets purchased from registered suppliers include:

 fiscal electronic cash register and office equipment from a corporate supplier at a price of Rs.
650,000 and Rs. 300,000 respectively.
 Delivery trucks worth Rs. 3,000,000 were purchased for timely distribution of goods to
customers.
(iv) As part of a settlement deal with Habib Bank Limited, RA agreed to set off its hypothecated stock of
Rs. 750,000 against an overdue loan of Rs. 950,000. The open market price of the goods was
estimated at Rs. 1,100,000.
(v) HA under misapprehension collected additional sales tax of Rs. 64,000 (on exempt supplies) from one
of its customers. 70% of the goods on which additional sales tax was collected are still lying with the
customer as unsold stock.
(vi) RA paid Rs. 700,000 against bill board advertisement to "Esha Associates". Sales tax amounting Rs.
112,000 was paid on aforesaid payment under second Schedule of Punjab Provincial Sales Tax on
Services Act, 2012. Relevant law does not prohibit from taking its credit.
(vii) In May 2023 the excess of input tax over output tax amounted to Rs. 40,000. Whereas, sales tax paid
on account of restriction on the adjustment of input tax in excess of 90% of the output tax u/s 8(b)
amounted Rs 20,000
(viii) RA is required to pay a penalty of Rs. 50,000 under the Sales Tax Act, 1990 on account of certain
defects in the maintenance of records.
(ix) All the above figures are exclusive of sales tax, wherever applicable. Sales tax is payable at the rate of
18%.
Required:
Under the provisions of the Sales Tax Act, 1990 and Rules made there under, compute the amount of sales tax
payable by or refundable to RA and the amount of sales tax to be carried forward, if any, for the tax period
June. 2023.
Note: Show all exemptions, exclusions and disallowances where relevant and give brief reasons for the
treatment of
 Goods supplied to UMT
 Additional sales tax collected from the customer (19)
Q.8
(a) Briefly describe the duties of "National Finance Commission" as per Article 160 of the Constitution of
Pakistan. (04)
(b) Briefly explain the tendency of taxpayer towards tax avoidance under different approaches of ethics and
morality for taxpayer. (04)

(THE END)



Solution Q # 01
Miss. Zukhruf
Computation of Taxable Income And Tax Liability
Tax Year 2023
Marks
Rupees Alloc.
Income From Property:
Gross Rent: N-1 2,620,000 2
Less: Allowable deductions N-2 (2,128,800)
Taxable income 491,200 0.25
Income From Other Source:

Lease of building with machinery
Lease rentals 350,000*11 3,850,000 0.5
Less: Allowable deductions
Depreciation on building (10,000,000-4,500,000)*10% (550,000) 1
Depreciation on machinery N-3 (2,883,688) 2
(3,433,688)
416,313 0.25
Loan in cash 500,000 1
Dividend- FTR (240,000+15,000)/85% 300,000 1
1,216,313
Taxable income 1,707,513

Less: Dividend-FTR (300,000)
1,407,513
Less: Zakat (15,000) 0.25
1,392,513 0.25
Tax liability (Non Salaried person case)
Tax 60,000+17.5%*(1,392,513-1,200,000) 93,690 0.25
Less: Tax credit on contribuition to approved pension fund N-4 - 1
Add: Tax liability on dividend 300,000*15% 45,000 0.25
138,690
Notes:
N-1 Gross rent:

House A/3
Rent 100,000*6+110,000*6 1,260,000
Unadjustable deposit 1,000,000*10% 100,000
House A/4
Rent 100,000*6+110,000*6 1,260,000
(Higher of actual rent or fair market rent is taken as rent)
2,620,000

N-2 Deductions U/S 15A
Repair allowance 1/5*2,620,000 524,000 0.75
Depreciation- not allowable deduction - 0.5
Legal charges defending the case 250,000 0.5
Insurance premium 350,000 0.5
Payment of interest 100,000 0.5
Unpaid rent 800,000 0.5
Collection charges (lower of:)
Salary paid 150,000
4% of chargable rent 4%*2,620,000 104,800 104,800 0.75
2,128,800
N-3 (Dep- Sewing machines)
Year-2023
Cost 10,000,000
Less: Subsidy by Local Government (2,000,000)
8,000,000
Less: Exchange gain (266-260)*7,500 (45,000)
7,955,000
Initial allowance @ 25% 7,955,000*25% (1,988,750)
5,966,250
Normal Dep @15% 5,966,250*15% (894,938)
Closing WDV 5,071,313
Total dep exp: 1,988,750+894,938 (2,883,688)
N-4
Tax credit in respect of approved pension fund is available only to a person who is deriving salary or
business income. Consequently, Miss. Zukhruf is not entitled to claim tax credit for contribuition
towards approved pension fund.
14

Solution
Q # 02 (Part a)
THHB
Tax Year 2023
Marks
Rupees
Notes Alloc.
Profit before tax-Accrual basis 15,800,000

Adjustments in profit before tax due to change in accounting method:
Add:
Expenses not paid yet 2,000,000 0.75
Less:
Sales on credit not received yet (6,000,000) 0.75
Closing stock N-1 - 1
Adjusted profit before tax-Cash basis 11,800,000 0.25
Add:
Demurrage paid- Allowable deduction - 0.5
Penalty on failure to deposit income tax withheld 125,000 0.5
Finished goods- Tax is not withheld 2,000,000 0.75
Disallowed amount shall not exceed 20% of total finished goods amount
i.e. 20%*20,000,000=4,000,000
Taxable gain on disposal of office equipment 2,500,000-2,200,000 300,000 0.75
Amount paid by THHB to Industrial Welfare School N-2 - 0.75
Advertisement campaign-Intangible asset 2,500,000 0.75
Less:
Amortization-Advertisement campaign 2,500,000/25*181/365 (49,589) 0.75
Gain on sale of listed securities (500,000) 0.5
Total taxable income 16,175,411 0.25
Capital Gains:
Gain on sale of listed securities (SBI) 500,000 0.75
Total income 16,675,411 0.25

Less: Gain on listed securities-SBI (500,000)
Taxable income-NTR 16,175,411 0.25

Tax libility (Higher of A or B) 4,891,394
A- Normal Tax Liability (Non Salaried)

1,330,000+35%*(16,175,411-6,000,000) 4,891,394 0.5
B- Minimum tax u/s 113

156,000,000*1.25% 1,950,000 0.75
Add: Tax on listed securities 500,000*15% 75,000 0.25

Total tax liability 4,966,394
11
N-1
A person accounting for income chargeable to tax under the head “Income from Business” on a
cash basis may compute the person’s cost of stock-in-trade on the prime-cost method or
absorption-cost method.
As THHB intends to use absorption cost method, therefore no adjustment is required in this
regard due to change of accounting method from accrual basis to cash basis.
N-2
A person shall be allowed a deduction for any expenditure (other than capital expenditure)
incurred in a tax year in respect of:
any educational institution or hospital in Pakistan established for the benefit of the person’s
employees and their dependents;

Solution Q # 02 (b)
Mr. Taha
Computation of Total Income, Taxable Income And Tax Liability
Tax Year 2023
Marks
Notes Rupees Alloc.
Income From Salary:
Salary 500,000 0.5

Un Recognized Provident Fund:
Total 6,000,000
Less: Contribuitions by Taha (2,000,000)
Taxable 4,000,000 4,000,000 1
Total taxable salary 4,500,000

Digital watch from friend 250,000 0.75
Prize bond-FTR 300,000 0.75
550,000
Exempt Income
Agiculture income 1,500,000 0.75
President award 500,000 0.75
2,000,000
Total income 7,050,000 0.25

Less: Exempt income:
Agiculture income (1,500,000)
President award (500,000)
Less: Prize bond-FTR (300,000)
Taxable income-NTR 4,750,000 0.5
Add: share from aop for tax rate purpose only
50% of profit before tax of THHB 16,175,411*50% 8,087,705 0.75
Taxable income for rate purpose: 12,837,705 0.25
Tax liability:
Tax liability on total income (Salaried person case) 3,248,197 0.5
2,955,000+35%*(12,837,705-12,000,000)
Tax liability of Mr. Taha: 1,201,845 0.5

3,248,197/12,837,705)*4,750,000
Less: Tax credit on donation:

Eligible amount-Lower of:
Car value 1,000,000*60% or 600,000

30% of taxable income 4,750,000*30% 1,425,000

Tax credit 3,248,197/12,837,705*600,000 (151,812) 1.5
Tax on prize bond 300,000*15% 45,000 0.25

Total tax liability 1,095,033

Solution Q # 03
Mr. Hamza
Tax Year 2023
Marks
Rupees Alloc.
Income From Salary:
Basic Salary 450,000*12 5,400,000 0.5

Medical allowance
Total 50,000*12 600,000
Less: Exempt (10% of B.S) 10%*5,400,000 (540,000)
Taxable 60,000 60,000 0.75
Car for both uses 3,000,000*5% 150,000 0.75
Leave encashment (benefit due but voluntarily waived off is fully taxable) 75,000 0.75
Perquisites – Olive Oil cans 15,000*2*12 N-1 360,000 1
Employee share scheme (5-3)*6,000*300 3,600,000 1
Pension from ex employer N-2 - 1
Directors meeting fee 200,000 0.75
Total taxable salary 9,845,000
Capital Gains (NTR):
Gain on sale of shares (Trio Limited) (8.5-5)*5,000*300 5,250,000 1

Less: B/f loss on sale of shares of Ghareeb (Pvt) Limited (250,000) 0.5
5,000,000

Royalty received from K Publishing 3,000,000/3 N-3 1,000,000 1
Taxable income (normal tax regime) 15,845,000 0.5
Tax liability (Non Salaried person case)

Tax 1,330,000+35%(15,845,000-6,000,000) 4,775,750 0.5
Add: Tax on royalty income

Tax year 2021 (3,000,000)/3*16% 160,000 0.5
Tax year 2022 (3,000,000)/3*18% 180,000 0.5
5,115,750
Add: Penalty on house 25,000,000*5% N-4 1,250,000 1
Total Tax liability 6,365,750

Notes:
N-1
Any perquisite or benefits for which the employer does not have to bear any marginal cost, as
notified by the Board are exempted from employees’ income. As the Board has not notified any SRO
in this connection, hence the given benefit is fully taxable in the hands of the employee as the same is
not within the ambit of clause (53A) of Part-I of 2nd Schedule to the Income Tax Ordinance, 2001.
N-2
Any pension received by citizen of Pakistan from an ex-employer other than where the person
continues to work for the employer is exempted from person’s income under clause (8) of Part-I of
the 2nd Schedule to the Income Tax Ordinance, 2001.
N-3
According to section 89 of the Ordinance, where the time taken by an author of a literary or artistic
work to complete the work exceeds twenty-four months, the author may elect to treat any lump sum
amount received by him in a tax year on account of royalties as having been received in that tax year
and the preceding two tax years in equal proportions.
As the average rate of tax were low in tax year(s) 2021 and 2022, therefore, Mr. Hamza elected this
option.
N-4
In case any immovable property having fair market value (fbr value or DC rate whichever is
applicable) greater than five million rupees is purchased in cash, then such person shall pay a penalty
of 5% of the FBR value or DC rate whichever is higher.
12

Solution
Q # 04
Mr. Ubaid
Computation of Taxable Income And Net Tax Liability
Tax Year 2023
Marks
Rupees
Notes Alloc.
Pakistan Source:
Income from non- speculation business:
Income from business 8,000,000

Loss on forward contract to avoid price fluctuation N-1 - 1
Less: gain on future contract with AE (Speculation business) (1,464,000) 0.5
(19,240-16,800)*600
Add: Loss on forward contracts (Speculation business) 1,200,000 0.5
7,736,000 0.25
Income from speculation business:
Gain on future contract with AE 1,464,000 0.4

Loss on forward contracts (1,200,000) 0.4
264,000 0.25
Income from other source-NTR 1,200,000 0.25

Other source loss of previous year remained unadjusted N-2 - 0.5
Taxable income-Pak source 9,200,000
Foreign Source:
Salary N-3 Exempt 0.75
Speculation business (1,500,000) N-4 - 0.5
Non-Speculation business
Income for the year 2,000,000
Less: b/f loss (1,200,000) 800,000 0.75
Taxable income-foreign source 800,000
Total taxable income 10,000,000 0.25
Tax liability (non salaried)

1,330,000+35%*(10,000,000-6,000,000) 2,730,000 0.25
Less: Tax credit of foreign business income (Lower of:)
Foreign tax paid 75,000
Pak tax: 2,730,000/10,000,000*800,000 218,400 (75,000) 0.7
Tax credit remained unadjusted N-5 - 0.5
2,655,000

Foreign speculation business loss C/F to next year N-4 1,500,000 0.25
N-1
The forward contract entered into by Anum Associates for the purchase of raw materials used in its
business is in the nature of a hedging contract which was entered into to guard against loss from
future price fluctuations. Such contracts have specifically been excluded from the definition of
speculative business. Therefore, the Rs. 400,000 paid to settle the forward contract is an expenditure
incurred in the normal course of business and is a deductible expenditure
N-2
Loss under the head income from other source can not be carried forward to next year.
Consequently, unadjusted loss of previous year can not be adjusted against the income of current
tax year.
N-3
Any foreign-source salary received by a resident individual shall be exempt from tax if the
individual has paid foreign income tax in respect of the salary. Mr. Ubaid has paid foreign tax on
his foreign salary income, therefore, it shall be exempt in Pakistan.
N-4
Loss from any head of foreign source income cannot be set off against any other head of foreign
source income. All losses shall be carried forward separately for 6 years. Further, foreign loss can
not be set off against Pakistan source income.
N-5
Any tax credit or part of a tax credit allowed for a tax year which is not credited shall not be
refunded, carried back to the preceding tax year, or carried forward to the following tax year.
Total Marks 8

Solution Q # 05
Part (i)
Marks
Alloc.
Where the taxpayer is satisfied with the decision of the Committee:

(a) the taxpayer shall deposit the amount of tax payable including any amount of penalty
and default surcharge as per decision of the Committee;
(b) the Commissioner shall amend assessment in accordance with the decision of the
Committee after tax payable including any amount f penalty and default surcharge as per 0.75 marks
for each
decision of the Committee has been paid; point
(c) the taxpayer shall waive the right to prefer appeal against such amended assessment; and
(d) no further proceedings shall be undertaken under this Ordinance in respect of issues
decided by the Committee unless the tax as per clause (c) has not been deposited by the
taxpayer.
Part (ii) Marks

Alloc.
(a) The Board shall have the powers to issue income tax general order in respect of persons :
• who are not appearing on ATL but are liable to file return.
(b) The income tax general order issued may entail any or all of the following consequences
for the persons mentioned therein, namely:
• disabling of mobile phones or mobile phone Sims
• discontinuance of electricity and gas connection
(c) FBR or the relevant Commissioner may order restoration of mobile phones, mobile phone
1 marks for
sims and connections of electricity and gas, in cases where he is satisfied that :
each point
• the return has been filed or
• person was not liable to file return.
(d) No person shall be included in the general order unless following conditions have been
met with, namely:
• notice to file return of income has been issued;
• date of compliance of the aforesaid notice has elapsed; and
• the person has not filed the return.

Part (iii) Marks
Alloc.
IT enabled services, include but not limited to inbound or outbound call centres, medical
transcription, remote monitoring, graphics design, accounting services, Human Resource

2 marks
(HR) services, telemedicine centers, data entry operations, cloud computing services, data
storage services, locally produced television programs and insurance claims processing.

Solution Q # 06
Part (a)
Marks
(i) Alloc.
Consequences of failure of Swera departmental store to integrate the system with FBR
system.
(a) In case a Tier-1 retailer does not integrate his retail outlet during a tax period or part
1 mark for
thereof, the adjustable input tax for whole of that tax period shall be reduced by 60%.
each point
(b) FBR is empowered to discontinue the supply of gas and electricity while notifying the
gas and distribution companies in case of failure of Tier-1 retailer to integrate his system
with FBR system.
Marks
(ii) Alloc.
Any tax invoice issued shall bear the CNIC/NTN number in case supplies are made by
manufacturer or importer to unregistered distributor. In case of non-compliance:
1 marks for
(a) input tax attributable to supplies made to unregistered distributor on pro-rata basis is
each point
disallowed.
(b) Similarly, expense will be disallowed proportionate to total turnover in income tax.
Marks
(iii) Alloc.
(a) As per SRO 297(I)/2023 dated 08 March 2023 Federal Government has directed to charge
sales tax @ 25% on import and subsequent supply of following third schedule goods: 1 marks for
point (a)
• Aerated water or beverages
0.5 marks
• Cigarettes, Cigars and e-cigarettes for listing
• Cosmetic and shaving items each item of
• Tissue papers 3rd
schedule-
• Household articles including crockery, kitchenware and tableware total 10
• Home appliances in CBU items listed
• Ice cream here,
student can
• Fruit and vegetable juices
write any
• Mattress and sleeping bags six of them.
• Shampoos
Part (b)
Marks
Alloc.
“Relative” in relation to an individual, means:
(a) An ancestor, a descendant of any of the grandparents, or an adopted child, of the 1 marks for
individual, or of a spouse of the individual; or each point
(b) A spouse of the individual or of any person specified in sub-clause (a).

Rabia Associates
Computation of Net Sales Tax Liability
For the Tax Period June 2023
Sales tax liability:

Value of
Sales Tax Rate Output Tax Marks
Output tax supplies
Total taxable supplies N-2 34,110,000 18% 6,139,800 0.25

Exempt supplies N-2 6,000,000 Exempt - 0.25
Zero rated supplies N-2 5,500,000 0% - 0.25
Less: Input tax or 90% of output-whichever is lower
Actual input tax

Input b/f 40,000+20,000 60,000 0.25
Input tax- specific purchase N-1 720,000
Input for the month N-2 2,660,565
3,440,565 0.25
90% of output 6,139,800*90% 5,525,820 (3,440,565) 0.25
2,699,235
Less: Input tax on fixed assets N-2 (161,538) 0.25
2,537,697
Add: Excess tax collected- incidence passed on to consumers N-5 19,200 1.00
Add: further tax @ 3% on supplies to unregistered
UMT- Not applicable being end consumer - 0.25
Others 3,000,000*3% 90,000 0.50
Sales tax payable 2,646,897 0.25
Sales tax refundable on account of zero rated supplies:

Goods purchased N-2 428,998
Fixed asset N-2 26,047
455,045
Less: Penalty payable under Sales Tax Act 1990 (50,000) 0.50
405,045 0.25
Return of excess tax collected- incidence not passed on to consumers N-5 44,800 0.25
Input tax inadmissible- Exempt supplies 467,997+28,415 N-2 496,412 0.25
N-1
Residual Input Tax: Taxable Value Sales Tax Rate Sales Tax
Rs. Rs.
Taxable goods from registered suppliers 22,000,000
Goods from Ali Associates-Temporarily registered- Input tax inadmissible (1,500,000) 0.75
Mineral water for annual dinner (input tax inadmissible) (158,000) 0.75
Goods purchased from Taiba Associates-Suspended supplier:
Goods purchased before suspension-Input tax admissible - 0.50
Goods purchased after suspension date-Input tax inadmissible (1,200,000) 0.50
Printed stationery- Input tax is admissible - 0.75
19,142,000 18% 3,445,560 0.25
Taxable goods-Un-Registered persons 850,000 Inadmissible - 0.25
Exempt goods from registered suppliers 650,000 Exempt - 0.25
Provincial sales tax - Input tax is admissible - - 112,000 0.75
Residual input tax (for apportionment) 3,557,560 0.25
Taxable goods from registered supplier (for local taxable supplies) N-3 4,000,000 18% 720,000 0.75
Fixed Assets:
Fixed assets from registered supplier 4,500,000

Fiscal electronic cash register- Input tax is admissible - 0.50
Office equipment (input tax inadmissible) (300,000) 0.50
Delivery trucks (input tax inadmissible) (3,000,000) 0.50
1,200,000 18% 216,000 0.25
216,000
N-2
Apportionment of Residual Input Tax:
Value of Fixed Asset-

Input tax
Taxable Supplies-Local: supplies Input tax
Taxable goods-Registered persons 20,500,000
Goods on installment-markup 2,040,000/102*2 (40,000) 0.50
Discount not shown on invoice 950,000/95%*5% 50,000 0.50
Goods to MA in EPZ for further manufacturing -Zero rated supplies (1,500,000) 0.50
Settlement deal with Habib bank Limited 1,100,000 0.75
Taxable goods-Un Registered persons
UMT N-4 11,000,000 1.00
Others 3,000,000 0.25
34,110,000/45,610,000*3,557,560 2,660,565
1.00
34,1100,000/45,610,000*216,000 34,110,000 161,538
Zero Rated Supplies:
Consumable items to PIA -International flight 4,000,000
Goods to MA in EPZ for further manufacturing 1,500,000
5,500,000/45,610,000*3,557,560 428,998
1.00
5,500,000/45,610,000*216,000 5,500,000 26,047
Exempt Supplies:
To local market 2,500,000
To Dubai 3,500,000
(Input tax relating it is inadmissible) 6,000,000/45,610,000*3,557,560 467,997
1.00
6,000,000/45,610,000*216,000 6,000,000 28,415
45,610,000 3,557,560 216,000
19.00
N-3
When the goods are purchased for making specific supply, then input tax on those goods shall not be apportioned. Moreover, input tax
credit shall be available against that specific supply only.
N-4
Taxable supplies to UMT:
A registered person shall not supply goods to unregistered person in excess of Rs. 10 million in a tax period. In case of non-compliance
the supplier shall not be entitled to claim input tax attributable to such excess supplies to unregistered persons. However, this provision
shall not pply in case of supplies to persons not engaged in supply of taxable goods. AS UMT is not involved in making any taxable
supplies, therefore, related input tax shall not be inadmissible.
N-5
Any person who has collected any tax, under misapprehension of any provision of the Act or otherwise, which is in excess of the tax
actually payable and the incidence of which has been passed on to the consumer, shall pay the amount of tax so collected to the Federal
Government.
In this case, since 70% of the stock, on which excess tax of Rs. 44,800 was collected, is still unsold, RA should return this amount to the
customer. However, the balance amount of Rs. 19,200, the incidence of which has been passed on to the consumers should be deposited
with the Federal Government.

Solution Q # 08
Part (a)
Marks
Alloc.
It shall be the duty of the National Finance Commission to make recommendations to the
President as to:
a) the distribution between the Federation and the Provinces of the net proceeds of the taxes;
1 marks for
b) the making of grants-in-aid by the Federal Government to the Provincial Governments;
each point
c) the exercise by the Federal Government and the Provincial Governments of the borrowing
powers conferred by the Constitution; and
d) any other matter relating to finance referred to the Commission by the President.
Part (b) Marks

Alloc.
A utilitarian, concerned with aggregate welfare, might be quite relaxed about tax
avoidance. After all, when tax is avoided, wealth is not destroyed: it is merely kept in the
private sector instead of being transferred to the public sector. The main utilitarian concern
would probably be that it would result in an unintended distribution of the tax burden, as
some of the burden would be shifted from the rich onto people with modest incomes who 1.33 marks
for each
cannot afford clever tax lawyers. That would reduce their satisfaction more than it would
point
increase the satisfaction of the better-off people who have succeeded in reducing their tax
burdens.
A virtue ethicist would perhaps dislike tax avoidance. It is, after all, hardly virtuous to
exploit rules knowing that one is exploiting them in unintended ways to redistribute the
disadvantage away from oneself.
A deontologist would not positively favour tax avoidance, but might not condemn it
either. Deontologists can easily argue for a duty to obey the law: yet obeying the law is
something the tax planner takes care to do, in his own peculiar way.

The Professionals’ Academy of Commerce
Certificate in Accounting and Finance Stage Mock Examinations
August 21, 2023
Cost & Management Accounting

(i) Answer all NINE questions.
Section A
Q.1 Western Limited (WL) is engaged in trading of a product Bright. Following information relates to the year
ending June 30, 2023:
 Total sales for the year were 15,000 units.
 Closing inventory was 2,000 units.
 Total purchases for the year were Rs. 2.56 million (16,000 units).
 Total order cost for the year was Rs. 32,000 (comprising of 80% variable and 20% fixed).
 Holding cost comprised of interest cost of 10% p.a. and storage cost of Rs. 4 per unit per month.
Currently WL follows a policy of ordering 500 units in each order. WL is planning to revise order policy for
2024 and avail bulk discounts. In this respect following information is available:
 Total sales are expected to increase by 20%.
 Closing inventory is expected to increase by 100%.
 Order cost and storage cost are expected to remain same. However, banks will most likely increase annual
interest rates by 1%.
 WL’s supplier has offered bulk discount as follows:
Order quantity Discount
Upto 999 units -
1,000 to 1,999 units 1%
2,000 to 3,999 units 2%
4,000 or more units 4%
Management of WL is willing to avail bulk discount.
Required:
Advise WL about the best choice of bulk discount available to them. (10)
Q.2 Marvel Limited (ML) manufactures and sells two products; Alpha and Beta. Management has prepared
following product-wise budget for the year ending June 30, 2024:
Alpha Beta
(Rs. million) (Rs. million)
Sales 120.00 315.00
Variable costs (75.00) (207.00)
Contribution 45.00 108.00
Fixed costs (18.00) (22.00)
Profit before tax 27.00 86.00
Tax 25% (6.75) (21.50)
Profit after tax 20.25 64.50
ML earns a contribution per unit of Rs. 1,500 on Alpha. Selling price of Alpha is Rs. 500 higher than selling
price of Beta.
Required:
Calculate number of units to be sold of each product if ML wants to achieve a minimum total profit after tax
of Rs. 46.50 million assuming the ratio of quantities remains same as budgeted. (07)
Cost & Management Accounting | Page 2 of 4
Q.3 Golden Pumps Limited (GPL) manufactures two products Alpha and Beta. Both the products are produced in
a joint process and afterwards each is processed further in separate finishing departments. Following data
relates to process 1 of GPL for the month of May:
Opening work in process:
3,000 units (40% complete)
Total cost Rs. 154,000
(comprising of direct material Rs. 84,000 and conversion cost Rs. 70,000)
Current period costs:
Direct material cost Rs. 600,000 (20,000 units)
Conversion cost Rs. 1,230,000
Closing work in process:
4,700 units (60% complete)
Losses:
Losses are determined when process is 30% complete. Expected losses are 1% of inspected units. Recovery
value or spoiled units is Rs. 10 per unit.
Output:
Output comprises of 12,000 units of Alpha and 6,000 units of Beta.
Required:
Prepare “Process 1 account” for the month of May using FIFO method. (10)
Q.4 Kids Corner (KC), a chain of retail garments store, has planned to introduce a new fancy dress for babies at its
outlets in the country. Currently they are expecting to sell 15,000 dresses in the first six months. Sales director
has suggested that company should also introduce a matching crown scarf and handbag with the new dress. As
a result, he feels projected sales of new dress would increase by 30% if matching crown scarf and handbag are
marketed together.
The data relating to sales and production of dress, crown scarf and handbag are as follows:
a) Each dress requires three and half meter of cloth which is easily available in the market at a price of Rs.
100 per meter. Part of the material left unused can be used to manufacture a crown scarf and handbag.
b) The cost of cutting the dress, crown scarf and handbag is Rs. 100, Rs. 50 and Rs. 80 respectively.
c) The company has a contract with a designer firm at a monthly fee of Rs. 1,500,000. However, for
manufacturing of handbag and crown scarf, the company will have to pay additional amount of Rs.
150,000 per quarter to the designer firm.
d) Each handbag will require a metal hook which is available in the market at Rs. 10 per hook. However, the
company has sufficient number of metal hooks in stock which was purchased at Rs. 6 per hook. If the
company does not opt for the manufacturing of handbags, these hooks can be sold at Rs. 8 per hook.
e) Other variable overheads per unit of dress, crown scarf and handbag would be Rs. 800, Rs. 150 and 360
respectively.
f) If crown scarves and handbags are also introduced, then sale of new dress would be made in following
mix:
Complete set 70%
Dress with crown scarf only 10%
Dress with handbags only 10%
Dress only 10%
g) The selling prices per unit are as follows:
Items Sale price (Rs.)
Dress 2,000
Crown scarf 300
Handbag 600
Complete set 2,500
Required:
Advise whether KC should launch new dress only or proceed with sale director’s suggestion. (10)
Q.5 List down the merits and demerits of activity-based costing. (04)

Q.6 (a) Discuss the assumptions used in marginal costing. (02)

(b) Karachi Limited (KL) is involved in the manufacture of a single product and has a total production capacity of
50,000 units per annum but a normal operating capacity of 80%. KL uses absorption costing. Below is the
KL's income statement for the year ending December 31, 2023:
Rs. 000
Sales (35,000 units) 70,000
Cost of sales:
Opening stock (4,500 units) 5,850
Production ???
Closing stock (2,000 units) (2,600)
???
Gross profit ???
Under applied fixed overheads (500)
Adjusted gross profit ???
Operating expenses (40% variable) (10,000)
Net profit 14,000
Other information:
 Budgeted fixed overheads for the year 2023 were Rs. 8 million.
 There has been no change in per unit cost as compared to last year.
Required:
Prepare Income statement for the year ending December 31, 2023 using marginal costing. (07)
Section B
Q.7 Prime Limited (PL) manufactures a product Alpha from two ingredients X and Y. PL uses standard absorption
costing system. Following information relates to PL for the month of June 2023:
Rs. Rs.
Standard total cost of actual units sold 10,890,000
Variances: Adverse Favorable

Direct material usage 15,000 -
Labour efficiency - 360,000
Labour rate 81,000 -
Under applied overhead 60,000 -
Material price variances are calculated on actual quantity purchased. Total material price variance is zero, but
analysis reveals an adverse variance of Rs 90,000 in respect of X and a favorable balance of Rs 90,000 in
respect of Y.
The standard mix of ingredients per standard unit of Alpha is 10 kgs of X and 3 kgs of Y. Actual consumption
of X during the month was 2000 kgs less than standard while actual consumption of Y exceeded standard by
2000 kgs. There were no opening stocks. Physical closing stocks were as follows:
Quantity Original purchase cost
Material X 22,000 kg Rs 514,800
Material Y 4,000 kg Rs 108,000
Finished stock 2,000 units
Overhead is applied at 150% of direct labor cost. Standard overhead rate comprises of 60% variable and 40%
fixed. During the month 6,000 units of Alpha were sold. Actual wage rate was Rs. 3 higher than standard.
Required:
Prepare a standard cost card per unit of Alpha. (15)
Q.8 Assume today is April 1, 2023

Star Group (SG) opened a pizza outlet under the brand name ‘A-1’ on January 1, 2021. The initial assessment
of the investment in A-1 had high financial prospects. SG entered into three-year rent agreement for pizza
outlet. The annual rent for the first year was agreed at Rs. 3,000,000 (payable on monthly basis) subject to an
annual increment of 10%. For pizza preparation, SG imported an equipment amounting Rs. 5,000,000.
A-1 brand could not flourish as expected and it was decided to close down the pizza outlet on December 31,
2023 (i.e. on completion of three-year rent period). However, after discussion with lessor, management is
considering following options:
1. Terminate the rent agreement and close down the outlet immediately paying a termination penalty of 20%
of rent for the remaining period.
2. Sub-lease (i.e. rent out) the outlet to another famous brand pizza “pizza fun” for 9 months at a monthly
rent of Rs. 180,000. After expiry of rent agreement that new party may directly contact with lessor
without any interference of SG. Apart from getting monthly rent, SG will also receive commission of 5%
on sales of pizza fun.
3. Continue to operate A-1 for 9 months. Further decision to continue will be made on expiry of remaining
rent agreement period.
Following estimates are made in respect of above options over the 9 months’ period:
(a) Sales of A-1 pizza in previous quarter was Rs. 2 million. It is expected to grow by 2% per quarter.
Moreover, home delivery service will also be started in collaboration with a famous food delivery
agent. Sales through home delivery is expected to be Rs. 200,000 per month. 25% commission will
be paid to food delivery agent.
(b) Variable production cost for all sales is 40% of sales. Variable packing cost only for home delivery
sales is 4% of sales.
(c) Salaries of outlet staff are Rs. 150,000 per month. One-month salary would be paid today as
compensation for their immediate termination if A-1 operations are not continued.
(d) Other fixed costs of outlet are Rs. 80,000 per month.
(e) The imported equipment can be sold now for Rs. 1,600,000. However, if used further, it’s sale value
is likely to decline by Rs. 60,000 per month.
(f) Being a famous brand, total outlet sales of Pizza fun is expected to be 100% higher than A-1’s total
outlet sales for 9 months.
Required:
Advise the best course of action available to SG. (15)
Q.9 Smart Engineering (SE) is engaged in manufacturing of a variety of industrial appliances. SE launched a new
type of machine “eco-star” on January 1, 2022. Eco-star machines are manufactured in batches of 200 units.
Following details relate to first batch of eco-star:
Rs.
Direct material (Rs. 150 per kg) 300,000
Direct labor (Rs. 400 per hour) 240,000
Factory overheads (Rs. 300* per hour) 180,000
720,000
* OAR for year 2022
SE is preparing its budget for the year ending December 31, 2024. In this regard, following information is
available:
1) Material cost increased by 10% in 2023. It is expected to increase further by 5% in 2024.
2) Learning curve effect is estimated at 80%. It is expected to remain effective for the first 100 batches only.
Labor rate per hour increased to Rs. 450 in 2023. It is expected to increase by Rs. 50 per hour in 2024.
3) Total Eco-star machines produced in 2022 and 2023 were 6,000 and 9,000 respectively. Budgeted
production of eco-star machines for year 2024 is 8,600 units.
4) Total factory overheads for the year 2024 are budgeted at Rs. 6 million. Total budgeted hours for 2024 for
all other products are 12,000 hours. Factory overheads absorption rate is calculated every year on the basis
of total budgeted labor hours for that year.
Required:
Calculate budgeted cost of goods manufactured for the year 2024. (20)
(THE END)
Question Marks
1 Inventory management 10 Grid 1 33
2 CVP 7 Grid 2 25
3 Process 10 Grid 3 42
4 General decision 10 100
5 ABC 4
6 Marginal & Absorption 9
7 Variance 15
8 Continue shut down 15
9 Inventory + labor + OH 20
100

Answer 1
1% discount 2% discount 4% discount
Order quantity (units) 1000 2000 4000
----------------- Rs. ------------------

Per unit cost
Purchase cost [160* x (1 - discount%)] [A] 158.40 156.80 153.60

0.5 mark 0.5 mark 0.5 mark
Holding cost:
- Storage cost [4 x 12] 48.00 48.00 48.00
- Finance cost [Purchase cost x 11%] 17.42 17.25 16.90
[B] 65.42 65.25 64.90
* 2,560,000 ÷ 16,000 = 160 0.5 mark
Total costs
Purchase cost [Annual demand (W-1) x A] 3,168,000 3,136,000 3,072,000
--------------------- 1 mark --------------------
Order cost [Rs. 800(W-2) x 20,000/OQ] 16,000 8,000 4,000
Holding cost [OQ/2 x B] 32,712 65,248 129,792
3,216,712 3,209,248 3,205,792
Conclusion:
4% discount is the best choice available.
W-1 Annual demand Units

Opening stock 2,000
Sales [15,000 x 120%] 18,000 0.5 mark
Closing stock [2,000 x 2] 4,000 0.5 mark
Purchases [Sale + closing - opening] 20,000 0.5 mark
W-2 Order cost

32,000 x 80% = OC per order x 16,000/500
=> Order cost per order = 800 1 mark

Answer 2
Marks
Weighted average CPU x combined units - Total fixed costs = Target PBT
Rs. 1,275(W-2) x combined units - Rs. 40m(W-3) = Rs. 62m(W-4)
=> Combined units = 80,000 1
Product-wise target sale units: Units

- Alpha [80,000 x 30/120] 20,000 0.5
- Beta [80,000 x 90/120] 60,000 0.5
80,000
W-1 Budgeted sales: Units

- Alpha [Rs. 45m ÷ 1,500] 30,000 0.5
- Beta [Rs. 315m ÷ 3,500(W-2)] 90,000 0.5
120,000
W-2 'Contribution per unit: Alpha Marks Beta

Sale price 4,000 0.5 3,500 0.5
[Rs. 120m ÷ 30,000(W-1)] [Rs. 4,000 - Rs. 500]
Variable cost (2,500) (2,300) 1
[balancing] [Rs. 207m ÷ 90,000(W-1)]
Contribution 1,500 1,200
[Given] [balancing]
Weighted average contribution per unit [1,500 x 30/120 + 1,200 x 90/120] 1,275 1
W-3
Total fixed costs [18 + 22] (Rs. million) 40.00 0.5
W-4
Target PBT [46.50 ÷ 75%] (Rs. million) 62.00 0.5

Answer 3
Process account
Units Rs. Units Rs.
Opening WIP 3,000 154,000 Transferred out:
Direct material 20,000 600,000 Alpha 12,000 1,105,753
Conversion - 1,230,000 Beta 6,000 552,877
0.5 mark Normal loss 200 2,000

[20,000 x 1%] 0.5 mark 0.5 mark
Abnormal loss (bal.) 100 4,898

0.5 mark
Closing WIP 4,700 318,472
23,000 1,984,000 23,000 1,984,000
Equivalent production Units Material Conversion

Opening WIP: 3,000
Conversion 60% 1,800
Started and completed 15,000 100% 15,000 15,000

[18,000 - 3,000]
AL: 100
Material 100% 100
Conversion 30% 30
Closing WIP: 4,700

Material 100% 4,700
Conversion 60% 2,820
19,800 19,650
1 mark 1 mark
Cost per unit ---------- Rs. ----------

Current period cost 600,000 1,230,000
Recovery value of NL (2,000)
598,000 1,230,000
Units 19,800 19,650
30.20 62.60
1 mark 0.5 mark

Statement of evaluation ---------- Rs. ----------
Cost of finished goods
Opening WIP:
b/d 154,000
Conversion [1,800 x 62.6] 112,680 266,680
Started and completed [15,000 x (30.2 + 62.6)] 1,391,950

*(adjusting rounding off difference) 1,658,630 1.5 mark
Allocated to:
Alpha [1,658,630 x 12/18] 1,105,753
1 mark
Beta [1,658,630 x 6/18] 552,877
Cost of AL
Material [100 x 30.2] 3,020
Conversion [30 x 62.6] 1,878
4,898 1 mark
Cost of closing WIP

Material [4,700 x 30.2] 141,940
Conversion [2,820 x 62.6] 176,532
318,472 1 mark

Answer 4
Option I - Sale of new dress only Rs. Marks

Total contribution [15,000 x Rs. 750 (W-1)] 11,250,000 0.5
Designer fee [irrelevant] -
11,250,000
Option 2 - Sale of crown scarf and handbag alongwith dress Rs.

Total contribution:
- Complete set [13,650(W-2) x Rs. 602(W-1)] 8,217,300 0.5
- Dress [5,850(W-2) x Rs. 750(W-1)] 4,387,500 0.5
- Crown scarf [1,950(W-2) x Rs. 100(W-1) 195,000 0.5
- Handbags [1,950(W-2) x Rs. 152(W-1)] 296,400 0.5
Additional designer fee [150,000 x 2] (300,000) 0.5
12,796,200
Conclusion:
It is more profitable if sales director's suggestion is adopted. 0.5
W-1
Contribution per unit: Dress Crown scarf Handbag Complete set
-------------------------- Rs. --------------------------
Sale price 2,000 300 600 2,500 1
Cloth [100 x 3.5] (350) - - (350) 0.5
Cutting cost (100) (50) (80) (230) 1
Metal hook - - (8) (8) 0.5
Other variable cost (800) (150) (360) (1,310) 1
750 100 152 602
W-2 Units sale Dress Crown scarf Handbag

--------------- units ---------------
Complete set [19,500* x 70%] 13,650 13,650 13,650 1
Dress with crown scarf [19,500 x 10%] 1,950 1,950 - 0.5

Dress with handbag [19,500 x 10%] 1,950 - 1,950 0.5
Dress only [19,500 x 10%] 1,950 - - 0.5
5,850 1,950 1,950
* 15,000 x 1.3 = 19,500

Answer 6
KL
Income Statement (Marginal costing)
for the year ending December 31, 2023:
Rs. 000 Marks
Sales 70,000
Variable cost of sales:
Opening stock [Rs. 5.85m - 4,500 x 200(W-2)] 4,950 1
COGM [Rs. 42.25m(W-1) - 32,500(W-3) x 200] 35,750 1
Closing stock [Rs. 2.6m - 2,000 x 200] (2,200) 1
38,500
Gross contribution 31,500
Variable operating cost [10,000 x 40%] (4,000) 0.5
Net contribution 27,500
Fixed costs:
Overheads [32,500 x 200 + Rs. 0.5m] (7,000) 1
Operating cost (6,000) 0.5
Net profit 14,500
W-1 Finding missing figures:

Rs. 000
Sales 70,000
Cost of sales:
Opening stock 5,850
COGM (bal.) 42,250 1
Closing stock (2,600)
(bal.) 45,500
Gross profit (bal.) 24,500
Under applied fixed OH (500)
Adjusted gross profit (bal.) 24,000
Operating expenses (10,000)
Net profit 14,000
W-2 Fixed OAR Rs.

Budeted fixed OH ÷ normal production = 8,000,000 ÷ (50,000 x 80%) = 200 0.5
W-3 Production
Production = 35,000 + 2,000 - 4,500 = 32,500 units 0.5

Solution – 5 [0.5 each for merits AND 0.5 each for de-merits]
Merits
1. The complexity of manufacturing has increased due to use of advance technologies and multiple products
range, along with shorter product life cycles. Activity based costing recognizes this complexity with multiple
cost drivers.
2. In competitive environment, entities must be able to assess its product profitability in more realistic manner.
Activity based costing technique helped entities to absorb indirect costs into products on the basis of
activities in order to calculate realistic product cost.
3. Activity based costing can be applied to all overhead costs, and not restricted to production overheads.
4. Activity based costing can be used easily in service costing as in product costing.
Demerits
1. Activity based costing will be of limited benefit if overhead costs are primarily volume related or overhead
costs is not significant proportion of total costs.
2. Cost apportionment may still be required at the cost poling stage for shared items of costs like rent,
depreciation of building. Apportionment can be an arbitrary way of sharing costs.
3. The cost of implementing and maintaining an activity-based costing system might exceed the benefits of
improved accuracy in product or service costs.
4. This model is difficult to understand and even can create problems in implementation due to fair
understanding activities and their related costs.
5. The choice of both activities and cost drivers might be inappropriate.

Solution – 6(a) [0.5 mark each]
 Every additional unit of output or sale, or every additional unit of activity, has the same variable cost
as every other unit. In other words, the variable cost per unit is a constant value.
 Fixed costs are costs that remain the same in total in each period, regardless of how many units are
produced and sold.
 Costs are either fixed or variable, or a mixture of fixed and variable costs. Mixed costs can be separated
into a variable cost per unit and a fixed cost per period.
 The marginal cost of an item is therefore the extra cost that would be incurred by making and selling
one extra unit of the item. Therefore, marginal costing is particularly important for decision making as
it focuses on what changes as a result of a decision.

Answer 7
Standard cost card (per unit)

Quantity Rate (Rs.) Cost (Rs.)
Direct material:
- X (W-1.1) 10 Kg 22.50 225.00
- Y (W-1.1) 3 Kg 30.00 90.00
Direct labor (W-2.1) 5 hours 120.00 600.00 1.5 marks
Variable FOH (W-2.2) 5 hours 108.00 540.00
Fixed FOH (W-2.2) 5 hours 72.00 360.00
1,815.00
W-1
FG units produced [6,000 sales + 2,000 clos. FG] 8,000 1 mark
W-1.1 X Y
------------ Kgs ------------
Material used [8,000 x 10 - 2,000][8,000 x 3 + 2,000] 78,000 26,000
Closing stock 22,000 4,000
Material purchased 100,000 30,000
1 mark 1 mark
MPV = SC x AQ(purchase) - AC x AQ (purchase)
For X: For Y:
- 90,000 = SC x 100,000 - 100,000 x 23.40* 90,000 = SC x 30,000 - 30,000 x 27**
SC = 22.5 1 mark SC = 30.00 1 mark
* Rate per Kg = 514,800 / 22,000 = Rs. 23.40/Kg ** Rate per Kg = 108,000 / 4,000 = Rs. 27/Kg
W-2 Rs.
Standard cost of 6,000 units 10,890,000
Standard material cost [6,000 x (10 x 22.50 + 3 x 30)] 1,890,000
Standard conversion cost 9,000,000
Allocated to:
Labor [9,000,000 x 100/250] (i.e. SR x SH) 3,600,000 1 mark
FOH [9,000,000 x 150/250] 5,400,000 1 mark
W-2.1 Labor W-2.2 OH

LRV = SR x AH - AR x AH Variable FOH per hour [5,400,000 x 60% / 30,000]
-81,000 = SR x AH - (SR + 3) x AH = 108 Rs./hour 1 mark
AH = 27000 1.5 marks
Fixed FOH per hour [5,400,000 x 40% / 30,000]
LEV = SR x SH - SR x AH = 72 Rs./hour 1 mark
360,000 = 3,600,000 - SR x 27,000
SR = 120.00 1 mark
SH = 30,000 [3,600,000 / 120] 1 mark
Standard hour per unit [30,000/6] = 5 hours 1 mark

Answer 8
Option I - Shut down outlet now Rs. Marks

Termination penalty [2,722,500(W-1) x 20%] (544,500) 1
Termination benefits to employees (150,000) 0.5
Sale of equipment 1,600,000 0.5
905,500
Option 2 - Close down outlet and rent out Rs.

Rent expense (W-1) (2,722,500) 0.5
Rent income [180,000 x 9] 1,620,000 1
Commission from Pizza fun [6,243,216 x 2 x 5%] 624,322 1.5
Termination benefits to employees (150,000) 0.5
Sale of equipment 1,600,000 0.5
971,822
Option 3 - Continue operations Rs.

Sales:
Outlet sales
- 1st quarter [2,000,000 x 1.02] 2,040,000 0.5
- 2nd quarter [2,040,000 x 1.02] 2,080,800 0.5
- 3rd quarter [2,080,800 x 1.02] 2,122,416 0.5
6,243,216
Home delivery sales [200,000 x 9] 1,800,000 0.5
8,043,216
Variable production cost [8,043,216 x 40%] (3,217,286) 1
Variable packing cost [1,800,000 x 5%] (90,000) 0.5
Commission to food delivery agent [1,800,000 x 25%] (450,000) 1
Salaries [150,000 x 9] (1,350,000) 0.5
Other fixed costs [80,000 x 9] (720,000) 0.5
Rent expense (W-1) (2,722,500) 0.5
Sale of equipment [1,600,000 - 60,000 x 9] 1,060,000 1
553,430
Conclusion:
It is more profitable if outlet is rented out to Pizza fun. 0.5
W-1 Rent expense Rs.

Annual rent for 3rd year [3,000,000 x 1.1 x 1.1] 3,630,000
Rent for remaining 9 months [3,630,000 x 9/12] 2,722,500 1.5

Answer 9 Rs. Marks
Direct material cost (W-1) 14,899,500 allocated
Direct labor (W-2) 2,039,105
Factory overheads [4,078.21(W-2) x Rs. 373.18 (W-3)] 1,521,906 1
18,460,511
W-1
Material quantity (Kgs) for 1st batch (200 units) [300,000/150] 2,000
Budgeted material quantity (Kgs) [2,000 x 8,600 / 200] [A] 86,000 1
Budgeted material cost per kg (Rs.) [Rs. 150 x 1.1 x 1.05] [B] 173.25 2
Budgeted material cost (Rs.) [A x B] 14,899,500 1
W-2
Total batches uptill 31-12-23 [(6,000 + 9,000) / 200] 75 1
Budgeted batches in 2024 [8,600 / 200] 43
Total batches uptill 31-12-24 118 1
Total hours for 75 batches = [600* x (75)-0.322] x 75

= 11,205.80 [C] 2
* 240,000 / 400 = 600 hours 1
Total hours for 100 batches = [600 x (100)-0.322] x 100

= 13,619.19 [D] 2
Total hours for 99 batches = [600 x (99)-0.322] x 99

= 13,526.70 2
Total hours for 100th batch = 13,619.19 - 13,526.70

= 92.49 [E] 1
Total budgeted hours of Eco-star for 2024:

Hours for 25 batches [D - C] 2,413.39 1
Hours for next 18 batches [E x 18] 1,664.82 1
4,078.21
Labor rate per hour [450 + 50] 500.00 0.5
Budgeted labor cost [4,078.21 x 500] 2,039,105 0.5
W-3 OAR
Total budgeted labor hours:
- for eco star (W-2) 4,078.21
- for all other products 12,000.00
16,078.21 1
OAR [6,000,000 / 16,078.21] 373.18 1

August 19, 2023
Business Law
(i) Answer all TEN questions.
(iii) Multiple Choice Questions must be answered in answer script only
Select the most appropriate answer from the options available for each of the following Multiple Choice
Questions (MCQs). Each MCQ carries ONE mark.
Q.1
Tick the most appropriate option:
i) Under 1973 Constitution of Pakistan, which institution has supreme law-making authority?
a) Supreme Court of Pakistan c) Election Commission of Pakistan
b) Parliament d) Armed Forces of Pakistan
ii) Haider applied for job in X Cotton Mills Ltd. and after interview Haider was sent home to wait for
company’s reply. With mixed feelings about interview when Haider reached home after interview,
he got another better job opportunity and he availed it. Next day Company confirms Haider’s
appointment and require him to report on duty.
a) Haider’s application was an offer which was accepted on confirmation by company after
interview. Therefore, Haider should have informed his revocation of offer before confirmation
and availing better opportunity.
b) Haider’s application was an offer but sending confirmation after Haider’s interview was a
counter offer. Therefore, Haider had all the rights to avail better opportunity and disassociate
with the company
c) Haider’s application was continuity of invitation to an offer published by the company and
after interview it was company’s offer that Haider was told to wait for. Company’s
confirmation was actually an offer, which Haider had the right to refuse.
d) Haider’s application as offer was required to be accepted in reasonable time and manner.
Holding Haider to wait was not a reasonable manner neither company informed Haider about
confirmation in reasonable time. Therefore, Haider had a right to go for better job opportunity.
iii) In an engagement ceremony Aslam and Salma placed engagement ring on each other’s hand.
Unfortunately, the engagement broke and both Aslam and Salma required return of all the gifts
exchanged in their families respectively and the engagement rings.
a) Gift made in near relations; made out of love and affection; in writing and registered are valid.
There wasn’t any such thing therefore between Aslam and Salma therefore, gifts and rings will
be returned.
b) Gifts, which are considered as completed gifts cannot be returned. Therefore, Aslam and Salma
are not required to return anything to each other
c) Gifts being completed gifts cannot be returned however rings being ceremonial symbols of
engagement can be returned.
d) Gifts exchanged were meant to be for relatives or prospective relatives. When no prospects of
relations were left then all the gifts including rings can be returned.
Business Law |Page 2 of 6
iv) Asad agreed to purchase a watch from scrap dealer mistakenly assuming that it worth millions,
whereas it worthen nothing. An agreement made under mistake is void if:
a) it is induced by a party to the agreement as to the substance of the thing, which is the subject of
the agreement.
b) it is made by both the parties to an agreement, as to matter of fact essential to the agreement.
c) it is an opinion of both the parties to an agreement about the value of things which form the
subject-matter of the agreement
d) it is made about any law in force in Pakistan.
v) Suhail owed Arsalan a sum of Rs. 1,000,000/-. Arsalan repeatedly asked Suhail to return the
money. Suhail requested that if Arsalan agrees to settle the debt in Rs. 800,000 then Suhail will pay
till next Monday. Arsalan agreed on one condition that if Suhail failed to pay Rs. 800,000 till
Monday then Arsalan will have his full claim of Rs. 1,000,000/- enforced through court of law.
Suhail didn’t pay and Arsalan filed a case against Suhail to recover his Rs. 1,000,000/-.
a) Arslan’s claim will fail because after remission the original contract is not required to be
performed
b) Arslan’s claim will succeed because it was a contingent contract based on an uncertain event of
payment till Monday and when the condition was not fulfilled the not fulfilled the contract was
discharged.
c) Both option (a) and (b) are correct because both are two sides of same coin. And it is just a
matter of interpretation.
d) Arsalan’s claim will fail because an agreement without consideration is void and any
advantage taken in void agreement cannot be restored.
vi) Gill was tenant in flat, which was owned by Wajahat. Gill offered to pay the rent due for the month
of March 2023, which Wajahat refused to take. Now:
a) Gill is not entitled to stay in the flat as tenant and he must vacate it immediately.
b) Gill is entitled to maintain his status as tenant and pay Wajahat outstanding rent without any
interest on delay in payment.
c) Gill status as tenant is at the disposal of Wajahat
d) Gill can remain as tenant in flat but on outstanding rent must pay interest till actual payment to
Wajahat.
vii) Ahmed had an outstanding loan of Rs. 100,000/- payable to Salman in January 2021. Later on,
Ahmed again took another amount of Rs. 50,000/- from Salman, which was also payable in
January 2021. In March 2023 Salman paid Rs. 15,000 to Ahmed. Unless otherwise agreed,
according to law the appropriation of Rs. 15,000 shall be:
a) The adjustment in Rs. 100,000/- because this amount was taken prior in time
b) The adjustment in Rs. 50,000/- because this amount was lesser in value
c) The adjustment in both the amount of Rs. 100,000/- & Rs. 50,000/- appropriately
d) The adjustment as interest on outstanding amounts and amounts in full shall remain payable.
viii) Aslam constructed a building for Salman and it was agreed that if the building is damaged in
earthquake, then Aslam will pay Rs. 10,000,000/- to Salman. In earthquake after construction
building survived but was so weak that it required immediate repair, which could have costed Rs.
5,000,000/-. Salman took the risk and delayed the repair work. The building collapsed in
subsequent monsoon rains, which caused a total loss of Rs. 50,000,000/- to Salman. Which of the
following amount Salman can claim from Aslam.
a) Nothing is payable by Aslam because building didn’t collapse due to earthquake.
b) Aslam will pay Rs. 5,000,000/- as the cost of repair for the damage caused due to earthquake.
c) Aslam will pay Rs. 10,000,000/- as liquidated damages agreed in contract
d) Aslam will pay Rs. 50,000,000/- as the actual loss suffered by Salman due to faulty
construction of Aslam.
ix) Aslam opened a new grocery store in his neighborhood. One day Aslam requested one of his
friends Naeem to take care of the shop in his absence as Aslam had to rush hospital in an
emergency. In the presence of Naeem only one customer named Amina came and she was Naeem’s
class fellow in school. Naeem gave grocery on credit to Amina. In this situation
a) Aslam will be responsible to get payment of grocery from Amina.
b) Naeem will be responsible to get payment of grocery from Amina.
c) Naeem will make sure that Amina pays for grocery to Aslam and if she doesn’t, then Naeem
will pay Aslam.
d) Aslam will get payment from Naeem as Aslam does not know Amina.
x) Adeel invested in a business of beauty Salon and for management engaged Saima, who was a
talented Makeup Artist. Adeel only visited beauty Salon for checking inventory items and sales
record. Saima suddenly died and Adeel called upon defaulting customers to make payment for the
services they had from beauty Salon.
a) Customers are not bound to make the payment as they were Saima’s customers and they didn’t
know Adeel.
b) Siama’s legal heirs are now responsible to arrange payment from customers for Adeel.
c) Adeel can assert himself as principal to the customers and take a legal action against customers
if they don’t pay.
d) In place of Siama, Adeel has to engage new Makeup Artist in the beauty Salon to get payment
from customers.
xi) Aslam and Saqib started out a restaurant business in partnership but they couldn’t get any success
in it therefore they decided to give the premises on lease to Baqar, who promised to pay Aslam and
Saqib Rs. 100,000/- each month for the use of premises and all its fixtures.
a) Baqar has now become a partner in the firm
b) Baqar is a tenant of Aslam and Saqib
c) Baqar is an employee of Aslam and Saqib
d) Baqar although is a tenant but will be considered as partner by holding out.
xii) Saqib draw a cross cheque of one billion for Zeeshan on Money Bank Ltd. payable on 15 August
2023. Zeeshan was too busy to deposit cheque for fund transfer in his account. On 20 August 2023
Money Bank Ltd. got insolvent and on 22 August 2023 Zeeshan deposited cheque to collect
payment. The cheque was dishonored because of closure of bank.
a) Saqib had funds in the account on due date. Zeeshan’s delay in depositing cheque caused Saqib
loss there Saqib was not responsible for payment.
b) Liability for dishonor of a cheque is always on drawer. Therefore, Saqib will be responsible for
arranging payment for Zeeshan otherwise FIR will be registered against Saqib.
c) In this situation Saqib is bound to get back the cheque from Zeeshan and give a new cheque
drawn on a bank, which is not insolvent.
d) All of the above options in alternate are correct.
xiii) Aslam went to State Bank of Pakistan to collect information regarding license to operate a
designated Payment System. Aslam was told that most appropriately, which of the following can
be taken as operator of a Designated Payment System
a) Any Bank authorized by Government of Pakistan
b) Any financial institution authorized by State Bank of Pakistan
c) Any financial or other institution or any person authorized by State Bank of Pakistan
d) Any financial or other institution or any person authorized by Government of Pakistan

xiv) Qasim and his family appoint Tariq an arbitrator for the decision on distribution of inheritance of
Qasim’s late father Ch. Rayasat Ali. During the arbitration proceedings Tariq received an
anonymous letter informing Tariq that Ch. Raysat Ali had a secret marriage in London and from
that marriage Ch. Rayasat Ali had two children, who are also entitled for in heritance. Qasim and
his family denied the information of Ch. Rayasat Ali’s secret marriage. Which of the following
options Tariq as arbitrator have in this situation.
a) Tariq can visit London to investigate the matter and collect evidence in this regard.
b) Tariq must rely only on the statements of the parties present in person and cannot waste time
on suspicious contents
c) Tariq can state a special case for the opinion of the court.
d) Tariq can avail any one of the above options.
xv) In NADARA record which one of the following will NOT be considered as data damage.
a) Alteration of record
b) Deletion of record
c) Making record temporarily unavailable
d) Copying of record
Q.2 Banana Readymade Garments (BRG) is a partnership firm engaged in a business of almost every type of
readymade garments. Imran and Jahangir are partners of BRG.
Explain the following:
(a) Salman was an importer of readymade garments and Imran appointed Salman as BRG agent to import
latest fashions of specific brands for BRG. According to Contract Act 1872 what is status and authority
of Salman in respect of BRG business? (04)
(b) Imran and Jahangir met famous model named Reham in a fashion show. They thought that they can use
Reham’s fame to boost their business therefore, they offered Reham to join the firm as partner and
offered her Rs. 1,000,000/- monthly salary in lieu of profits. Reham joined the firm but at the time
collecting salary Imran and Jahangir excused that the firm is running into losses. Can Reham claim
Salary from other partners? (03)
(c) Reham as partner in BRG felt embarrassed and betrayed by other partners. She felt inclined to use her
authority as partner to bind the firm. However, there are certain actions, which Reham cannot take
without express authority of other partners. List down those actions (04)
(d) Imran received a cheque of payment in firm’s name for the goods supplied by the firm. Under
Negotiable Instruments Act 1881 what are conditions required to become a holder in due course and
evaluate that if Imran is a holder in due course? (04)
Q.3 On completion of five years tenure National Assembly stands dissolved and interim prime minister is
appointed to carry out the functions of government and conduct free and fair elections. In such interim set
up how laws are made? (04)
Q.4 Aleem as a builder agreed to construct a house for Bilawal in 20 million Rupees. Aleem agreed that in the
house all sanitary fixtures and tiles will be imported from Italy. Aleem specifically agreed that the house
will be handed over to Bilawal on 15th of January 2023. It was also agreed that Aleem will pay Rs. 50,000
per day on account of delay in delivery of possession.
Unfortunately, due to financial crises in Pakistan import on luxury items got very expensive, which
ultimately affected the cost of Aleem in constructing Bilawal’s house. Aleem told Bilawal about the
prevailing situation and claimed that Bilawal will pay for extra amount of Rs. 5 million paid by Aleem on
import from Italy.
In the light of above background answer the following:
a) If the house was ready for delivery on 15th of January 2023, can Aleem claim extra Rs. 5 million paid
on import from Italy? (02)
b) House was ready for delivery on 20th of January 2023 with a delay of 5 days due to pandemic
lockdowns. However, Aleem made a further delay of 5 days in resolving the issue of additional cost.
Can Bilawal claim compensation from Aleem for delay in delivery of possession? (04)
c) Aleem on 1st of January 2023 convinced Bilawal that delivery of possession date will be extended till
25th of January 2023 and Bilawal agreed. In this situation can Bilawal claim compensation for the delay
in delivery of possession? (04)
Q.5 Aqsa sold her mobile to Zahid in Rs. 20,000. Further elaborate this example to distinguish between
a) Coercion
b) Undue Influence
c) Fraud (06)
Q.6 a) Give examples to explain following rules of reciprocal promises

i) Mutual and dependent reciprocal promises
ii) Order of performance of reciprocal promises (04)
b) Iman had his last conversation with his missing friend Hammad in Italy, therefore Imran mistakenly
presumed that Hammad was in Italy. Imran in order to know whereabout of Hammad in Italy
contracted with Ali, who was a private detective. Imran agreed to pay Ali Rs. 5 million after Ali finds
Hammad in Italy. Ali spent Rs. 1 million in searching Hammad and it was ascertained that Hammad was
not in Italy.
Analyze above situation according to the law regarding mistakes in Contract Act 1872 and advice Ali
that if he can recover his Rs. 1 million from Imran? (04)
Q.7 Saqib was an emerging cricketer and had a potential carrier in international cricket. Star Cricket Club
contracted with Saqib that if Saqib maintained his fitness till December 2022 then Club will select him to
paly at national level cricket matches. Following terms were added in the contract, which would be
applicable if Saqib was selected.
a) During national level cricket matches Saqib will not play cricket anywhere else.
b) Saqib will not be allowed to see his parents for a whole year.
c) If Saqib had any dispute with the Club, Saqib will not file any case against the club
d) Saqib will obey any order of whatever nature given to Saqib by the club management.
Analyze the above situation according to Contract Act 1872 and state the type of contact with reason and
also evaluate separately the terms of contract between Saqib and Star Cricket Club. (10)
Q.8
a) Habib gifted his house to his grandson Ibrahim. Asim who is Ibrahim’s father provides necessities to
Ibrahim suitable to his life. Can Asim recover the amount of necessities from the house of Ibrahim.
(02)
b) Asim and Amir jointly borrowed Rs. 100,000 from Akbar and it was agreed between the parties that
Asim will pay the whole amount to Akbar. On due date Asim refused to make the payment. Can Akbar
now claim the amount from Amir? (02)
c) Salma was widow of Atif, who in his life agreed to perform in a movie for Qasim. Atif also took
advance money for his performance and consumed it. Atif died without any estate. What will be the
liability of Salma towards Qasim in this situation? (02)
d) Asim was acting as an arbitrator to resolve a dispute over sale of goods between seller and buyer.
During the discussion a question on liability to pay sales tax arose. Asim was confused about this
question. What powers Asim have to resolve his confusion? (02)
e) Taimoor purchased 4 kanal plot in DHA from Qaiser in 100 million rupees. Taimoor wanted to pay
Qaiser through cheque with restrictive crossing. But Qaiser insisted that he will only accept Demand
Draft of 100 million rupees in his favor as valid mode of payment. What makes Demand Draft more
secure than cheque with restrictive crossing (02)
Q.9
a) Differentiate between information system and critical infrastructure as defined in Prevention of
Electronic Crime Act 2016 (02)
b) Illustrate of explain glorification of an offence as cybercrime prohibited under Prevention of Electronic
Crime Act 2016 (04)
c) Listed two situations which are common in ‘Prohibited Agreements’ and ‘Abuse of dominant position’
as given in Competition Act 2010 (02)
d) What are the operational requirement of a designated payment system given in Pakistan Payment
System and Electronic Fund Transfer Act 2007 (04)
Q.10
a) Sharing of profit is not the sole determining factor of partnership. What would be your opinion about
relation of partnership in following situations:
i) Azhar advanced some money to Basit and Kashif, two merchants. The merchants agreed to carry
on the business subject to the control of Azhar in several respects. Azhar was to receive a commission
of 20% on all the profits. (02)
ii) Mustafa, a clerk in Kashif’s business entered into a verbal agreement with Kashif for a share of
profit and loss in the proportion of one-sixth to Mustafa and five-sixth to Kashif. It was further
agreed that building in which the business was carried on should remain the property of Kashif.
(02)
b) Shoaib was partner in a firm named Makan Property Dealers. The firm business was buying and selling
of immoveable property. In a meeting of partners, it was agreed that firm will not deal in properties of
Ravi Urban Development Authority (RUDA). However, in violation of specific restriction Shoaib
agreed to purchase a plaza located in RUDA. Partial payment was made by Shoaib on behalf of firm.
When partners came to know about the transaction, they scolded Shoaib and he tried his best to reason
with other partners the potential benefits for the firm in the transaction.
In the light of above circumstances answer the following:
i) Due to statutory restriction can firm be held liable for the unauthorized action of Shoaib
(02)
ii) What options firm have to handle the situation created by Shoaib’s unauthorized action. (04)
(THE END)

Business Law Mock Solution (Autumn 2023)
Answer: 1
Tick the most appropriate option
1 B
2 A
3 C
4 B
5 B
6 B
7 C
8 B
9 A
10 C
11 B
12 A
13 C
14 A
15 D

Answer: 2
a) According to Contract Act 1872 the status of Salman with respect of BRG would be of an agent.
And as an agent his authority will be:
(i) Express Authority: Salman shall have the express authority to do every lawful thing
necessary to import the garments.
(ii) Implied authority: Salman an agent having an authority to carry on a business has the
authority to do every lawful thing necessary for the purpose, or usually done in the
course of conducting such business.
(iii) Authority in Emergency: Further, in case of an emergency, Salman shall have the
authority, to take all necessary actions for the purpose of protecting BRG from any
potential loss as would be done by a person of ordinary prudence, in his own case, under
similar circumstances.
b) According to Partnership Act 1932 if any person is held entitled for an interest on capital, then
such person can only get it out of profits. Here Reham was inducted as partner because of her
fame and the salary was to be paid in lieu of profits. Therefore, Reham will not be entitled for
salary because the firm is not earning any profits.
c) A partner can bind the firm in usual course of the business of the firm. However, there are
certain restrictions. In the absence of any usage or custom of trade to the contrary, Reham’s
implied authority as BRG’s partner, would not empower her to:
i) submit a dispute relating to BRG’s business to arbitration
ii) open a banking account on behalf of BRG in her own name
iii) compromise or relinquish any claim or portion of a claim by BRG
iv) withdraw a suit or proceeding filed on behalf of BRG
v) admit any liability in a suit or proceeding against BRG
vi) acquire immoveable property on behalf of BRG
vii) transfer immoveable property belonging to BRG
viii) enter into partnership on behalf of BRG
d) Following conditions are required to be fulfilled by Imran in order to become a holder in due
course:
i) He must fulfill all essentials of a holder and must be a holder for valuable consideration;
ii) He should receive the cheque before its maturity; and
iii) He should take the cheque without any negligence on his part and in good faith without
having any reason to believe that any defect existed in the title of the transferor.
iv) If there is any suspicion and he takes the Cheque without making proper inquiries, he
cannot be said to be acting in good faith.
v) There is no forgery on the cheque
All these conditions are fulfilled in Imran then Imran is a holder in due course. Because as
partner Imran is an agent of the firm.

Answer: 3
In interim setup, when National Assembly is not available the President, if deems necessary to take
immediate action, has power to make an Ordinance. Such Ordinance promulgated thus, shall have the
same force and effect as an Act of the Parliament.
The Ordinance shall stand repealed after 120 days if it is not presented or passed by the National
Assembly, in case of Money Bill; and by both the Houses, if it is other than Money Bill.
However, if interim setup prolongs then president may be required to promulgate expired ordinance
again.

Answer: 4
a) In this situation increase in cost of performance of contract does not hold the party liable for
performance for any extra benefit. Aleem is liable to perform his contract and he cannot claim
any extra amount over and above already agreed between the parties. Any extra benefit claimed
by Aleem will be considered as breach of contract.
b) The parties can agree in their contract an amount payable as liquidated damages on breach of
contract, which in this case were Rs. 50,000 for every day of delay. However, Aleem cannot be
held liable for the delay, which was beyond his control. In this case delay due to pandemic
lockdown was not in the control of Aleem but delay due to unnecessary debate was in control
of Aleem therefore Bilawal is entitled for compensation of 5 days delay in settling the issues of
cost. This amount of compensation can extend till Rs. 250,000/-
c) When time is the essence of contract then a party must perform his part on time. In the situation
Bilawal faced anticipatory breach, when Aleem told him that he will not be able to perform the
contract on time. However, Bilawal agreed for delayed performance but for compensation of
the delay Bilawal had to inform at the time of acceptance of delayed performance. In the
situation it is not indicated that Bilawal made such disclosure then Bilawal is not entitled for
any compensation for delayed performance.

Answer: 5
a) Coercion: Aqsa was threatened to be killed by Zahid if she refused to sell her mobile in Rs.
20,000 to Zahid. Aqsa agreed as Zahid wanted. This is an agreement made under coercion.
b) Undue Influence: Aqsa was a die-hard follower of Zahid. Zahid misuses his dominant position
over Aqsa and requires her to sell her mobile worth Rs. 400,000/- in just Rs. 20,000 to Zahid.
Aqsa couldn’t refuse. Zahid misused his fiduciary relation hence caused undue influence on
Aqsa.
c) Fraud: Aqsa was having trouble in selling her damaged mobile, therefore she lied to Zahid that
her mobile is not damaged and was never repaired. Zahid believed in Aqsa and agreed to buy
her mobile in Rs. 20,000/-. Aqua got Zahid entered into contract through fraud.

Answer: 6
a) Following are the example for rules of reciprocal promises
i) Asim wanted his car shock absorbers to be replaced by Salman, the car mechanic.
Salman promised Asim that if Asim bring shock absorbers and his car to Salman’s
garage on Monday and he will change them. Here, Promise of Salman to repair Asim’s
car is depended on Asim’s promise to bring his car to Asim’s garage and rule is that
Salman is not responsible for non-performance unless Asim performs his promise first.
This is called rule of performance of mutual and dependent reciprocal promises.
ii) Under Contract Act 1872 if parties have not agreed the order of performance of
reciprocal promises, then such reciprocal promises are performed according to the
nature of transaction. E.g., in agreement of sale of goods seller usually give goods after
he gets payment of the goods. Therefore, when Asim agreed to purchase mangos from
Salman on Monday in Rs. 200 per kg. then unless otherwise agreed Asim has to make
the payment first before getting delivery of mangos from Salman.
b) According to section 18 of Contract Act 1872 if a person induces mistake about subject matter
of a contract then the contract is voidable at the option of the aggrieved party. In the situation
under discussion the agreement between Imran and Ali under a mistaken assumption of a fact,
which has been caused by Imran therefore the agreement is voidable at the option of Ali, who
can recover his money back from Imran.
another solution
According to Section 20 of Contract Act, where both parties to a contract are under mistaken
assumption of fact the agreement is void and any advantage taken under an agreement, which
is discovered to be void, has to be returned. Thus Ali and Imran both were under mistake as to
a matter of fact therefore the agreement is void and Ali can recover Rs. 1 million as advantage,
which Imran has taken from Ali.

Answer: 7
The agreement between Saqib and Star Cricket Club is not a contingent contract but a simple executory
contract, which Saqib will get only if he maintained his fitness till December 2022. Executory contracts
are the contracts, which parties agree to perform in future. In the following terms of contract are
discussed with reasons:
a) This term of contract is valid as the club want to retain 100 % fitness, energy and performance
in national level cricket therefore restraining Saqib from playing cricket elsewhere is valid and
cannot be taken as agreement in restraint of trade.
b) Any term in a contract restraining parental rights is void. Saqib parents have right to see their
son and to be part of important milestones of their son’s life. Therefore, restraining Saqib from
seeing his parents, without any valid reason, cannot be taken as a valid term in the contract.
c) According to Contract Act 1872 any agreement in restraint of legal proceedings is void.
Therefore, Saqib cannot be restrained from taking any action in court of law to enforce his
rights against the club.
d) Any agreement or term of contract, that is vague or is not capable of being made certain will
be treated as void. Thus, a sweeping statement about following any orders of whatsoever nature
is not a valid term of the contract. Because its vague and open to any interpretation and is not
capable of being made certain.

Answer: 8
a) Asim as father is bound under the law to provide necessities of life to his children. Therefore,
even if Ibrahim is independently resourceful this does not absolve Asim from his duty to
provide Ibrahim necessities. Asim cannot recover amount of necessities from the estate of
Ibrahim.
b) Most rules of performance of a contract as provided in Contract Act 1872 are taken as default
rules and can be read in all the agreements, unless otherwise agreed between the parties. In the
situation under discussion parties have agreed that although debt was incurred by both Amir
and Asim but to return the amount only Asim was responsible. Therefore, if Asim failed to pay
then Akbar cannot claim the amount from Amir.
c) Legal heir of deceased is only liable to perform the commitments of deceased from the estate
of deceased. Here the agreement was to provide personal services, which could only have been
provided by the deceased. The death of Atif discharged the contract for impossibility of
performance. However, the liability could have been the return of amount received by deceased,
which in this situation is not available. Therefore, Salma has no liability towards Qasim.
d) In an arbitration proceeding an arbitrator has the powers to state a special case to the court for
an advice on a question of law before giving a final award or an arbitrator can announce the
award subject to the observation of court on the question of law by stating as special case in the
court of law. In the situation under discussion the arbitrator on liability of sales tax can send the
matter to court by stating a special case on question of law.
e) Payment through demand draft is considered as more secure than a cheque with restrictive
crossing because if cheque with restrictive crossing is dishonored on non-availability of funds
in drawers account, then bank is not liable for payment and FIR is registered against the drawer.
However, Demand draft is also known as banker’s cheque as the bank issue demand draft in its
own name and the payment on it is the liability of bank. Demand draft are normally not
dishonored. However, if it does then bank is personally liable for the consequences.

Answer: 9
a) “critical Infrastructure" means critical elements of infrastructure namely assets, facilities,

systems, networks or processes the loss or compromise of which could result in:
(a) major detrimental impact on the availability, integrity or delivery of essential services
including those services, whose integrity, if compromised, could result in significant loss
of life or casualties, taking into account significant economic or social impacts; or
(b) significant impact on national security, national defense, or the functioning of the state.
Whereas information system can be taken as any electronic device, which is capable of
processing an input to give an output.
b) Mr. A was participant of an illegal protest, where shops were being looted and cars were being
damaged. In order to instigate people to participate in illegal protest sends live steaming through
social media, while calling it a success of rightful people against evil. Mr. A will be liable for
punishment under section 9 of PECA.
c) Following are two rules which are common in ‘Prohibited Agreements’ and ‘Abuse of dominant
position’ lists:
i) applying dissimilar conditions to equivalent transactions with other trading parties,
thereby placing them at a disadvantage; and
ii) make the conclusion of contracts subject to acceptance by the other parties of
supplementary obligations which, by their nature or according to commercial usage,
have no connection with the subject of such contracts.
d) An Operator of a Designated Payment System shall establish the following operational

arrangement to maintain its status:
i) rules and procedures setting out the rights and liabilities of the operator and the
participant and the financial risks the participants may incur
ii) procedures, controls and measures for the management of credit, liquidity and
settlement risk, including rules determining the time when a payment instruction and a
settlement is final
iii) criteria for participation in the Designated Payment System and
iv) measures to ensure the safety, security and operational reliability of the Designated
Payment System including contingency arrangements.

Answer: 10
a) Sharing of profit is prima-facie evidence but not a sole proof of partnership
i) Sharing of profit alone is not the partnership. Key test to determine as if sharing of
profit between two persons is partnership or not is the test of mutual agency. In the
situation Basit and Kashif seem to be the agents of Azhar. But Azhar is in control of
Basit and Kashif. Therefore, mutual agency is not available in this situation therefore
there is no partnership
ii) Mustafa as a clerk is agent of Kashif but kashif is not an agent of Mustafa. Therefore,
sharing of profit is not the sole determining factor of Partnership as Mustafa and Kashif
are not having mutual agency, there is no partnership.
b) Following are the answers
i) The statutory restrictions on implied authority given in Partnership Act 1932 in its
opening sentence state that these restrictions are applicable “in the absence of any
custom of trade or usage to the contrary”. Now Makan Property Dealers are in the
business of real estate and it is in the custom of trade and usage to buy or sell immovable
properties. Therefore, firm can be held liable for unauthorized transaction of Shoaib.
ii) To handle unauthorized transaction of Shoaib, firm has two options. First option is to
repudiate the transaction and face the consequences and whatever the loss firm face,
Shoaib will be liable to compensate the firm for it. Second option is that firm can ratify
the transaction of Shoaib and with retrospective effect the unauthorized transaction will
become authorized.

August 18, 2023
Financial Accounting & Reporting II

(iii) Multiple Choice Questions must be answered in answer script only.
Section A
Q.1 On 1 January 2022, Guilt Limited (GL) purchased 3 million four year bonds issued by Surprise Limited (SL)
at a premium of Rs. 4 per bond with the intention to hold them till maturity un-till 31st December 2025. The
bonds will be redeemed at their face value of Rs. 100 per bond. The transaction costs associated with the
acquisition of the bonds were Rs.1 million. The coupon interest rate is 12% per annum while the effective
interest was 10.6147%.
Required:
Prepare Journal entries for the year ended 31st December 2022 for GL Limited and extracts of statement of
financial position as at 31st December 2022. (08)
Q.2 Satisfied Limited (SL) is incorporated in Pakistan and on 1st March 2022, SL made an order to supplier in
Singapore to import a machine and paid 60% advance of total cost of machine. Total cost of machine is 0.7
million SGD (Singapore Dollar) and again 29% advance payment made on 1st April 2022. On 1st May 2022
machine was received in Pakistan and installed on 1st June 2022 at installation cost of Rs. 3 million.
Remaining payment of 11% was made on 1st September 2022. SL uses revaluation model for subsequent
measurement of property, plant and equipment and depreciation is provided on straight line basis with useful
life of 10 years. Fair value of machine as on December 31st 2022 was Rs. 125 million. SL follows net
replacement method to account for revaluation. Following spot exchange rates are available:
Date 1-March-2022 1-April-2022 1-May-2022 1-September-2022 31-December-2022
SGD 1 Rs. 170 Rs. 174 Rs. 176 Rs. 177 Rs. 180
Required:
Prepare journal entries in the books of SL for the year ended December 31st 2022. (08)
Q.3 Winter Limited (WL) is listed on Pakistan Stock Exchange and has registered office in Peshawar. WL engages
in manufacturing of cooking oil. It operates a manufacturing plant at Sahiwal. The following information is
relevant to Financial statements of WL for the year ended June 30th 2023.
(i) Book value of total fixed assets sold during the year is Rs. 12 million and break up is as follows:
Name of buyer Cost of Book Sale Details

Fixed Value Proceed
asset
Ali ahmed[employee] 1,000,000 700,000 450,000 Vehicle sold as per
company policy
Ahmed Saleem 2,000,000 1,300,000 720,000 Vehicle sold as per
[employee] company policy
Others (<500,000 book 15,000,000 10,000,000 10,500,000 Multiple Transactions
value)

Financial Accounting & Reporting II | Page 2 of 6
(ii) Authorised share capital is 1000 million shares of Rs. 10 each and issued share capital is 780 million
shares of Rs.10 each.
(iii) Financial statements for the year ended 30 June 2023 were approved by the board of directors in their
meeting held on 13th August 2023:
(iv) 90 million shares were issued as bonus shares in the previous year’s whereas 44 million shares were
issued as a consideration for purchase of building at market price of Rs. 15 per share. Remaining
shares were allotted for consideration paid in cash.
(v) During the year, WL produced 0.1 million tonnes of Cooking oil operating at 75% production
capacity. The shortfall was due to overall economic and energy crisis prevailing in the country.
(vi) Cash dividend of 20% for the year ended 30th June 2023 was proposed by directors in meeting held on
13th August 2023
Required:
Prepare relevant notes showing possible disclosures as required under the IFRSs and the Companies Act
relevant to Financial statements of WL for the year ended 30th June 2023. (09)
Q.4 Extreme Limited (EL) is in process of finalizing its financial statements for the year ended 30 th June 2023.
Following information pertains to EL’s intangible assets.
(i) Value of intangible assets as at 30 June 2022:
Rupees in Million
Software License
Cost 1000 600
Accumulated amortization 500 225
(ii) Research and development expenditure during the year ended 30 June 2022 and 2023 was as follows:
Year Product Research Development
Rupees in million
2022 AA7 25 20
2023 AA7 - 60
(iii) Product AA7 was completed on 1st April 2023 with useful life of 10 years.
(iv) On 1st January 2023 existing software was sold for Rs. 250 million and replaced with new software
costing Rs. 1,300 million with total useful life of 8 years
(v) License & software are amortized over their remaining useful life of 8 years on straight line method.
Required:
Prepare a note on intangible assets, for inclusion in EL’s financial statements for the year ended 30th June
2023 in accordance with the requirements of International Financial Reporting Standards. (comparative
figures and total column are not required) (09)
Q.5 Motivated Limited (ML) is a manufacturing company and following matters are pending while finalizing the
financial statements for the year ending June 30th,2023
(i) In May 2023, ML’s board of directors decided to relocate its regional office from Sialkot to
Faislabad. In this respect, a detailed plan was approved by the management and a formal public
announcement was made in June. ML has planned to complete the relocation by December 2023. The
related costs have been estimated as under:
Rs. in
million
Redundancy payments 10
Costs of moving office equipment to Faislabad 1.5
Compensation to employees agreeing to relocate 6
Salary of existing operation manager responsible to supervise 1.2
the relocation)
(ii) On 10 July 2023, workers filed a case against ML claiming Rs. 30 million. The claim is made in
respect of severe injuries and stress caused during a fire incident in ML’s head office in June 2023.
Workers are of the view that ML was negligent in maintaining fire safety systems in its head office.
According to ML’s lawyers, there is 80% probability that ML would be found negligent and would
need to pay 45% of the amount claimed.
Requirement
Discuss the accounting treatment (including disclosure requirements) of the above matters of ML for the year
ended 30th June 2023. (07)
Q.6 Select the most appropriate answer(s) from the options available for each of the following Multiple Choice
Questions.
(i) Which two of the following are the non-monetary items?
(a) Foreign currency trade payables
(b) Right of use assets
(c) Advance to suppliers
(d) Lease liabilities (01)
(ii) An entity acquired a patent for a period of ten years at cost of Rs. 100 million. The patent can be further
renewed for another five years at renewal cost of Rs. 1 million. The entity estimated that expected period
of cash inflows is twelve years from acquisition date. The useful life of patent in years is: (01)
(a) Five (b) Ten (c) Twelve (d) Fifteen
(iii) A conditional grant related to a biological asset measured at its ‘fair value less estimated point-of-sale
costs’ should be recorded as income:
(a) over the period in which conditions would be fulfilled
(b) only when the grant becomes receivable
(c) only when the conditions are met
(d) over the life of related biological asset (01)
(iv) Computer hardware and related operating system, which is an integral part of the computer hardware, are
treated under:
(a) IAS 16 as a combined asset
(b) IAS 38 as a combined asset
(c) IAS 16 for computer hardware and IAS 38 for operating system
(d) IAS 16 or IAS 38 at the option of the entity (01)
(v) Which of the following is one of the conditions set out in IFRS 16 for an arrangement to be classified as
a lease?
(a) The lessee has the right to obtain substantially all of the economic benefits from use of the asset
(b) The lease term covers substantially all of the economic life of the asset
(c) The lessor has a substantive right of substitution
(d) The lessor has the right to direct the use of the asset (02)
(vi) The applicable financial reporting framework and schedule of the Companies Act, 2017 for Large Sized
Company are:
(a) IFRS and Fourth Schedule
(b) IFRS and Fifth Schedule
(c) Revised AFRS for SSE and Fourth Schedule
(d) Revised AFRS for SSE and Fifth Schedule (02)

(vii) According to IFRSs, if a financial report contains both consolidated financial statements of a parent, as
well as parent’s separate financial statements, segment information is required:
(a) only in the consolidated financial statements
(b) only in the parent’s separate financial statements
(c) in both sets of financial statements
(d) Either in the consolidated or parent’s separate financial statements (01)
Section B
Q.7
(a) On 1 April 2023, Summer Limited (SL) entered into a contract with Temperature Limited (TL) to supply 40
units of a specialized machine at a total consideration of Rs. 480 million. The machines will be delivered in
lots of 20 units at the end of every six months. TL has paid 10% non-refundable consideration in advance
(recorded as contract liability by SL) while the remaining consideration will be paid in two equal instalments,
only after delivery of each lot and not before. Upto year ended 30th June 2023, SL had manufactured 12 units
of the machine at a cost of Rs. 96 million which will be delivered on 30th September 2023.
The Marketing team of SL was working on obtaining this contract and spent incremental cost of Rs. 12
million for preparing and presenting the proposal for the contract. The team was rewarded with a bonus of Rs.
16 million on obtaining the contract.
Since the machines are of specialised nature, revenue and receivable for 12 units manufactured so far has
been recognized without adjusting any amount from the advance received. Further, the sales team cost of Rs.
28 million has been recorded as contract cost which would be taken to profit or loss on completion of the
contract.
Required:
Record Adjusting entries in the books of SL for the year ended 30th June 2023. (06)
(b) Pride Limited (PL) is a manufacturer of machines. During 2023, PL launched a new machine with model
name R77 Plus. Each unit of R77 Plus is being sold for Rs. 5 million payable upon delivery. Revenue from
sale of R77 Plus is recognised upon delivery to the customer premises. Further, Ten months support service
contract for R77 Plus is sold separately at Rs. 0.05 million payable monthly. Revenue from support services
is recognized over contract period. Customers can also obtain such support services from third parties.
The Finance department has proposed the following options to increase the sales of R77 Plus:
Arrangement 1: PL would offer customers a bundle of R77 Plus and support services for ten months at a
combined price of Rs. 5.1 million.
Arrangement 2: At purchase of one unit of R77 Plus, customers would be provided with an option to
purchase another unit of R77 Plus within 6 months at a material discount of 20%. It is
estimated that 55% customers will avail the option
Required:
Discuss recognition and amount of revenue under each of independent arrangement and calculate amount of
revenue for PL (08)
Q.8 Following balances are extracted from the records of Angry Limited (AL), Happy Limited (HL) and Fear
Limited (FL) for the year ended 30th June 2023
Rs. in million
AL HL FL
Revenue 9,420 5,150 2,300
Cost of sales (3,910) (2,630) (940)
Gross profit 4,510 2,520 1,360
Operating expenses (1,210) (920) (495)
Other income 1750 640 164
Finance Cost (275) (260) (129)
Profit for the year 5,775 1,980 890
Other comprehensive income:
Fair Value Gain 190 110 50
Additional Information:
(i) Details of AL’s investments are as follows:
Share capital (Rs. 10 Retained earnings of
Date of Holding % Investee each) of investee investee
investment ---- Rs. in million ----
1 July 22 54% HL 2,500 2,700
1 March 21 32% FL 1,000 1,550
(ii) Following was the consideration for acquisition of HL’s shares
 Immediate payment of Rs. 300 million and another payment of Rs. 400 million after 2 years.
 Immediate issuance of two shares in AL for every five shares in HL. At the acquisition date, the
fair values of each share of AL and HL were Rs. 50 and Rs. 18 respectively. The fair value of
HL’s share is more reliably measurable than the fair value of AL’s share
(iii) At the date of acquisition of HL, carrying values of its net assets were equal to fair values except the
following:
 Contingent liability of Rs.4 million disclosed by HL at acquisition date related to a legal case
and its fair value is estimated at Rs.3 million at acquisition date. Such case was settled on 17 th
March 2023 at Rs. 5 million and recorded by HL
 equipment whose fair value exceed carrying value by Rs.60 million and remaining life at the
acquisition date was four years. Carrying value of such equipment at acquisition date was Rs.
340 million and recoverable amount of such equipment was Rs.260 million on June 30th, 2023
 Fair value of land exceeded Carrying value by 10 million and cost of land was Rs. 70 million.
Such land was sold by HL on 31st May 2023 for Rs. 83 million
(iv) On 1 January 2023, AL purchased an investment property with useful life of twenty years for Rs. 500
million and rented out to HL on same date for Rs. 1 million per month till 31 December 2023. The
property was carried in AL’s books at fair value of Rs. 520 million on 30 June 2023.
(v) It is group's policy to value the non-controlling interest at proportionate shares of the subsidiary's net
assets. Discount rate of 20% is applicable for AL
(vi) Goodwill related to acquisition of HL was impaired by 15% and investment in FL was impaired by
Rs. 4 million during the year ended June 30th 2023
(vii) During the year ended 30th June 2023, HL and FL declared and paid interim dividend of 2% and 5%
respectively.AL recorded its share as other income
(viii) AL acquired shares in FL by paying cash and measures investment at cost
(ix) On 1st January2023, FL sold a plant having carrying value of Rs. 30 million to AL for Rs. 36 million.
The remaining useful life of the plant at the time of disposal was 3 years.
Required:
Prepare consolidated statement of comprehensive income for AL Group for the year ended June 30th, 2023 as
per relevant International Financial Reporting standards (IFRS). (18)
Q.9
(a) Envy Limited (EL) has prepared draft financial statements for the year ended 30th June 2023 and profit
before tax of Rs. 593 million was determined after making adjustments.
(i) Accounting depreciation on Property, plant & equipment(PPE) for the year exceeds tax depreciation by
Rs. 30 million and carrying value of PPE exceeded tax base by 150 million as on 30th June 2022. On
30th June 2023, Plants were revalued for the first time resulting in a surplus of Rs. 110 million.
Revaluation does not affect taxable profits.
(ii) As on 30th June 2022 total taxable losses were Rs.40 million and deferred tax asset was recorded on
taxable losses of Rs. 24 million only.
(iii) During the year ended 30th June 2023, Fair value gain of Rs. 6 million was recorded on investment in
shares measured at fair value through other comprehensive income. Under tax laws, capital gain is
taxable at the time of sale and on 30th June 2022 there was taxable difference on these investment of
Rs. 20 million. During the year dividend income of Rs. 3 million was received and as per tax it is
exempt from tax.
(iv) Interest receivable as at 30th June 2023 is Rs. 9 million and interest received during the year was Rs.
8.6 million. As per tax Interest is taxed on receipt basis at 17%. As at 30 th June 2022, Deferred tax
liability on interest receivables was recorded at 0.68 million.
(v) The tax rate for 2023 & onward year is 25% while it was 28% in 2022 and prior periods except stated
otherwise.
Required:
Prepare a note on taxation for inclusion in EL’s financial statements for the year ended 30 th June 2023 and
reconciliation to explain the relationship between the tax expense and accounting profit. (11)
(b) Moeed Manufacturer Limited (MML) is a dealer of specialized machines. MML acquires each unit of
machine ‘A1’ from manufacturer at a cost of Rs. 12 million and sells it for Rs. 15 million. The estimated
economic life of A1 is four years. Market rate of interest is 18% per annum. MML entered into the following
arrangements during the year ended 30th June 2023:
(i) On 1st February 2023, MML leased A1 to Zahran for a non-cancellable period of one and a half years.
Half yearly installment of Rs. 2.6 million is to be paid in arrears. MML will dispose this unit of A1 at the
end of three years at an estimated residual value of Rs. 4 million.
(ii) On 1st October 2022, MML leased A1 to Shayan for a non-cancellable period of three years. The rate of
interest implicit in the lease is 20% per annum. Annual instalment of Rs. 5.25 million is to be paid in
advance. At the end of the lease term, Shayan has an option to purchase A1 at Rs. 2.988 million. It is
reasonably certain that Shayan will exercise this option
Required:
Prepare journal entries for each of above lease transactions in the books of MML for the year ended 30 th June
2023. (07)
(THE END)

Financial Accounting and Reporting-II
Mock Suggested Answers
Autumn-23
Answer 1.
Rs in million
Date Accounting Head Debit Credit
01-01-2022 Investment 215.00

Bank 215.00 (Marks-2)
(Purchase of debt instrument )
30-06-2019 Bank 36.00 (Mark-2)
Interest income 33.22
Investment(bal.) 2.78
( Interest income for the year 2022 and receipt of interest )
GL
Extracts of Statement of Financial Position
As at December 31st 2022
2022
Non Current Assets
Investment 307.15 (Marks-1)
Current Assets
Investment 3.07 (Marks-1)
310.22
Amortisation Schedule
Year Opening Interest income receipts Closing
2022 313.00 33.22 (36.00) 310.22 (Marks-2)
2023 310.22 32.93 (36.00) 307.15
2024 307.15 32.60 (36.00) 303.76
2025 303.76 32.24 (336.00) (0.00)

Autumn-23
Answer 2. Rs in million
01-03-2022 Advance for PPE 71.40
(advance payment for purchase of machine)
01-04-2022 Advance for PPE 35.32
(advance payment for purchase of machine)
01-05-2022 PPE (bal.) 120.27 (Marks-1)
Advance for PPE 106.72
Payable for PPE 13.55
(receipt of machine)
01-06-2022 PPE 3.00 (Marks-1)
Bank 3.00
(Installation cost incurred)
01-09-2022 Payable for PPE 13.55 (Marks-1)
P&L(loss)(bal.) 0.08
Bank 13.63
(Remaining payment made)
31-12-2022 Depreciation 7.19 (Marks-1)
Accumulated Depreciation 7.19
(Depreciation for the year 2022)
31-12-2022 Accumulated Depreciation 7.19 (Marks-1)
PPE 7.19
(Elimination of accumulated depreciation against cost )
31-12-2022 PPE 11.92 (Marks-1)
Revaluation Surplus(OCI) 11.92
(125- (120.27-7.19))

Autumn-23
Answer 3.
Winter Limited
Notes to financial statements
for the year ended June 30th , 2023
1 - Company and its operations

Winter Limited (WL) is listed on Pakistan Stock Exchange and has registered office in Peshawar.WL engages in manufacturing
of cooking oil. It operates a manufacturing plant at Sahiwal. (Marks-1)
2 - Share capital
Shares (million) Rs. million
Authorized capital 1,000 10,000 (Marks-0.5)

Issued capital:
- allotted against cash 646 6460 (Marks-0.5)
- allotted against purchase of building 44 440 (Marks-0.5)
- allotted as bonus shares 90 900 (Marks-0.5)
780 7,800
2.1 All shareholders of WL carry equal voting rights. (Marks-0.5)
3 - Plant capacity and utilization

During the year, WL produced 0.1 million tonnes of cooking oil operating at 75% production capacity. The shortfall was
due to overall economic and energy crisis prevailing in the country. (Marks-1)
4 -Events after reporting date

Cash dividend of 20% for the year ended 30th June 2023 was proposed in meeting held on August 13, 2023.
(Marks-1)
5 - Date of authorization for issue
The financial statements were authorized for issue by board of directors on August 13th, 2023.
(Marks-0.5)
6 - Fixed Assets disposal
Particulars of assets Sold to Cost Book value Sale Proceed Gain/(loss) Mode of sale
Rupees in '000'
Book value greater than 500,000
Vehicle Employee Ali Ahmed 1,000,000 700,000 450,000 (250,000) Company car Policy
Vehicle Employee Ahmed Saleem 2,000,000 1,300,000 720,000 (580,000) Company car Policy
(Marks-1 each )
Book value less than 500,000
Others Multiple transactions 15,000,000 10,000,000 10,500,000 500,000
18,000,000 12,000,000 11,670,000 (330,000) - -

Autumn-23
Answer 4.
Extreme Limited
Notes to Financial Statements
For the year ended 3oth June 2023
Intangible Assets
Software License Development
Cost cost
Balance at start of year 1,000.00 600.00 20.00 Marks-0.5 each
Additions 1,300.00 - 60.00 Marks-1 each
Disposals (1,000.00) - - Marks-1 each
Balance at end of year 1,300.00 600.00 80.00
Accumulated Amortization
Balance at start of year 500.00 225.00 - Marks-0.25 each
Amortization For the year 143.75 75.00 2.00 Marks-0.5 each
Disposals (562.50) - - Marks-0.5 each
Balance at start of year 81.25 300.00 2.00
Net book value 1,218.75 300.0 78.0 Marks-0.5

Useful life(in years) 8 8 10 Marks-0.5
Method of amortization SLM SLM SLM
Subsequent Measurement Model Cost Cost Cost
Workings
Software
Old
1000/8x6/12 62.5
New
1300/8x6/12 81.25
143.75

Autumn-23
Answer 5.
(i)
A provision for restructuring cost is to be recognised, as a formal restructuring plan has been
finalised and approved by the management and a formal public announcement was made prior
to 30 June 2023
However, a provision should only be made for redundancy cost of Rs. 10 million as it pertains to
the closing of sialkot unit.Costs of moving machinery to the Faislabad and compensation to
employees agreeing to transfer Faislabad relate to future conduct of the business / ongoing
business of ML should not be recorded in the year ended 30 June 2023.
Salary of the existing operation manager should not be recorded as it is not incremental cost, and
would be incurred whether relocation takes place or not Marks-3
(ii) ML should recognise the provision of Rs. 13.5 million(30×45%) due to the following:
Filing of case by workers is considered as an adjusting event because the fire incident was
occurred in June consequently evidence of conditions i.e. injuries & stress to such workers exist
at reporting date.
The payment is probable as according to ML’s lawyers, there is 80% probability that ML would be
determined to be negligent.Amount can also be estimated reliably as ML’s lawyers
is of view that ML will have to pay 45% of the amount claimed.
Marks-3

Autumn-23
Answer 6.
(i) (b)(c)
(ii) (c )
(iii) (c )
(iv) (a)
(v) (a)
(vi) (b)
(vii) (a)

Autumn-23
Answer 7(a).
Rs in million
30-06-2023 Expense(P&L) 12.00

Conract cost 12.00 (Marks-2)
(recording of contract cost as expese)
30-06-2023 Revenue 144.00 (Marks-2)
Receivables 144.00
(reversal of recorded revenue)(480/40x12)

30-06-2023 Inventory 96.00 (Marks-2)
Cost of sales 96.00
(reversal of recorded cost of sales)
Answer 7(b).
Arrangement 1
Revenue would be recognized in the existing manner. The total transaction price of Rs. 5.1 million would be
allocated proportionately to two performance obligations using the stand-alone selling prices as follows
Marks1
Standalone Price Allocated Price

Sale of R77 Plus 5 4.64 (5.1x5/5.5) Marks-1.5
Support service 0.5 0.46 (5.1x0.5/5.5) Marks-1.5
(0.05x10)
5.5 5.1
Arrangement 2
PL should account for the promise to provide the discount as a performance obligation in the contract for the
sale of R77 Plus. The stand-alone selling price of the discount voucher can be estimated as Rs. 0.55 million (5×20%×55%).
Total transaction price of Rs. 5 million will be allocated proportionately to the 2 performance obligations using
stand-alone selling prices as under:
Marks-1
Standalone Price Allocated Price

Sale of R77 Plus 5 4.50 (5x5/5.55) Marks-1
Discount Voucher 0.55 0.50 (5x0.55/5.55) Marks-1
5.55 5
Revenue from sale of R77 plus would be recognized at Rs. 4.50 million upon sale of 1st unit of R77 plus. The remaining
receipt of Rs. 0.50 million would be transferred to revenue upon exercising the discount option /purchase of
another unit of R77 Plus or expiry of 6 months, whichever is earlier.
Marks-1

Autumn-23
Answer 8.
AL Group
Consolidated Statement of comprehensive income
for the year ended June 30th , 2023
Profit & Loss Rs.(in million)
Sales (9450+5150) 14,600.00 (Marks-1)

Cost of Sales (3910+2630) (6,540.00) (Marks-1)
Gross Profit 8,060.00
Operating expenses (1210+920-3+15+40+24.54-6+12.5) (2,213.04) (Marks-4)
Other income (1750+640-10-27-16-20-6) 2,311.00 (Marks-4)
Finance cost (275+260)+(277.78x20%)) (590.56) (Marks-1)
Share of profit from Associate 279.20 (Marks-3)
Profit for the year 7,846.60
Other comprehensive income
Fair value gain (110+190) 300.00 (Marks-0.5)
Share in other comprehensive income of associate (50x0.32) 16.00 (Marks-0.5)
Total comprehensive income 8,162.60
Profit Attribtable to :
Group (Bal.) 6,964.32
NCI 882.28 (Marks-2.5)
7,846.60
TCI Attribtable to :
Group (Bal.) 7,229.72
NCI ( 882.28 +(110x46%) 932.88 (Marks-0.5)
8,162.60
All workings Rs. In (million)
(N-1) NCI Share
HL PAT 1,980.00
Liability reversal 3.00
Extra Depreciation (60/4) (15.00)
Impairment loss equipment(300-260) (40.00)
Land gain (10.00)
1,918.00
x46%
882.28
(N-2) Goodwill Calculation HL
Investment -cash 300.00
Deferred -cash (400x1.2^-2) 277.78
Investment-Shares(2500/10x0.54x18) 2,430.00
{A} 3,007.78
SC 2,500.00
Pre - Reserves 2,700.00
Liability recorded (3.00)
Equipment 60.00
Land 10.00
5,267.00
x 54%
{B} 2,844.18
Goodwill/(bargain purchase gain) {A-B} 163.60
Impairment loss 24.54
(N-3) Share of Profit /(Loss) from Associate (FL)

Profit for the year of FL 890.00
Gain on sale (36-30) (6.00)
Depreciation on gain(6/3*6/12) 1.00
885.00
Share in Associate FL 32% x 32%
Share of Profit from Associate 283.20
Bargain Purchase gain
Impairment loss (4.00)
Share of Profit from Associate 279.20
(N-4) Depreciation on property
500/20x6/12 12.5
(N-5)
Dividend from HL & FL by AL
From HL 2500x2%x54% 27.00
From FL 1000x5%x32% 16.00

Autumn-23
Answer 9 (a).
Envy Limited
Notes to Financial Statement
For the year ended June 30,2023
XX - Taxation Rs. million
Income Tax
Current Year 143.06 (Marks-3)
Deferred tax (W-2)
-Relating to temporary difference (0.65) (Marks-4.5)
-Relating to Rate Change (3.78) (Marks-1)
138.63 - -
XX.1 - Relationship between tax expense and accounting profit - -
Accounting profit 593.00
Tax [593 x 25%] 148.25 (Marks-0.5)

Tax effect on income at different rate (1.09) (Marks-0.5)
Tax effect due to rate change (3.78) (Marks-0.5)
Urecognized Tax Losses claimed (4.00) (Marks-0.5)
Tax on exempt income (0.75) (Marks-0.5)
138.63
Rs. Million
W-1 Current tax
PBT 593.00
Excess accounting depreciation 30.00
Interest income-accounting(9+8.6-4) (13.60)
Dividend income (3.00)
Taxable profit 606.40
Unused Tax Losses (40.00)
Taxable profit-adjusted 566.40
Current tax-Normal 25% 141.60

Current tax on interest income (8.6*17%) 1.46
143.06
(W-2) Deferred Tax
B/f 41.56
Rate Change (P&L) 3.78 OCI (rev gain)(110x25%) 27.50

Rate Change (OCI) 0.60 OCI (FV gain)(6x25%) 1.50
P&L(bal.) 0.65
C/F 65.53
70.56 70.56
(W 2.1) Closing Deferred tax
CA TB Diff Rate DTL / (DTA)
---------------- Rs. million ----------------
PPE (W-2.3) 230.00 25% 57.50
Interest receivables 9.00 - 9.00 17% 1.53
Investment in shares - - 26.00 25% 6.50
65.53
CA TB Diff Rate DTL / (DTA)
(W 2.2) Opening Deferred tax ---------------- Rs. million ----------------
PPE (W-2.3) 150.00 28% 42.00
Tax losses (24.00) 28% (6.72)
Investment in shares 20.00 28% 5.60
Interest receivables 4.00 - 4.00 17% 0.68
41.56
W-2.3 PPE difference Rs. million

Opening balance 150.00
Depreciation (30.00)
Disposal
Revaluation 110.00
Closing balance 230.00

Autumn-23
Answer 9(b).
(i) Rs in million
01-02-2023 Property,plant & equipment 12.00
Bank 12.00
(Purchase of machine)
(Marks-01)
30-06-2023 Receivable - Rent 2.17
Rent income 2.17
(Rent income is accrued) (2.6/6*5) (Marks-01)

30-06-2023 Depreciation 1.11
Accumulated Depreciation 1.11
(12-4)/36*5
(Depreciation expense for the year) (Marks-01)
(ii)
Rs in million
01-10-2022 Lease receivables (w-1) 15.00
Cost of sales 12.00
Sales 15.00
Inventory 12.00
( recording Sales and lease receiable) (Marks-02)
01-10-2022 Bank 5.25
Lease receivables 5.25
(Receipt of installment) (Marks-1.5)
30-06-2023 Lease receivables 1.46
Interest income 1.46
(15-5.25)x20%x9/12
(Interest income for the year) (Marks-1.5)
(w-1)
5.25+5.25x(1-1.2^-2)/.2)+2.988x1.20^-3
15

August 20, 2023
Managerial & Financial Analysis

Section A
Q.1 Select the most appropriate answer from the options available for each of the following Multiple Choice
Questions.
1. The rise in price of goods over time is called: (01)
a. Interest rate c. GDP
b. Inflation d. Balance of payments
2. …………………… is a process of adding a public and private key with the data being shared on a
network. (01)
a. Firewall c. Passwords
b. Encryption d. Anti-virus
3. Information technology deals with ……………….. whereas information system deal with
……………….. (01)
a. Innovation; production c. Innovation; decision making
b. Production; decision making d. Decision making; innovation
4. For a business to be successful, it is important to focus on external environment to determine any
opportunity or threats that might be prevalent in the environment. The framework(s) that help analyzing
is the environment is(are): (01)
a. PESTEL c. Five forces
b. Diamond d. All of the above
5. In ……………… activity of primary value chain, materials are converted into final products. (01)
a. Operations c. Sales and marketing
b. Inbound logistics d. Services
6. Home delivery of products relates to …………………… activity of primary value chain. (01)
a. Operations c. Sales and marketing
b. Inbound logistics d. Outbound logistics
7. P Company issued 7% irredeemable preference shares three years ago. The cost of preference share is
12%. What is the market value per share? P Company pays 28% corporate tax? (02)
a. Rs. 0.42 c. Rs. 0.58
b. Rs. 1.71 d. Rs. 1.23
8. A company has a liquidity ratio equal to 0.4. Company wants to increase its overdraft level and agreed
to alter company credit terms to customers from one month to two months.
What would be the effects on the company's cash operating cycle and liquidity ratio if this change were
to be achieved? (01)
Management and Financial Analysis | Page 2 of 5
Cash operating cycle Liquidity ratio
a) Decreases Decreases
b) Decreases No change
c) Increases No change
d) Increases Increased
9. Identify the name of bond that is denominated in a currency which differs from the country of issue."
(01)
a. Foreign currency bond c. Long term bond
b. Euro Bond d. International Bond
10. Which of the following is NOT a source of new equity finance? (01)
a. a rights issue of shares c. a public issue of shares
b. a bonus issue of shares d. a placing of shares
Q.2 A sound system of Environment Scanning is of critical importance in the formulation of Strategic Plans of
any progressive company operating in a fast-changing and competitive business environment.
Hawk Engineering Limited (HEL) is engaged in the business of manufacturing of small motors
which are installed in printers. HEL has made substantial investments in manufacturing facilities and R&D
and has developed its own in-house technology and manufacturing processes. This gives HEL competitive
advantage over its rivals in terms of meeting the stringent requirements of its quality conscious customers.
Important customers of HEL are the original equipment manufacturers of precision laser printers. Although
motors account for a nominal proportion of the cost of the laser printers, their efficient and reliable
performance are of crucial importance for HEL’s customers who provide performance guarantees for their
products. HEL is one of the few firms who manufacture these types of small motors. It is able to achieve high
profit margins and returns on its investments because of the superior quality of its products for which its
customers are willing to pay premium prices.
Required:
Identify and explain briefly four factors which HEL should monitor closely to anticipate the emerging
business environment in which it operates and its impact in the formulation of its Strategic Plans. (08)
Q.3
(i) Smart Electronics (SE), a company specialized in the manufacturing and selling of smartphones, experienced
remarkable success when it launched its latest smartphone, the ‘Horizon-S’. Despite its high price, Horizon-
S quickly gained popularity among consumers due to its unique features and design. Following its established
practices, SE adopted lifecycle costing for Horizon-S, paving the way for strategic decision-making
throughout the product lifecycle. Through intensive marketing efforts, SE successfully created awareness
and excitement among potential buyers, resulting in significant sales growth that endured for well over a
year. This outstanding performance enabled SE to establish a strong market presence and gain a considerable
market share.
Observing the tremendous success of Horizon-S, SE’s direct competitor, Ztronics (ZT), sought to replicate
SE’s achievement by developing its own smartphone called the ‘Z-factor’ that boasted all the features of the
Horizon-S, and the added innovative feature of 360-degree rotating phone camera. ZT also employed
lifecycle costing for the development and production of the Z-factor. The market reception for the Z-factor
was positive, and upon its launch, the market share of Horizon-S started to reduce. However, to ZT’s dismay,
just after a few months of Z-factor’s launch, three other reputable competitors also launched their
smartphones, which closely replicated the configurations and features of the Z-factor but at significantly
lower prices.
Required:
(a) Identify the costs that SE may have incurred on Horizon-S at each phase of the lifecycle to date. (04)
(b) Suggest strategies, other than pricing, that SE and ZT may adopt for their product to extend the existing
product lifecycle. (06)
(ii) City Express (CE) operates inter-city passenger bus service over 20 districts of Sindh. It was incorporated in
2015 when Government of Sindh (GoS) awarded the company exclusive road permits to operate in distant
areas of Sindh. CE was an instant success because of wide area coverage, low ticket pricing and large fleet
of state-of-the-art buses. In view of the encouraging response from general public, GoS is also considering
to introduce a new inter-city train service. GoS has been providing subsidies, granting various tax exemptions
and promoting services of CE by extensive coverage in the electronic and social media to encourage CE to
operate in areas with low profit margins. Still, certain routes are not profitable. In these routes, buses often
depart late and schedules are cancelled frequently. The management of CE is considering to negotiate with
GoS to relax restrictions on fixation of fare rates to counter increasing the rate of inflation.
Required:
Conduct a swot analysis for city express. (08)
Q.4 East West Technologies Ltd (EWTL) has been providing software solutions to a wide range of clients since
2001. So far, EWTL has been dealing with the clients that operate small-scale businesses and have a business
turnover of less than one million PKR a year. Recently, some issues have been reported regarding password
breach of many employees in the organization that has resulted in significant data loss and security issues.
Required:
Suggest any four measures that can be taken to ensure effectiveness of passwords for enhanced information
security at EWTL. (06)
Q.5 You work as a senior accountant at a mid-sized manufacturing company. One day, you discover that your
company has been inaccurately recording certain expenses in their financial statements. The CFO, who is
also your immediate supervisor, instructs you to make these changes without informing the external auditors.
You are aware that this directive could potentially violate ethical standards and result in misleading financial
information being presented to stakeholders.
Required:
Using the American Accounting Association (AAA) model for ethical decision-making, outline the step-by-
step solution for addressing this scenario. (07)
Section B
Q.6 Mehanti Limited (ML) is in the process of preparing budget for the year ending 31 December 2023.The
following data has been extracted from the projected profit and loss account for the year ending 31 December
2022.
Summarised Profit and Loss Account

Rs. in million
Sales 1,000
Cost of sales
Manufacturing cost 722
Opening finished goods 81
Closing finished goods (89)
(714)
Operating expense (100)
Profit before tax 186
Other relevant information is as under:
(i) ML uses absorption costing. FIFO method is used for valuation of inventories. There is no balance
of work in process.
(ii) Depreciation for 2023 would be the same as in 2022.
(iii) Closing inventory of finished goods is estimated at Rs.97 million on 31 December 2023.Raw
material inventory would be maintained at 30 days consumption.
(iv) Operating costs for 2022 include depreciation amounting to Rs.9 million and advertisement cost of
Rs.16 million. All other costs vary in line with the variation in sales. Price effect on advertisement
costs and other variable costs for 2023 is estimated at 6% and 10% respectively.
(v) For the year 2023 ML plans to earn a markup of 50% on cost of sales. The sales volume is expected
to increase by 20%. Cash sales would be made at a discount of 2% and it is estimated that net cash
sales after discount would constitute 20% of total sales.
(vi) Manufacturing costs comprises raw materials consumed and variable and fixed conversion costs in
the ratio of 35:45:20. Fixed costs include depreciation of Rs.3 million. Effect of price increase in
2023 on raw materials and variable and fixed costs (excluding depreciation is estimated at 8%,10%
and 6% respectively.
(vii) Opening balances of trade debtors and trade creditors are Rs.90 million and Rs.40 million
respectively. Trade debtors are expected to increase by 20%.
(viii) Purchases and other expenses are paid in 60 days and 35 days respectively.
Required:
Prepare a cash budget for ML for the year ending December 31,2023.
[(Assume that except stated otherwise,all transactions are evenly distributed over the year (360 days)]
(14)
Q.7 Play Co manufactures safety surfacing for children’s playgrounds. The main raw material required is rubber
particles and these are currently purchased from an outside supplier for Rs 3.50 per tonne. This price is
contractually guaranteed for the next four years. If the contract is terminated within the next two years, Play
Co will be charged an immediate termination penalty of Rs 150,000 which will not be allowed as a tax
deductible expense.
The directors are considering investing in equipment that would allow Play Co to manufacture these particles
in house by using recycled tyres.
The machine required to process the tyres will cost Rs 400,000, and it is estimated that at the end of year four
the machine will have a second-hand value of Rs 50,000.
The costs associated with the new venture are as follows:
Variable costs (per tonne produced) Rs 0.80
Fixed costs (per annum) Rs 2,50,000
The additional fixed costs include maintenance costs of Rs 40,000 and the additional depreciation charge
(calculated on a straight-line basis over the life of the asset) relating to the machine.
All of the above are quoted in current price terms. Inflationary increases are expected as follows:
Variable costs: 3% per annum
Maintenance costs: 5% per annum
Other fixed costs: 2% per annum
The annual demand for the particles (based on the sales forecasts of the company) is:
Year 1 Year 2 Year 3 Year 4

Demand (in tonnes) 100,000 110,000 130,000 160,000
Profit tax of 30% per year will be payable one year in arrears. Tax allowable depreciation on a 25% reducing
balance basis could be claimed on the cost of the equipment, with a balancing allowance being claimed in the
fourth year of operation when the machine is disposed of.
Required:
Using 15% discount rate, advise Play Co on the desirability of purchasing the equipment. (10)
Q.8
(a) The finance director of Zaheen Limited (ZL) has heard that the market value of the company will increase if
the weighted average cost of capital of the company is decreased. The company, which is listed on a stock
exchange, has 100 million shares in issue and the current ex dividend-ordinary share price is Rs 2.50 per
share. ZL also has in issue bonds with a book value of Rs 60 million and their current ex-interest market price
is Rs 104 per Rs 100 bond. The current after-tax cost of debt of ZL is 7% and the tax rate is 30%.
The recent dividends per share of the company are as follows.
Year 2016 2017 2018 2019 2020
Dividend per share (Rs.) 19.38 20.20 20.41 21.02 21.80

The finance director proposes to decrease the weighted average cost of capital of ZL and hence increase its
market value, by issuing Rs 40 million of bonds at their par value of Rs 100 per bond. These bonds would
pay annual interest of 8% before tax and would be redeemed at a 5% premium to par after 10 years.
Required:
Calculate weighted average cost of capital of ZL in the following circumstances:
(i) before the new issue of bonds takes place.
(ii) after the new issue of bonds takes place.
(12)
(b) Fast Limited (FL) has in issue 9% bonds which are redeemable at their par value of Rs 100 in five years’
time. Alternatively, each bond may be converted on that date into 20 ordinary shares of the company.
The current ordinary share price of FL is Rs 4.45 and this is expected to grow at a rate of 6.5% per year for
the foreseeable future. FL has a cost of debt of 7% per year.
Required:
Calculate market value of convertible bond (04)
Q.9 Assume that the date today is August 1, 2023. Zafar Auto Limited (ZAL) has imported CNG kits from Japan
and has to pay an amount of JPY 175 million in three months’ time.
ZAL intends to hedge the contract against adverse movements in foreign exchange rates and its foreign
exchange exposures. The following data are available:
Exchange rates quoted on August 1, 2023
JPY 1
Buy Sell
Spot Rs. 1.9223 Rs. 1.9339
one month forward Rs. 1.9335 Rs. 1.9451
Three months forward Rs. 1.9410 Rs. 1.9493
Interest rates available to ZAL
Japan Pakistan
Borrowing 5% 8%
Lending 3% 5%
JPY currency futures
Futures have a contract size of JPY 100,000.
Contract prices (Rupee per JPY) are as follows:
Rs. / JPY
September 2023 1.9421
October 2023 1.9490
The contracts can mature at the end of the above months only. Closing spot is 1.9500 Rs/JPY.
Required:
Recommend which method should ZAL select to hedge its currency exposure. (10)
(THE END)
Answer: 01
Mock Questions.
MCQs
1. B
2. B
3. D
4. A
5. A
6. D
7. C
8. D
9. B
10. B

Question no. 2
A sound system of Environment Scanning is of critical importance in the formulation of Strategic

Plans of any progressive company operating in a fast-changing and competitive business
environment.
Hawk Engineering Limited (HEL) is engaged in the business of manufacturing of small motors
which are installed in printers. HEL has made substantial investments in manufacturing facilities
and R&D and has developed its own in-house technology and manufacturing processes. This gives
HEL competitive advantage over its rivals in terms of meeting the stringent requirements of its
quality conscious customers. Important customers of HEL are the original equipment
manufacturers of precision laser printers. Although motors account for a nominal proportion of
the cost of the laser printers, their efficient and reliable performance are of crucial importance
for HEL’s customers who provide performance guarantees for their products. HEL is one of the
few firms who manufacture these types of small motors. It is able to achieve high profit margins
and returns on its investments because of the superior quality of its products for which its
customers are willing to pay premium prices.
Identify and explain briefly four factors which HEL should monitor closely to anticipate the
emerging business environment in which it operates and its impact in the formulation of its
Strategic Plans. (10)
Solution:
HEL should closely monitor the following factors in the emerging business environment
in which it operates and its impact in the formulation of its strategic plans:
Projection of future demand for laser printers in the international market – The
demand for motors by the original equipment manufacturers of laser printers is a
derived demand and changes in the demand for these printers can have
considerable impact on the business prospects of HEL. HEL would have to expand
its manufacturing capacity if it anticipates increase in the demand for laser printers
or alternatively explore new markets for its products if it foresees decline in demand
for these printers in its existing markets.
Technological changes – Changes in models and designs of laser printers due to

variations in customers requirements can have considerable impact on HEL’s
business prospects. HEL would have to keep abreast of these changes, continuously
enhance its R&D capabilities and introduce necessary modifications in its
manufacturing processes, designs and tooling. This would involve substantial R&D
expenditures and investments in additional equipment which would have to be
incorporated in its strategic planning process.
Threat of entry of new competitors – HEL is presently earning high profit margins
and realizing attractive returns on investments. Therefore, the threat of new
entrants who may pose competitive challenges to HEL is always present. HEL
should be prepared to meet the threat of new entrants and adopt appropriate
measures to maintain its competitive advantages and face threats posed by potential
competitors by interacting closely with its important customers and creating barriers
of high switching costs. This would involve continuous upgrading of technology
and improvement of manufacturing process to retain its competitive advantage.

Competitive rivalry and prices of Competing Products – Although HEL has
significant competitive advantages in terms of quality of its products over its
competitors, it should take cognizance of the strategies of its rivals who would want
to improve the quality of their products and may offer competitive prices to attract
HEL’s customers. HEL should adopt appropriate strategies to monitor these threats
and counter them effectively.
Diversification – HEL’s present customer base and product range is considered to

be quite narrow. It may like to explore the prospects of marketing its products to
other original equipement manufacturers such as manufacturers of photocopiers,
computers, etc. and also introduce related products (other than small motors).
Question no. 3 (i)

Smart Electronics (SE), a company specialized in the manufacturing and selling of
smartphones, experienced remarkable success when it launched its latest smartphone, the
‘Horizon-S’. Despite its high price, Horizon-S quickly gained popularity among consumers
due to its unique features and design. Following its established practices, SE adopted lifecycle
costing for Horizon-S, paving the way for strategic decision-making throughout the product
lifecycle. Through intensive marketing efforts, SE successfully created awareness and
excitement among potential buyers, resulting in significant sales growth that endured for well
over a year. This outstanding performance enabled SE to establish a strong market presence
and gain a considerable market share.
Observing the tremendous success of Horizon-S, SE’s direct competitor, Ztronics (ZT), sought
to replicate SE’s achievement by developing its own smartphone called the ‘Z-factor’ that
boasted all the features of the Horizon-S, and the added innovative feature of 360-degree
rotating phone camera. ZT also employed lifecycle costing for the development and
production of the Z-factor. The market reception for the Z-factor was positive, and upon its
launch, the market share of Horizon-S started to reduce. However, to ZT’s dismay, just after
a few months of Z-factor’s launch, three other reputable competitors also launched their
smartphones, which closely replicated the configurations and features of the Z-factor but at
significantly lower prices.
Required:
a. Identify the costs that SE may have incurred on Horizon-S at each phase of the lifecycle
to date. (04)
b. Suggest strategies, other than pricing, that SE and ZT may adopt for their product to
extend the existing product lifecycle. (06)
Solution
a. Introduction phase:
 Manufacturing costs (costs of operations)
 Marketing and advertising costs to raise product awareness
 Costs of setting up and expansion of distribution channels
Growth phase:
 Increased costs of working capital
 Costs of increasing capacity
 Marketing and advertising costs to raise the customer base
Maturity phase
 Costs to maintain manufacturing capacity
 Marketing and product enhancement costs to extend the maturity
Decline phase
The decline phase has just started, or may not yet have started, and therefore no
major cost is likely incurred in this phase as yet.
b. Given that both SE and ZT are implementing lifecycle costing strategies, the
following strategies, other than pricing, are suggested:

Strategies applicable for both companies:
 Differentiation through design, feature enhancements, packaging
improvements, etc. to extend the product’s lifecycle.
 Expansion into untapped markets in terms of geographical area, gender, type of
customer, lifestyle, etc.
 Focus on effective marketing and branding strategies to maintain customer

interest and loyalty. This can involve targeted advertising campaigns, leveraging
social media platforms, and highlighting unique selling points to differentiate
their products from competitors.
 Exploration of partnerships and collaborations with other companies to create

a seamless and integrated experience for customers. This can involve integrating
their products with complementary services, applications, platforms, etc.
 Implementing excellent customer support and engagement initiatives which can

help prolong the product lifecycle.
Company-specific strategies:
For SE: Leveraging existing customer base by implementing strategies such as

offering loyalty programs, exclusive discounts, or upgrades for existing customers.
This can help in extending the product lifecycle by fostering customer retention and
generating repeat purchases.
Question no. 3 (ii)

City Express (CE) operates inter-city passenger bus service over 20 districts of Sindh. It was
incorporated in 2015 when Government of Sindh (GoS) awarded the company exclusive
road permits to operate in distant areas of Sindh. CE was an instant success because of wide
area coverage, low ticket pricing and large fleet of state-of-the-art buses. In view of the
encouraging response from general public, GoS is also considering to introduce a new
inter-city train service. GoS has been providing subsidies, granting various tax exemptions and
promoting services of CE by extensive coverage in the electronic and social media to encourage
CE to operate in areas with low profit margins. Still, certain routes are not profitable. In these
routes, buses often depart late and schedules are cancelled frequently. The management of CE is
considering to negotiate with GoS to relax restrictions on fixation of fare rates to counter
increasing
Conduct a SWOT analysis for city. (08)

Solution
SWOT analysis for CE is as follows:
Strengths:
 Exclusive road permits.

 Large fleet of state-of-the-art buses.
 Wide area coverage.
Weaknesses
 Restriction on fixation of fare rates.

 Reliance on GoS for subsidies, tax exemptions and promotion of business.
 Buses often depart late and schedules are cancelled frequently.
 Unprofitable routes.
Opportunities
 Operate in unexplored markets of other provinces / Start operating intra city bus services.
 Abandon non-profitable routes.
 Negotiate with GoS to revise the fares / subsidies.
Threats
 Introduction of new inter-city train services by GoS.
 Non-preferential treatment from GoS in future.
Question no. 4

East West Technologies Ltd (EWTL) has been providing software solutions to a wide range of
clients since 2001. So far, EWTL has been dealing with the clients that operate small-scale
businesses and have a business turnover of less than one million PKR a year. Recently, some
issues have been reported regarding password breach of many employees in the organization
that has resulted in significant data loss and security issues.
Required
Suggest any four measures that can be taken to ensure effectiveness of passwords for enhanced
information security at EWTL. (06)
Solution
A system of password controls should operate more successfully if certain control measures are taken.
 Passwords should be changed regularly frequently, and employees should be continually reminded
to change passwords.
 Users should be required to use passwords that are not easy to guess: for example, an organisation
might require its employees to use passwords that are at least 8 digits and include a mixture of letters
and numbers.
 A security culture should be developed within the organisation, so that the user’s staff are aware of
the security risks and take suitable precautions.
 Passwords must not be shared with anyone within the organisation.
Question no. 5

You work as a senior accountant at a mid-sized manufacturing company. One day, you discover
that your company has been inaccurately recording certain expenses in their financial
statements. The CFO, who is also your immediate supervisor, instructs you to make these
changes without informing the external auditors. You are aware that this directive could
potentially violate ethical standards and result in misleading financial information being
presented to stakeholders.
Required:
Using the American Accounting Association (AAA) model for ethical decision-making,
outline the step-by-step solution for addressing this scenario. (08)
Solution
Step 1: Identify the Problem and Gather Information
Begin by clearly identifying the ethical dilemma. In this case, the issue revolves around
inaccurate recording of expenses and potential non-disclosure to external auditors. Gather all
relevant information, including company policies, accounting principles, legal regulations, and
potential consequences.
Step 2: Identify Alternative Courses of Action

Consider various options for addressing the situation:
a) Follow the CFO's instructions and make the inaccurate changes.
b) Refuse to comply with the CFO's directive and report the issue to a higher authority.
c) Seek guidance from a professional organization or an ethics committee.
d) Consult colleagues or mentors for advice.
Step 3: Evaluate the Consequences

Analyze the potential outcomes of each alternative, considering the short-term and long-term
consequences for the company, stakeholders, your professional reputation, and ethical
principles such as integrity and transparency.
Step 4: Make a Decision

Based on your evaluation, make an informed decision that aligns with ethical principles and
your professional responsibilities. Choose the option that upholds integrity, transparency, and
the best interests of stakeholders.
Step 5: Implement the Decision

If you decide not to comply with the CFO's directive, take appropriate actions. This may
involve discussing your concerns with the CFO, escalating the matter to a higher authority, or
following established whistleblower procedures within the company.
Step 6: Reflect on the Decision

After taking action, reflect on the outcome and the process you followed. Consider whether
your decision aligns with your ethical values and whether you could have approached the
situation differently. This step helps you learn and grow from the experience.
Step 7: Seek Feedback

Discuss your decision and actions with mentors, colleagues, or ethical advisors. Gain insights
into how others perceive your actions and receive feedback on your approach to ethical
decision-making.
Step 8: Continuous Monitoring and Adjustment

Stay vigilant about the situation and its outcomes. If necessary, be prepared to adjust your
actions based on new information or changing circumstances.
Remember, the AAA model provides a framework for ethical decision-making, but each
situation is unique. Always prioritize honesty, integrity, and the best interests of stakeholders
when making ethical choices in the field of accounting.

Question No.6 ML)
Cash Budget for the year ending 31 December 2023 (2 marks)
Cash Receipts Rs. in million
Cash from customers (W-1) 1,328.36
Cash payments:
Payments for purchase (W-3) (318.11)
Payments for expenses (W-4) (681.35)
Net Cashflows 328.90
Workings:
W-1: Cash from customers Rs. in million (3 marks)

Gross sale for 2023 [(W-2) 901.25 x 1.5] 1351.88
Cash Sales net of 2% discount (1351.88 x 20%) 270.38
Collection from trade debtors
Trade debtors (opening balance) 90.00
Credit sales for 2023 [1351.88 – (270.38/0.98)] 1075.98
Trade debtors (closing balance) (90 x 1.2) (108.00)
1057.98
1328.36
W-2: Cost of sales for 2023 Rs. in million (3 marks)

Raw material consumption (722 x35% x1.2 x1.08) 327.50
Variable conversion cost (722 x 45% x 1.2 x1.1) 428.87
Fixed conversion cost [(722 x20% -3) x1.06 +3] 152.88
Cost of goods manufactured 909.25
Opening finished goods inventory 89.00
Closing finished goods inventory (97.00)
901.25
W-3: Payments for Purchases Rs. in million (3 marks)

Raw material consumption (W-2) 327.50
Opening stock of raw material [(722 x35%) x30/360] (21.06)
Closing stock of raw material (327.50 x30/360) 27.29
Total purchases for 2023 333.73
Trade creditors (opening balance) 40.00
Trade creditors (closing balance) (333.73 x 60/360) (55.62)
318.11
W-4: Payments for Expenses ( 4 marks ) Rs. in million

Variable & fixed conversion costs (428.87 + 152.88 – 3) 578.75
Variable operating cost [(100-9-16) x 1.2 x 1.1] 99.00 (4 marks)
Fixed operating cost (advertisement) (16 x 1.06) 16.96
Total costs for 2023 (excluding dep) 694.71
Payables for expenses (opening balance) [(722x65%-3+100-9)x35/360] 54.18
Payables for expenses (closing balance) (694.71 x 35/360) (67.54)
681.35

A-7
PLAY CO
(a)
Year 1 2 3 4 5
Rs000 Rs000 Rs000 Rs000 Rs00
0
Costs saved (W1) 350 385 455 560
Variable costs (W2) (82) (94) (113) (144)
Maintenance costs (42) (44) (46) (49)
Fixed costs (W3) (124.95) (127.45) (130) (132.6)
–––––– –––––– –––––– ––––––
Taxable cash flow 101.95 119.55 166 234.4
Taxation (30.32) (35.87) (49.8) (70.32)
Dep tax benefits (W4) 30 22.5 16.88 35.62
Scrap value 50
––––– –––––– –––––– –––––– ––––
– –
After-tax cash flows 101.05 119.24 152.64 251.48 (34.7)
Discount at 15% 0.870 0.756 0.658 0.572 0.497
–––––– –––––– –––––– –––––– ––––
–
Present values 87.87 90.16 100.36 143.79 (19.84)
–––––– –––––– –––––– –––––– ––––
–
Rs000
Present value of 533
benefits
Initial investment 400
Early termination fine 150
––––
Net present value (18)
––––
The net present value is positive and so the investment in machine is financially acceptable.
Workings
(W1) Costs saved

Year 1 2 3 4
Demand (tonnes/yr) 100,000 110,000 130,000 160,000
Cost (Rs/tonne) 3.50 3.50 3.50 3.50
––––––– ––––––– ––––––– –––––––
Contribution (Rs/yr) 350,000 385,000 455,000 560,000
––––––– ––––––– ––––––– –––––––

(W2) Variable costs incurred
Year 1 2 3 4
Demand (tonnes/yr) 100,000 110,000 130,000 160,000
Cost (Rs/tonne) – 3% inflation 0.82 0.85 0.87 0.90
––––––– ––––––– ––––––– –––––––
Contribution (Rs/yr) 82,000 93,500 113,100 144,000
––––––– ––––––– ––––––– –––––––
(W3)
Fixed costs incurred
Annual depreciation = (Rs400,000 – Rs50,000) ÷ 4 = Rs87,500
Other fixed costs = Rs250,000 – Rs87,500 – Rs40,000 = Rs65,000

Inflating at 2% per annum
(W4) Tax allowable depreciation tax benefits
Year TA depreciation Tax benefit (Rs)

(Rs)
1 100,000 (400,000 × 0.25) 30,000 (0.3 × 100,000)
2 75,000 (300,000 × 0.25) 22,500 (0.3 × 75,000)
3 56,250 (225,000 × 0.25) 16,875 (0.3 × 56,250)
–––––––
231,250
50,000 (scrap value)
–––––––
281,250
4 118,750 (by difference) 35,625 (0.3 × 118,750)
–––––––
400,000
–––––––

A-8
ZL
(a) Cost of equity
Geometric average dividend growth rate = (21.8/19.38)0.25 – 1 = 0.0298 or 3%
Using the dividend growth model, ke = 0.03 + ((21.8 × 1.03)/250) = 0.03 + 0.09 = 12%
Market values of equity and debt

Market value of equity = Ve = 100m × 2.50 = Rs250 million
Market value of loan notes = Vd = 60m × (104/100) = Rs62.4 million
Total market value of PQR Co = Ve + Vd = 250 + 62.4 = Rs312.4 million
Current WACC calculation

The current after-tax cost of debt is 7%
WACC = [Ve/(Ve + Vd)] × ke + [Vd/(Ve + Vd)] × kd WACC = [250/312.4] × 12 +

[62.4/312.4] × 7 = 11%
The weighted average after-tax cost of capital before the new issue of loan notes is 11%
After-tax cost of debt of new loan note issue
After-tax interest rate = 8 × (1 – 0.3) = 5.6% per year

Using linear interpolation:
Year Cash flow Rs 5% PV (Rs) 6% PV (Rs)

Discoun Discoun
t t
0 Market value (100) 1.000 (100.00) 1.000 (100.00)
1–10 Interest 5.6 7.722 43.24 7.360 41.22
10 Redemption 105 0.614 64.47 0.558 58.59
7.71 (0.19)
After-tax cost of debt = 5 + [((6 – 5) × 7.71) / (7.71 + 0.19)] = 5 + 0.98 = 5.98% or 6%

Revised WACC calculation
The market value of the new issue of loan notes is Rs40 million
The total market value of ZL increases to 312.4 + 40 = Rs352.4 million
WACC = [250/352.4] × 12 + [62.4/352.4] × 7 + [40/352.4] × 6 = 10.4%
After the new issue of loan notes, the weighted average after-tax cost of capital has decreased
from 11% to 10.4% because the proportion of debt finance, which has a lower required rate of
return than equity finance, has increased.

(b) Calculation of market value of each convertible bond Expected Share price in five
years’ time = 4.45 × 1.0655 = Rs6.10
Conversion value = 6.10 × 20 = Rs122
Compared with redemption at par value of Rs100, conversion will be preferred
The current market value will be the present value of future interest payments, plus the present
value of the conversion value, discounted at the cost of debt of 7% per year.
value of each convertible bond if converted = (9 × 4.100) + (122 × 0.713) = Rs123.89
the present value of future interest payments, plus the present value of the redemption value,
discounted at the cost of debt of 7% per year.
value of each convertible bond = (9 × 4.100) + (100 × 0.713) = Rs108.20
Market value = 123.89

A9
Hedge using forward contract

ZAL will have to buy JPY to make this payment
Amount to pay in three months’ time JPY 175,000,000

Forward contract amount [JPY 175,000,000 x 1.9493] = Rs. 341,127,500
Hedge using Money Market

To earn JPY 1 million, invest now [JPY 175,000,000 ÷ (1 + (3% ÷ 4)] JPY 173,697,270
Purchase JPY at spot (Rs. 173,697,270 x Rs. 1.9339) Rs. 335,913,150
Borrow rupees to buy JPY [Rs. 335,913,150 x (1 + (8% ÷ 4)] Rs. 342,631,413
Futures Market Hedge
Futures can mature at the given dates only. Since the amount is to be paid on October 31, the contract with maturity date
of October 31 2023 would be chosen.
Step 1 payment JPY 175,000,000
Step 2 Buy JPY future contract
Step 3
No. of futures contracts to buy (JPY 175,000,000 ÷ JPY 100,000) 1,750
Step 4 close the contract by taking the opposite position
No. o Rs/JPY
Buy future 1.9490
Sell Future 1.9500
GAIN 0.0010
0.0010x1750x100000
Rs 175,000
Step 5
Buy JPY import payment at market rate 175m x 1.950 Rs/ JPY 341.25
Gain 0.175
341.425

August 22, 2023
Company Law
Select the most appropriate answer from the options available for each of the following Multiple Choice Questions
(MCQs). Each MCQ carries ONE mark.
Q.1
1. Kimari Ltd engaged in production of sports products having paid up capital of Rs.10 million
comprising of 1 million shares of Rs. 10 each. Election of directors was held on 31 December 2022 in
which nine (09) directors were elected. Mr. Tarik who was elected with minimum number of votes
totaling to 972,000, was appointed chief Executive by BoD after election. Mr. Sarfraz and Mr. Irfan
were also elected securing 2,054,000 and 1,982,000 votes respectively. In June 2023 both of them
resigned and shifted to Canada. In August 2023 Board of Directors appointed Mr. Khalid as new
Director. Now Kimari Ltd is considering to remove Mr. Khalid from BoD.
Mr. Khalid will not be deemed to be removed as director if votes casted against the resolution are more
than or equal to:
a) 1.1250 million c) 972,000
b) 9 million d) 1 million
(02)
2. When alteration in articles affects the substantive rights or liabilities of members or of a class of
members, it shall be carried out only if:
a) a majority of at least three-fourths of the members or of the class of members affected by such
alteration vote in favor of such alteration
b) a majority of more than three-fourths of the members or of the class of members affected by
such alteration vote in favor of such alteration
c) a majority of at least two third of the members or of the class of members affected by such
alteration vote in favor of such alteration
d) a majority of more than three-fourths of the members or of the class of members affected by
such alteration vote in favor of such alteration
3. Evergreen Limited, having financial year end on 30 September each year, was incorporated on 11 July
2022 and 1st AGM was held on 25 December 2022. Now company secretary is planning the next
Annual general meeting of company for year end 30 September 2023. What is the latest date for
holding 2nd annual general meeting of SL:
a) 28 January 2024 c) 30 November 2023
b) 31 December 2023 d) 31 January 2024
4. Mr. Jack, a creditor of Ghazi Limited, filed petition for winding up of company to the Court on 24
January 2023. The Court appointed a provisional manager on 31 January 2023 and continued with
hearing of the petition. On 5th February 2023, the court ordered winding up of the company and
appointed official liquidator. Statement of affairs was to be submitted by company officials to official
liquidator by:
a) 15th February 2023 c) 20th February 2023
b) 5th February 2023 d) 2nd March 2023
5. Korangi Limited (KL) was formed for a period of five years. The period of five years is due to
complete on 31 August 2023. Company Secretary of KL is of the view that company can not continue
its business after expiry of the said period. In this regard which of the following statement is correct:
a) KL will continue its business even after expiry of the period mentioned in its Articles of
association until members pass special resolution for winding up of company.
b) KL will continue its business even after expiry of the period mentioned in its Articles of
association until members pass a resolution for winding up of company.
c) KL will not continue its business after expiry of the period mentioned in its Articles of
association and members shall pass special resolution for winding up of company.
d) KL will continue its business even after expiry of the period mentioned in its Articles of
association until BOD passes resolution for winding up of company. (1.5)
6. Rajistan Limited has obtained short term loan of Rs. 50 million from a bank against which RL has
deposited a post dated cheque as security.
Which of the following statements is correct regarding registration of above security under the
Companies Act, 2017?
a) Post dated cheque is not considered as a security for the purpose of mortgage or charge and
does not require registration
b) Post dated cheque of the same bank is required to be registered as mortgage or charge
c) Post dated cheque upto Rs. 50 million is not required to be registered as mortgage or charge
d) Post dated cheque is acceptable as security; hence, it is required to be registered as mortgage or
charge
7. Clifton Limited is in financial difficulties and creditors has started legal proceedings against company.
In which of the following situations, CL shall be deemed to be unable to pay its debts:
a) if a creditor of Rs. 3 million duly made a demand requiring CL to pay the sum so due and CL
has for 21 days thereafter neglected to pay/secure/compound the sum.
b) if a creditor of Rs.100,000 or more made a demand requiring CL to pay the sum so due and CL
has for 30 days thereafter neglected to pay/secure/compound the sum.
c) if a creditor of Rs. 100,000 or more duly made a demand requiring CL to pay the sum so due
and CL has for 21 days thereafter neglected to pay/secure/compound the sum.
d) if a creditor of Rs. 101,000 duly made a demand requiring CL to pay the sum so due and CL
has for 30 days thereafter neglected to pay/secure/compound the sum. (1.5)
8. Science Research Center was registered under section 42 of Companies Act, 2017. On November 01,
2020 licence of Science Research Center was revoked by Commission due to non-compliance with
licensing requirements. On 30 November 2020, all assets of the company were transferred to Alif
Associates, another company registered under section 42. Directors of Science Research Center shall
not hold office in Alif Associates till:
a) 30 December 2020 c) 31 January 2025
b) 29 November 2025 d) 31 January 2026
9. A company which, through inadvertence or otherwise, is registered by a name in contravention of the
Companies Act:
a) may, with approval of the Commission, change its name
b) shall, if the registrar so directs, within 30 days of receipt of such direction, change its name
with approval of the Commission.
c) shall, if the registrar so directs, within 30 days of receipt of such direction, change its name
with approval of the registrar.
d) shall, if the registrar so directs, within 60 days of receipt of such direction, change its name
with approval of the registrar.

Company Law |Page 3 of 5
10. Which of the following conditions are not applicable to an association not for profit registered under
section 42:
a) It should be capable of being formed as a limited company.
b) It applies or intends to apply its profits/income in promoting its objects.
c) It only allows the payment of dividend to its foreign members.
d) such company’s objects and activities are not and shall not, at any time, be against the laws,
public order, security, sovereignty and national interests of Pakistan.
11. Any dividend payable in cash by a listed company may be paid:
a) only through electronic mode directly into the bank account designated by the entitled
shareholders
b) by cross cheques issued in the name of the entitled shareholders
c) by dividend warrant at the registered address of entitled shareholders
d) only through electronic mode directly into the bank account designated by the entitled
shareholders or in any other mode as per directions of shareholder.
12. Which of the following is entitled to inspect the books of accounts?
a) Directors at any time
b) Shareholders having more than 10% shares at any time
c) Directors during business hours
d) Shareholders having more than 10% shares during business hours
13. Mr. Zubair is the Chief Operating officer of Copper Limited (CL). CL is in the process of acquiring
new machinery, which is imported from a foreign country by Zunaira who is Zubair’s wife. CL asked
Zunaira to provide terms and conditions of the agreement for consideration and necessary approval.
Which of the following statements is correct?
a) Zubair will have to disclose his interest and obtain prior approval of CL’s board before signing
the agreement
b) CL can sign the agreement and Zubair will give an update to CL’s board in the immediately
next board meeting
c) CL can sign agreement with prior approval of the chief executive
d) No approval is needed; however, Zubair cannot be involved in the transaction.
Q.2 Orangi Limited (OL), a public unlisted company, passed a resolution to wind up company by court on 07
June 2023. Petition for winding up was filled on 27 July 2023. Court appointed Mr. Rahat as official
liquidator. Mr. Rahat has to file a report to court after his appointment.
a) You are required to list the information which shall be included in the said report and filling
requirements of this report. (09)
b) For the purpose of preparation of this report Mr. Rahat will need information/statement from company.
You are required to advice Mr. Rahat from whom relevant statement can be demanded by him. (04)
Q.3 Qalanders Limited (QL), a listed company, is in the process of finalization of names for independent
director to be elected for next term. Management of company finalized some names but company secretary
is of the view that any of the persons finalized by management can not be appointed as independent
directors due to relationships as enumerated below.
You are required to comment on each of following cases.
a) Mr. Ashok is a law graduate and his name was included in list of independent directors last year. Mr.
Ashok was employee in Time limited and resigned two years ago. Time Limited and Qalanders
Limited are associated companies. (03)

b) Mr. Zegler is CEO of Clock Limited since last two years. Clock Limited was engaged in supplying
major raw material to QL during last month. Mr. Zegler was not director of Clock Limited before his
appointment as CEO. (03)
c) Mr. Madhu was also shortlisted by QL. Mr. Madhu is brother of CEO of QL. (02)
d) Mr. Ram was employee of QL and got retired in 2015. As part of company’s retirement policy, he is
receiving a monthly pension from QL since the date of his retirement. (03)
Q.4 Gandhara Limited (GL) has obtained a short term financing of Rs. 500 million from Emirates Bank Limited
(EBL) and Rs. 50 million running finance from Sindh Bank Limited (SBL).
The loan from Emirates Bank Limited is secured by way of first pari passu hypothecation charge on the
stocks and moveable assets of the Company while the loan from Sindh Bank Limited is secured against a
promissory note issued by company. The Company Secretary of GL forgot to file the required forms and
Hypothecation Agreement with the registrar for registering the above charges within the time allowed
under the law. The banks, after becoming aware of this fact, approached GL and asked for repayment of the
loan in full within 30 days of serving the notice.
The banks are of the view that the charge is defective and is of no use because it is not registered with the
Registrar within prescribed timelines.
Required:
Advise the management of GL, the most suitable action which they can take in the above mentioned
scenario, keeping in view the provisions of the Companies Act, 2017. (10)
Q.5 Hibiscus Limited (HL), incorporated on 10 July 2019, is a listed entity engaged in the business of
information technology.
Abid was appointed as HL’s company secretary on 31 May 2023. He is planning to arrange next
shareholders’ general meeting(s) to discuss annual financial statements for the year ending 30 June 2023
and other matters. He obtained the following information from HL’s records:
First annual general meeting (AGM) of HL was held on 31 August 2020, where seven directors were also
elected. Subsequent AGMs were held on 26 August 2021 and 21 August 2022 respectively.
Required:
i) Advise, with justification, the most efficient timelines for holding the meeting of the shareholders.
(03)
ii) Prepare a list covering statutory communications, submissions and filings mandatorily required to
be made before and after the respective meetings along with time frame(s). (08)
Q.6 Sohail Afzal is the director of Amla Limited (AL) and Shimla Limited (SL). Both companies are listed on
Pakistan Stock Exchange Limited and have paid-up share capital of Rs. 500 million and Rs. 800 million
respectively.
AL’s board of directors has taken following decisions in its meeting held on 2 August 2022:
i) To make investment of Rs. 150 million in SL, by purchasing 15 million shares of Rs. 10 each from
its sponsor in the following manner:
 Rs. 85 million shall be invested during the month of September 2022; and
 The remaining amount shall be invested from time to time over the period of two years.
ii) To grant a loan of Rs. 5 million to Sohail Afzal’s son for higher studies. The loan will be repayable
in 6 equal quarterly instalments.
Required:
a) Discuss the impact, if any, of each of the aforesaid decisions on AL due to directorship of Sohail Afzal.
(06)
b) Specify the requirement(s) that need to be followed by AL with reference to aforesaid decisions. (06)

Q.7 Under the provisions of the Companies Act, 2017 briefly explain the exception(s) to the following general
rules:
a) No person shall make a public offer of securities unless the issuer (i.e. a company) or offeror of the
securities has submitted for approval to the Commission, and the Commission has approved
prospectus. (05)
b) Companies can commence the business only after obtaining certificate of commencement of business
from the registrar. (03)
Q.8 Mr. Hanan recently joined a corporate consultancy firm which have many private and public sector clients.
You are required to advise him on following:
a) What information is generally included in annual return of a company. (02)
b) At which date annual return is prepared and time limit for filling of annual return. (03)
c) Any exceptions the filling requirement of annual return. (03)
d) Directors of Stage private Limited approved financial statements for the year ending 31 March 2023
and proposed 5% dividend. Annual general meeting was held on 15 July 2023 in which accounts were
presented to members. Mr. Irfan a shareholder of 10 % shares proposed 20% dividend and members
approved his proposal. Dividend is still payable. (03)
Q.9 Khala Limited (KL), a listed company, has two classes of ordinary shares i.e. Class A and Class B. Both
classes have same voting rights. The directors intend to restrict voting rights of class B ordinary shares.
Currently KL’s memorandum and articles of association do not contain such restriction. Some shareholders
of Class B ordinary shares do not agree with such change.
a) Under the provisions of the Companies Act, 2017 briefly describe the steps which the directors should
take prior to approval of such change. (04)
b) Advise shareholders about course of action they should take in this case if they do not agree to such
restriction on voting rights. (05)
(The End)

ANS-01
1 A
2 A
3 B
4 A
5 B
6 A
7 B
8 B
9 C
10 C
11 A
12 C
13 A

ANS-2
a) Following particulars shall be included in report.
i) the nature and details of the assets of the company including their location and current
value duly ascertained by a registered valuer;
ii) the cash balance in hand and in the bank, if any, and the negotiable securities, if any, held
by the company;
iii) the amount of authorised and paid up capital;
iv) the existing and contingent liabilities of the company indicating particulars of the
creditors, stating separately the amount of secured and unsecured debts, and in the case
of secured debts, particulars of the securities given;
v) the debts due to the company and the names, addresses and occupations of the persons
from whom they are due and the amount likely to be realised on account thereof;
vi) debts due from contributories;
vii) details of trademarks and intellectual properties, if any, owned by the company;
viii) details of subsisting contracts, joint ventures and collaborations, if any;
ix) details of holding and subsidiary companies, if any;
x) details of legal cases filed by or against the company;
xi) any other information which the Court may direct or the official liquidator may consider
necessary to include.
Mr. Rahat shall also include in his report the manner in which the company was promoted or formed
and whether in his opinion any fraud has been committed by any person in its promotion or formation,
or by any director or other officer of the company in relation to the company since its formation.
Mr. Rahat shall also make a report on the viability of the business of the company or the steps which,
in his opinion, are necessary for maximising the value of the assets of the company.
Mr. Rahat may also, if he thinks fit or upon directions of the Court, make any further report or reports.
Filling Requirement.
Mr. Rahat shall, as soon as practicable after receipt of the statement of affairs and not later than 60 days,
from the date of the winding up order submit the above report to the Court.
A certified copy of the reports aforesaid shall also be sent to the registrar simultaneously with their
submission to the Court.
b) The statement of affairs shall be submitted and verified by persons who are at the relevant date
the directors, chief executive, chief financial officer and secretary of the company.
The provisional manager or official liquidator, subject to the direction of the Court, may also
require to make and submit to him a statement in the prescribed form as to the affairs of the
company by some or all of the persons:
i) who have been directors, chief executives, chief financial officer, secretary or other
officers of the company within one year from the relevant date;
ii) who have taken part in the formation of the company at any time within one year
before the relevant date;
iii) who are in the employment of the company, or have been in the employment of the
company within the said year, and are in the opinion of the official liquidator or
provisional manager capable of giving the information required and to whom the
statement relates.

ANS-3
a) The objection of Company Secretary in case of Mr. Ashok is not in accordance with law as
Companies Act only restricts the persons who has been an employee of the company, any of its
subsidiaries or holding company within the last 3 years. As Mr. Ashok was employee of
associated company so he can become independent director of QL. (03)
b) Objection of company secretary is valid. Mr. Zegler can not be appointed as independent
director of QL because he is CEO of Clock Limited which has material business relationship
with QL. (03)
c) A close relative of a director can not be appointed as independent director. Mr. Madhu being
brother of CEO does fall in definition of close relative so he is ineligible to become Independent
director of QL. (02)
d) Mr. Ram can be appointed as independent director as more than 3 years has been elapsed since
his retirement and retirement benefits i.e pension does not disqualify him to become
independent director. (03)

ANS-4
Loan from EBL:
 Ghareeb Limited (GL) or EBL being an interested party may apply to Commission to grant
relief in case of omission to file with the registrar the particulars of any mortgage or charge or
any modification therein within the time.
 The Commission shall grant relief on being satisfied that the omission
a) was accidental or due to inadvertence or to some other sufficient cause, or
b) is not of a nature to prejudice the position of creditors or shareholders of the company,
or
c) on other grounds it is just and equitable.
 The Commission, on such terms and conditions as seem to the Commission just and expedient,
may order:
a) that the time for filing the required particulars be extended; or
b) that the omission or misstatement be rectified; and
c) as to the costs of the application as it thinks fit.
 A copy of the order passed for rectification of register of mortgages duly certified by the
Commission or its authorised officer shall be forwarded to the concerned registrar within 7 days
from the date of the order.
 Where the Commission extends the time for the registration of a mortgage or charge, the order
shall not prejudice any rights acquired in respect of the property concerned prior to the time
when the mortgage or charge is actually registered.
Loan from SBL:

Loan from SBL is secured against issuance of negotiable instrument which is not required to be
registered under the provisions of Companies Act, 2017.

ANS-5
(i) Most efficient timelines for holding meetings of shareholders:
In order to be most efficient, HL should plan to hold Annual General Meeting (AGM) on 31 August
2023 in which HL can also hold election of its directors whose term of three years’ office will be
expired on that date.
If HL could not hold its AGM on that date then it shall have to call an EOGM to conduct the elections
on 31 August 2023 and then will have to hold its AGM separately for the purpose of adoption of
annual financial statements and other matters latest by 28 October 2023 (i.e. within 120 days of close
of financial year).
(ii) Statutory communications, submissions and filings:
Before the shareholders’ meeting
 Send notice of AGM along with proxy form and draft resolution in case of special resolution
(if any) to the members, directors, auditors, Commission, PSX, and any person entitled to a
share in consequence of the death / bankruptcy of a member where HL has been notified of his
entitlement, 21 days before AGM. Also publish notice of AGM in newspapers.
 Send audited financial statements along with auditors’/ directors’/ chairman’s review report in
the manner stated above and post the same on HL’s website. Further, send by post three copies
and also an electronic copy to PSX, Commission and registrar.
 Transmit the notices received from members seeking to contest election to the office of director
to all the members 7 days before AGM and publish the same in newspapers.
After the shareholders’ meeting
 File prescribed particulars of directors and auditors with the registrar in specified form within
15 days of AGM.
 Where special resolution has been passed in AGM, the same shall be filed with registrar within
15 days of the meeting.
 File the consent in writing from proposed directors with the registrar within 15 days of receipt
of consent.
 File a copy of duly signed financial statements and reports with the registrar within 30 days of
AGM in which audited financial statements were adopted.
 File annual returnwith registrar within 30 days from AGM.

ANA-6
a) Investment in SL:
It is necessary to establish whether AL and SL are associated companies or not; that depends upon
the nature of Sohail ‘s directorship in these companies.
AL and SL shall be considered as associated companies due to Sohail Afzal’s common directorship.
However, AL and SL shall not be considered as associated companies if Nadeem is an independent
director or director by virtue of nomination of the Federal Government or Provincial Government
or a financial institution directly or indirectly owned or controlled by such Government or National
Investment Trust.
 If AL and SL are associated companies then AL should not make any investment in SL
without seeking further approval.
 If AL and SL are not associated companies then the board’s decision may be implemented.
Loan to director’s Son:
Impact on the decision of loan will depend on as to whether Nadeem’s son is a minor or major.
 If Nadeem’s son is minor then the Board’s decision cannot be implemented without further
approval.
 If Nadeem’s son is major then the Board’s decision may immediately be implemented.
b) Investment in SL:
If AL and SL are associated companies:
 Investment should be made under the authority of a special resolution.
 AL’s directors while presenting special resolution shall certify to the members that they
have carried out necessary due diligence with reference to the said investment before
recommending for approval.
If AL and SL are not associated companies then investment can be made by directors on their
own decision.
Loan to director’s Son:
 If Sohail’s son is minor then the loan has to be approved by a resolution of AL’s members.
 Moreover, being a listed company, approval of the Commission is also required before
sanctioning of loan.

ANS-7
a) The requirement of approval does not apply:
i) to securities offered by the State Bank of Pakistan.
ii) where the securities are offered in connection with a private offering or private
placement.
iii) issue of shares of a subsidiary to the members of a listed holding company by way of
specie dividend or any other distribution in the prescribed manner.
iv) where the securities are offered by the issuer to members or employees of the issuer or
families of such members and employees.
v) the securities are shares and are offered as bonus shares to any or all of the members of
the issuer.
b) Following companies can commence business without obtaining certificate of commencement
of business:
i) A private company
ii) A company converted from private to public
iii) A company limited by guarantee and not having a share capital

ANS-8
a) Annual Return is a snapshot of general information about a company as on a specific date,
giving details of its chief executive, directors, chief financial officer, secretary, legal adviser
and auditors, registered office address, members and share capital.
b) The annual return is prepared as on the date of the annual general meeting or, where no such
meeting is held or if held is not concluded, on the last day of the calendar year.
The annual return shall be filed with the registrar within 30 days from the date of annual return.
However, in the case of a listed company, the registrar may for special reasons extend the period
of filing of such return by a period not exceeding 15 days.
c) The requirement of annual retuen shall not apply to following companies, in case there is no
change of particulars in the last annual return filed with the registrar:
 A single member company.
 A private company having paid up capital of not more than Rs. 3 million.
All other companies shall inform the registrar in a specified manner that there is no change of
particulars in the last annual return filed with the registrar.
d) Proposal by Mr. Irfan was not according to provisions of law as members are not authorized to
enhance the dividend proposed by directors. Further, dividend was due to be paid within 10
working days from the date of its declaration.

ANS-9
a)
• the directors are first required to alter the provisions of KL’s articles of association and
memorandum of association by getting a special resolution passed by general meeting.
• It should however be noted that where such alteration affects the substantive rights or
liabilities of members or of a class of members, it shall be carried out only if a majority
of at least three fourths (3/4) of the members or of the class of members affected by
such alteration, as the case may be, exercise the option through vote either personally
or through proxy.
• An altered copy of the articles of association shall be filed with the registrar, within
thirty days from the date of passing of the resolution. The registrar shall register the
same and then the alteration shall be effective.
b) Any member or members of affected class representing at least 10% shareholding of that
class who are aggrieved by the variation of their rights may, within 30 days of the date of
the resolutionvarying their rights, apply to the Court for an order cancelling the resolution.
The application may be made on behalf of the shareholders entitled to make it by such one
or moreof their number as they may authorise in writing in this behalf.
The court has got the powers to declare the resolution null and void if it feels that either:
• the company withheld certain facts while getting the resolution passed, had the
members been in knowledge of those facts, they would not have passed the
resolution varying the rights of a particular class; or
• the variation is otherwise prejudicial to the interest of members.

August 24, 2023
Audit and Assurance

(i) Answer all SIX questions.
Q.1 (a) You are the audit partner of NJ & Company, Chartered Accountants. The following significant matters
have arisen at different audit clients of your firm, where the audit field work for the year ended 31
March 2023 has been completed:
i. Ballot Bonanza Limited (BBL) has significant financing arrangements that are set to expire, and
outstanding amounts are payable on 19 June 2023. However, BBL’s management has not made
any assessment regarding how the company would manage without these financing arrangements.
Further, no disclosures have been made regarding the uncertainty that may arise from this
situation. (08)
ii. Electoral Automobile Limited (AAL) has experienced significant growth during the year,
primarily attributed to the introduction of a highly anticipated vehicle in January 2023. AAL
offers a 3-year warranty or 50,000 km, whichever comes earlier, on all its vehicles. As a standard
practice, AAL records a warranty provision of 0.2% for all its sales, which has proven to be fairly
reliable in previous years. However, your audit team has noticed a significantly high amount of
part replacement claims for the newly launched vehicle in the months of April 2023 and May
2023. (04)
Required:
Evaluate each of the above matters and advise the course of action. Also suggest the implications, if any, on
the audit report.
(Audit procedures are not required).
(b)
i. You are the auditor of Counting Limited (CL). During the audit, you found out that there is a
legal dispute pending against the company which the management has not disclosed in the
financial statements. Suggest audit procedures to be performed to identify other possible
contingencies? (05)
ii. As part of your analytical procedures on the financial statements of Majority Limited (ML), a
retailer, you note an improvement in the current ratio. The financial controller explains that this is
due to the factors listed below:
 A restructuring of ML’s finances with short-term borrowings consolidated into a 10-year
loan with annual repayments.
 The sale of one of ML’s freehold stores to a developer for cash.
For each of the above factors, briefly explain whether it is a plausible explanation for the
improvement in the current ratio. (04)
iii. When reviewing the accounting records for significant journal entries at one of audit clients, it
was noted that the year-end journal to record prepayments had been posted to the general ledger
twice in error. The journal entries had not been authorised or reviewed and IT controls do not
prevent the posting of journals with a reference number which is identical to an existing journal.
State two internal control deficiencies. Also outline two possible consequences and two
recommendations against each deficiency.
(07)
Audit and Assurance| Page 2 of 4
Q.2 Your firm AG & Company, Chartered Accountants, has been appointed as the auditor of Polls Limited (PL),
which is a listed company. Management has shared the following extracts from the draft financial statements
for the year ended 31 March 2023 with your team:
2023 2022
--------- Rs. in '000 ---------
Extracts from statement of financial position
Property and equipment 218,503 73,115
Intangibles 1,000,732 566,870
Cash & cash equivalents 357,665 565,880
Extracts from profit or loss
Revenue 5,899,750 3,477,800
During the meeting, your team has also been informed as follows:
i. The appointment of the auditor was made due to the board of directors’ dissatisfaction with the previous
auditor’s performance, who was removed after only two years. The board of directors believed that the
previous auditor was inefficient in their work and that the changes recommended by them often proved
erroneous, as PL's management rarely agreed to them.
ii. PL’s revenue is derived from various sources, primarily through sale of off-the-shelf software, bespoke
software projects, regular software updates, and end-to-end solutions in the form of short-term and long-
term projects.
iii. Until March 2022, 95% of PL’s business came from North American clients. However, during the year
ended 31 March 2023, PL has witnessed substantial growth in business from the Middle East and
Pakistan. Despite this increase, during the year ended 31 March 2023, 50% of income is still generated
from North America, 35% from Middle East, and 15% from Pakistan. This rise in sales is mainly
attributed to PL’s strategic decision to establish a dedicated division catering to clients in Pakistan and
Middle East.
iv. Increase in intangible assets can be attributed to two reasons. Firstly, during the year, PL has revalued its
intangible assets, which were Previously carried at cost, resulting in a revaluation surplus. These
intangibles primarily consist of customer support software acquired by PL in 2018. Secondly, the
development of a state-of-the-art website has also contributed to the increase. This website has enabled
PL to showcase its projects and collect client’s data for bespoke projects.
v. Due to a high turnover of key development staff, PL has implemented a new scheme of offering interest-
free loans for the purchase of vehicle and for housing-related expenses, such as purchasing or
constructing a house. These loans are payable over a maximum period of 20 years.
Required:
Discuss the audit risks that exist in the above scenario. (18)
Q.3 You are the audit manager of MA & Company, Chartered Accountants. Following significant matters have
arisen at different audit clients of your firm where audit field work has been completed:
i. During the physical stock count at the audit of Freedom Limited (FL), certain expired stock items were
identified which were included in the year-end stock balance at their carrying value. The management
represented that they have maintained a 10% general provision of Rs. 15 million for slow-moving and
obsolete stocks in the financial statements and consequently no specific provision is required for expired
stock items identified during physical count. On further enquiry, the management informed that this
provision has been maintained for last many years but they failed to substantiate the basis of this
provision. (05)
The carrying value of stock in trade at year-end was Rs. 55 million net of general provision.
ii. During the course of audit of Democracy Limited (DL) for the year ended 31 March 2022, your audit
team identified that there were three overdue instalments of the long-term loans. On enquiry, the
management informed your team that they were negotiating a loan restructuring agreement with its banks
since February 2022 and had formally signed it with the bank on 7 April 2022. Under the agreement,
Regards: payment ofAhmad,
Saboor principal amount
Senior has Associate
been relaxed inTaxaccordance
at PwC with (0302-9114479)
BL’s cash flow forecast and
outstanding interest has been converted into a two-year loan. The first repayment of principal is now due
in July 2023. All the amounts have been adjusted and disclosures have been made in the financial
statements on the basis of the restructuring agreement. (05)
iii. During the year, Voice Limited (VL) has obtained an office building under a three-year lease period for
relocating its head office. According to lease contract, WL has the right to cancel the lease anytime by
giving one-month notice. Furthermore, after the lease, WL has incurred substantial leasehold
improvement costs on the office building. Considering the lease cancellation option, the management has
not recorded right of use assets and related lease obligations as they were of the view that since VL has
the right to cancel the lease anytime, it is not a long-term lease. Similarly, all leasehold improvement
costs were expensed out immediately. (05)
Required:
Discuss the auditor’s course of action along with implications on the audit report.
(Audit procedures are not required)
Q.4 Caretaker Sports Limited (CSL) is a manufacturer of footballs and is a new audit client for your firm. You are
required to assess the sales system and recommend control improvements. The sales system of CSL operates as
follows:
i. CSL generates new customer leads through a third-party company.
ii. Sales staff assess new customers' creditworthiness and propose credit limits, which are authorized by the
sales director.
iii. Sales staff have monthly sales targets and can grant sales discounts of up to 10% at their discretion.
These discounts are recorded in the customer master data file.
iv. Sales staff visit customer sites and complete orders using two-part pre-printed order forms. The sales
order number is based on the salesperson's identification (ID) number.
v. CSL markets itself on dispatching all orders within three working days. Sales staff email the finance
department and warehouse dispatch team with customer IDs and sales order details, which generates a
pick list. Sequentially numbered goods dispatched notes are completed and filed in the warehouse.
vi. Sequentially numbered invoices are generated using pick lists for quantities and customer master data for
prices.
vii. Standard credit terms for customers are 30 days. Any sales invoices over 90 days outstanding are
notified to the relevant salesperson for direct payment follow-up with the customer.
Required:
Identify and explain any six deficiencies in the sales system of CSL and provide a recommendation to address
each of these deficiencies. (12)
Q.5 Delimitation Limited (DL) is audited by FN & Company, Chartered Accountants (FN). Shahbaz, DL's
engagement partner, became ill during the year-end audit for the year ending March 31, 2023, and was
replaced by Anwar, who previously worked as a senior audit manager at KT & Company, Chartered
Accountants (KT).
As the audit nears completion, the team discovered that DL's management had treated initial operational losses
from a new production plant as a trial run loss. DL's management explained that KT had conducted the
feasibility study and cash flow projections for this new facility. However, KT missed a crucial cost element,
resulting in these losses. Following KT's advice, DL capitalized these losses in the plant's cost.
DL's management was surprised that this issue surfaced only during finalization, especially since Anwar was
previously with KT team that performed above mentioned services and should have caught it earlier. Anwar
was upset and furious that the audit team didn't discuss the matter with him before raising it with the client,
strictly instructing them not to discuss audit issues with others before consulting him.
Required:
Identify and evaluate the threats involved in the above situation and explain the course of action that should be
taken to resolve the issue. (10)
Q.6 (a) Comment on each of the following situations with reference to the appointment of external auditors in
accordance with the requirements of the Companies Act 2017.
i. XYZ & Co. Chartered Accountants (XYZ) has received an offer for the appointment as external
auditor of Frontier Limited (FL), which is involved in humanitarian efforts to support internally
displaced people in remote regions. One of its affiliated companies, Highland Ventures Limited
(HVL), also operates in this sector. Mr. Ahmed Rahman is the nominated director of HVL on
behalf of the government. He is the spouse of Zara, the managing partner of the firm. (03)
ii. ABC & Co. Chartered Accountants (ACCA) has received an offer for the appointment as external
auditor from Oasis Finance Limited (OFL), a financial institution specializing in a range of
consumer loan services. OFL has a subsidiary named Capital Credit Limited (CCL). Mr. Adam, a
partner in ACCA, holds an outstanding loan with CCL amounting to Rs. 5 million. This loan
agreement was executed three years ago in the regular course of business, and Mr. Adam has been
faithfully repaying the loan as per the agreed terms. (03)
iii. PQR & Co. Chartered Accountants (PQRA) has received an offer for the appointment as external
auditor of Minerals United Limited (MUL), a company engaged in mineral extraction across
various regions in the country. Given the significant mineral potential, several corporations formed
a consortium a few years ago, and MUL is part of this alliance. Zephyr Resources Limited (ZRL),
the parent company of MUL, is also actively involved in mineral mining, along with another
subsidiary, Alpine Minerals Limited (AML). Mrs. Sarah, the wife of Mr. Abdul, who serves as a
partner in PQRA, was elected as a director of AML three months ago. (03)
(b)
i. You are the audit senior on the audit of Voter Limited (VL) for the year ended 31 August 2022.
You are reviewing the work undertaken by the audit junior on trade receivables. The audit junior
has noted that an amount of Rs. 650,000, due from Commission Limited (CL), is included in trade
receivables. However, the response from CL to your firm’s trade receivables confirmation states
that there are no outstanding balances due to VL.
Required:
List the matters you would expect to see documented by the audit junior in respect of this issue.
(04)
ii. You are working on the external audit of No Campaign Limited (NCL) for the year ended 31
August 2022. You are responsible for performing the planned procedures in respect of trade
receivables. Your analytical procedures identified that receivables days have increased from 35
days at 31 August 2011 to 43 days at 31 August 2022. On enquiry, NCL’s financial controller
explained: “The increase is due to a contract for the supply of goods to a new customer, Full
Campaign Limited (FCL). The contract allows FCL 60 days’ credit rather than our standard 30
days’ credit. We dispatched a large order to FCL 50 days before the year end.”
Required:
Outline the additional audit procedures you would perform in respect of the financial controller’s
explanation. (04)
(THE END)

Ans. 1
a-(i)
Evaluation of the matter and course of action (3 Marks)
Expiration of financing arrangements and since the outstanding amounts are payable on 19 June
2023 this indicates a material uncertainty regarding the entity’s ability to continue as a going
concern which needs to be disclosed in the financial statements. There is an explicit requirement
for management to make a specific assessment of the entity’s ability to continue as a going concern.
It is the auditor’s responsibility to evaluate management’s assessment in this regard. If management
refuses to perform such an assessment of the entity, it constitutes a scope limitation.
We will ask the management and those charged with governance to make an assessment of the
entity’s ability to continue as a going concern and also disclose it in the notes to the financial
statements.
Reporting implication (5 Marks)

If adequate disclosure about a material uncertainty regarding the entity’s ability to continue as a
going concern is not made in the financial statements, the auditor shall express a qualified opinion
or an adverse opinion. In the Basis for Qualified or Adverse Opinion section of the auditor’s report,
the auditor should state that a material uncertainty exists that may cast significant doubt on the
entity’s ability to continue as a going concern and that the financial statements do not adequately
disclose this matter.
If management is not willing to carry out an assessment of an entity’s ability to continue as a going
concern, a qualified opinion or a disclaimer of opinion in the auditor’s report may be appropriate.
This is because the auditor may not be able to obtain sufficient appropriate audit evidence regarding
management’s use of the going concern basis of accounting in the preparation of the financial
statements. In such cases, the auditor should include in the Basis for Opinion section the reasons
for the inability to obtain sufficient appropriate audit evidence.
In case the management has performed an assessment of the entity’s ability to continue as a going
concern and has also made appropriate disclosures, then the auditor will include a paragraph related
to material uncertainty related to going concern in our audit report.
a-(ii)
Evaluation of the matter and course of action (2 Marks)
Although AAL became aware of the increased warranty claims after the year-end, it provides
evidence of conditions that already existed at the end of the reporting period. Therefore, it is an
adjusting event. Instead of recording warranty provision at 0.2% for the newly launched vehicle, it
should be reassessed based on the recent claims.
It is also necessary to discuss this matter with those charged with governance to reassess their
estimation of the warranty provision.
Reporting implication(2 Marks)
If management disagrees with making the above adjustments, auditors will need to qualify their
report. In the basis of opinion section of the report, the auditor should describe the financial effects
of the material misstatement.

b-i
The audit approach to gathering evidence on contingencies may be as follows: (5 Marks)
 Ascertain the approach taken by the client’s management to identifying contingencies.
 Review the minutes of board meetings (where such matters are likely to be discussed).
 Review the client’s correspondence with lawyers and invoices for legal services. These may
help the auditor to identify contingencies that the client has not disclosed in the notes to the
draft financial statements, or that provide additional information for the auditor about
contingencies that have been disclosed.
 Consider direct confirmation from lawyers of matters handled on behalf of the entity under
audit. Any letter should be sent by management with an instruction for the reply to be sent
directly to the auditor. It is more likely that lawyers will respond if the letter lists specific areas
where contingencies may exist, together with an assessment by management of the possible
outcome. The lawyers should then be asked to comment on the information in the letter.
 Consider whether expert advice may be required from outside sources other than lawyers.
b-ii (4 Marks)
Refinancing
 plausible explanation - restructuring the loan would result in a reduction in current liabilities
(denominator in the current ratio)
Sale of freehold store
 plausible explanation - disposal of the non-current asset for cash would result in an increase
in current assets (numerator in the current ratio).
b-iii
Deficiency (1 Mark)
 Journal entries are not authorised or reviewed.
Consequences (1 Mark)
 Errors may be made in journal entries which would go undetected.
 This might result in a misstatement in the financial statements.
 Fraudulent entries could be made.
Recommendations (1.5 Mark)
 All journal entries should be authorised before being entered into the accounting records.
 A report of all journal entries posted should be regularly reviewed for accuracy and prior
authorisation.
 Approval and review should be evidenced.
 Employees who are authorised to post journal entries should be restricted through the use of
passwords.
Deficiency (1 Mark)
 There are no IT controls to prevent duplicate journal entries.
Consequences (1 Mark)
 This may result in errors in the financial statements.
 Time and costs will be incurred to correct these errors.
Recommendations (1.5 Mark)

 Journal entries should have a unique reference.

 IT controls should be introduced that alert users if they try to post a journal with a reference
identical to an existing journal entry.
 If IT controls are not possible, an exception report of duplicate journal entries should be
regularly reviewed and duplicates followed up and corrected.

Ans. 2
Risks of opening balances and fraudulent financial reporting: (3 Marks)
Considering that the audit adjustments were often erroneous in the prior year, it is not advisable to rely on
them to verify opening balances. There poses a risk that the opening balances may not have been carried
forward from the previous year’s financial statements, especially since this is the first year of audit, or that
the opening balances may contain misstatements.
The disputes with the previous auditor and their removal after only two years of appointment indicate a
fraud risk factor and an intimidating attitude of the management towards the auditor.
Risk of inadequate disclosure regarding segment reporting: (3 Marks)
In previous years, the majority of sales, accounting for 95%, were concentrated in the North American
region therefore it did not qualify to be reported as an operating segment. However, in the current year, PL
has expanded its business to include the Pakistan and Middle East regions. Furthermore, PL has established
a dedicated department to specifically handle clients located in Pakistan and the Middle East, indicating
separate performance measurements. Therefore, the sales to North America, the Middle East, and Pakistan
may qualify to be reported as operating segments. There is a risk of inadequate disclosure regarding these
segments.
Risk relating to foreign exchange translation: (1.5 Marks)
Since around 85% of the revenue comes from abroad, PL is exposed to numerous transactions that require
translation into PKR. Therefore, there is a risk that the correct exchange rate may not be applied or that the
transactions are not translated on the correct date, resulting in an incorrect calculation of exchange gain/loss.
Risk of incorrect revaluation of intangible assets: (3 Marks)
There is a risk that PL has revalued the intangible assets when it did not qualify to be recorded under the
revaluation model. Generally, there is no market for the sale of software licenses as these are not salable.
Therefore, the fair value of the licenses may not be reliably determined.
Furthermore, whenever an asset is revalued the entire class of asset needs to be revalued. There is a risk
that other intangible assets of the same class may not be revalued. This further leads to the risk that the
management may have tried to fraudulently misstate the financial statements by not revaluing the entire
class of assets. Due to the change in policy PL would have to take the effect of change in policy
retrospectively, there is a risk that it may not be done and disclosed correctly.
Risk relating to revenue recognition: (3 Marks)
There is a risk that during the sale of software, revenue is not correctly apportioned between the sale of
software and future updates. Determining whether license and updates constitute separate performance
obligations requires judgment, as it involves assessing the nature of the arrangement and the contractual
terms.
The Company’s revenue is derived from various revenue streams, which primarily include the sale of goods,
provision of services as well as end-to-end solutions in the form of long-term projects, which in most cases
lead to revenue being recognized over multiple accounting periods. There is judgment involved in
determining the progress towards satisfaction of performance obligations which may result in incorrect
revenue recognition and its related contract asset.

Risk relating to the recording of website cost: (3 Marks)
A website resulting from development can be recognized as an intangible asset if PL can demonstrate that
it will generate probable future economic benefits. However, if the website is developed solely or primarily
for promoting and advertising its own products and services, all expenditures on developing such a website
shall be recognized as an expense when incurred, as the probable future economic benefits may not be met.
Therefore, there is a risk that the website is incorrectly recorded as an intangible asset.
Risk relating to the recording of interest-free employee loans: (1.5 Marks)
There is a risk that PL might have recorded these staff loans at their gross amount without recording any
expense over the period of loan amortization. There is also a risk that PL might not use an appropriate
discount rate for calculating the fair value of loans resulting in incorrect expense.

Ans. 3
I (5 Marks)
The current general provision of Rs. 15 million has no documentary support and has been provided without
any reasonable basis. Consequently, it cannot be substantiated for inventory valuation. Therefore,
management has to carry out extensive exercise to identify expired stock, near expiry stock and slow-
moving items and make proper provision based on required details and support. In this respect, the auditor
should:
 discuss the matter with the management/those charged with governance and ask them to make
provision on a reasonable basis.
 obtain the stock aging report so the provision could be verified.
If management does not agree to make provision on a reasonable basis, the auditor will not be able to verify
the valuation assertion, due to limitation of scope. Consequently, applying his judgement, the auditor may
qualify the audit report on the basis that he was not able to satisfy as to the carrying value of stock in trade
at year-end. Since the reason for modification resulted from inability to obtain sufficient appropriate audit
evidence, the auditor shall include in the basis of opinion section the reason for the inability.
ii(5 Marks)
BL’s decision to adjust the amount and present the disclosure on the basis of the restructuring agreement is
not correct. The auditor should inform management/those charged with governance that the financial
liabilities need to be classified as current as they were due to be settled, at year end, within twelve months
after the reporting period.
Agreement to reschedule the loan has been completed after the reporting period and hence, classification
between short and long term portions should still be based on the position prior to restructuring.
The signing of the restructuring agreement after the reporting date, would need to be disclosed as a non-
adjusting event which would include the details of loan rescheduling and its effect on the financial
statements.
If the loan is not classified as a current liability, the auditor should express a qualified opinion and should
describe the financial effects of the material misstatement in the basis of opinion section of the report.
iii(5 Marks)
Lease period of head office premises is 3 years and management has incurred substantial leasehold
improvement expenditure. Apparently there is no intention of the management to terminate the lease in
short term. Considering this, the management has to recognize right of use asset and related lease obligation
in line of the requirement of IFRS 16. Further, leasehold improvements being substantial in nature should
also be capitalized.
The audit team needs to ask the management to reverse the rent expense and record a depreciation charge
on the right of use asset and the leasehold improvements. The finance cost on the lease obligation also needs
to be recognized.
If management disagrees to make above adjustments, then auditors have to qualify their report due to non-
compliance of IFRS and significance of its impact. The auditor should also describe the financial effects of
the material misstatement in the basis of opinion section of the report.

Ans. 4 (1 Mark for each deficiency (Maximum 6 marks) and 1 Mark for each recommendation (Maximum 6 marks)
Control deficiency Control recommendation

1. New customers’ credit worthiness is assessed by a 1. New customers should complete a credit application which
salesperson who sets the credit limit, which is authorized should be checked through a credit department with a credit
by the sales director. limit set. Once authorized by the sales director, the limit
should be entered into the system by a credit controller.
2. Sales staff have discretion to grant sales discounts to 2. All discounts to be granted to customers should be authorized
customers of up to 10%. This could result in a loss of in advance by a responsible official, such as the sales director.
revenue as they may award unrealistic discounts simply to If not practical, then the supervisor of the sales staff should
meet sales targets. The discounts granted by sales staff are undertake this role.
not being reviewed and could result in unauthorized
discounts allowed.
3. Sales staff are able to make changes to the customer 3. Sales staff should not be able to access the master data file to
master data file, in order to record discounts allowed and make amendments. Any such amendments to master file data
these changes are not reviewed. should be restricted so that only supervisors and above can
make changes.
4. Inventory availability does not appear to be checked by 4. Prior to the salesperson finalizing the order, the inventory
the salesperson at the time the order is placed. system should be checked in order for an accurate assessment
of the availability of goods to be notified to customers.
5. The order form should be amended to be at least four-part.
5. Customer orders are recorded on a two-part pre-printed The third part of the order should be sent to the warehouse
form, one copy is left with the customer and one with the department and the fourth part sent to the finance department.
salesperson. 6. The copy the salesperson has should be stored centrally in the
sales department. Upon dispatch, the goods dispatch note
6. The sales department of SL does not hold these orders should be matched to the order; a regular review of unmatched
centrally and hence would not be able to monitor if orders orders should be undertaken by the sales department to
are being fulfilled on a timely basis. This could result in a identify any unfulfilled orders.
loss of revenue and customer goodwill. 7. Sales orders should be sequentially numbered. On a regular
basis, a sequence check of orders should be undertaken to
7. Customer orders are given a number based on the
identify any missing orders.
salesperson’s own identification (ID) number. These
numbers are not sequential. Without sequential numbers,
it is difficult for CSL to identify missing orders and to
monitor if all orders are being dispatched in a timely
8. The third part of the sales order as mentioned previously
manner, leading to a loss of customer goodwill.
should be forwarded directly to the warehouse department.
8. The salesperson emails the warehouse dispatch team with
the customer ID and the sales order details, rather than a
copy of the sales order itself, and a pick list is generated
9. Upon dispatch of goods, a four-part GDN should be
from this.
completed, with copies to the customer, warehouse
9. Sequentially numbered goods dispatched notes (GDNs)
department, sales department to confirm dispatch of goods and
are completed and filed by the warehouse department. If
a copy for the finance department. Upon receipt of the GDN,
the finance department does not receive a copy of these
once matched to the fourth part of the sales order form, an
GDNs, they will not know when to raise the related sales
accountant should raise the sales invoices in a timely manner,
invoices. This could result in goods being dispatched but
confirming all details to the GDN and order.
not being invoiced, leading to a loss of revenue.
10. A credit controller should be appointed, and it should be their
10. The salesperson is given responsibility to chase customers role, rather than the salesperson, to chase any outstanding
directly for payment once an invoice is outstanding for 90 sales invoices which are more than 30 days old.
days. This is considerably in excess of the company’s
credit terms of 30 days which will lead to poor cash flow.

Ans. 5
Identification and evaluation of self–review threat (5 Marks)
A self-review threat to the fundamental principle of integrity arises since the engagement partner is unlikely
to criticize any elements of the cash flow forecasts and feasibility report that were not highlighted by him.
Since the audit is in the finalization stage, it indicates that the audit fieldwork might have been completed.
Course of action
The firm will have to adopt the following safeguards:
i. sing different individuals to conduct an additional review of the affected audit work
ii. re-perform that work to the extent necessary
iii. assigning the engagement to another partner
iv. engaging another firm to review or re-perform the affected audit work to the extent necessary
Identification and evaluation of intimidation threat to Anwar (2 Marks)
There is also a possibility that management may be pressurizing Anwar to capitalize the loss relating to the
new production facility, even if it may not qualify to be capitalized under IAS 16. Due to this intimidation
threat Anwar may not be objective and compromise his professional judgement.
Course of action
In case Anwar is feeling pressurized he should step away from the engagement and hand it over to another
partner.
Identification and evaluation of intimidation threat to the audit team (3 Marks)
Furthermore, Anwar is also intimidating his audit team not to discuss the audit issues with anyone else. The
audit team may also feel pressurized to ignore the audit issues. Due to this intimidation threat from the
partner the audit team may compromise their objectivity.
Course of action
The audit team should promptly communicate the breach in accordance with the firm’s policies and
procedures to other relevant personnel in the firm through:
 escalating the matter within the firm, including when appropriate, explaining any consequential
risks to the firm, for example, with any senior partner or quality control partner.
 disclosing the matter in line with the firm’s policies, including ethics and whistleblowing policies,
using any established mechanism.

Ans. 6
(a)
i. XYZ qualifies for the appointment of FL because the nominated directorship of Ahmed in one
of the associated companies has no significance with respect to qualification or disqualification
of his spouse. (3 Marks)
ii. ACCA is qualified for the appointment as the auditor of OFL because loan agreement with CCL
which is the subsidiary of OFL is as per ordinary course of business. Such indebtedness in the
ordinary course of business has no impact on the qualification of the firm and it is allowed as
per Companies Act 2017. (3 Marks)
iii. PQRA is not qualified for the appointment of external auditor as per Companies Act 2017, A
person will not be qualified for appointment as auditor of a company if he is disqualified for
appointment as auditor of any other company which is that company’s subsidiary or holding
company or a subsidiary of that holding company. Spouse of director cannot be appointed as
the auditor of the company. (3 Marks)
(b)
(i) Matters documented by the audit junior (4 Marks)
Details of:
 any follow up and explanation.
 post year-end receipts or credit notes / reconciling items / cut-off.
 invoices / dispatch records / orders relating to outstanding amount
 correspondence between VL and CL
Whether an error has been identified, and if so:
 consideration of whether Rs. 650,000 is material
 error added to list of uncorrected misstatements.
 details of additional testing
 whether the error was due to internal control deficiencies / noted for reporting to management
(ii) (4 Marks)
Additional audit procedures
 Inspect the contract with FCL to confirm credit terms are 60 days
 Inspect other contracts to confirm credit terms are 30 days
 Check date of contract with FCL
 Inspect records of goods despatched to Pets prior to year end
 Ascertain if amount was paid after year end
 Direct confirmation of balance with Pets
 Reperform trade receivables days’ calculation excluding FCL and ascertain if:
 days are in line with 30-day credit policy for other customers
 days are in line with prior year

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The Professionals’ Academy Of Commerce

Pakistan’s Leading Accountancy Institute

(b) Other information is as follows:

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

(iii) Fixed assets purchased from registered suppliers include:

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Gross Rent: N-1 2,620,000 2

Less: Allowable deductions N-2 (2,128,800)

Taxable income 491,200 0.25

Income From Other Source:

Taxable income 1,707,513

N-1 Gross rent:

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

N-3 (Dep- Sewing machines)

Total dep exp: 1,988,750+894,938 (2,883,688)

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Profit before tax-Accrual basis 15,800,000

Total taxable income 16,175,411 0.25

Total income 16,675,411 0.25

Taxable income-NTR 16,175,411 0.25

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

A- Normal Tax Liability (Non Salaried)

B- Minimum tax u/s 113

Add: Tax on listed securities 500,000*15% 75,000 0.25

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Salary 500,000 0.5

Total taxable salary 4,500,000

Income From Other Source:

Total income 7,050,000 0.25

Tax liability of Mr. Taha: 1,201,845 0.5

Less: Tax credit on donation:

Car value 1,000,000*60% or 600,000

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Tax on prize bond 300,000*15% 45,000 0.25

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Basic Salary 450,000*12 5,400,000 0.5

Capital Gains (NTR):

Gain on sale of shares (Trio Limited) (8.5-5)*5,000*300 5,250,000 1

Income From Other Source:

Taxable income (normal tax regime) 15,845,000 0.5

Tax liability (Non Salaried person case)

Add: Tax on royalty income

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Income from non- speculation business:

Income from business 8,000,000

Income from speculation business:

Gain on future contract with AE 1,464,000 0.4

Income from other source-NTR 1,200,000 0.25

Taxable income-Pak source 9,200,000

Salary N-3 Exempt 0.75

Speculation business (1,500,000) N-4 - 0.5

Taxable income-foreign source 800,000

Total taxable income 10,000,000 0.25

Tax liability (non salaried)

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Where the taxpayer is satisfied with the decision of the Committee:

Part (ii) Marks

Regards: Saboor Ahmad, Senior Associate Tax at PwC (0302-9114479)

Gain on sale of shares (Trio Limited) (8.5-5)5,000300 5,250,000 1