SUGGESTED ANSWERS TO

THE QUESTIONS SET AT

CHARTERED ACCOUNTANCY PROFESSIONAL (CAP)-II LEVEL

JUNE 2021 EXAMINATIONS

Group-I

The Institute of Chartered Accountants of Nepal

(ICAN)
Satdobato, Lalitpur
© The Institute of Chartered Accountants of Nepal
All exam questions and solutions are the copyright of ICAN and can only be used for classroom and
student use in preparation for their CA exams. They cannot be published in any form (paper or soft
copy), or sold for profit in any way, without first gaining the express permission of ICAN. Nor can they
be used as examinations, in whole or in part, by other institutions or awarding bodies.

Year and month of Publication: 2021 December

Disclaimer:
The suggested answers published herein do not constitute the basis for evaluation of the students'
answers in the examination. The answers are prepared by the concerned resource persons and compiled
by the Secretariat of the Board of Studies of the Institute with a view to assist the students in their
education. While due care has been taken in the compilation of answers, if any errors or omissions are
noted, the same may be brought to the attention of the Secretariat of the Board of Studies. The Council
or the Board of Studies of the Institute is not any way responsible for the correctness or otherwise of
the answers published herewith.

Page 2 of 42
Table of Contents

Paper 1: Advanced Accounting .............................................................................................................. 4

Paper 2: Audit and Assurance ............................................................................................................... 22
Paper 3: Corporate and Other Laws ...................................................................................................... 31
Examiner’s Commentary on Students' Performance in June 2021 Examinations ....................... 41

Page 3 of 42
Paper 1: Advanced Accounting
Attempt all questions. Working notes should form part of the answer.
1. The following are the Balance Sheets of companies as at 31st Ashadh, 2078:

Capital & DHARMA SHARMA DHARMA SHARMA

Assets
Liabilities Ltd. (Rs.) Ltd. (Rs.) Ltd. (Rs.) Ltd. (Rs.)

Equity share
capital 800,000 600,000 Goodwill 600,000 -
(Rs. 100)
General reserve 400,000 300,000 Fixed Assets 500,000 800,000
Investment
allowance - 400,000 Investment 200,000 400,000
reserve
Sundry
500,000 200,000 Current Assets 400,000 300,000
creditors
Total 1,700,000 1,500,000 Total 1,700,000 1,500,000
DHARMA Ltd. took over SHARMA Ltd. on the basis of the respective shares value, adjusting
wherever necessary, the book values of assets and liabilities on the basis of the following
information:
i) Investment allowance reserve amounting to Rs. 200,000 has to carry forward till FY 2079/80
for utilization.
ii) Investments of SHARMA Ltd. included 1,000 shares in DHARMA Ltd. acquired at cost of Rs.
150 per share. The other investments of SHARMA Ltd. have a market value of Rs. 192,500.
iii) The market value of investments of DHARMA Ltd. are to be taken at Rs. 100,000.
iv) Goodwill of DHARMA Ltd. and SHARMA Ltd. are to be taken at Rs. 500,000 and Rs. 100,000
respectively.
v) Fixed assets of DHARMA Ltd. and SHARMA Ltd. are valued at Rs. 600,000 and Rs. 850,000
respectively.
vi) Current assets of DHARMA Ltd. included Rs. 80,000 of stock in trade received from
SHARMA Ltd. at cost plus 25%.
vii) The above scheme has been duly adopted.
Required:
Pass necessary Journal Entries in the books of DHARMA Ltd. and prepare Balance Sheet of
DHARMA Ltd. after taking over the business of SHARMA Ltd. Fractional share to be settled in
cash, rest in shares of DHARMA Ltd. Calculation shall be made to the nearest multiple of a
rupee. 20 marks
Answer
Journal Entries in the Books of DHARMA Ltd.
Dr
Cr Amount
Particulars LF Amount
(Rs)
(Rs)
Business Purchase Account Dr 1,242,500

Page 4 of 42
 To Liquidator of SHARMA Ltd. 1,242,500
(Being purchase consideration due)

Investments Account Dr. 192,500

Goodwill Account Dr. 100,000
Fixed Assets Account Dr. 850,000
Current Assets Account Dr. 300,000
To Sundry Creditors Account 200,000
To Business Purchase Account 1,242,500
(Being assets and liabilities taken over at agreed
value)

Liquidator of SHARMA Ltd. Dr. 1,242,500

To Equity Share Capital Account (Rs. 100) 903,600
To Securities Premium Account (Rs. 37.50) 338,850
To Cash Account 50
(Being purchase consideration discharged)

Goodwill Account Dr. 16,000

To Current Assets (Stock) Account 16,000
(Being elimination of unrealized profit on unsold
stock)

Amalgamation Adjustment Account Dr. 200,000

To Investment Allowance Reserve Account 200,000
(For incorporation of statutory reserve)

Balance Sheet of DHARMA Ltd. As on 31st Ashadh 2078

Amount
Particulars Amount (Rs) Particulars
(Rs)
17,036 shares of Rs. 100 each Fixed Assets 1,350,000
(out of which 9,036 shares are 1,703,600 (500,000 + 850,000)
issued in favour of vendor for
consideration other than
cash)
Goodwill 716,000
General Reserve 400,000
(6,00,000 + 1,00,000 + 16,000)

Page 5 of 42
 Investments 392,500
Securities Premium 338,850
(200,000 + 192,500)

Investment Allowance Current Assets 683,950

200,000
Reserve (700,000 – 50 – 16,000)
Sundry Creditors 700,000 Amalgamation Adj. Account 200,000
3,342,450 3,342,450
Working Note 1:
Calculation of net asset value of shares
DHARMA Ltd (Rs) SHARMA Ltd (Rs)
Goodwill 500,000 100,000
Fixed Assets 600,000 850,000 Investments
100,000 330,000* Current Assets
400,000 300,000
1,600,000 1,580,000
Less: Sundry Creditors 500,000 200,000
Net assets 1,100,000 1,380,000 Number of shares
8,000 6,000
Value per equity share 137.50 230
*Investments of SHARMA Ltd. are calculated as follows:
Amount (Rs.)
Shares in DHARMA Ltd. (1,000  137.50) 137,500
Market value of remaining investments (given) 192,500
330,000
Working Note 2.
Calculation of Purchase Consideration
Amount (Rs.)
Net assets of SHARMA Ltd. 380,000
Value of Shares of DHARMA Ltd. 137.50
Number of shares to be issued in DHARMA Ltd. to SHARMA Ltd. 10,036.36
(13,80,000  137.50)
Less: Shares already held by SHARMA Ltd. 1,000
Additional shares to be issued 9,036.36
Total value of shares to be issued (9036  137.50) 1,242,450
Cash payment for fractional share (.36  137.50) 50
1,242,500
2.
a) Balance Sheet of M/s Mustang Ltd. as on 31st Ashadh, 2077 and 2078 are as follows:
(Rs.in '000)

Page 6 of 42
 Liabilities 31-03-77 31-03-78 Assets 31-03-77 31-03-78
Equity share capital 1,000 1,150 Land & 500 480
buildings
Capital reserve - 10 Machinery 750 820
General reserve 250 300 Investments 100 50
Profit and loss A/c 150 180 Stock 300 280
Long term loan from 500 400 Sundry debtors 400 420
bank
Sundry creditors 500 400 Cash in hand 200 165
Provision for taxation 50 60 Cash at bank 300 410
Proposed dividends 100 125
Total 2,550 2,625 Total 2,550 2,625
Additional information:
i) Dividend of Rs. 100,000 was paid during the year ended 31st Ashadh, 2078.
ii) Machinery purchased during the year for Rs. 125,000.
iii) Company sold some investments at a profit of Rs. 10,000 which was credited to capital
reserve.
iv) Depreciation written off on land and building Rs. 20,000.
v) Income tax provided during the year Rs. 55,000.
Required:
Prepare a cash flow statement for the year ended 31st Ashadh, 2078 as per NAS 7 using indirect
method. 10 marks
b) Ramlal, a readymade garment trader, keeps his books of account under single entry system. On the
closing date, i.e. on 31st Ashadh, 2076 his statement of affairs stood as follows:
Liabilities Amount (Rs.) Assets Amount (Rs.)
Raman's capital 480,000 Building 325,000
Loan 150,000 Furniture 50,000
Creditors 310,000 Motor car 90,000
Stock 200,000
Debtors 170,000
Cash in hand 20,000
Cash at bank 85,000
Total 940,000 Total 940,000
Riots occurred and a fire broke out on the evening of 31st Ashadh, 2077, destroying the books of
accounts. On that day, the cashier had absconded with the available cash. You are furnished with
the following information:
i) Sales for the year ended 31 st Ashadh, 2077 were 20% higher than the previous year's sales,
out of which, 20% sales were for cash. He always sells his goods at cost plus 25%. There
were no cash purchases.

Page 7 of 42
 ii) Collection from debtors amounted to Rs. 1,400,000, out of which Rs. 350,000 was received
in cash.
iii) Business expenses amounted to Rs. 200,000, of which Rs. 50,000 were outstanding on 31 st
Ashadh, 2077 and Rs. 60,000 paid by cheques.
iv) Gross profit as per last year's audited accounts was Rs. 300,000.
v) Provide depreciation on building and furniture at 5% each and motor car at 20%.
vi) His private records and the Bank Statement disclosed the following transactions for the year
2076/77:
Particulars Amount (Rs.)
Payment to creditors (paid by cheques) 1,375,000
Personal drawings (paid by cheques) 75,000
Repairs (paid by cash) 10,000
Travelling expenses (paid by cash) 15,000
Cash deposited in bank 715,000
Cash withdrawn from bank 120,000
vii) Stock level was maintained at Rs. 300,000 all throughout the year.
viii) The amount defalcated by the cashier is to be written off to the Profit and Loss A/c.
Required:
Prepare Trading and Profit and Loss A/c for the year ended 31st Ashadh, 2077 and Balance Sheet
as on that date of Ramlal. All the workings should form part of the answer. 10 marks
Answer
2 a) Cash Flow Statement
for the year ended on 31st Ashadh, 2078

S. No. Particulars Rs. Rs.

I Cash flow from Operating Activities
Net profit made during the year (W.N.1) 260,000
Add: Depreciation on machinery (W.N.2) 55,000
Add: Depreciation on land and building 20,000
Operating profit before change in working capital 335,000
Add: Decrease in stock (3,00,000 – 2,80,000) 20,000
Less: Increase in sundry debtors(4,20,000 – 4,00,000) (20,000)
Less: Decrease in sundry creditors (5,00,000 – 4,00,000) (100,000)
Less: Income tax paid (W.N.3) (45,000)
Net cash generated from operating activities 1,90,000
II Cash flow from Investing Activities
Purchase of machinery (125,000)
Sale of investment (50,000 + 10,000) 60,000

Page 8 of 42
 Net cash used in investing activities (65,000)
III Cash flow from Financing Activities
Issue of equity shares (11,50,000 – 10,00,000) 1,50,000

Repayment of long term loan from bank

(5,00,000 –4,00,000) (1,00,000)
Dividend paid (1,00,000)
Net cash used in financing activities (50,000)
Net increase in cash and cash equivalent 75,000
Add: Cash and Cash Equivalents at the beginning of the period (2,00,000 +
3,00,000) 5,00,000
Cash and cash equivalents at the end of the period (1,65,000 +4,10,000) 5,75,000
Working Notes
1. Net profit (before tax) made during the year Rs.
Increase in Profit and Loss A/c balance (1,80,000 – 1,50,000) 30,000
Add: Transfer to General Reserve (3,00,000 – 2,50,000) 50,000
Add: Provision for taxation made during the year 55,000
Add: Provided for proposed dividend during the year (W.N.4) 1,25,000
2,60,000

W.N.2 Machinery Account

Particulars Rs. Particulars Rs.
To Balance b/d 7,50,000 By Depreciation (Bal. Fig.) 55,000

To Bank(machinery purchased) 1,25,000 By Balance c/d 8,20,000

Total 8,75,000 Total 8,75,000

W.N.3 Provision for Taxation

Particulars Rs. Particulars Rs.
To Cash (Bal. fig.) 45,000 By Balance b/d 50,000
To Balance c/d 60,000 By Profit & Loss A/c 55,000
Total 1,05,000 Total 1,05,000

W.N.4 Proposed Dividend A/c

Particulars Rs Particulars Rs.
To Bank 1,00,000 By Balance b/d 1,00,000
To Balance c/d 1,25,000 By Profit & Loss A/c (Bal. fig.) 1,25,000

Page 9 of 42
 Total 2,25,000 Total 2,25,000

b) Trading and Profit and Loss Account of Ramlal

For the year ended 31st Ashadh 2077
Amount
Particulars Amount (Rs) Particulars
(Rs)
To Stock 2,00,000 By Sales 18,00,000
To Purchases (Bal. fig.) 15,40,000 By Closing Stock 3,00,000
To Gross Profit c/d 3,60,000
2,100,000 2,100,000

To Business Expenses 2,00,000 By Gross Profit b/d 3,60,000

To Depreciation: 36,750
Building 16,250
Machinery 2,500
Motor Car 18,000
To Repairs 10,000
To Travelling Expenses 15,000
To Loss by theft (cash 20,000
defalcated)
Net Profit 78,250
Total 360,000 Total 360,000

Balance Sheet of Ramlal as at 31st Ashadh 2077

Amount Amount
Capital & Liabilities Assets
(Rs) (Rs)
Capital 480,000 483,250 Building 325,000 308,750
Add: Net Profit 78,250 Less: Depreciation (16,250)
Less: Drawing (75,000)
Loan 150,000 Furniture 50,000 47,500
Less: Depreciation (2,500)
Sundry Creditors 475,000 Motor car 90,000 72,000
Less: Depreciation (18,000)
Outstanding business 50,000 Stock in Trade 300,000
Expenses
Sundry Debtors 210,000
Bank Balance 220,000
Total 1,158,250 Total 1,158,250

Page 10 of 42
 Working Notes
1. Cash and Bank Account
Particulars Cash Bank Particulars Cash Bank
To Balance b/d 20,000 85,000 By Payment to - 1,375,000
Creditors
To Collection 350,000 1,050,000 By Business Expenses 90,000 60,000
from Debtors
To Sales 3,60,000 – By Repairs 10,000 –
(1,800,000 x
20%)
To Cash (C) – 7,15,000 By Cash (C) 120,000
(withdrawal)
By Bank (C) 715,000
To Bank (C) 1,20,000 - By Travelling 15,000 –
Expenses
By Private Drawings - 75,000
By Balance c/d 220,000
By Cash defalcated 20,000
(balancing fig.)
Total 850,000 1,850,000 Total 850,000 1,850,000

2. Calculation of sales during 2076-77

Particulars Amount (Rs)
Gross profit (last year i.e. for year ended 31.3.2076) 300,000
Goods sold at cost plus 25% i.e. 20% of sales 1,500,000
Sales for 2075-76 3,00,000/0.2
Sales for 2076-77 (15,00,000 x 1.2) 1,800,000
Credit sales for 2076-77 1,440,000
(80% of 18,00,000)
3. Debtors a/c
Particulars Amount (Rs) Particulars Amount (Rs)
To, Bal. b/d 170,000 By Cash 350,000
To, Sales (1,800,000 x 80%) 1,440,000 By Bank 1,050,000
Bal. c/d 210,000
Total 1,610,000 Total 1,610,000

4. Creditors a/c
Particulars Amount (Rs) Particulars Amount (Rs)

Page 11 of 42
 To Bank 1,375,000 By Bal. b/d 310,000
To Bal. c/d (bal. fig.) 475,000 By Purchases 1,540,000
Total 1,850,000 1,850,000

3.
a) The partners of Ojasvi Enterprises decided to convert the partnership firm in to a private
limited company Tejasvi (P) Ltd. with effect from 1st Baishakh, 2077. However, company could
be incorporated on 1st Ashwin, 2077. The business was continued on behalf of the company
and the consideration of Rs. 600,000 was settled on that day along with interest @ 12% per
annum. The company availed loan of Rs. 900,000 @ 10% per annum on 1st Ashwin, 2077 to
pay purchase consideration and for working capital. The company closed its accounts for the
first time on 31st Ashadh, 2078 and presents you the following summarized profit and loss
account:
Rs. Rs.
Sales 1,980,000
Cost of goods sold 1,188,000
Discount to dealers 46,200
Directors' remuneration 60,000
Salaries 90,000
Rent 135,000
Interest 105,000
Depreciation 30,000
Office expense 105,000
Preliminary expenses (to be written off in first year itself)
Profit 15,000 1,774,200
205,800
Sales from Ashwin, 2077 to Chaitra, 2077 were 2.5 times of the average sales, which further
increased to 3.5 times in Baishakh to Ashadh quarter, 2078. The company recruited additional
work force to expand the business. The salaries from Kartik, 2077 doubled. The company also
acquired additional showroom at monthly rent of Rs. 10,000 from Kartik, 2077.
Required:
Prepare a statement showing apportionment of cost and revenue between pre- incorporation
and post-incorporation periods. Also suggest the purposes for which pre-incorporation profit
& pre- incorporation losses can be used for. 10 marks
b) Following information is provided relating to loan and advances of a commercial bank:
Types of Loan and Advances Rs. in lakhs
 Pass Loan (including loan Rs. 1,800 lakhs extended only
against personal guarantee) 30,000
 Watch List Loan 2,600
 Sub-standard Loan 1,800

Page 12 of 42
  Doubtful Loan (realizable value of collateral Rs. 600 lakhs only) 1,000
 Bad Loan (including loan Rs. 120 lakhs insured with DCGC) 500
 Restructured Loan 1,200
Required: Calculate (i) amount of loan loss provision to be made in the profit and loss account
(ii) total amount of specific LLP. 5 marks
Answer
a) Tejasvi (P) Limited Profit and Loss Account
for 15 months ended 31st Ashadh, 2078
Pre. inc.(5 months) Post inc. (10 months)
Rs Rs
Sales (W.N.1) 3,00,000 16,80,000
Less: Cost of sales 1,80,000 10,08,000
Discount to dealers 7,000 39,200
Directors' remuneration - 60,000
Salaries (W.N.2) 18,750 71,250
Rent (W.N.3) 15,000 1,20,000
Interest (W.N.4) 30,000 75,000
Depreciation 10,000 20,000
Office expenses 35,000 70,000
Preliminary expenses 15,000
Net profit 4,250 2,01,550

Purchases for which pre-incorporation Profits and losses can be used are as follows:
Pre-incorporation Profits can be used for: Pre-Incorporation Losses can be used for:
 writing off Goodwill on acquisition  Setting off against Post-
Incorporation Profit
 writing off Preliminary Expenses
 addition to Goodwill on acquisition
 writing down over-valued assets
 writing off Capital Profit
 Issuing of bonus shares
 Paying up partly paid shares.

Working Notes:
1. Calculation of sales ratio
Let the average sales per month in pre-incorporation period be x
Average Sales (Pre-incorporation) = x× 5 =5 x
Sales (Post incorporation) from Ashwin to Chaitra, 2074 =2×1/2 x ×7 =17.5 x
From Baishakh to Ashadh, 2075 =3×1/2 x ×3 =10.5 x
Total Sales 28.0x

Page 13 of 42
 Sales ratio of Pre-incorporation & post incorporation is 5x:28x

2. Calculation of ratio for salaries

Let the average salary be x
Pre-incorporation salary = x ×5 =5x
Post incorporation salary
Ashwin, 2074 = x
Kartik to Ashadh, 2075 =x ×9×2 =18 x
19 x
Ratio is 5:19
3. Calculation of Rent
Total rent 1,35,000
Less: Additional rent for 9 months @ Rs 10,000 p.m. 90,000
Rent to old premises apportioned in tine ratio 45,000

Apportionment Pre inc. Post Inc.

Old premises rent 15,000 30,000
Additional Rent 90,000
15,000 1,20,000

4. Calculation of Interest
Pre-incorporation period from Baishakh, 2074 to Bhadra, 2074
6,00,000×12×5
{ 100×12
}= Rs 30,000

Post-incorporation period from Ashwin, 2074 to Ashadh, 2075

9,00,000×10×10
{ 100×12
}= Rs 75,000
Rs 1,05,000
b)
Calculation of Loan loss provision and Specific LLP
Rs. in Rs. in
Types of Loan and Advances lakhs LLP lakhs

(i) a. Pass Loan extended Against personal guarantee 1,800 21% 378.00
b. Pass Loan 28,200 1% 282.00
(ii) Watch List Loan 2,600 5% 130.00
General LLP 790.00
(iii) Sub-standard Loan 1,800 25% 450.00

Page 14 of 42
 (iv) a. Doubtful Loan with realizable value of
collateral 600 50% 300.00
b. Doubtful Loan no collateral 400 100% 400.00
(v) a. Bad Loan insured with DCGC 120 25% 30.00
b. Bad Loan 380 100% 380.00
(vi) Restructured Loan 1,200 12.50% 150.00
Specific LLP 1,710.00
Total 37,100 2,500.00
a. Amount to be charged to Profit & Loss account as LLP is Rs. 2,500 lakhs.
b. Amount of specific LLP is Rs. 1,710 lakhs.

4.
a) The following information regarding Nepal Shipping Limited are supplied to you.
 Current ratio 2.5
 Liquid ratio 1.5
 Proprietary ratio 0.75
 Working capital Rs. 60,000
 Reserves and surplus Rs. 40,000
 Bank overdraft Rs. 10,000
 There is no long term loans or fictitious assets
Required:
Make out a statement of assets and liabilities with complete details. 10 marks
b) Aditya Traders of Kathmandu has a branch at Butwal. Following is the information of Butwal
Branch for the year ending 31st Ashadh, 2077:
i) Goods are invoiced to the branch at cost plus 25%
ii) Sales Price is cost plus 40%
iii) Goods sent during the year at invoice price Rs. 1,350,000
iv) Sales during the year Rs. 1,470,000
v) Branch Expenses Rs. 55,000
vi) Stock as on 1st Shrawan, 2076 at Invoice Price Rs. 320,000
Required:
Calculate the profit earned by the branch during the year and Branch Stock Reserve in respect
of unrealized profit. 5 marks
Answer
a) Nepal Shipping Limited
Statement of Assets & Liabilities
Liabilities Amount Assets Amount

Page 15 of 42
 Share Capital WN - 6 200,000.00 Fixed Assets WN -5 180,000.00
Reserves & Surplus 40,000.00 Stock WN - 2 40,000.00
Creditors WN -3 30,000.00 Debtors WN - 7 60,000.00
Bank Loan 10,000.00
Total 280,000.00 280,000.00
Working Notes:
1. Calculation of current assets and current liabilities
Current Assets – Current Liabilities = Working Capital
Current ratio = 2.5 Liquid ratio = 1.5 working capital = Rs. 60,000
Current ratio = current assets/current liabilities
Working capital = current assets – current liabilities
Current assets = 2.5* working capital/1.5
Current assets = 2.5* 60,000/1.5 = 100,000
Current liabilities = Current assets – working capital
Current liabilities = 100,000 – 60,000 = 40,000
2. Calculation of stock
Liquid ratio = Current Assets – stock/ current liabilities
1.5 = 100,000 – stock/40,000
100,000 - Stock = 1.5*40,00 = 60,000
Stock = 100,00- 60,000
Stock = 40,000
3. Calculation of creditors
Creditors = current liabilities – bank overdraft
Creditors = 40,000- 10,000 = 30,000
4. Calculation of proprietary fund
Since no long term loan
Proprietary fund is 0.75 of total
Working capital is Rs. 60,000
Proprietary fund = 60,000/ (1-.75) = 240,000
5. Calculation of fixed assets
Fixed assets = 0.75 * Proprietary fund = 0.75*240,000 = 180,000
6. Calculation of share capital
Share capital = Proprietary fund – reserves and surplus
= 240,000 – 40,000 = 200,000
7. Calculation of Debtors
Current assets = cash and bank + Stock + Debtors
Debtors = current assets – cash & Bank – Stock

Page 16 of 42
 = 100,000 – nil – 40,000 = 60,000
Assuming cash & Bank balance nil as bank overdraft is given.
b) Calculation of profit earned by the branch
Butwal Branch
Trading Account for the year ended 31st Ashadh, 2077
Particulars Amount Rs. Particulars Amount Rs.
To Opening Stock 3,20,000 By Sales 14,70,000
To Goods received by 13,50,000 By Closing stock 3,57,500
Head office (Refer W.N.)
To Expenses 55,000
To Gross profit 102,500
18,27,000 18,27,500
ii) Branch Stock reserve in respect of unrealized profit
= Rs. 3,57,500 × (25/125) = Rs. 71,500
Working Note:
Rs.
Cost Price 100
Invoice Price 125
Sales Price 140
Calculation of closing stock at invoice price
Opening stock at invoice price 3,20,000
Goods received during the year at invoice price 13,50,000
16,70,000
Less: Cost of goods sold at invoice price (14,70,000×(125/140)) (13,12,500)
Closing stock 3,57,500
5.
a) Manakamana Enterprises has been charging depreciation on an item of plant and machinery
on straight line basis. The machine as purchased on 1st Shrawan, 2072 at Rs. 325,000. It is
expected to have a total useful life of 5 years from the date of purchase and residual value of
Rs. 25,000. Calculated the book value of the machine as on 1st Shrawan, 2074 and the total
depreciation charged till 31st Ashadh, 2074 under SLM. The company wants to change the
method of depreciation and charge depreciation @ 20% on WDV from 2074/75. Is it valid to
change the method of depreciation? Explain the treatment required to be done in the books of
accounts in the context of Accounting Standards. Ascertain the amount of depreciation to be
charged for 2074/75 and the net book value of the machine as on 31-3-2075 after giving effect
of the above change. 5 marks
b) A company with a turnover of Rs. 250 crores and an annual advertising budget of Rs. 2 crores
have taken up the marketing of a new product. It was estimated that the company would have
a turnover of Rs. 25 crores from the new product. The company has debited to its Profit and
Loss Account the total expenditure of Rs. 2 crores incurred on extensive special initial
advertisement campaign for the new product. Is the procedure adopted by the company
correct? 5 marks

Page 17 of 42
 c) ABC Ltd. has entered into a contract for the provision of services over a two-year period. The
total contract price is Rs. 150,000. In the first year costs of Rs. 60,000 have been incurred and
50% of the work has been completed. The contract has not progressed as expected and ABC
Ltd. is not sure of the ultimate outcome, but believes that the costs incurred to date will be
recovered from the customer. ABC Ltd. initially expected to earn a profit of Rs. 20,000 on the
contract. Company is struggling with the amount of revenue to be recognized in the first year
of contract. Suggest the right amount of revenue to be recognized, clearly indicating the
provision of relevant standard. 5 marks
d) ABC Ltd. has entered into a contract for the provision of services over a two-year period. The
total contract price is Rs. 150,000. In the first year costs of Rs. 60,000 have been incurred and
50% of the work has been completed. The contract has not progressed as expected and ABC
Ltd. is not sure of the ultimate outcome, but believes that the costs incurred to date will be
recovered from the customer. ABC Ltd. initially expected to earn a profit of Rs. 20,000 on the
contract. Company is struggling with the amount of revenue to be recognized in the first year
of contract. Suggest the right amount of revenue to be recognized, clearly indicating the
provision of relevant standard. 5 marks
Answer
a) As per NAS 16, Property, Plant & Equipment, the depreciation method applied to an asset shall be
reviewed at least at each financial year end and, if there has been a significant change in the
expected pattern of consumption of the future economic benefits embodied in the asset, the method
shall be changed to reflect the changed pattern. Such a change shall be accounted for as a change
in an accounting estimate in accordance with NAS 8. As per NAS 8, Accounting Policies, Changes
in Accounting Estimates & Errors, changes in accounting estimates shall be adjusted prospectively
that means the effect of a change in an accounting estimate shall be included in the determination
of net profit or loss in:
(a) The period of the change, if the change affects the period only; or
(b) The period of the change and future periods, if the change affects both.
In the given case, the company can change the method of depreciation from year 2074-75 if the
conditions set aside in above paragraph have been fulfilled.
Depreciation for year 2074-75 and net book value of Machine as on 31.3.75 after effect of the
change
Book value of Machinery as on 01.04.2074 Rs.2,05,000
Current year depreciation as per new method (WDV) Rs.41,000
(205,000 X 20%)
Net Book value as on 31.03.2075 Rs.1,64,000
(205,000–41,000)
Book Value of Machinery and Depreciation under SLM as on 01-04-2074
Cost of Machine purchased on 01.04.2072 Rs.3,25,000
Less: Residual Value Rs.25,000
Depreciable amount Rs.3,00,000
Useful life of Machine 5 Years
Depreciation for 2 Years (Rs.3,00,000x2/5) Rs.1,20,000
Book value as on01.04.2074 Rs.2,05,000
b) As per NAS, expenditure on an intangible item should be recognized as an expense when it is in
current unless it forms part of the cost of an intangible asset.

Page 18 of 42
 In the given case, advertisement expenditure of Rs. 2 crores had been taken up for the marketing
of a new product which may provide future economic benefits to an enterprise by having a turnover
Rs. 25 crores. Here, no intangible asset or other asset is acquired or created that can be recognized.
Therefore, the accounting treatment by the company of debiting the entire advertisement
expenditure of Rs. 2 crores to the profit and loss account of the year is correct.
c) As per NAS 18, Revenue, revenue from rendering of services shall be recognized on the basis of
stage of completion. However, when outcome of the transaction involving the rendering of services
cannot be estimated reliably, revenue shall be recognized only to the extent of the cost incurred that
are recoverable.
In the given case, it is clear that the company is not in position to estimate the outcome of service
contract and the company expects that the costs incurred to date will be recovered. So, as per NAS
18, Revenue, the company shall recognize revenue to the extent of cost incurred i.e. Rs. 60,000.

6. Write short notes on: (5×3=15 marks)

a) Average clause and its importance in insurance
b) Translation of foreign currency monetary and non-monetary items at the end of each reporting
period as per NAS 21
c) Statutory Liquidity Ratio (SLR)
d) Reserve for outstanding insurance claim payables
e) Window dressing
Answer
a) Some unscrupulous businessmen may resort to under-insurance of stocks in order to save some
amount of premium. Under-insurance means insuring for a lesser value. Under- insurance is
resorted to because, usually the loss will not be total and therefore, in spite of under-insurance, the
businessman can recover his loss. For example, stocks worth Rs.10,00,000 may be insured for, say
Rs. 60,000, because the inured knows, from experience, that in the event of fire not all his stocks
are likely to be lost. (There are, of course, materials like plastics, cotton and other materials where
nothing can be saved in the event of fire. These are exceptions.) So, if there is a fire and the actual
loss is Rs. 50,000, the insured can recover the absence of an’ average clause’. To prevent such
misuse of insurance, the policy incorporates an average clause.
By inserting average clause, the insured is insured is called upon to bear a portion of loss himself
in the event of under-insurance. The main object of this clause is to discourage under-insurance, to
encourage full-insurance and, above all, to impress upon the property owner the necessity of having
his property valued accurately before insurance. Under this clause the loss is suffered by both
insurer and insured proportionately. This is based on the principle that, in case of under –insurance,
the owner of the property himself acts as an insurer to the extent the property has not been insured
with the insurance company .If, for example, a building of Rs. 60,000, is insured for Rs. 50,000,
then, to the extent of Rs. 10,000, the owner himself is acting as insurer and will bear proportionate
losses. If, because of fire there is a complete loss of building of Rs.60,000 then insurance company
will bear only Rs. 50,000 and the proprietor of the building will bear Rs. 10,000. If the loss is less
than Rs. 60,000, then the share of the insurance company is reduced proportionately. The formula,
therefore, may be laid down as follows:
Loss to be borne by the insurance company
𝐴𝑚𝑜𝑢𝑛𝑡 𝑜𝑓 𝑝𝑜𝑙𝑖𝑐𝑦
= 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦×Actual loss
50,000
= 60,000 × 60,000 = Rs. 50,000

(when there is a complete loss)

Page 19 of 42
 If the actual loss to the building is estimated at Rs. 30,000 then insurance company will pay:
𝑃𝑜𝑙𝑖𝑐𝑦
Claim= 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦 𝑖𝑛𝑠𝑢𝑟𝑒𝑑×Actual loss
50,000
= 60,000×30,000 = Rs. 25,000

b) At the end of each reporting period foreign currency monetary and non-monetary items are
translated as follows.
i) Foreign currency monetary items shall be translated using the closing rate.
ii) non-monetary items that are measured in terms of historical cost in a foreign currency shall be
translated using the exchange rate at the date of the transaction and
Non-monetary items that are measured at fair value in a foreign currency shall be translated using
the exchange rate at the date when the fair value was measured.
c) Provision relating to statutory Liquidity Ratio
The licensed banks and financial institution should maintain liquid assets as a prescribed percentage
of total domestic deposit. Banks and financial institution of classes 'A', 'B', 'C and D' shall have to
maintain the SLR as below:
 10% for Class “A” commercial bank,
 8% for Class “B” development bank and
 7% for Class “C” Financial Institution.
 4% for Class “D” Financial Institution.
For SLR the following assets shall be considered as liquid assets:
(a) Investment in Nepal Government Securities
(b) Amount kept at Nepal Rastra Bank for Cash Reserve Ratio purpose
(c) Cash balance at own vault
(d) Amount kept at class “A” Commercial Bank by class “B”, “C” and “D” Financial
(e) Institution for Cash Reserve Ratio purpose.
(f) Amount kept by Financial Institution other than national level financial institution in
(g) other Bank and Financial Institution which is receivable on demand.
(h) Amount invested in international securities issued in Nepalese currency.
(i) The particulars of statutory liquidity ratio at prescribed format shall be submitted to
NRB with15 days of next month.
d) Reserve for Outstanding Insurance Claim Payables
As Per Rule 15 of the Insurance Regulation 2049, every insurer shall provide an amount of
one hundred fifteen percent (115%) of the remaining amounts of the payment against the
claim made by the Insurer before the expiry of each fiscal year. Such amount shall be
recognized as income in next year.
e) Window dressing is actions taken to improve the appearance of a company's financial statements.
Window dressing is particularly common when a business has a large number of shareholders, so
that management can give the appearance of a well-run company to investors who probably do not
have much day-to-day contact with the business. It may also be used when a company wants to
impress a lender in order to qualify for a loan. If a business is closely held, the owners are usually
better informed about company results, so there is no reason for anyone to apply window dressing
to the financial statements.

Page 20 of 42
Examples of window dressing are:
 Cash. Postpone paying suppliers, so that the period-end cash balance appears higher than it
should be.
 Accounts receivable. Record an unusually low bad debt expense, so that the accounts
receivable (and therefore the current ratio) figure looks better than is really the case.
 Fixed assets. Sell off those fixed assets with large amounts of accumulated depreciation
associated with them, so the net book value of the remaining assets appears to indicate a
relatively new cluster of assets.
 Revenue. Offer customers an early shipment discount, thereby accelerating revenues from a
future period into the current period.
 Depreciation. Switch from accelerated to straight-line depreciation in order to reduce the
amount of depreciation charged to expense in the current period. The mid-month convention
can also be used to further delay expense recognition.
 Expenses. Withhold supplier expenses, so that they are recorded in a later period

Page 21 of 42
Paper 2: Audit and Assurance
1. As an auditor, give your opinion with explanations on the following cases: (45=20 marks)
a) XYZ Limited has provided Rs. 50 lakhs for Inventory obsolescence in 2076/77. In the subsequent
year, it was determined that 45% of such inventory was usable. The Board of Directors is in the
view of adjusting same through prior period adjustment.
b) The ABC Ltd., while valuing its finished goods inventory at the year-end wants to include interest
on Bank Overdraft as an element of cost, for the reason that overdraft has been taken specifically
for the purpose of financing current assets like inventory and for meeting day to day working
expenses.
c) XYZ is a manufacturing company. There was huge fire in the factory of XYZ on 1 Ashoj 2077 and
fixed assets having written down value of Rs. 10 crores out of total fixed assets of Rs. 20 crores of
the company were destroyed. The financial statements of the company for the year 2076/77 was
approved by the Board on 30 Ashoj 2077 in which fixed assets have been presented at WDV of Rs.
20 crores despite the severe loss due to fire and the information about the loss due to fire is properly
explained in the Notes to the financial statements.
d) You are the auditor of Success Ltd. some shareholders of Success Ltd. lodged complain against you
citing that you failed to send the auditor’s report to them.
Answer
a) As per NAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, prior period
errors are omissions from and misstatement in an entity’s financial statements for one or more prior
periods arising from a failure to use or misuse of reliable information that was available when
financial statements for those period where authorized for issue and could reasonably be expected
to have been obtained and taken into account in the preparation and presentation of those financial
statements. Such errors include the effects of mathematical mistakes, mistakes in applying
accounting polices oversights or misrepresentations of facts, and fraud. In light of these facts, the
write-back of provision made in respect of inventories in the earlier year does not constitute prior
period errors (adjustment) since it neither constitutes error nor omission but it merely involves
making estimates based on prevailing circumstances when financial statements were being
prepared. It is a mere estimate process involving judgment based on the latest information available
at that particular time.
An estimate may have to be revised if changes occur regarding the circumstances on which the
estimate was based, or as a result of new information, more experience or subsequent
developments. The revision of the estimate, by its nature, does not bring the adjustment within the
definitions of prior period errors discussed above.
In this case, XYZ Ltd. provided Rs 50 lakhs for inventory obsolescence in 2076/77. In the
subsequent year, due to change in circumstances, it was determined that 45% of such inventory
was usable. Revision of such an estimate does not bring the resulting amount of Rs.22.5 lakhs
within the definition of a prior period errors requiring adjustment in prior period. The amount,
however, involved is material and requires separate disclosure to understand the financial position
and performance of an enterprise. Accordingly, adjustment in the value of the inventory through
prior period item would not be appropriate.
b) As per NAS 2, Inventories, cost of inventories comprises all costs of purchase, costs of conversion
and other costs incurred in bringing the inventories to their present location and condition. NAS
23, Borrowing Costs includes inventories as qualifying assets and borrowing cost that are directly
attributable to the acquisition, construction or production of qualifying assets are included in the
cost of that asset. In the given case, Bank overdraft was taken for the purpose of financing current
assets not especially for the inventories. Therefore, the proposal of ABC Ltd. to include interest
on bank overdraft as an element of cost of inventories is not acceptable because it does not form
part of cost of production.

Page 22 of 42
c) As per NAS 10, Events After the Reporting Period, events after the reporting period are those
events, favorable and unfavorable, that occur between the end of the reporting period and the date
when the financial statements are authorized for issue. Two types of events can be identified:
 those that provide evidence of conditions that existed at the end of the reporting period
(adjusting events after the reporting period); and
 those that are indicative of conditions that arose after the reporting period (non-adjusting
events after the reporting period)
So, the event in the given case (fire after reporting period) is a non-adjusting event. An entity shall
not adjust the amounts recognized in its financial statements to reflect non-adjusting events after
the reporting period.
If events after the reporting date impacts going concern status of the entity, the entity is required to
prepare its financial statements on break-up value basis. This does not seem to be the case here.
If non-adjusting events after the reporting period are material, non-disclosure could influence the
economic decisions that users make on the basis of the financial statements. Accordingly, an entity
shall disclose the following for each material category of non-adjusting event after the reporting
period:

 the nature of the event; and

 an estimate of its financial effect, or a statement that such an estimate cannot be made.
So, presenting fixed assets at Rs 20 crores in the balance sheet with appropriate disclosure in the
Notes to Accounts seems to be appropriate.
d) Section 115 of the Company Act, 2063 lays down the functions and duties of auditor. As per
provisions of the law, it is no part of the auditor’s duty to send a copy of his report to members
(shareholders) of the company individually. The auditor’s duty concludes once he forwards his
report to the company. It is the responsibility of company to send the report to every member
(shareholders) of the company. In Re Allen Craig and Company (London) Ltd., 1934 it was held
that duty of the auditor after having signed the report to be annexed to a balance sheet is confirmed
only to forwarding his report to the secretary of the company. It will be for the secretary or the
director to convene a general meeting and send the balance sheet and report to the members (or
other person) entitled to receive it. Hence in the given case, the auditor cannot be held liable for the
failure to send the report to the shareholders.
2. Give your comments on the following cases: (45=20 marks)
a) You are appointed as manager of quality control section in one of the leading audit firms of Nepal.
The senior partner of the firm instructs you to draft objectives statement for quality control policies
and procedures.
b) The auditor of a company is unable to obtain audit evidence relating to business promotion
expenses of Rs. 1 lakh. The company has earned net profit of Rs. 1 Arab and has net asset base of
Rs. 10 Arab. The management explains that the expense is genuine although the said invoices are
misplaced. However, auditor requests the management either not to charge the said promotional
expenses to profit or loss statement or he will qualify his audit report. The auditor does not have
any other issue on the faithful presentation and preparation of the financial statements.
c) Mr. Small, auditor of Big Ltd., has his office and residence in the building owned by Big Ltd. Mr.
Small has been given 10% concession in rent by the company as compared to other tenants.
d) Mr. R Pandey and Mr. H Pahari are the two chartered accountants who just qualified their exams
and took membership from ICAN in Bhadra 2076. Mr. R Pandey, who without holding the
Certificate of Practice, signed a document in capacity of the member holding Certificate of Practice
and Mr. H Pahari, as being a member of ICAN, committed an act contrary to the provisions of
Nepal Chartered Accountants Act, 2053.

Page 23 of 42
Answer
a) As per Nepal Standards on Quality Control (NSQC) 1, it is necessary for the firms that perform
audits and review of historical financial information and other services to design appropriate quality
control system to ensure quality of services they provide. The relevance of quality control issue in
auditing services is equally important like in other services. If quality control could not be done in
auditing work, quality services could not be provided to client which may result in negative
consequences both for auditor and client including in overall economy. Hence, every auditor should
carry out the audit work based on formal quality control policy and procedures. The objective
statement of quality control policies and procedures would be:
i. Professional Requirements
Personnel in the firm should adhere to the principles of independence, integrity, objectivity,
confidentiality and professional behaviour. Particular procedures may be framed to achieve this
objective. For example, a firm may require all its personnel to make a written statement every
year as to whether they hold any shares or any other interest in the entity being audited by the
firm.
ii. Skills and Competence
The firm should be staffed with personnel who have attained the professional qualification and
maintain and enhance the knowledge and skill attained earlier. For example, a firm can achieve
this objective through proper recruitment procedures, periodic staff evaluation and a system of
training whereby latest information relating to current development in professional standards,
law, etc. is regularly communicated to audit staff.
iii. Assignment
Audit work should be assigned to such personnel who have the knowledge and experience
required in the circumstances.
iv. Delegation
There should be sufficient direction, supervision and review of work at all levels to provide
reasonable assurance that the work performed meets appropriate quality standards. For
example, a firm may establish guidelines relating to the form and content of working papers;
use of standardized forms, etc. similarly, the audit plans may identify the staffing requirements
and timing of various phases of audit to facilitate delegation of audit.
v. Consultation
Where ever necessary, persons having appropriate expertise, within or outside the firm, should
be consulted.
vi. Acceptance and Retention of Clients
Before accepting an audit, the firm should evaluate its independence and ability to serve the
prospective client properly. A similar review should be made, on-going basis, of association
with the existing clients.
vii. Monitoring
The continued adequacy and operational effectiveness of the quality control policies and
procedures should be developed and applied constantly.
b) As per NSA 705, Modification to the Opinion in the Independent Auditor's Report, the auditor shall
express a qualified opinion when:
i) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are material, but not pervasive, to the financial statements; or

Page 24 of 42
 ii) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, but the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive.
Rs 1 lakh expenses for a company which earns net profit of Rs 1 Arab and having net assets base
of Rs 10 Arab seems to be immaterial/insignificant because omission or misstatement of expenses
by Rs 1 lakh in this case is unlikely to affect the decision of the users due to this
omission/misstatement. Since the auditor does not have any other issue on faithful preparation and
presentation of the financial statements, qualifying audit opinion for immaterial impact does not
seem to be appropriate. The auditor should however communicate the finding through management
letter with the recommendation to strengthen the system of proper maintenance and retention of
supporting evidence.
c) As per NSA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in
accordance with Nepal Standards on Auditing, in the case of an audit engagement which is of
public interest requires by the code of ethics that the auditor should be independent of the entity
subject to audit. The code describes independence as comprising both independence of mind and
in appearance. The auditor's independence from the entity safeguards the auditor's ability to form
an audit opinion without being affected by influences that might compromise the opinion.
Independence enhances the auditor’s ability to act with integrity, to be objective and to maintain
an attitude of professional skepticism.
In the instant case, Mr. Small has his office and residence in the building owned by Big Ltd. who
are subject to audit by Mr. Small. Giving 10% concession in rent may be due to some other reasons
other than holding auditor-ship of Big Ltd. It may be due to being very old tenant or due to occupy
of large space in same building or Mr. Small might have carried out major renovation and so on.
Thus, in the instant case, unless and until there is direct proof, giving 10% concession in rent does
not affect independence of the auditor in expressing his opinion on the audit of Big Ltd. However,
the auditor should always be alert on his/her independence and fundamental ethical principles and
make appropriate safeguard needed.
d) Section 41 of Nepal Chartered Accountants Act, 2053 has made different levels of punishment for
different levels of culpability. Here in case of R Pandey, If a person, who has not obtained a
Certificate of Practice is proved to have signed any document in capacity of the member holding
Certificate of Practice, shall be liable to punishment with a penalty up to two thousand rupees or
imprisonment for a period of up to three months or both.
In case of H Pahari, if a member, who commits any act contrary to the provisions of this Act or
Regulations framed under this Act other than the provisions of this section, shall be suspended for
a maximum period of five years and shall be liable of punishment with a maximum penalty of two
thousand rupees or imprisonment for a maximum period of three months or both.
So, R Pandey and H Pahari are to be punished accordingly.
3. Answer the following: (3 5=15 marks)
a) While planning the audit of S Ltd., you want to apply sampling techniques. What are the risk factors
you should keep in mind?
b) What are the elements that an auditor has to consider while evaluating the design of the entity’s
control environment?
c) Is it not necessary to sign audit engagement letter every year in case of recurring audits?
Answer
a) Risk Factors while applying Sampling Techniques: As per NSA 530, Audit Sampling, sampling
risk is the risk that the auditor’s conclusion based on a sample may be different from the conclusion
if the entire population were subjected to the same audit procedure. Sampling risk can lead to two
types of erroneous conclusions-

Page 25 of 42
  In the case of a test of controls, that controls are more effective than they actually are, or in the
case of tests of details, that a material misstatement does not exists when in fact it does. The
auditor is primarily concerned with this type of erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an inappropriate audit opinion.
 In the case of test of controls, the controls are less effective than they actually are, or in the
case of tests of details, that a material misstatement exists when in fact it does not. This type of
erroneous conclusion affects audit efficiency as it would usually lead to additional work to
establish that initial conclusions were incorrect.
The auditor should also consider about appropriate design, size and selection of items for testing.
b) As per NSA 315, Identifying and Assessing the Risk of Material Misstatement through
Understanding the Entity and Its Environment, the auditor should obtain an understanding of the
control environment. The control environment includes the governance and management functions
and the attitudes, awareness, and actions of those charged with governance and management
concerning the entity’s internal control and its importance in the entity. The control environment
sets the tone of an organization, influencing the control consciousness of its people. It is the
foundation for effective internal control, providing discipline and structure.
The primary responsibility for the prevention and detection of fraud and error rests with both those
charged with governance and the management of an entity. In evaluating the design of the control
environment and determining whether it has been implemented, the auditor understands how
management, with the oversight of those charged with governance, has created and maintained a
culture of honesty and ethical behavior, and established appropriate controls to prevent and detect
fraud and error within the entity.
In evaluating the design of the entity’s control environment, the auditor considers the following
elements and how they have been incorporated into the entity’s processes:
i. Communication and enforcement of integrity and ethical values – essential elements which
influence the effectiveness of the design, administration and monitoring of controls.
ii. Commitment to competence – management’s consideration of the competence levels for
particular jobs and how those levels translate into requisite skills and knowledge.
iii. Participation by those charged with governance – independence from management, their
experience and stature, the extent of their involvement and scrutiny of activities, the
information they receive, the degree to which difficult questions are raised and pursued with
management and their interaction with internal and external auditors.
iv. Management’s philosophy and operating style – management’s approach to taking and
managing business risks, and management’s attitudes and actions toward financial reporting,
information processing and accounting functions and personnel.
v. Organizational structure – the framework within which an entity’s activities for achieving its
objectives are planned, executed, controlled and reviewed.
vi. Assignment of authority and responsibility – how authority and responsibility for operating
activities are assigned and how reporting relationships and authorization hierarchies are
established.
vii. Human resource policies and practices – recruitment, orientation, training, evaluating,
counselling, promoting, compensating and remedial actions.
c) Audit Engagement Letter in Recurring Audit: As per NSA 210, Agreeing the Terms of Audit
Engagement, on recurring audits, the auditor shall assess whether circumstances require the terms
of the audit engagement to be revised and whether there is a need to remind the entity of the existing
terms of the audit engagement. The auditor may decide not to send a new audit engagement letter
or other written agreement each period.

Page 26 of 42
 However, the following factors may make it appropriate to revise the terms of the audit engagement
or to remind the entity of existing terms:
i. Any indication that the entity misunderstands the objective and scope of the audit.
ii. Any revised or special terms of the audit engagement.
iii. A recent change of senior management.
iv. A significant change in ownership.
v. A significant change in nature or size of the entity’s business.
vi. A change in legal or regulatory requirements.
vii. A change in the financial reporting framework adopted in the preparation of the financial
statements.
viii. A change in other reporting requirements.
4. Answer/Comment on the following: (3  5=15 marks)
a) Mr. Dipen, a chartered accountant prepared a project report for one of his clients to obtain bank
finance (long-term) of Rs. 90 lakhs from a commercial bank. Consequent to the sanction of the loan
by the bank, Mr. Dipen charged 1% fee on the figures of loan sanctioned.
b) What are the threats that professional accountants face in performing their engagement? Further,
define Advocacy and Familiarity threats.
c) What are the various penalties prescribed under section 14 of Nepal Chartered Accountants Act,
2053, which may be imposed on recommendation of Disciplinary Committee, by Council against a
member?
Answer
a) As per the ICAN's Handbook of the Code of Ethics for Professional Accountants, 2018,
Professional fees should be a fair reflection of the value of the professional services performed for
the client, taking into account:
i. The skill and knowledge required for the type of professional services involved.
ii. The level of training and experience of the persons necessarily engaged in performing the
professional services.
iii. The time necessarily occupied by each person engaged in performing the professional services.
iv. The degree of responsibility that performing those services entails.
Professional fees should normally be computed on the basis of appropriate rates per hour or per
day for the time of each person engaged in performing professional services. These rates should be
based on the fundamental premise that the organization and conduct of the professional accountant
in public practice and the services provided to clients are well planned, controlled and managed. It
is for each professional accountant in public practice to determine the appropriate rates.
A professional accountant in public practice should not make a representation that specific
professional services in current or future periods will be performed for either a stated fee, estimated
fee, or fee range if it is likely at the time of the representation that such fees will be substantially
increased and the prospective client is not advised of that likelihood.
When performing professional services for a client it may be necessary or expedient to charge a
pre-arranged fee, in which event the professional accountant in public practice should estimate a
fee taking into account the referred matters.
Section 34(10) of Nepal Chartered Accountants Act, 2053 states that members holding Certificate
of Practice shall not base their remuneration as a percentage on the profit or on any other uncertain
results.

Page 27 of 42
 Entering into a contingent fee arrangement relating to an assurance engagement is an example of
self-interest threat. In the present case, fee is contingent upon the approval or sanction of loan by
the bank. So, this is against the legal provision and also the situation of self-interest threat to the
auditor and hence it is advisable for the auditor not to accept the engagement under such fee
arrangement.
b) Section 100 (12) of ICAN's Handbook of the Code of Ethics for Professional Accountants, 2018
defines that threats may be created by a broad range of relationships and circumstances. When a
relationship or circumstance creates a threat, such a threat could compromise, or could be perceived
to compromise, a professional accountant’s compliance with the fundamental principles. A
circumstance or relationship may create more than one threat, and a threat may affect compliance
with more than one fundamental principle. Such threats include self-interest threat, self-review
threat, advocacy threat, familiarity threat and intimidation threat.
Advocacy threat is the threat that a professional accountant will promote a client’s or employer’s
position to the point that the professional accountant’s objectivity is compromised.
Familiarity threat is the threat that due to a long or close relationship with a client or employer, a
professional accountant will be too sympathetic to their interests or too accepting of their work.
c) According to section 14 Nepal Chartered Accountants Act, 2053, the Disciplinary committee shall
be formed to inquire into a complaint and recommend the Council for necessary action, where any
one lodges a complaint in the Institute that any member has done any act or action contrary to the
Nepal Chartered Accountants Act or the Rules or code of ethics framed under this Act or where the
Institute itself receives such information.
Further, as per section 14(5) of Nepal Chartered Accountants Act, 2053, the disciplinary committee
shall make recommendation, along with its opinion and finding, to the Council for taking necessary
action against a member if found guilty from its investigation and in view of such recommendation
the council may, impose any of the following penalties on the concerned member, according to the
gravity of the offence:
a) Reprimanding;
b) Removing from the membership for a period not exceeding 5 years;
c) Prohibiting from carrying on the accounting profession for any specific period;
d) Canceling the professional certificate or membership.
5. Answer/Comment on the following: (2  5=10 marks)
a) Describe the process for appointing auditor of a company by the Registrar of Company.
b) Discuss about the provision relating to removal of appointed auditor under Company Act, 2063.
Answer
a) According to section 113 of the Company Act, 2063 on request of the Board of Directors, the Office
of the Company Registrar may appoint auditor in following cases:
i. If the auditor is not appointed in Annual General Meeting of a company, or Annual General
Meeting could not be held, or
ii. The auditor appointed under the Company Act cannot continue due to whatever reason,
In view of above, if any of the situations prevails, Board of Directors may request to appoint an
auditor to the Office of the Company Registrar. The Office of the Company Registrar may appoint
an auditor on receiving such request.
b) As per section 119 of company Act 2063, no auditor appointed pursuant to provision in the Act
shall be removed pending the completion of audit of accounts of any financial year for which he/she
was appointed as the auditor.

Page 28 of 42
 However, if any auditor breaches the code of conduct of auditors or does any act against the interest
of the company which has appointed him as the auditor or commits any act contrary to the
prevailing law, such auditor may be removed through the same process whereby he/she was
appointed as auditor, by giving prior information to the Institute of Chartered Accountants of Nepal,
and with the approval of the regulatory authority, if any authorized by the prevailing law for the
regulation of business of the company concerned , and failing such authority, with the approval of
the Office.
While removing an auditor pursuant to Sub-section (2), the auditor shall be provided with a
reasonable opportunity to defend him/herself.
6. Write short notes on the following: (42.5=10 marks)
a) Key Audit Matters
b) Key Management Personnel
c) Audit Strategy
d) Cost Audit
Answer
a) Those matters that, in auditor's professional judgment, are of most significant in the audit of
financial statements of the current period are referred as key audit matters. Such key audit matters
are selected from matters communicated with those charged with governance. The auditor is
required to communicate such matters to those charged with governance and include in audit report
in the Key Audit Matters Section.
The purpose of communicating key audit matters is to enhance the communicative value of
auditor's report by providing greater transparency about the audit that was performed.
Communicating key audit matters provides additional information to intended users of the financial
statements to assist them in understanding those matters which are of most significance in the audit
of the financial statements. Communicating key audit matters is not a substitute for disclosure in
the financial statements or the substitute for the auditor expressing a modified opinion. In
determining key audit matters, auditor may take into account the areas of higher assessed risks and
areas requiring significant management judgment.
b) Key management personnel are those persons who have the authority and responsibility for
planning, directing and controlling the activities of the reporting entity.
It may be noted here that non-executive directors of a company will not be considered as key
management personnel under NAS 24 by virtue of merely their being directors, unless they have
the authority and responsibility for planning, directing and controlling the activities of the reporting
entity.
Further, the requirements of NAS 24 should not be applied in respect of a non-executive director
even if he participates in the financial and/or operating policy decision of the enterprise unless he
falls in any of the categories discussed in other NASs.
c) Audit strategy is concerned with designing optimized audit approaches that seek to achieve the
necessary audit assurances at the lowest cost within the constraints of the information available.
Audit procedures should be relevant to the important assertions, and as cost effective as possible to
perform. Audit strategy generally involves the following steps:
i. Obtaining knowledge of business.
ii. Performing analytical procedures at initial stages.
iii. Evaluating inherent risks.
iv. Evaluating internal control system for strategy purpose.
v. Formulating the strategy.

Page 29 of 42
d) Cost Audit represents the verification of cost accounts and check on the adherence to cost
accounting plan. It ascertains the accuracy of cost accounting records to ensure that they are in
conformity with Cost Accounting principles, plans, procedures and objective. Cost audit provides
useful information to the management regarding regulating production, economical method of
operation, reducing cost of operation and reformulating Cost accounting plans. It aims to identify
the undue wastage or losses and ensure that costing system determines the correct and realistic cost
of production.
Cost Audit comprises following;
 Verification of the cost accounting records such as the accuracy of the cost accounts, cost
reports, cost statements, cost data and costing technique and
 Examination of these records to ensure that they adhere to the cost accounting principles,
plans, procedures and objective.
7. Distinguish between: (2 5=10 marks)
a) Verification and Valuation
b) Internal Audit and External Audit
Answer
a) Distinction between verification and valuation:
1. Meaning: verification establishes existence, ownership and acquisition of assets and liability
whereas valuation certifies correctness of the value of assets and liabilities.
2. Time: Verification is done at the end of the year whereas valuation is done during the year.
3. Personnel: Verification is done by auditor whereas valuation is done by the proprietor himself
or by the professional valuators.
4. Evidence: The title deeds, receipts of payments constitute documentary evidence for
verification whereas certificate given by the proprietor or valuator is the documentary evidence
for valuation.
5. Basis: Verification can rely on valuation to some extent but valuation does not rely on
verification.
6. Expertise: Valuation requires technical expertise beyond accounting.
b)
Bases Internal Audit External Audit
Appointing Management of the entity Owner of the entity (shareholder)
authority
Approach To ensure adherence to To collect sufficient appropriate audit
management, safeguard of assets, evidence as to express, “true and fair”
completeness and accuracy of view on financial statement
accounting records
Independence Less independent Complete independent
Reporting To management or to Audit To shareholder, or appointing authority
responsibility committee
Conducted by Employee or outsourced consultant Member holding Certificate of practice
Coverage All categories of risk, their Financial reports, financial reporting
management, including reporting on risks.
them

Page 30 of 42
Paper 3: Corporate and Other Laws
Attempt all questions.
1. Answer the following questions: (5×5=25 marks)
a) The board of directors of Nepal Cement Private Ltd., wants to know whether their company could
be converted itself into a public limited company. Advise Nepal Cement Private Ltd. how a private
company could be converted into public company as per the Companies Act, 2063.
b) PQ Ltd. want to issue share and inquire you whether a company can issue shares at premium as
per the provisions of the Companies Act, 2063? Mention the conditions on which a company may
issue shares at premium and utilization of premium amount. Answer referring the provisions of the
Companies Act, 2063.
c) The board of directors of Investment Bank passed a resolution to purchase ATM machines from
Asus Tech. Accordingly, a deed of contract drafted and duly signed with advance money. Some of
the shareholders of the bank questioned the validity of the contract as four out of seven directors
found disqualified. Give your opinion as to the validity of the contract.
d) ABC Limited changed its objective clause in Memorandum of Association. Mr. Prakash, a
substantial shareholder, is not satisfied with the change being made. He wants to make amendment
to declare null and void. How court entertains his decent ideas? Suggest the process as provided
in the Companies Act, 2063.
e) The object clause of Memorandum of Association of ABC Pvt. Ltd. authorized the company to carry
on the business of trading in fruits and vegetables. The directors of the company in recently
concluded board meeting decided to carry fish trading and accordingly, the company ordered fish
for the purpose of trading. FSH Limited supplied fish to ABC Pvt. Ltd. worth Rs. 30 Lakhs. The
members of the company convened an extraordinary general meeting and negated the proposal of
the board of directors on the ground of ultra vires acts. FSH Limited being aggrieved of the said
decision of ABC Pvt. Ltd. seeks your advice. Advise them.
Answer:
a) Section 13 of the Companies Act, 2063 contains the following provisions for conversion of a
private company into a public company.
A private company may decide to convert the company into a public company by adopting a special
resolution in the general meeting. However, no private company shall be capable of being
converted into a public company unless and until it fulfills the requirements to be fulfilled pursuant
Companies Act for being a public company.
Then the concerned private company shall, for being converted into a public company, make as
application as prescribed, accompanied by a copy of the resolution and by the fees as prescribed,
to the Company Registrar’s Office within thirty days after the date of such resolution.
On receipt of an application the Office shall, if the concerned private company has fulfilled the
necessary requirements for carrying on transactions as a public company, will mention in the
Register of Company as conversion of such company into a public company and give a company
conversion certificate as prescribed within 60 days.
b) Section 29 of the Companies Act, 2063 has specified the conditions for issuing shares at premium.
As per the said section, any company fulfilling the following conditions may, with the prior
approval of the office of the company registrar, issue shares at premium:
 A public company desiring to issue securities to the public shall fulfil the terms and conditions
as prescribed by the prevailing law on securities. However, for private companies and other
public companies with no provision to issue securities to the public as per the prevailing law
on securities, total assets should exceed its total liabilities,

Page 31 of 42
  The Company's general meeting has decided to issue shares at a premium.
The premium thus collected shall be deposited in a premium account to be opened to that effect.
The money deposited in premium account can be utilized for following purpose:
 Paying up unissued share capital to be issued to the shareholders as fully paid bonus shares,
 Providing for the premium payable on the redemption of any redeemable preference shares,
 Writing off the preliminary expenses made by the company.
 Bearing or reimbursing the expenses of or the commission paid or discount allowed on, any
issue of shares of the company.
c) Company being a legal person its business and affairs are carried on by its directors who are
considered as the representatives of the shareholders. Section 89(1) of the Companies Act, 2063
has listed the various circumstances where a person becomes disqualified to be a director. In
general, the act done by disqualified board of directors cannot get validity and binding to the
company.
Section 106 of the Companies Act, 2063 provided that if it is afterwards discovered that any
provision under this Act has not been complied with in respect of the appointment of any director,
acts already done by such director him /her before the discovery of such fact shall not be rendered
invalid by that fact. Therefore, the resolution passed by the directors though disqualified and
contract with Asus Tech is also valid and binding
d) Any Company has its objectives mentioned in the Memorandum of Association. It is reasonable to
make amendment in the objective clause for its new regime and speed. However, any person being
a shareholder, may take own decent opinion and proceed for null and void the amendments. The
companies Act, 2063 has made such provision to apply the amendment provision. Section 21 has
provided the amendment provision for the sake of test of sustainability of the amendments in the
object clause. Sub section 4 of section 21 has provided requires the following terms and condition
to be fulfilled:
If a shareholder of a public company who is not satisfied with an amendment made to the objectives
of the company may, on fulfilling the following requirements, file a petition, setting out the reasons
therefore, in the court to have that amendment declared null and void:
(a) A shareholder or shareholders holding at least five percent shares of the paid-up capital of the
company, except the shareholders who consent to or vote for the amendment or alteration, has
to make a petition,
(b) A petition has to be filed within twenty one days after the adoption of the resolution to amend
the objectives of the company,
(c) Where any one is to file a petition on behalf of one or more than one shareholder entitled to
make petition, the petition has to be filed by a person who is authorized in writing for that
purpose.
Court may entertain his decent opinion from the application submitted pursuant to sub section
4 of section 21. On a petition as submitted above, the court may issue an appropriate order,
specifying the following terms and conditions:
(a) Declaring the amendment made to the objectives of the company to be fully or partly valid or
void,
(b) Requiring the company to subscribe for a reasonable value, the shares and other rights held
by the shareholders making a petition under Subsection (4), upon being disagreed with the
making as alteration in the main objectives of the company,
(c) The shares have to be subscribed under Clause (b) from the moneys as referred to in Sub-
section(2) of Section 61; and in the case of a company which has no such moneys, issuing an

Page 32 of 42
 order to decrease the capital of the company as if the share capital were decreased to the extent
of such subscription by adopting a special resolution by the company; and where such order
is issued, the company shall amend its memorandum of association and articles of association,
subject to the provisions of this Act.
e) The question is related to the doctrine of ultra vires. The meaning of the term ultra vires is simply,
beyond (their) powers. The legal phrase “ultra vires” is applicable only to acts done in excess of
the legal powers of the doers. This presupposes that the powers in their nature are limited. It is a
fundamental rule of Company Law that the objects of a company as stated in its memorandum can
be departed from only to the extent permitted by the Act, thus far and no further.
In consequence, any act done or a contract made by the company which travels beyond the powers
not only of the directors but also of the company is wholly void and inoperative in law and is
therefore not binding on the company.
On this account, a company can be restrained from employing its fund for purposes other than those
sanctioned by the memorandum. Likewise, it can be restrained from carrying on a trade different
from the one it is authorized to carry on.
The impact of the doctrine of ultra vires is that a company can neither be sued on an ultra vires
transaction, nor can it sue on it.
Since the memorandum is a “public document”, it is open to public inspection. Therefore, when
one deals with a company one is deemed to know about the powers of the company. If in spite of
this you enter into a transaction which is ultra vires the company, you cannot enforce it against the
company.
Therefore, the resolution passed by the Board of Director ABC Pvt. Limited for an ultra vires
transaction is invalid. As a result of this, the transaction entered into the supply of fish with FSH
Limited is not legal and is void.
2. Answer the following questions: (3 × 5=15 marks)
a) Ram Janaki Bank Ltd. had earned the profit in FY 2076/77 and board of directors want to
recommend dividend in coming AGM. As this is the first time to recommend dividend they want to
know if there is any restriction to distribute dividend by bank as per the Bank and Financial
Institution Act, 2073.
b) Tilak Das was appointed as a director of Nepal Rastra Bank for the term of 4 years. An application
filed to the Ministry of Finance to remove the director as he was expelled from the post of CEO of
Janak Bikas Bank 5 years back in a charge of over valuation of security that resulted huge loss to
the bank. The ministry wants your opinion to the following matters:
i) The conditions when the director can be removed.
ii) Can he be removed on the above ground?
c) Pukar Singh has been elected in the general meeting as a board of director of Kamana Bank Ltd.
You, as an employee of the bank, have to prepare a document including the matters to be submitted
by a board of director after his appointment. List out the matters that you have to collect from him
for the disclosure to be made by the director as per the Bank and Financial Institution Act, 2073.
Answer
a) As per Section 47 of the Bank and Financial Institutions Act, 2073 before declaration of dividend
by bank and financial institutions following conditions need to be fulfilled:
1. A bank or financial institution shall obtain approval of Nepal Rastra Bank, before declaring
and distributing dividends.
2. No bank or financial institution shall be allowed to declare or distribute or distribute dividends
until it
i) Recovered all of its preliminary expenses;

Page 33 of 42
 ii) Recovered all of its losses sustained by it until the previous year;
iii) Capital fund is maintained;
iv) Amount shall have to set aside provision for possible loan loss;
v) Amount shall have to set aside for general reserve fund;
vi) Shares set aside for public issue are issued and fully paid up,
b)
i) Pursuant to Section 22(1) of the Nepal Rastra Bank Act, 2058 the Government of Nepal, the
Council of Ministers shall remove the Governor, Deputy Governor and Director on conditions
stipulated under Section 22(5) which provides that the Governor, Deputy Governor and
Director shall be removed from the office on any of the following grounds:-
1. If one is disqualified to become a Director pursuant to section 21.
2. The lack of capability to implement or cause to implement the functions which the Bank
has to carry out in order to achieve the objectives of the Bank under this Act.
3. If one has committed any act causing loss and damage to the banking and financial system
of the country.
4. If one is found to have acted dishonestly or with mala-fide intention in any transaction
related to the business of the Bank.
5. If professional license is revoked or prohibited from carrying out any profession rendering
disqualified to be engaged in any trade or profession on the ground of gross misconduct.
6. If one is absent for more than three consecutive meeting of Board without a genuine
reason.
ii) As the act of over valuation of security and punishment thereof is not a ground to remove the
Governor, Deputy Governor and Director as per Section 22(5) as mentioned above, the
Government of Nepal cannot remove Mr. Tilak Das from his post. The removal shall be treated
as unlawful.
c) It is mandatory under Sub-section (1) of Section 25 of the Bank and Financial Institution Act, 2073
that every director shall have to submit the details referred to in Sub-Section (1) of Section 24 to
the bank or financial institution within seven days of his/her appointment. When the details have
to be provided by the directors, the bank or financial institution shall have to separately maintain
records of such details. Under Section 24 of the Bank and Financial Institution Act, 2073, a bank
or financial institution shall collect the following details of a director: -
 Full Name, address, academic qualifications, profession and experience of the director,
 Details as to designation and responsibility if he/she has worked earlier as Director, official or
employee of any other agency,
 Details as to name and address of family of the Director and relevant person's details and
financial interests of himself/herself or his/her family in bank or financial institution or other
agencies, share ownership in his/her name and names of the family of said institution,
 Details of the shares and debentures subscribed by the Director or his/her family members in
the bank or financial institution or its holding or subsidiary company,
 Details of the family members is working as official or employee in the concerned bank or
financial institution, if any,
 Details as to whether the concerned bank or financial institution has, or is going to have, any
type of agreement with himself/herself or his/her family member,
 Details as to whether any type of interests or concerns with regard to appointment of Chief
Executive, Company Secretary and Auditor,

Page 34 of 42
  Written authority given to the Rastra Bank to allow it to conduct an inquiry or to cause to be
conducted the inquiry as to the financial and professional background of the Director,
 Self-declaration that he/she is qualified to be the Director pursuant to this Act,
 Any other details as specified by Rastra Bank from time to time to be furnished before the
Rastra Bank and the Board of Directors.
3. Answer the following questions: (2 × 5=10 marks)
a) Mr. YU, owner of an estate with grasslands, sold the grass to RANA Buffalo Park Pvt. Ltd. He has
also paid share in the company. He further has got insurance of grass in his own name not the
company. One week later, the grass is destroyed by the fire. Mr. YU filed a petition to recover of
loss occurred from fire. However, insurance company refused to provide loss to him. Identify and
describe the reason for refusing of insurance company to provide loss of grass. Describe the
principle of insurable interest with referring a relevant case.
b) Securities Act, 2063 has made legal provision for power to refuse to issue a license to carry on
securities business. State, the legal grounds of refusal to issue license.
Answer:
a) Insurable interest exists when an insured person derives a financial or other kind of benefit from
the continuous existence, without impairment or damage, of the insured object (or in the case of a
person, their continued survival). A person has an insurable interest in something when loss of or
damage to that thing would cause the person to suffer a financial or other kind of loss.
Typically, insurable interest is established by ownership, possession, or direct relationship. For
example, people have insurable interests in their own homes and vehicles, but not in their neighbors'
homes and vehicles, and certainly not those of strangers.
The "factual expectancy test" and "legal interest test" are the two major concepts of insurable
interest.
A company may have an insurable interest in a President/CEO or other employee with special
knowledge and skills. A creditor has an insurable interest in the life of a debtor, up to the amount
of the loan. A person who is financially dependent on a second person has an insurable interest in
the life of that second person.
In Macaura v Northern Assurance Co Ltd case, insurance claim had refused to Mr. Macaura,
the policy holder and seller of timber, as to the same fact of above case. In this case, insured object
is timber that had already sold to other company. Insurer had refused to give insurance amount
being Mr. Macaura has not insurable interest over the timber. In this case, it is concluded that the
appellant had no insurable interest in the timber described. It was not his. It belonged to the Irish
Canadian Sawmills Ltd, of Skibbereen, co Cork. He had no lien or security over it and, though it
lay on his land by his permission, he had no responsibility to its owner for its safety, nor was it
there under any contract that enabled him to hold it for his debt. He stood in no "legal or equitable
relation to" the timber at all. He had no "concern in" the subject insured. His relation was to the
company, not to its goods, and after the fire he was directly prejudiced by the paucity of the
company's assets, not by the fire.
In above case, Mr. YU has same status as explained in the Macaura case. Due to the lack of
insurable interest, he has no right to claim over the insurer on claimant of insurance amount.
b) Section 60 of the Securities Act, 2063 states, Power to refuse to issue a license to carry on securities
business. However, the Board may refuse to issue a license to carry on securities business to any
company or body on the following circumstances:
i) if it is proven that such company or body has been insolvent due to its inability to repay
creditors,

Page 35 of 42
 ii) if the application for such a license is not accompanied by the documents and details required
to be accompanied under this Act or the Rules framed under this Act, or any other matter as
the Board may specify,
iii) if, upon considering the matters set forth in subsection (2) of Section 58, it is not appropriate
to issue a license to carry on securities business.
4. Answer the following questions: (2 × 5 = 10 marks)
a) Simara Steel Ltd. is going to distribute bonus of FY 2076/77. In this year some of the employees
were involved in riots and in disciplinary acts. Company is in dilemma and confusion how bonus
is to be distributed to such employees? Suggest in following query in accordance with the Bonus
Act, 2030.
i) What are the eligibility criteria for distributing bonus?
ii) Is there any restriction to have or to distribute bonus?
b) State the provisions of establishment and function, duties and powers of the One Stop Service
Centre under the Industrial Enterprises Act, 2076.
Answer:
a) Bonus Act, 2030, section 6, has mentioned the eligibility criteria of bonus as follows:
(1) An employee who has worked for the half period to be worked in a fiscal year, shall be entitled
to obtain bonus under to this Act.
Provided that, no employee shall be entitled to obtain Bonus who has worked casually or in a
shift basis.
(2) For the purpose of 1 above, the following periods shall also be computed as a period where an
employee has worked.
(i) A period kept on reserve
(ii) A period under which an employee is on any leave with salary.
(iii) A period of disablement caused by accident arising in course of business of the
enterprise.
There are restriction provisions to have or to distribute bonus in the Bonus Act, 2030. Section 8 has
prescribed the restriction provision that an employee shall not be entitled to obtain bonus under this
Act, if he/she is punished or dismissed from service for committing any act as follows:
(i) Theft of the property of the enterprise or any damage to such property.
(ii) Illegal strike or abetment to other for such strike,
(iii) Riots or breaching of discipline.
Above condition shall not be deemed to be prejudiced to obtain in the case of the bonus for a period
before committing such a punishable act.
b) The Industrial Enterprises Act, 2076 has prescribed the provision regarding the establishment of
One Stop service Centre to provide smooth services related to the establishment of industrial firms
and operation through one door system. The Centre is established for the purpose of providing the
incentives, exemptions, facilities or concessions easily to those industries or investors entitled
under this Act and other prevailing laws and performing the functions to be discharged by various
bodies of the Government of Nepal through one place in a timely manner and delivering industry
administration related services from the permission to establish, registration, expansion and
liquidation of industries. Different services as to registration, environment compliance, foreign
currency exchange, visa matters, infrastructure, land administration customs and revenue and
administration and law are provided through the same Centre at the same place.

Page 36 of 42
 The Government of Nepal may establish and run One Stop Service Centre by publishing a notice
in the Nepal Gazette. While publishing the notice, apart from other matters, it shall provide the
place of Centre, service provided by it, its units and service operation committee.
Function, duties and powers of one stop service Centre
One stop service center shall be established to provide smooth services to investors as well as make
available the incentives and concessions to be enjoyed by any industry from a single place. Pursuant
to Sub-section (1) of Section 36 of the Act, the one stop service committee shall exercise the
following function, duties and powers:-
 To implement or cause to implement the decision to provide exemptions, concessions and
facilities available to the industries as per this Act.
 To perform acts delegated by the Board under its function, duties and powers.
 To decide and implement for the timely arrangement of infrastructure service, like, electricity,
water supply, communication equipment, land and road to the industries.
 To do other works as prescribed.
5. Answer the following questions: (2 × 5=10 marks)
a) A complaint for breach of code of conduct of The Institute of Chartered Accountants of Nepal has
been lodged against Mr. XY Sharma who is Council Member as well as member of Disciplinary
Committee of the Institute. How will the investigation and if applicable, punishment be given to
Mr. XY Sharma as per the provisions of the Nepal Chartered Accountants Act, 2053?
b) State the function, duties and powers of the Accounting Standard Board under the Nepal Chartered
Accountants Act, 2053.
Answer:
a) Sub-section (2) of Section 14 of the Nepal Chartered Accountants Act, 1997 prescribes for the
procedure of investigation for any complain against Chairman or any member of the Disciplinary
Committee for their actions contrary to the Act or the Regulations, Bye-laws or code of conduct
framed under the Act. The provisions of this sub-section clearly spells out that such Chairman or
member shall not be allowed to attend the meeting that hears the complaint against them.
Similarly, sub-section (6), provides that any Council member against whom the Disciplinary
Committee, after investigating upon the complaint of his action contrary to the Act or Regulations,
Bye-laws or code of conduct framed under the Act, has decided to recommend the Council to take
necessary action, shall not be allowed to attend and to vote at the Council meeting where the
Council is hearing at such recommendation.
In the given case where complain is lodged against Mr. XY Sharma who is the member of both
Disciplinary Committee and the Council. In this case, according to the above provisions of the Act,
he shall not be allowed to take part in the hearing and investigation process in the Disciplinary
Committee, also he shall not be allowed to be present in the meeting of the Council when it hears
the recommendation of the Disciplinary Committee.
b) The fundamental function, rights and duties of the board is to develop accounting standards in order
to govern and regulate the financial reporting and accounting profession. Section 15B of the Nepal
Chartered Accountants Act, 2053 has provided the rights and duties of Accounting Standards Board
be as follows:
 To develop accounting standards, on the basis of relevant International Accounting Standards,
in order to govern and regulate financial reporting and accounting profession.
 To evolve appropriate process of development of accounting standards and publish material
related to accounting standards.
 To redraft, improvise and revise standards.

Page 37 of 42
  To interpret the standards.
 To undertake other related tasks related to accounting standards.
6. Answer the following questions: (5 × 4 = 20 marks)
a) Under what circumstances the negotiable instrument deemed to be dishonored and no presentment
is necessary for its payment as per the Negotiable Instruments Act, 2034?
b) What includes by the employment period under the Labour Act, 2074?
c) 'K' entered into a contract with 'P' for the purchase of 1000 bags of rice at the rate of Rs. 1,000 per
bag. 'P' has not supplied the goods within the due date and due to this 'K' suffered a loss of Rs.
100,000 as he has to purchase these bags at the rate of Rs. 1,100 per bag from the market to deliver
the same to its customers. Decide how much compensation can be claimed by 'K' from 'P'.
d) Explain "Sick Industry" under the Industrial Enterprises Act, 2073.
e) What special programs may be operated by the Government of Nepal relating to the social welfare
as per The Social Welfare Act, 2049?
Answer:
a) Situation in the Negotiable Instruments shall be deemed to be dishonored and no presentment is
necessary for its payment:-
(a) If the maker, acceptor or drawee deliberately prevents the presentment of the Negotiable
Instrument, or
(b) If the instrument being payable at the specified place, neither the payer or his Agent to pay it
attends at such place during the business hours on a business day, or
(c) If the payer closes his/her office during the business hours on a business day, or
(d) If the Negotiable Instrument not being payable at any specified place, the concerned party
cannot be found for the presentment after due search.
b) Section 2 (o) of the Labour Act, 2074 has defined the term employment period which means the
period of employment with the employer. It also includes the following period:
 The period remained in reserve.
 The period stayed with remuneration leave.
 The period of maternity or maternity care leave.
 The period stayed in sick leave because of accident during the course of employment
c) The given problem is related to compensation for loss or damage caused by breach of contract
covered under section 537 of the National Civil Code, 2074.
According to the provision, when a contract has been broken, the party who suffers by such breach
is entitled to receive, from the party who has broken the contract, compensation for any loss or
damage caused to him thereby, which naturally arose in the usual course of things from such breach,
or which the parties knew, when they made the contract, to be likely to result from the breach of it.
In estimating the loss or damage arising from a breach of contract, the means which existed of
remedying the inconvenience caused by the non-performance of the contract must be taken into
account.
Given facts state that 'K' entered into contract with 'P' for purchase of 1000 bags of rice at the rate
of Rs. 1,000 per bag. 'P' breaks his promise as to supply of goods within the due date. This act of P
resulted loss to 'K' of Rs. 1,00,000 as he has to purchase these bags of Rs. 1,100 per bag from
market to deliver it further to its customers.
Accordingly, as per the provision in the given situation, 'K' is entitled to receive from 'P' by way of
compensation, the sum, by which the contract price falls short of the price (i.e., 100 per bag) from

Page 38 of 42
 the market price on the day of default. The number of damages will be Rs. 1,00,000 (i.e., 1000 of
rice bags x 100).
d) Section 37 of the Industrial Enterprises Act 2073, prescribes the provision about the Sick Industry.
If any industry is being operated at least five years and in loss for a consecutive period of last 3
years due to operate in thirty percent or below of the total production capacity due to condition out
of control and not being due to negligence or weakness of management, following the procedure
mentioned under prescribed guidelines, Government of Nepal may identify as sick industry.
On the basis of contribution made by the industry before being sick industry on generation of
employment, import substitution or earn foreign exchange by export promotion and can be re-
operated if provided fixed concession, facility or rebate, Nepal Government may take necessary
action to restructure, reformation and management of such industry.
e) Pursuant to Section 3 of the Social Welfare Act 2049, the Government of Nepal, by means of
different activities relating to the social welfare work, to support the overall development of the
country may operate the social welfare Program through the concerned Ministry and Social
organizations and institutions.
Similarly, as per Section 4, the Government of Nepal may operate special Programs, relating to the
social welfare activity and social service, in the following matters:
a) To serve interest and render welfare to the children, old age, helpless or disabled people.
b) To foster participation in development and to promote and protect the welfare, rights and
interest of the women.
c) To rehabilitate and help to lead a life of dignity to the victims of social mischief's and also to
juvenile delinquency, drug addicts and similar people involved in other kind of addictions.
d) To help to lead a life with dignity to the jobless, poor and illiterate people.
e) To manage religious places and the activities of the trust Guthi institutions.
f) To take effective management and actions for the welfare of the backward communities and
classes.
7. Write short notes: (2 × 5 = 10 marks)
a) Disqualifications of insurance agents, surveyor and brokers.
b) Various leave and holidays facilities prescribed by the Labour Act, 2074.
Answer:
a) As per the Section 32 of the Insurance Act, 2049 no person shall become an Insurance Agents,
Surveyor or Broker in following conditions:
i) If he/she has not attained age of sixteen years,
ii) If he/she is of unsound mind,
iii) If he/she is an insolvent,
iv) If he/she has been convicted and sentenced to punishment by a court in an offence involving
any type of theft, fraud, misappropriation or embezzlement of property entrusted to him, or
v) If he/she has done anything in the course of work regarding to the insurance business causing
loss or damage to the Insurer or insurance policy holder.
b) Labour Act, 2074 under sections 40 to 48 has provided the leave and holidays facilities as follows.
 Weekly holiday- 1 day every week
 Public Holiday- 13 days including May Day and additional 1 day to female employees
including International Women's Day.

Page 39 of 42
 Home Leave- 1 day for every 20 worked days.
 Sick Leave- up to 12 days fully paid annually.
 Mourning Leave- 13 days in case of death of persons.
 Leave in lieu- For the laborers put in work on public holiday or weekly off will be provided
accordingly.
 Maternity Leave- 98 days. Fully paid up to 60 days either before or after the delivery.
 Paternity Leave- 15 days. Fully paid.

Page 40 of 42
Examiner’s Commentary on Students' Performance in June 2021
Examinations
This commentary has been written to accompany the published questions and answers and is written
based on the observations of evaluators. The aim is to provide constructive guidance for future
candidates, giving insight into what the evaluating team is looking for, and flagging difficulties
encountered by candidates who attempted these questions.
Subject: Advanced Accounting
Question No. 1
Overall Satisfactory
Question No. 2
Concept and preparation lacking in calculation of profit during year
Question No. 3
Average performance; most of the students have not answered 3(b) correctly.
Question No. 4
Generally good
Question No. 5
Satisfactory: provision of concerned Standard is not mentioned by many students
Question No. 6
Satisfactory performance
Subject: Audit and Assurance
Question No. 1
Average performance; most of the students referred NAS-10 instead of NAS 8.
Question No. 2
Average Performance; most of the students did not mention exact punishment in answer.
Question No. 3
Average performance; most of the students were not conceptually clear on control environment.
Question No. 4
Poor Performance; misconception about CAs that they are only auditors.
Question No. 5
Most of the students have not answered well about audit strategy.
Question No. 6
Satisfactory performance
Question No. 7
Average performance; repetitive points

Subject: Corporate & Other Laws

Question No. 1

Page 41 of 42
Satisfactory performance
Question No. 2
Average performance. Students need to be more focused on Bonus Act and BAFIA Provision.
Question No. 3
Satisfactory Performance
Question No. 4
Satisfactory Performance
Question No. 5
Satisfactory Performance
Question No. 6
Average performance; 6(a) is not answered well.
Question No. 7
Satisfactory Performance

Page 42 of 42