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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION GROUP II
Volume 7
14
SUGGESTED ANSWERS
November, 2012
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The Institute of Chartered Accountants of India

(Set up by an Act of Parliament)
New Delhi
SUGGESTED ANSWERS TO QUESTIONS SET AT THE
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION GROUP II

NOVEMBER, 2012
BOARD OF STUDIES THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (Set up by an Act of Parliament)
The Suggested Answers published in this volume do not constitute the basis for evaluation of the students answers in the examination. The answers are prepared by the Faculty of the Board of Studies with a view to assist the students in their education. While due care is taken in preparation of the answers, if any errors or omissions are noticed, the same may be brought to the attention of the Director of Studies. The Council of the Institute is not in anyway responsible for the correctness or otherwise of the answers published herein.
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
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: : : :
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Contents
Page Nos. Paper 5. Paper 6. Paper 7. Advanced Accounting ...................................................................................1 30 Auditing and Assurance ...............................................................................31 43 Information Technology and Strategic Management ...................................44 60
Examiners comments on the performance of the candidates
PAPER 5: ADVANCED ACCOUNTING Question No. 1 is compulsory Answer any five questions from the remaining six questions. Wherever necessary, suitable assumption(s) may be made by the candidates. Working notes should form part of the answer. Question 1 Answer the following questions: (a) A loan account remains out of order as on the date of Balance Sheet of a Bank. The account has been classified as doubtful assets (upto 1 year). Details of the accounts are : Outstanding ECGC coverage Value of security held
` 6,73,000
25% (Limited to ` 1,00,000)
` 1,50,000
Compute the necessary provision to be made by a Bank as per applicable rates. (b) ABC Ltd. came up with public issue of 3,00,000 Equity Shares of ` 10 each at ` 15 per share. P, Q and R took underwriting of the issue in ratio of 3 : 2: 1 with the provisions of firm underwriting of 20,000, 14,000 and 10,000 shares respectively. Applications were received for 2,40,000 shares excluding firm underwriting. The marked applications from public were received as under: P - 60,000 Q - 50,000 R - 60,000 Compute the liability of each underwriter as regards the number of shares to be taken up assuming that the benefit of firm underwriting is not given to individual underwriters. (c) A company acquired for its internal use a software costing ` 10 lakhs on 28.01.2012 from the USA for US $ 1,00,000. The exchange rate on that date was ` 52 per USD. The seller allowed trade discount @ 5 %. The other expenditure were: (i) (ii) Import Duty : 20% Purchase Tax : 10%
(iii) Entry Tax : 5 % (Recoverable later from tax department)
The first sentence of this question should be read as A company acquired for its internal use a software on 28.01.2012 from the USA for US $ 1,00,000.
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012
(iv) Installation expenses : ` 25,000 (v) Profession fees for Clearance from Customs : ` 20,000 Compute the cost of Software to be capitalized. (d) Give Journal Entries in the books of Head Office to rectify or adjust the following: (i) (ii) Goods sent to Branch ` 12,000 stolen during transit. Branch manager refused to accept any liability. Branch paid ` 15,000 as salary to the officer of Head Office on his visit to the branch.
(iii) On 28th March, 2012, the H.O. dispatched goods to the Branch invoiced at ` 25,000 which was not received by Branch till 31st March, 2012. (iv) A remittance of ` 10,000 sent by the branch on 30th March, 2012, received by the Head Office on 1st April, 2012. (v) Head Office made payment of ` 25,000 for purchase of goods by Branch and wrongly debited its own purchase account. (4 5 = 20 Marks) Answer (a) ` Doubtful Assets (upto 1 year) Less: Value of security (excluding ECGC cover) Less: ECGC coverage (limited to ` 1,00,000) Unsecured portion Provision: for unsecured portion @100% on ` 4,23,000 for secured portion @ 25% on ` 1,50,000 Total provision to be made in the books of the bank 4,23,000 37,500 4,60,500 6,73,000 (1,50,000) 5,23,000 (1,00,000) 4,23,000
(b) Calculation of liability of each underwriter (in shares) assuming that the benefit of firm underwriting is not given to individual underwriters (Number of shares) P Gross Liability Less: Marked applications 1,50,000 Q 1,00,000 R 50,000 Total 3,00,000
PAPER 5 : ADVANCED ACCOUNTING
(excluding firm underwriting) Balance Less: Surplus of R allocated to P and Q in the ratio of 3:2 Balance Less: Unmarked applications including firm underwriting (Refer W.N.) Net Liability Less: Surplus of R allocated to P and Q in the ratio of 3:2 Add: Firm underwriting Total Liability Working Note:
(60,000) 90,000
(50,000) 50,000
(60,000) (10,000)
(1,70,000) 1,30,000
(6,000) 84,000
(4,000) 46,000
10,000 -
1,30,000
(57,000) 27,000
(38,000) 8,000
(19,000) (19,000)
(1,14,000) 16,000
(11,400) 15,600 20,000 35,600
(7,600) 400 14,000 14,400
19,000 10,000 10,000
16,000 44,000 60,000
Applications received from public Add: Shares underwritten firm (20,000 + 14,000 + 10,000) Total applications Less: Marked applications (60,000 + 50,000 + 60,000) Unmarked applications including firm underwriting
2,40,000 shares 44,000 shares 2,84,000 shares (1,70,000 shares) 1,14,000 shares
(c) Calculation of cost of software (intangible asset) acquired for internal use Purchase cost of the software Less: Trade discount @ 5% Cost in ` (US $ 95,000 x ` 52) Add: Import duty on cost @ 20% (`) $ 1,00,000 ($ 5,000) $ 95,000 49,40,000 9,88,000
59,28,000 Purchase tax @ 10% (`) Installation expenses (`) Profession fee for clearance from customs (`) Cost of the software to be capitalised (`) 5,92,800 25,000 20,000 65,65,800
Note: Since entry tax has been mentioned as a recoverable / refundable tax, it is not included as part of the cost of the asset. (d) Particulars In the books of Head Office Journal Entries Dr. Amount ` (i) Loss of goods due to theft during transit To Purchases account (Being goods lost on account of theft during transit) (ii) Salaries account To Branch account (Being salary paid by the branch for H.O. employee) (iii) No entry in the books of head office for goods sent to branch not received by branch till 31st March 2012 (iv) Cash in transit account To Branch account (Being remittance by branch not received by 31st March, 2012) (v) Branch account To Purchases account (Being rectification of entry for payment for goods purchased by branch wrongly debited to purchase account) Note: In entry (i), it is assumed that refusal of branch manager (to accept liability of stolen goods) is accepted by the Head Office. Alternatively, Branch account will be credited on the basis of assumption that refusal of branch manager is not accepted by the Head Office. Dr. 25,000 25,000 Dr. 10,000 10,000 Dr. 15,000 15,000 Dr. 12,000 12,000 Cr. Amount `
Question 2 P, Q and R are partners sharing profits and losses in the ratio 3 : 2 : 1 after allowing interest on capital @ 9% p.a. Their Balance Sheet as at 31st March, 2012 are as follows: Liabilities Capital Accounts: P Q R Reserve Fund Creditors 50,000 30,000 20,000 1,00,000 60,000 48,000 2,08,000 2,08,000
` Assets
Plant & Machinery Fixtures Stock Sundry Debtors
`
1,08,000 20,000 50,000 30,000
They applied for conversion of the firm into a Private Limited Company named PQR Pvt. Ltd. and the certificate was received on 01-04-2012. They decided to maintain same profit sharing ratio and to preserve the priority in regard to repayment of capital as far as possible. For that purpose, they decided to insert a clause of issuance of Preference shares in Memorandum of Association in addition to issuance of Equity shares of ` 10 each. On 01-04-2012, the value of goodwill is to be determined on the basis of 2 years' purchase of the average profit from the business of the last 5 years. The particulars of profits are as under:
`
Year ended 31.03.2008 Year ended 31.03.2009 Year ended 31.03.2010 Year ended 31.03.2011 Year ended 31.03.2012 Profit Loss Profit Profit Profit 10,000 5,000 18,000 27,000 30,000
The loss for the year ended 31-03-2009 was on account of loss by strike to the extent of ` 10,000. It was agreed that rest of the assets are valued on the basis of the Balance Sheet as at 31-03-2012 except Plant & Machinery which is valued at ` 1,02,000. You are required to prepare (a) the Balance Sheet of the Company as at 01-04-2012, (b) Partners' Capital Accounts and (c) Statement showing the final settlement between the partners taking Q's capital as basis. (16 Marks)
Answer (a) Balance Sheet of the PQR Pvt Ltd. as on 1-4-2012 Note No. Equity and Liabilities Shareholders funds Share Capital Current liabilities Trade Payables Total Assets Non-current assets Fixed Assets Tangible Assets Intangible Assets Current assets Inventories Trade Receivables Total Notes to Accounts 50,000 30,000 2,38,000 2 3 1,22,000 36,000 48,000 2,38,000 1 1,90,000
`
1. Share Capital Equity share capital 18,000 fully paid shares of ` 10 each Preference share capital (9% Preference Shares) (All the shares have been issued for consideration other than cash) 1,90,000 2. Tangible assets Plant and Machinery Fixtures 3. Intangible asset Goodwill 36,000 1,02,000 20,000 1,22,000 1,80,000 10,000
(b)
In the books of Partnership Firm Partners Capital Accounts P Q R P Q R
`
To Plant machinery A/c and 3,000
`
2,000
`
1,000 By b/d
Balance 50,000 30,000 20,000
To Equity shares in 90,000 60,000 30,000 By Reserve 30,000 20,000 10,000 PQR Pvt. Ltd. fund To 9% Preference By Realization* shares in PQR Pvt. A/c (Profit Ltd. on sale of 5,000 5,000 business) 18,000 12,000 6,000 98,000 62,000 36,000 98,000 62,000 36,000 (c) Statement showing the final settlement between the Partners taking Qs capital as basis P Q R Total
`
Value of Equity Shares to be allotted, taking Qs capital as basis Ps Capital =60,000 3/2 Rs Capital =60,000 1/2 Total value of Equity Shares allotted to P,Q and R 9% Preference Shares to be allotted to P ` (95,000-90,000) 9%Preference Shares to be allotted to R ` (35,000-30,000) Total Value of Preference Shares allotted to P and R Total Purchase Consideration (W.N.2) 5,000
90,000
60,000
30,000 1,80,000
5,000 10,000 1,90,000
Taking Qs capital as basis, both P and R have ` 5,000 each as excess in their capital account balances. Since interest on capital is meant to compensate those whose capital is in excess of proportionate limits and since in the case of partners it is an appropriation of profit, it will be proper to give 9% preference shares to P and R for ` 5,000 each and the remaining amount of ` 1,80,000 in the form of Equity Shares to be divided among P, Q and R in the ratio 3:2:1. They will then share the companys profit in the ratio 3:2:1 after allowing preference dividend.
Note: The question requires that the profit sharing ratio should be maintained even after conversion of partnership firm into a company. Further, it also requires that priority in regard to repayment of capital should also be preserved. Therefore, it is also possible that 9% preference shares equivalent and proportionate to the capital balance of partners as on 31.3.2012 may be issued, so that such preference shares earn dividend equivalent to the interest on such capital @ 9%. Further, priority in regard to repayment of capital should be ensured to the extent of preference share capital and dividend thereon. Thereafter, to maintain the profit sharing ratio, equity share capital may be issued in the ratio of sharing profits and losses. In that case, 1,00,000, 9% Preference shares will be issued to P, Q and R in the proportion of 5:3:2 and Equity shares will be issued to P, Q and R in the proportion of 3:2:1. Working Notes: 1. Calculation of goodwill
2007-08 2008-09 2009-10 2010-11 2011-12
`
Profits Adjustment for abnormal loss in 2008-09 10,000 Total Profit from 2007-08 to 2011-12 Average Profit (90,000 / 5) Goodwill equal to 2 years purchase 10,000
`
(5,000) 10,000 5,000
`
18,000 18,000
`
27,000 27,000
`
30,000 30,000
`
90,000 18,000 36,000
2.
Computation of Purchase consideration
`
Assets: Goodwill Plant and Machinery Fixtures Stock Sundry Debtors Less: Liabilities: Creditors Purchase Consideration 36,000 1,02,000 20,000 50,000 30,000 2,38,000 48,000 1,90,000
Question 3 (a) M Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2012 :
` in 000
Equity & Liabilities Share Capital: Authorised Capital: Issued and Subscribed Capital : 3,00,000 Equity shares of ` 10 each fully paid up 20,000 9% Preference Shares of 100 each (issued two months back for the purpose of buy back) Reserve and Surplus: Capital reserve Revenue reserve Securities premium Profit and Loss account Non-current liabilities - 10% Debentures Current liabilities and provisions Assets Fixed Assets: Cost Less: Provision for depreciation Non-current investments at cost Current assets, loans and advances (including cash and bank balances) 3,000 250 10 4,000 500 1,800 3,000 2,000
` in 000
5,000
5,000
6,310 400 40 11,750
2,750 5,000 4,000 11,750
(1) The company passed a resolution to buy back 20% of its equity capital @ ` 15 per share. For this purpose, it sold its investments of ` 30 lakhs for ` 25 lakhs. (2) The company redeemed the preference shares at a premium of 10% on 1st April, 2012.
10
(3) Included in its investments were 'Investments in own debentures' costing ` 3 lakhs (face value ` 3.30 lakhs). These debentures were cancelled on 1st April, 2012. You are required to pass necessary Journal entries and prepare the Balance Sheet on 01.04.2012. (12 Marks) (b) Define the term Finance Lease. State any three situations when a lease would be classified as finance lease. (4 Marks) Answer (a) In the books of M Ltd. Journal Entries Dr. ` in 000 1 Bank A/c Profit and Loss A/c To Investment A/c (Being investment sold for the purpose of buy-back) 2 Preference share capital A/c Premium on redemption of Preference Shares A/c To Preference shareholders A/c (Being redemption of preference share capital at premium of 10%) 3 Preference shareholders A/c To Bank A/c (Being payment made to preference shareholders) 4 Revenue Reserve A/c To Capital redemption reserve A/c (Refer Note) (Being creation of capital redemption reserve to the extent of nominal value of preference shares redeemed) 5 Equity share capital A/c Securities Premium A/c (Premium payable on buyback) To Equity shares buy-back A/c (Being the amount due on buy-back ) Dr. Dr. 600 300 900 Dr. 2,000 2,000 Dr. 2,200 2,200 Dr. Dr. 2,000 200 2,200 Dr. Dr. 2,500 500 3,000 Cr. ` in 000
11
Equity shares buy-back A/c To Bank A/c (Being payment made for buy-back)
Dr.
900 900
10% Debentures A/c To Own debentures A/c To Capital reserve A/c (Profit on cancellation) (Being own debentures cancelled at profit)
Dr.
330 300 30
8.
Securities Premium A/c To Premium on redemption of preference shares A/c (Being premium on redemption of preference shares adjusted through securities premium)
Dr.
200 200
Balance Sheet of the M Ltd. as on 1st April, 2012 Notes No. Equity and Liabilities 1 Shareholders funds Share capital Reserves and Surplus 2 3 Non-current liabilities Long term borrowings Current liabilities Total Assets 1 Non-current assets (a) Fixed assets (b) Non-current investments 2 Current assets Total Notes to Accounts 4 5 2,750 1,700 3,400 7,850 3 70 40 7,850 1 2 2,400 5,340
` in 000
`
1. Share Capital Authorised share capital:
000
in ` in 000 5,000
12
Issued, subscribed and fully paid up share capital: 2,40,000 Equity shares of ` 10 each, fully paid up (60,000 equity shares had been bought back and cancelled during the year) 2. Reserves and Surplus Capital Reserves Add: Profit on cancellation of debentures Securities Premium Less: Premium on redemption of preference shares Premium on buy-back of equity shares Revenue Reserve Less: Transfer to Capital Redemption Reserve Capital Redemption reserve Surplus (Profit & Loss Account) Less: Loss on sale of investment 3. 4. Long term borrowings 10% Debentures (400 - 330) Non-current investments Balance as on 31.03.2012 Less: Investment sold Own debentures cancelled 5 Current assets Balance as on 31.03.2012 Add: Cash received on sale of investment Less: Payment made to equity shareholders for buy back of shares Payment made to preference shareholders 4,000 2,500 (900) (2,200) 3,400 5,000 (3,000) (300) 1,700 70 1,800 (500) 1,300 5,340 10 30 500 (200) (300) 4,000 (2,000) 2,000 2,000 40 2,400
Note: In the given solution, it is assumed that buy-back of shares has been done out of the proceeds of issue of preference shares, therefore, no amount is transferred to capital redemption reserve for buy-back. However, if it is assumed that buy-back is from sale of investments and not from the proceeds of issue of preference shares, then, amount of revenue reserves transferred to capital redemption reserve will be ` 2,600 instead of ` 2,000.
13
(b) As per AS 19 Leases, a finance lease is a lease that transfers substantially all the risks and rewards incident to ownership of an asset. As per para 8 of the standard, classification of lease into a finance lease or an operating lease depends on the substance of the transaction rather than its form. Three situations which would normally lead to a lease being classified as a finance lease are: (a) the lessor transfers ownership of the asset to the lessee by the end of the lease term; (b) the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised; (c) the lease term is for the major part of the economic life of the asset even if title is not transferred. Question 4 Following are the summarized Balance Sheet of Companies K Ltd. and W Ltd., as at 31-12-2011 : Liabilities Share Capital : Equity shares of ` 100 each 10% Preference shares of ` 100 each General Reserve Profit and Loss Account 12% Debentures of ` 100 each Sundry Creditors 2,000 700 240 (` in 000) K Ltd. W Ltd. Assets Goodwill 1,500 Other Fixed Assets 400 Debtors Stock 170 Cash at bank Debenture 15 Own (Nominal value of 200 ` 2,00,000) 315 Discount on issue of debentures Profit and Account 4,100 2,600 Loss (` in 000) K Ltd. 20 2,400 625 412 38 192 W Ltd. 1,150 615 680 155
600 560
2 411 4,100 2,600
On 01-04-2012, K Ltd. adopted the following scheme of reconstruction: (i) Each equity share shall be sub-divided into 10 equity shares of ` 10 each fully paid up. 50% of the equity share capital would be surrendered to the company.
14
(ii)
Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive 80% of the dividend claim and accept payment for the balance.
(iii) Own debentures of ` 80,000 (nominal value) were sold at ` 98 cum interest and remaining own debentures were cancelled. (iv) Debenture holders of ` 3,00,000 agreed to accept one machinery of book value of ` 3,20,000 in full settlement. (v) Creditors, Debtors and stock were valued at ` 5,00,000, ` 6,00,000 and ` 4,00,000 respectively. Goodwill, discount on issue of debentures and Profit and Loss account (Dr.) are to be written off. (vi) The company paid ` 20,000 as penalty to avoid capital commitments of ` 4,00,000. On 02.04.2012, a scheme of absorption was adopted. K Ltd. would take over W Ltd. The purchase consideration was fixed as below: (a) Equity shareholders of W Ltd. will be given 50 equity shares of ` 10 each fully paid up, in exchange for every 5 shares held in W Ltd. (b) Issue of 10% preference shares of ` 100 each in the ratio of 4 preference shares of K Ltd. for every 5 preference shares held in W Ltd. (c) Issue of 12% debentures of ` 100 each of K Ltd. for every 12% debenture in W Ltd. Pass necessary Journal entries in the books of K Ltd. and draw the resultant Balance Sheet as at 2nd April, 2012. (16 Marks) Answer In the books of K Ltd. Journal Entries Particulars 01.04.2012 1. Equity share capital A/c To Equity share capital A/c (Being sub-division of one share of ` 100 each into 10 shares of ` 10 each) 2. Equity share capital A/c To Capital reduction A/c (Being reduction of capital by 50%) Dr. 10,00,000 10,00,000 Dr. Dr. Amount ` 20,00,000 20,00,000 Cr. Amount `
15
3.
Capital reduction A/c To Bank A/c (Being payment in cash of 20% of arrears of 3 years preference dividend) Bank A/c To Own debentures A/c [(1,92,000/2,00,000) x 80,000] To Capital reduction A/c (Being profit on sale of own debentures transferred to capital reduction A/c) 12% Debentures A/c To Own debentures A/c [(1,92,000/2,00,000) x 1,20,000] To Capital reduction A/c (Being profit on cancellation of own debentures transferred to capital reduction A/c) 12% Debentures A/c Capital reduction A/c To Machinery A/c (Being machinery of ` 3,20,000 taken up by the debenture holders for ` 3,00,000) Creditors A/c To Capital reduction A/c (Being liabilities revalued)
Dr.
42,000 42,000
4.
Dr.
78,400 76,800 1,600
5.
Dr.
1,20,000 1,15,200 4,800
6.
Dr. Dr.
3,00,000 20,000 3,20,000
7.
Dr.
60,000 60,000
8.
Capital reduction A/c To Debtors A/c To Stock A/c To Goodwill A/c To Discount on debentures A/c To Profit and Loss A/c To Bank A/c To Capital reserve A/c (Being assets revalued and losses written off and penalty paid off through capital reduction account and the balance of capital reduction account transferred to capital reserve account)
Dr.
10,04,400 25,000 12,000 20,000 2,000 4,11,000 20,000 5,14,400
16
02.04.2012 9. Business Purchase A/c To Liquidators of W Ltd. (Being the purchase consideration payable to W Ltd.) 10. Fixed assets A/c Stock A/c Debtors A/c Cash at bank A/c To Sundry creditors A/c To 12% Debentures A/c of W Ltd. To Profit and Loss A/c To General reserve A/c To Capital reserve A/c (W.N.2) To Business purchase A/c (Being the takeover of all assets and liabilities of W Ltd. by K Ltd.) 11. Liquidators of W Ltd. A/c To Equity share capital A/c To 10% Preference share capital A/c (Being the purchase consideration discharged) 12. 12% Debentures of W Ltd. A/c To 12% Debentures A/c (Being K Ltd. issued their 12% Debentures against 12% Debentures of W Ltd.) Balance Sheet of K Ltd. as on 2nd April, 2012 Particulars I. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus 1 2 35,20,000 10,19,400 Notes No. Amount (`) Dr. 2,00,000 2,00,000 Dr. 18,20,000 15,00,000 3,20,000 Dr. Dr. Dr. Dr. 11,50,000 6,80,000 6,15,000 1,55,000 3,15,000 2,00,000 15,000 1,70,000 80,000 18,20,000 Dr. 18,20,000 18,20,000
17
(2)
Non-Current Liabilities (a) Long-term borrowings 3 4 Total 3,80,000 8,15,000 57,34,400
(3) Current Liabilities (a) Trade payables II. Assets (1) Non-current assets (a) Fixed assets (i) Tangible assets 5 6 7 8 Total Notes to Accounts ` 1 Share Capital Equity Share Capital Less: Surrender 50% equity capital Add: Equity share capital issued to W Ltd. 10% Preference share capital Add: Preference share capital issued to W Ltd. 2. Reserves and Surplus Profit and Loss A/c General Reserve (2,40,000 + 1,70,000) Capital Reserve (5,14,400 + 80,000) 3. Long-term borrowings 12% Debentures Less: Settled in consideration of machinery Less: Cancelled debentures 6,00,000 (3,00,000) (1,20,000) 15,000 4,10,000 5,94,400 10,19,400 20,00,000 (10,00,000) 15,00,000 7,00,000 3,20,000 10,20,000 35,20,000 25,00,000 32,30,000 10,80,000 12,15,000 2,09,400 57,34,400 (2) Current assets (a) Inventories (b) Trade receivables (c) Cash and cash equivalents
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Add: 12% Debentures issue to W Ltd. 4. Trade payables of K Ltd. Less: Reduction due to revaluation Add: Trade payables of W Ltd. 5. Tangible assets Balance of Other fixed assets Less: Machinery taken up by debenture holders Add: Other fixed assets of W Ltd. 6. Inventories Less: Reduction due to revaluation Add: Inventories of W Ltd. 7. Trade receivables Less: Reduction due to revaluation Add: Trade receivables of W Ltd. 8. Cash and cash equivalents Less: Payment of arrear of preference dividend Add: Profit on sale of own debentures Less: Penalty paid Add: Cash and cash equivalents of W Ltd. Working Notes: 1. Purchase Consideration Equity share capital [(15,000 x 50/5) x ` 10] 10% Preference share capital [(4,000x 4/5) x ` 100] = 2. Capital Reserve
2,00,000 5,60,000 (60,000) 3,15,000
3,80,000
8,15,000
24,00,000 (3,20,000) 11,50,000 4,12,000 (12,000) 6,80,000 6,25,000 (25,000) 6,15,000 38,000 (42,000) 78,400 (20,000) 1,55,000 2,09,400 12,15,000 10,80,000 32,30,000
`
15,00,000 3,20,000 18,20,000
`
Share Capital of W Ltd. (Equity + Preference) 19,00,000
19
Less: Share Capital issued by K Ltd.
(18,20,000)
Capital reserve 80,000 Note: In the question, summarised balance sheets of K Ltd. and W Ltd. as on 31.12.2011 are given. However, the internal reconstruction and amalgamation took place on 1.4.2012 and 2.4.2012 respectively. Since, no information have been provided for the intervening period of 3 months (i.e. from 1.1.2012 to 31.3.2012), the above solution is given assuming this date of summarised balance sheets as 31.3.2012 instead of 31.12.2011. Alternatively, the solution may be given on the basis of 31.12.2011. In that case, the only difference will be that dividend on preference shares and interest on debentures for period of 3 months (i.e. from 1.1.2012 to 31.3.2012) will be considered at the time of internal reconstruction. Question 5 (a) The following figures are extracted from the books of KLM Bank Ltd. as on 31-03-2012 :
`
Interest and discount received Interest paid on deposits Issued and subscribed capital Salaries and allowances Directors Fees and allowances Rent and taxes paid Postage and telegrams Statutory reserve fund Commission, exchange and brokerage Rent received Profit on sale of investment Depreciation on assets Statutory expenses Preliminary expenses Auditor's fee The following further information is given: (1) A customer to whom a sum of ` 10 lakhs was advanced has become insolvent and it is expected only 55% can be recovered from his estate. (2) There was also other debts for which a provisions of ` 2,00,000 was found necessary. 38,00,160 22,95,360 10,00,000 2,50,000 35,000 1,00,000 65,340 8,00,000 1,90,000 72,000 2,25,800 40,000 38,000 30,000 12,000
20
(3) Rebate on bill discounted on 31-03-2011 was ` 15,000 and on 31-03-2012 was ` 20,000. (4) Income tax of ` 2,00,000 is to be provided. The directors desire to declare 5% dividend. Prepare the Profit and Loss account of KLM Bank Ltd. for the year ended 31-03-2012 and also show, how the Profit and Loss account will appear in the Balance Sheet if the Profit and Loss account opening balance was NIL as on 31-03-2011. (8 Marks) (b) Prepare the Fire Insurance Revenue A/c of Jasmine Fire Insurance Co. Ltd. as per IRDA regulations for the year ended 31st March, 2012 from the following details: Particulars Claims Paid Legal Expenses regarding claims Premiums received Re-insurance premium paid Commission Expenses of Management Provision against unexpired risk as on 1st April, 2011 Claims unpaid on 1st April, 2011 Claims unpaid on 31st March, 2012 Provide for unexpired risk @ 50% less reinsurance. Answer (a) KLM Bank Limited Profit and Loss Account for the year ended 31st March, 2012 Schedule Year ended 31.03.2012 ` I. Income: Interest earned Other income Total II. Expenditure Interest expended 15 22,95,360 13 14 37,95,160 4,87,800 42,82,960 Amount (`) 5,00,000 10,000 12,50,000 50,000 3,00,000 2,00,000 5,75,000 50,000 80,000 (8 Marks)
21
Operating expenses Provisions and contingencies (4,50,000+2,00,000+2,00,000) Total IIII. Profits/Losses Net profit for the year Profit brought forward IV. Appropriations Transfer to statutory reserve (25% of 5,67,260) Proposed dividend Balance carried over to balance sheet
16
5,70,340 8,50,000 37,15,700 5,67,260 Nil 5,67,260 1,41,815 50,000 3,75,445 5,67,260
Profit & Loss Account balance of ` 3,75,445 will appear under the head Reserves and Surplus in Schedule 2 of the Balance Sheet. Year ended 31.3.2012 ` I. Schedule 13 Interest Earned Interest/discount on advances/bills (Refer W.N.) Schedule 14 Other Income Commission, exchange and brokerage Profit on sale of investment Rent received Schedule 15 Interest Expended Interests paid on deposits Schedule 16 Operating Expenses Payment to and provisions for employees (salaries & allowances) Rent, taxes paid Depreciation on assets 37,95,160 37,95,160 1,90,000 2,25,800 72,000 4,87,800 22,95,360 22,95,360 2,50,000 1,00,000 40,000
I. II. III.
I.
I. II. III.
22
IV. V. VI. VII. VIII.
Directors fee, allowances and expenses Auditors fee Statutory (law) expenses Postage and telegrams Preliminary expenses
35,000 12,000 38,000 65,340 30,000 5,70,340
Working Note: ` Interest and discount received Add: Rebate on bills discounted on 31.3.2011 Less: Rebate on bills discounted on 31.3.2012 (b) FORM B - RA Name of the Insurer: Jasmine Fire Insurance Co. Ltd. Registration No. and Date of Registration with the IRDA: Revenue Account for the year ended 31st March, 2012 Particulars (1) (2) (3) (4) (5) (6) Premium earned Other income Interest, dividend and rent Total (A) Claims incurred Commission Operating expenses related to Insurance business Total (B) Operating Profit (A)- (B) Schedule 1 : Premium earned (net) Premium received Less: Re-insurance premium 2 3 4 Schedule 1 Amount (`) 11,75,000 11,75,000 5,40,000 3,00,000 2,00,000 10,40,000 1,35,000 ` 12,50,000 (50,000) 38,00,160 15,000 (20,000) 37,95,160
It is assumed that preliminary expenses have been fully written off during the year.
23
Net premium Adjustment for change in reserve for unexpired risks (Refer W.N.) Schedule 2 : Claims Incurred Claims paid including legal expenses (5,00,000 + 10,000) Add : Claims outstanding at the end of the year Less : Claims outstanding at the beginning of the year Total claims incurred Schedule 3 : Commission Commission paid Schedule 4: Operating expenses Expenses of management Working Note: Change in the provision for unexpired risk Unexpired risk reserve on 31st March, 2012 =50% of net premium (i.e. 50% of ` 12,00,000) Less : Unexpired risk reserve as on Question 6 1st April 2011 Change in the provision for unexpired risk
12,00,000 (25,000) 11,75,000 ` 5,10,000 80,000 (50,000) 5,40,000 ` 3,00,000 3,00,000 ` 2,00,000 2,00,000
`
6,00,000 (5,75,000) 25,000
(a) Himalayas Ltd. had ` 10,00,000, 8% Debentures of ` 100 each as on 31st March, 2011. The company purchased in the open market following debentures for immediate cancellation: On 01-07-2011 1,000 debentures @ ` 97 (cum interest) On 29-02-2012 1,800 debentures @ ` 99 (ex interest) Debenture interest due date is 30th September and 31st March. Give Journal Entries in the books of the company for the year ended 31st March, 2012. (8 Marks) (b) Department A sells goods to Department B at a profit of 20% on cost and Department C at 15% profit on cost. Department B sells goods to A and C at a profit of 10% and 20%
24
on sales respectively. Department C sells goods to A and B at 15% and 10% profit on cost respectively. Departmental managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated. Departmental profits after charging manager's commission, but before adjustment of unrealized profit are as under:
`
Department A Department B 36,000 27,000
Department C 18,000 Stock lying at different departments at the end of the year are as below: Department A Department B Department C
`
Transfer from Department A Transfer from Department B Transfer from Department C 19,000 4,600
`
7,200 3,300
`
5,750 15,000 (8 Marks)
Find out correct departmental profits after charging manager's commission. Answer (a) Date 1.07.2011 In the books of Himalayas Ltd. Journal Entries Particulars Own Debentures A/c Dr. Debenture Interest Account A/c Dr. [1,0001008% (3/12)] To Bank A/c (Being 1,000 Debentures purchased @ ` 97 cum interest for immediate cancellation) 8% Debentures A/c Dr. To Own Debentures A/c To Capital reserve A/c (Profit on cancellation of debentures) (Being profit on cancellation of 1,000 Debentures transferred to capital reserve account) Dr.
Cr.
`
95,000 2,000
97,000
1.07.2011
1,00,000 95,000 5,000
25
30.09.2011
29.02.2012
29.02.2012
31.03.2012
Debenture interest A/c [9,000 100 8% (1/2)] To Debenture holders A/c (Being interest accrued on 9,000 debentures and credited to debenture holders account) Debentureholders A/c To Bank A/c (Being interest amount paid) Own Debentures A/c Debenture Interest Account A/c [1,800 100 8% (5/12)] To Bank A/c (Purchase of 1,800 Debentures @ ` 99 ex interest for immediate cancellation) 8% Debentures A/c To Own Debentures A/c To Capital reserve A/c (Profit on cancellation of debentures) (Being profit on cancellation of 1,800 Debentures transferred to capital reserve account) Debentures Interest A/c [7,200 100 8% (1/2)] To Debentureholders A/c (Being interest accrued on 7,200 debentures and credited to debenture holders account)
Dr.
36,000 36,000
Dr.
36,000 36,000
Dr. Dr.
1,78,200 6,000 1,84,200
Dr.
1,80,000 1,78,200 1,800
Dr.
28,800 28,800
31.3.2012
31.03.2012
Debentureholders A/c Dr. To Bank A/c (Being amount paid) Profit and Loss A/c Dr. To Debentures Interest A/c (Being interest on debentures for the year transferred to profit and loss account at the year end)
28,800 28,800 72,800 72,800
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(b) Calculation of correct Departmental Profit Department A Department B Department C
`
Profit after charging managers commission but before adjustment for unrealized profit Add back : Managers commission (1/9) Less: Unrealised profit on stock (Working Note) Profit before Managers commission Less: Commission for Department Manager @10% Correct profit after charging manager s commision Working Note :
Department A Department B
`
27,000
`
18,000
36,000
4,000 40,000 (1,950) 38,050 (3,805) 34,245
3,000 30,000 (4,900) 25,100 (2,510) 22,590
2,000 20,000 (900) 19,100 (1,910) 17,190
Department C
Total
`
Unrealised Profit on transfer to: Department A Department B Department C
`
5,750 x 15/115= 750 15,000 x 20% = 3,000 __
`
1,950 4,900 900
__ 7,200 x 20/120 = 1,200 19,000 x 10% = 1,900 4,600 x 15/115= 600 __ 3,300 x 10/110= 300
Question 7 Answer any four of the following: (a) Annual lease rent = ` 40,000 at the end of each year Lease period = 5 years Guaranteed residual value = ` 14,000 Fair value at the inception (beginning) of lease = ` 1,50,000 Interest rate implicit on lease is 12.6%. The present value factors at 12.6% are 0.89, 0.79, 0.7, 0.622, 0.552 at the end of first, second, third, fourth and fifth year respectively. Show the Journal entry to record the asset taken on finance lease in the books of the lessee.
27
(b) A new Plant X was acquired in exchange of old Plant B and on payment of ` 20,000. The carrying amount of the old Plant B was ` 1,75,000 (Historical cost less depreciation). The fair value of the Plant B on the date of exchange was ` 1,50,000. Suggest the accounting entry in the books of the enterprise. (c) A company is in a dispute involving allegation of infringement of patents by a competitor company who is seeking damages of a huge sum of ` 900 lakhs. The directors are of the opinion that the claim can be successfully resisted by the company. How would you deal the same in the annual accounts of the company? (d) State the conditions of issuance of Sweat Equity Shares by Joint Stock Companies. (e) Give two examples on each of the following items: (i) (ii) Change in Accounting Policy Change in Accounting Estimate (4 4 = 16 Marks) In the books of Lessee Journal entry ` Asset A/c To Lessor (Being recognition of finance lease as an asset and a liability) Working Note: Year 1 2 3 4 5 5 Lease Payments Dr. 1,49,888 1,49,888 `
(iii) Extra Ordinary Items (iv) Prior Period Items. Answer (a)
`
40,000 40,000 40,000 40,000 40,000 14,000 (GRV)
Discounting Factor (12.6%) 0.89 0.79 0.70 0.622 0.552 0.552
Present Value
`
35,600 31,600 28,000 24,880 22,080 7,728 1,49,888
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(b) When a fixed asset is acquired in exchange for another asset, its cost is usually determined by reference to the fair market value of the consideration given. Accordingly, the value of Plant X will be ` Exchange value of Plant B Add: Additional cash paid Journal entries for acquisition of Plant X will be given as: 1,50,000 20,000 1,70,000
`
1 Plant X A/c To Plant B A/c To Bank A/c (Being new plant X acquired in exchange of Plant B on additional payment of ` 20,000) 2 Profit and Loss A/c To Plant B A/c (Being loss on exchange of old Plant B transferred to Profit and Loss Account) Dr. 25,000 Dr. 1,70,000
`
1,50,000 20,000
25,000
Note: Fair value of Plant B on the date of exchange has been considered for computation of cost of Plant X in the above answer. An alternative treatment is also possible when the assets exchanged are similar in nature. In such a case, new asset may be recorded at the net book value of the asset given up after making adjustments for balance receipt or payment of cash. Accordingly, the value of plant will be ` 1,95,000 (1,75,000+20,000) instead of ` 1,70,000 and the following entry will be made:
`
Plant X A/c To Plant B A/c To Bank A/c (Being New plant X was acquired in the exchange of plant B on additional payment of ` 20,000) Dr. 1,95,000
`
1,75,000 20,000
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(c) As per para 14 of AS 29, 'Provisions, Contingent Liabilities and Contingent Assets, a provision should be recognised when (a) an enterprise has a present obligation as a result of a past event; (b) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised. If these conditions are not met, no provision should be recognised. In the given situation, since, the directors of the company are of the opinion that the claim can be successfully resisted by the company, therefore there will be no outflow of the resources. The company will disclose the same as contingent liability by way of the following note: Litigation is in process against the company relating to a dispute with a competitor who alleges that the company has infringed patents and is seeking damages of ` 900 lakhs. However, the directors are of the opinion that the claim can be successfully resisted by the company. (d) A company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled(i) (ii) the issue of sweat equity shares is authorised by a special resolution passed by the company in the general meeting. the resolution specifies the number of shares, current market price, the consideration if any, and the class or classes of directors or employees to whom such equity shares are to be issued.
(iii) not less than one year has, at the time of the issue, elapsed since the date on which the company was entitled to commence business. (iv) the sweat equity shares of company, whose equity shares are listed on a recognised stock exchange, are issued in accordance with the regulations made by the Securities and Exchange Board of India (SEBI) in this behalf. But in the case of company whose equity shares are not listed on any recognised stock exchange, the sweat equity shares are issued in accordance with the guidelines as may be prescribed. (e) (i) Examples of Changes in Accounting Policy: a. b. (ii) a. Change of depreciation method from WDV to SLM and vice-versa. Change in cost formula in measuring the cost of inventories. Change in estimate of provision for doubtful debts on sundry debtors.
Examples of Changes in Accounting Estimates:
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b. a. b. a. b.
Change in estimate of useful life of fixed assets. Loss due to earthquakes / fire / strike Attachment of property of the enterprise by government Applying incorrect rate of depreciation in one or more prior periods. Omission to account for income or expenditure in one or more prior periods.
(iii) Examples of Extraordinary items:
(iv) Examples of Prior period items:
PAPER 6: AUDITING AND ASSURANCE Question No.1 is compulsory. Attempt any five questions from the remaining six questions. Question 1 Discuss on the following: (a) Shares issued at a discount. (b) Ceiling on number of audits in a company to be accepted by an auditor. (c) Purposes of providing depreciation. (d) Filling of a casual vacancy of auditor in respect of a company audit. Answer (a) Issue of Shares at a Discount: According to Section 79 of the Companies Act, 1956, a company can issue shares at a discount on the following conditions: (i) (ii) The issue should be authorised by an ordinary resolution of the company sanctioned by the Central Government No such issue of shares at discount can be sanctioned by the Central Government in case the maximum rate of discount should exceed 10% unless the Central Government is of the opinion that a higher rate for discount is justified by the special circumstances of the case (5 Marks) (5 Marks) (5 Marks) (5 Marks)
(iii) The issue should be made within two months of the sanction by the Central Government and not earlier than one year after the date of commencement of business. (iv) The issue should be a class already issued by the company. (v) It is the duty of the auditor to confirm that the conditions given above have been complied with by the company at the time the allotment was made. As per the Revised Schedule VI, the unamortised discount on issue of shares should be disclosed in the balance sheet under the heading Other Non-Current Assets/Current assets (depending on the remaining period of amortisation). (b) Ceiling on number of Audits : According to Section 224 (1B) of the Companies Act, 1956, a Chartered Accountant cannot hold more than the specified number of company audit. This section further states that in case of Chartered Accountant Firm, the specified number is 20 companies per such partner who is not in whole time employment elsewhere. Out of the above 20 companies not more than 10 companies may have a paid up share capital of ` 25 lakhs or more. Explanation II after sub-section (IC) of section 224 further amplifies the manner of identifying the audit units for calculating the specified number. Under this explanation, when an auditor is appointed to audit even a part of a
32
companys accounts, the part will be considered as a unit of audit for the purpose of calculation of the ceiling. Each of the joint auditors is considered a part auditor for the purpose. Any joint audit held by an auditor will be included as one audit unit for the purpose of calculating the ceiling of audits. However, audit of a branch of company is not included in the computation of the ceiling. Similarly, audit of corporations which are not companies and foreign companies are also not to be included. Further, it may be noted that even non-profit companies would be counted for the purpose of ceiling. However, guarantee companies not having share capital, special audit and investigation of companies will not be counted for the purpose. As per Companies (Amendment) Act, 2000, audit of private companies are not to be counted in computation of ceiling limit. Therefore, with this amendment, while computing the ceiling a number of audits; only audit of public companies would be taken into consideration. In other words, an auditor can accept audit of any number of private companies. This, however, is subject to guidelines of the Institute which provide restriction in respect of private companies as well. The Council of ICAI has specified a ceiling of 30 audit assignments per person, whether in respect of private companies or other companies. In case of an audit firm, the ceiling shall be multiplied by the number of partners. Also the ceiling shall be 10 in case of public companies having paid up share capital of ` 25 lakhs or more. (c) Purposes of Providing Depreciation: The main purposes of providing depreciation are as under: (i) To keep intact the capital invested in fixed assets - This is accomplished by retaining the amount of depreciation charged in the profit and loss account in the business. To ascertain the true cost of production - As the value of fixed assets depletes gradually by consumption during the process of production, it is necessary that such consumption of value be charged in the accounts for determination of the true cost of production.
(ii)
(iii) To determine the profit or loss for the year - Depreciation being an expense represented by the loss in value of fixed assets arising on use, it is charged to the profit and loss account for determining the profit or loss during a year; (iv) To present a true and fair value of entity's assets in the balance sheet, since the original costs of fixed assets gradually decreases due to use and other factors, it is improper to continue to carry such assets at original costs. Therefore, the amount of depreciation charged in the profit and loss account representing the loss in value of the assets is deducted from the original cost on a cumulative basis so as to reflect in the balance sheet a true and fair value of the fixed assets. (d) Filling of a Casual Vacancy: A casual vacancy in the office of the auditor can be filled by the Board of Directors, provided such vacancy has not been caused by the resignation of the auditor. In case of a casual vacancy arising on account of resignation, only the company in
PAPER 6: AUDITING AND ASSURANCE
33
general meeting can fill the vacancy by appointing another auditor. The expression casual vacancy has not been defined in the Act. Taking its natural meaning, it stands for a vacancy created by the auditor ceasing to act after he was validly appointed and the appointment was accepted. This may arise due to a variety of reasons which include death, resignation, disqualification, dissolution of the firms of auditors, etc. The provision to require the filling of casual vacancy caused by resignation of the auditor by the general meeting is in consonance with the principle of auditors independence. The process may bring out facts regarding the auditors resignation to the notice of, and hence scrutiny by the shareholders. Any abuse of authority or financial impropriety by the management that might have contributed to the resignation will be known. If the auditor could be found to be conscientious and honest, the general meeting may even request him to reconsider his decision and take appropriate steps to cure the evils, if any, in the management. The auditor appointed to a casual vacancy shall hold office till the conclusion of the next annual general meeting. Question 2 (a) Explain the concept of True and Fair view. (6 Marks) (b) Mention the areas in which differing accounting policies are encountered and how that would be disclosed? (10 Marks) Answer (a) Concept of True and Fair: The phrase true and fair in the auditors report signifies that the auditor is required to express his opinion as to whether the state of affairs and the results of the entity as ascertained by him in the course of his audit are truly and fairly represented in the accounts under audit. What constitutes true and fair has not been defined in the legislation. However, section 211(5) of the Companies Act, 1956 states that the balance sheet and profit and loss account of a company shall not be treated as not disclosing a true and fair view of the state of affairs of the company if they do not disclose any matters which are not required to be disclosed by virtue of the provisions of Schedule VI to the Companies Act, 1956, or by virtue of any notification or any order. What constitutes a true and fair view is a matter of the auditors judgement in the particular circumstances of the case. In specific terms to ensure truth and fairness, an auditor has to see: (i) (ii) that the assets are neither undervalued or overvalued; no material asset is omitted;
(iii) the charge on assets, if any, is disclosed; (iv) material liabilities should not be omitted, and liabilities are neither undervalued or overvalued;
34
(v) accounting policies have been followed consistently; (vi) all unusual, exceptional, non recurring items have been disclosed separately; (vii) accounts have been drawn as per requirement of Schedule VI to the Companies Act; and (viii) the accounts have been drawn in compliance to the relevant accounting standards. In case of deviation from accounting standards, disclosure should be made of the reasons for such deviation and financial effects, if any arising due to such deviation (b) The areas in which different accounting policies may be encountered are : Method of depreciation, depletion and amortization-Straight Line Method, Written Down Value method. Valuation of inventories FIFO, LIFO, weighted average etc. Treatment of goodwill write off, retain. Valuation of investment at cost, market or net realizable value etc. Treatment of retirement benefits-Actuarial, funded through trust, insurance policy etc. Valuation of fixed assets-historical cost, revaluation price, exchange fluctuation etc.
Note: (The above list is not exhaustive. There may be other examples as well.) Disclosure of Accounting Policies The purpose of AS-1 is to promote better understanding of financial statements by establishing through an accounting standard the disclosure of significant accounting policies and the manner in which accounting policies are disclosed in the financial statements. Such disclosure would also facilitate a more meaningful comparison between financial statements of different enterprises. All significant accounting policies adopted in the preparation and presentation of financial statements should be disclosed. Such disclosure should form part of the financial statements. It would be helpful to the reader of financial statements if they are all disclosed at one place instead of being scattered over several statements, schedules and notes and form part of financial statements. Any change in an accounting policy which has a material effect should be disclosed. The amount by which any item in the financial statements is affected by such change should also be disclosed to the extent ascertainable. Where such amount is not ascertainable, wholly or in part, the fact should be indicated. If a change is made in the accounting policies which has no material effect on the financial statements for the current period but which is reasonably expected to have a material effect in later periods, the fact of such change should be appropriately disclosed in the period in which the change is adopted.
35
Question 3 (a) What are the duties of Comptroller and Auditor General? (b) State any six basic elements of the Auditor's Report. Answer (a) Duties of Comptroller & Auditor General : The Comptroller & Auditor Generals (Duties, Powers and Conditions of Service) Act, 1971 lays down duties of the C&AG as under: (i) Compile and submit Accounts of Union and States - The C&AG shall be responsible for compiling the accounts of the Union and of each State from the initial and subsidiary accounts rendered to the audit and accounts offices under his control by treasuries, offices or departments responsible for the keeping of such account. General Provisions Relating to Audit - It shall be the duty of the C&AG (a) to audit and report on all expenditure from the Consolidated Fund of India and of each State and of each Union Territory having a Legislative Assembly and to ascertain whether the moneys shown in the accounts as having been disbursed were legally available for and applicable to the service or purpose to which they have been applied or charged and whether the expenditure conforms to the authority which governs it; (b) to audit and report all transactions of the Union and of the States relating to Contingency Funds and Public Accounts; (c) to audit and report on all trading, manufacturing profit and loss accounts and balance-sheets and other subsidiary accounts kept in any department of the Union or of a State. (iii) Audit of Receipts and Expenditure - Where any body or authority is substantially financed by grants or loans from the Consolidated Fund of India or of any State or of any Union Territory having a Legislative Assembly, the Comptroller and Auditor General shall, subject to the provisions of any law for the time being in force applicable to the body or authority, as the case may be, audit all receipts and expenditure of that body or authority and to report on the receipts and expenditure audited by him. (iv) Audit of Grants or Loans - Where any grant or loan is given for any specific purpose from the Consolidated Fund of India or of any State or of any Union Territory having a Legislative Assembly to any authority or body, not being a foreign State or international organisation, the Comptroller and Auditor General shall scrutinise the procedures by which the sanctioning authority satisfies itself as to the fulfillment of the conditions subject to which such grants or loans were given and shall for this purpose have right of access, after giving reasonable previous notice, to the books and accounts of that authority or body. (10 Marks) (6 Marks)
(ii)
36
(v) Audit of Receipts of Union or States - It shall be the duty of the Comptroller and Auditor General to audit all receipts which are payable into the Consolidated Fund of India and of each State and of each Union Territory having a Legislative Assembly and to satisfy himself that the rules and procedures in that behalf are designed to secure an effective check on the assessment, collection and proper allocation of revenue and are being duly observed and to make this purpose such examination of the accounts as he thinks fit and report thereon. (vi) Audit of Accounts of Stores and Stock - The Comptroller and Auditor General shall have authority to audit and report on the accounts of stores and stock kept in any office or department of the Union or of a State. (vii) Audit of Government Companies and Corporations - The duties and powers of the Comptroller and Auditor General in relation to the audit of the accounts of government companies shall be performed and exercised by him in accordance with the provisions of the Companies Act, 1956. (b) Basic elements of the Auditors Report: As per SA 700(Revised), Forming an Opinion and Reporting on Financial Statements, the auditors report includes the following basic elements, ordinarily, in the following layout: (i) (ii) Title; Addressee;
(iii) Introductory Paragraph (vi) Managements Responsibility for the Financial Statements. (v) Auditors Responsibility (vi) Auditors Opinion (vii) Other Reporting Responsibilities (viii) Signature of the Auditor (ix) Date of Auditors Report. (x) Place of signature Question 4 (a) What are the factors that are to be considered while designing a confirmation request? (8 Marks) (b) Distinguish between Auditing and Investigation. Answer (a) As per SA -505 External Confirmations, the design of a confirmation request may directly affect the confirmation response rate, and the reliability and the nature of the (8 Marks)
37
audit evidence obtained from responses. The following factors should be considered while designing a confirmation request:(i) (ii) (iv) The assertions being addressed. Specific identified risks of material misstatement, including fraud risks. Prior experience on the audit or similar engagements.
(iii) The layout and presentation of the confirmation request. (v) The method of communication (vi) Managements authorisation to the confirming parties to respond to the auditor. Confirming parties may only be willing to respond to a confirmation request containing managements authorisation. (vii) The ability of the confirming party to provide the requested information (b) Distinction between Auditing and Investigation: Auditing is different from investigation which is another significant service, a professional accountant renders. Investigation is a critical examination of the accounts with a special purpose. For example if fraud is suspected and an accountant is called upon to check the accounts to whether fraud really exists and if so, the amount involved, the character of the enquiry changes into investigation. Investigation may be undertaken in numerous areas of accounts, e.g., the extent of waste and loss, profitability, cost of production, etc. It normally concerns only specified areas, but at times, it may involve the whole field of accounting. Its essence lies in going into the matter with some pre-conceived notion suited to the objective. The techniques fit the circumstances of the case. For auditing on the other hand, the general objective is to find out whether the accounts show a true and fair view. Audit never undertakes discovery of specific happenings and is never started with a preconceived notion about the state of affairs. The auditor seeks to report what he finds in the normal course of examination of the accounts adopting generally followed techniques unless circumstances call for a special probe: fraud, error, irregularity, whatever comes to the auditors notice in the usual course of checking, are all looked into in depth and sometimes investigation results from the prima facie findings of the auditor. The purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. Whereas investigation aims at establishing a fact or a happening or at assessing a particular situation. Question 5 (a) What are the eight audit points to be considered by the auditor during the audit of a Hospital? (8 Marks)
38
(b) As an auditor, how will you verify application and allotment money received on shares issued for cash? (8 Marks) Answer (a) Audit of Hospital: The audit points to be considered by the auditor during the audit of a Hospital are stated below:(i) Vouch the Register of patients with copies of bills issued to them. Verify bills for a selected period with the patients attendance record to see that the bills have been correctly prepared. Also see that bills have been issued to all patients from whom an amount was recoverable according to the rules of the hospital. Check cash collections as entered in the Cash Book with the receipts, counterfoils and other evidence for example, copies of patients bills, counterfoils of dividend and other interest warrants, copies of rent bills, etc.
(ii)
(iii) See by reference to the property and Investment Register that all income that should have been received by way of rent on properties, dividends, and interest on securities settled on the hospital, has been collected. (iv) Ascertain that legacies and donations received for a specific purpose have been applied in the manner agreed upon. (v) Trace all collections of subscription and donations from the Cash Book to the respective Registers. Reconcile the total subscriptions due (as shown by the Subscription Register and the amount collected and that still outstanding). (vi) Vouch all purchases and expenses and verify that the capital expenditure was incurred only with the prior sanction of the Trustees or the Managing Committee and that appointments and increments to staff have been duly authorised. (vii) Verify that grants, if any, received from Government or local authority has been duly accounted for. Also, that refund in respect of taxes deducted at source has been claimed. (viii) Compare the totals of various items of expenditure and income with the amount budgeted for them and report to the Trustees or the Managing Committee significant variations which have taken place. (ix) Examine the internal check as regards the receipt and issue of stores; medicines, linen, apparatus, clothing, instruments, etc. so as to ensure that purchases have been properly recorded in the Stock Register and that issues have been made only against proper authorisation. (x) See that depreciation has been written off against all the assets at the appropriate rates. (xi) Inspect the bonds, share scrips, title deeds of properties and compare their particulars with those entered in the property and Investment Registers.
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(xii) Obtain inventories, especially of stocks and stores as at the end of the year and check a percentage of the items physically; also compare their total values with respective ledger balances. (b) Verification of application and allotment money received on Shares Issued for Cash shall be carried out as under: On Application Verify the amount received along with the applications for shares in the following manner: (i) (ii) Check entries in the Application and Allotment Book (or Sheets) with the original applications; Check entries in the Application and the Allotment Book as regards deposits of money, received with the applications, with those in the Cash Book;
(iii) Vouch amounts refunded to the unsuccessful applicants with copies of Letters of Regret; (iv) Check the totals columns in the Application and Allotment Book and confirm the journal entry debiting Share Application Account and crediting Share Capital Account. On Allotment (i) (ii) Examine Directors Minutes Book to verify approval of allotments. Compare copies of letters of allotment with entries in the Application and Allotment Book.
(iii) Trace entries in the Cash book into the Application and Allotment Book for the verification of amounts collected on allotment. (iv) Trace the amount collected on application as well as those on allotment from the Application and Allotment Book into the Share Register. (v) Check totals of amounts payable on allotment and verify the journal entry debiting Share Allotment Account and crediting Share Capital Account. Question 6 (a) What are the audit working papers? Discuss various contents of current file. (8 Marks) (8 Marks) Answer (a) Audit Working Papers: Working papers are papers prepared and obtained by the auditor and retained by him, in connection with the performance of his audit. Working papers are the property of the auditor. As per SA 230 Audit Documentation refers to the (b) Explain, what are the factors to be considered while "Vouching of travelling expenses" ?
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record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as working papers or work papers are also sometimes used). Working papers should record the audit plan, the nature, timing and extent of auditing procedures performed, and the conclusions drawn from the evidence obtained. Current Audit file: The current file normally includes: (i) (ii) Correspondence relating to acceptance of annual reappointment. Extracts of important matters in the minutes of Board Meetings and General Meetings, as are relevant to the audit.
(iii) Evidence of the planning process of the audit and audit programme. (iv) Analysis of transactions and balances. (v) A record of the nature, timing and extent of auditing procedures performed and the results of such procedures. (vi) Evidence that the work performed by assistants was supervised and reviewed. (vii) Copies of communications with other auditors, experts and other third parties. (viii) Copies of letters or notes concerning audit matters communicated to or discussed with the client, including the terms of the engagement and material weaknesses in relevant internal controls. (ix) Letters of representation or confirmation received from the client. (x) Conclusions reached by the auditor concerning significant aspects of the audit. (xi) Copies of the financial information being reported on and the related audit reports. (b) The following factors are to be considered while Vouching of Travelling Expenses: (i) Travelling expenses are normally payable to staff according to rules approved by directors or partners. Where no rules exist, the auditor should recommend that these be framed for controlling the expenditure. In the absence of T.A. Rules, the expenditure should be vouched on the basis of actual expenditure incurred. A voucher should be demanded for all items of expenses incurred, except those which are capable of independent verification. As regards travelling expenses claimed by directors the auditor should satisfy himself that these were incurred by them in the interest of the business and that the directors were entitled to receive the amount from the business.
(ii)
(iii) The voucher for travelling expenses should normally contain the under mentioned information: (1) Name and designation of the person claiming the amount.
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(2) Particulars of the journey. (3) Amount of railway or air fare. (4) Amount of boarding or lodging expenses or daily allowance alongwith the dates and times of arrival and departure from each station. (5) Other expenses claimed (iv) If the journey was undertaken by air, the counterfoil of the air ticket should be attached to the voucher; this should be inspected. For travel by rail or road, the amount of the fare claimed should be checked from some independent source. (v) Particulars of boarding and lodging expenses and in the case of halting allowance the rates thereof should be verified. (vi) The evidence in regard to sundry expenses claimed is generally not attached to T.A. bills. So long as the amount appears to be reasonable it is usually not questioned. All vouchers for travelling expenses should be authorised by some responsible official. In the case of foreign travel or any extraordinary travel, the expenses, before being paid, should be sanctioned by the Board. (vii) The travelling advance taken, if any, should be settled on receipt of final bills. At the year end, the amount not settled should be shown appropriately in the Balance Sheet. (viii) Unless the articles specifically provide or their payment has been authorised by a resolution of shareholders, directors are not entitled to charge travelling expenses for attending Board Meetings. Question 7 Write short notes on any four of the following: (a) Audit of discounted bills receivable dishonoured. (b) Auditors lien. (c) Inherent risk. (d) Cut-off arrangements. (d) Examination in depth. Answer (a) Audit of Discounted Bills Receivable Dishonoured (i) (ii) Obtain the schedule of discounted bills receivable dishonoured. Check the entry in bank statement regarding the amount of bills dishonoured and see that the bank has debited the account of client. (4 x 4 = 16 Marks)
(iii) Verify the bills receivable returned by the bank along with banks advice.
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(iv) See that the dishonoured bills have been noted and protested by following the proper procedure and the account of the drawee or the debtor is also debited. (v) Check that bank commission, if any, charged by the bank has been recovered from the party. (b) Auditors Lien: In terms of the general principles of law, any person having the lawful possession of somebody elses property, on which he has worked, may retain the property for non-payment of his dues on account of the work done on the property. On this premise, auditor can exercise lien on books and documents placed at his possession by the client for non payment of fees, for work done on the books and documents. Under section 209 of the Companies Act, 1956 books of account of a company must be kept at the registered office of the company and if removed from the registered office, a resolution to this effect must be passed in a meeting of the Board of Directors and should have informed this removal to the Registrar of Companies. If this is done then only the auditor can have lawful possession. As per section 209, the auditor must provide reasonable facility for inspection of the books of account by directors and others authorised to inspect under the Act. SA 230 issued by ICAI on Audit Documentation also states that, working papers are the property of the auditor. The auditor may at his discretion make portions of or extracts from his working papers available to his clients. (c) Inherent risk (risk that material errors will occur): The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. It is higher for some assertions and related classes of transactions, account balances, and disclosures than for others. For example, it may be higher for complex calculations or for accounts consisting of amounts derived from accounting estimates that are subject to significant estimation uncertainty. External circumstances giving rise to business risks may also influence inherent risk. For example, technological developments might make a particular product obsolete, thereby causing inventory to be more susceptible to overstatement. Factors in the entity and its environment that relate to several or all of the classes of transactions, account balances, or disclosures may also influence the inherent risk related to a specific assertion. Such factors may include, for example, a lack of sufficient working capital to continue operations or a declining industry characterised by a large number of business failures. (d) Cut-off arrangements: Accounting is a continuous process because the business never comes to halt. It is, therefore, necessary that transactions of one period would be separated from those in the ensuing period so that the results of the working of each period can be correctly ascertained. The arrangement that is made for this purpose is technically known as cut-off arrangement. It essentially forms part of the internal control system of the organisation. Accounts, other than sales, purchase and stock are not usually affected by the continuity of the business and therefore, this arrangement is
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generally applied only to sales, purchase and stock. The auditor satisfies by examination and test-checks that the cut-off procedures are adequately followed and ensure that: (i) Goods purchased, property in which passed on to the client, have in fact been included in the inventories and that the liability has been provided for in case of credit purchase. Goods sold have been excluded from the inventories and credit has been taken for the sales. If the value of sales is to be received, the concerned party has been debited.
(ii)
The auditor may examine a sample of documents, evidencing the movement of stock into and out of stores, including documents pertaining to period shortly before and after the cut-off date and check whether stocks represented by those documents were included or excluded as appropriate during stock taking for perfect and correct presentation in the financial statements. (e) Examination in Depth: It implies examination of a few selected transactions from the beginning to the end through the entire flow of the transaction, i.e., from initiation to the completion of the transaction by receipt of payment of cash and delivery or receipt of the goods. This examination consists of studying the recording of transactions at the various stages through which they have passed. At each stage, relevant records and authorities are examined; it is also judged whether the person who has exercised the authority in relation to the transactions is fit to do so in terms of the prescribed procedure. For example, if payment to a creditor is to be verified in depth, it would be necessary to examine the following documents: (i) (ii) The invoice and statement of account received from the supplier. The entry in the stock record showing that the goods were received.
(iii) The Goods Received Note and Inspection Certificate showing that the goods on receipt were verified and inspected. (iv) The copy of the original order and authority showing that the goods in fact were ordered by an authority which was competent to do so. It is to be emphasized that, so far as the management is concerned, the internal control should have willing acceptance at the hands of the employees and there should exist proper mechanism for such motivation.
PAPER 7 : INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT SECTION A : INFORMATION TECHNOLOGY Question No. 1 is compulsory Answer any five questions from the rest. Question 1 Describe briefly, the following terms with reference to Information Technology. (i) (ii) Switch Modem
(iii) HTML (iv) Site Blocking (v) Buffering (vi) Data Transformation (vii) Source Program (viii) Open Source Software (ix) Mirror log (x) Chat Server Answer (i) Switch: It is hardware device used to direct messages across a network. Switches create temporary point to point links between two nodes on a network and send all data along that link. (1 x 10 =10 Marks)
(ii) Modem: It stands for Modulator/Demodulator and is an encoding as well as decoding device used in data transmission that converts a digital computer signal into an analog telephone signal (i.e. it modulates the signal) and converts an analog telephone signal into a digital computer signal (i.e. it demodulates the signal) in a data communication system. (iii) HTML: HTML (Hypertext Markup Language) is used to create Web pages. HTML lets the creator of a Web page specify how text will be displayed and how to link to other Web pages, files, and Internet services. (iv) Site Blocking: Site Blocking is software based approach that prohibits access to certain Web sites that contain explicit objectionable material or are deemed inappropriate by management of any organization to prevent employees from accessing these sites from company Internet servers.
PAPER 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
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(v) Buffering: Buffering enables the processor to execute another instruction while input or output is taking place rather than being idle while transfer was completed. (vi) Data Transformation: The Data Transformation is performed by Data Transformation layer; a component of Data Warehouse; that receives data from the data sources, cleans and standardizes it, and loads it into the data repository. (vii) Source Program: The program submitted to compiler for compilation is called a source program (or source module). (viii)Open Source Software: Open Source software is created by generous programmers and released into the public domain for public use. The company or individual that develops the software retains ownership of the program but the software can be used freely. (ix) Mirror Log: A mirror log is an optional file and has a file extension of .mlg. It is a copy of a transaction log and provides additional protection against the loss of data in the event the transaction log becomes unusable. (x) Chat Server: Some organizations choose to run a server that allows multiple users to have real-time discussions, called chats on the Internet. Most chat servers allow the creation of private chat rooms where participants can meet for private discussions. Question 2 (a) What is Software? Describe various types of software in brief. (b) Describe the various components of an Expert System. Answer (a) Software: Software refers to the set of computer programs, procedures that describe the programs and how they are to be used. In other words, software is the collection of computer programs and related data that provide the instructions to the computer what to do. There are basically three types of software: System Software, Application Software and General-purpose Software. These are discussed as follows: (i) System Software: System software is defined as a set of one or more programs designed to operate the computer hardware and to provide and maintain a platform for running application software. It comprises of the programs such as Programming languages, Operating systems, Device Drivers, Utility programs and Language translators that control and support the computer system and its data processing applications. Application Software: Application software is a subclass of computer software that employs the capabilities of a computer directly to perform single or multiple tasks that the user wishes to perform. Examples of such software include Payroll, General accounting, sales statistics and inventory control etc. (4 Marks) (4 Marks)
(ii)
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(iii) General-purpose software: This software provides the framework for a great number of business, scientific, and personal applications. Spreadsheet, Databases, Computer-Aided Design (CAD) and Word processing software etc. fall into this category. Most general-purpose software is sold as a package and is accompanied by user-oriented documentation such as reference manuals, keyboard templates, and so on. (b) Components of an Expert System are as follows: (i) Knowledge Base: This includes the data, knowledge, relationships, rules of thumb (heuristics), and decision rules used by experts to solve a particular type of problem. Inference Engine: This program contains the logic and reasoning mechanisms that simulate the expert logic process and deliver advice. It uses data obtained from both the knowledge base and the user to make associations and inferences, form its conclusions, and recommend a course of action.
(ii)
(iii) User Interface: This program allows the user to design, create, update, use, and communicate with the expert system. (iv) Explanation facility: This facility provides the user with an explanation of the logic the Expert System used to arrive at its conclusion. (v) Knowledge Acquisition facility: Building a knowledge base, referred to as Knowledge Engineering, involves both a human expert and a knowledge engineer. The knowledge engineer is responsible for extracting an individuals expertise and use the knowledge acquisition facility to enter it into the knowledge base. Question 3 (a) Describe salient features of Hierarchical Database. (b) Define Data Warehouse. Explain in brief concerns in using Data Warehouse. Answer (a) Salient features of Hierarchical Database are as follows: (i) (ii) Records are logically organized into hierarchy of relationship and arranged in an inverted tree pattern. Database structure is less flexible as relationships between records are relatively fixed by the structure. (4 Marks) (4 Marks)
(iii) It requires that hierarchy of records must be determined and implemented before a search. (iv) Ad hoc queries that require different relationships other than that are already implemented are difficult and time consuming to accomplish. (v) Frequent management queries may not be supported as effectively.
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(vi) However day-to-day operational data can be processed rapidly. (vii) Any group of records with natural hierarchical relation to one another fits nicely. (viii) It provides the parent child relationship amongst the nodes. (ix) It implements one-to-one and one-to-many relationship. (b) Data Warehouse: A Data warehouse is a repository of an organizations electronically stored data specifically designed to support management information and analysis purposes. These data warehouses bring in data from a range of different data sources, such as mainframe computers, minicomputers, as well as personal computers and office automation software such as spreadsheets and integrate this information in a single place. Concerns in using Data Warehouse are as follows: Extracting, cleaning and loading data could be time consuming. Data warehouses can get outdated relatively quickly. Problems with compatibility with systems already in place e.g. transaction processing system. Providing training to end-users. Security could develop into a serious issue, especially if the data warehouse is web accessible. A data warehouse is usually not static and maintenance costs are high. (4 Marks) (4 Marks)
Question 4 (a) Define Ring Topology. Discuss its advantages and disadvantages. (b) Differentiate between Serial Transmission and Parallel Transmission. Answer (a) Ring Topology: In this topology, the network cable passes from one node to another until all nodes are connected in the form of a loop or ring. There is a direct point-to-point unidirectional link between two neighboring nodes. Advantages of Ring Topology are as follows: Ring networks offer high performance for a small number of workstations or for larger networks where each station has a similar workload. Ring networks can span longer distances than other types of networks. Ring networks are easily extendable. Relatively expensive and difficult to install.
Disadvantages of Ring Topology are as follows:
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Failure of one computer on the network can affect the whole network. It is difficult to trouble shoot a ring network. Adding or removing computers can disrupt the network. S.No 1 2 3 4 SERIAL TRANSMISSION In this, the data bits are transmitted serially one after another. Data is transmitted over a single wire. It is a cheaper mode of transferring data. Applicable for long distance data transmissions. Relatively slower PARALLEL TRANSMISSION In this, the data bits are transmitted simultaneously. Data is transmitted over 8 different wires. Relatively expensive. Not practical for long distance communications as it uses parallel path, so cross talk may occur. Relatively faster.
(b) Differences between Serial Transmission and Parallel Transmission
5 Question 5
(a) Explain in brief technical functionality of Customer Relationship Management. (4 Marks) (b) Describe tactical level of activities in Supply Chain Management. Answer (a) Technical functionality of Customer Relationship Management is as follows: Scalability: The ability to be used on a large scale, and to be reliably expanded to whatever scale is necessary. Multiple communication channels: The ability to interface with users via many different devices (phone, WAP, internet, etc) Workflow: The ability to trigger a process in the back office system, e. g. Email Response, etc. Assignment: The ability to assign requests (Service Requests, Sales Opportunities) to a person or group. Database: The centralized storage (in a data warehouse) of all information relevant to customer interaction. Customer privacy considerations: The data encryption and the destruction of records are needed to ensure that they are not stolen or abused. Sourcing contracts and other purchasing decisions. (4 Marks)
(b) Tactical level of activities in Supply Chain Management are as follows: (i)
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(ii)
Production decisions, including contracting, locations, scheduling, and planning process definition.
(iii) Inventory decisions, including quantity, location, and quality of inventory. (iv) Transportation strategy, including frequency, routes, and contracting. (v) Benchmarking of all operations against competitors and implementation of best practices throughout the enterprise. Question 6 Draw a flow chart to print the square of odd numbers between 10 to 50 and also print the sum of their square. (8 Marks) Answer The required flowchart is as follows:

I: YES
START I = 11 SQ = 0 SUM = 0 SQ = I * I SUM = SUM + SQ
Print SQ
I=I+2
Is I < 50? NO Print SUM STOP
Stores the value of odd number between 10 to 50 at each step.
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SQ: SUM:
Stores the calculated value of square of each odd number at each step Stores the sum of the squares of all the odd numbers till that step
Question 7 Describe briefly any four terms: (i) (ii) Secured Electronic Transaction (SET) Wireless LAN
(iii) System flow chart (iv) SQL (v) Fifth Generation Language Answer (i) Secured Electronic Transaction (SET): Secured Electronic Transaction protocol (SET) is a combination of a protocol designed for use by other applications and a standard for handling credit card transactions over the Internet. Designed for cardholders, merchants, banks, and other card processors, SET uses digital certificates to ensure the identities of all parties involved in a purchase. It also encrypts credit card and purchase information before transmission on the Internet. (2 x 4 = 8 Marks)
(ii) Wireless LAN: Wireless Local Area Network (WLAN) is a flexible data communications system that does not require any physical media or cables for data transmission. Using Radio Frequency (RF) technology, Wireless LANs transmit and receive data over the air. Users can access shared information without any plug in or without any physical connection. Wireless LAN configurations range from simple peer-to-peer topologies to complex networks offering distributed data connectivity, flexibility and mobility. (iii) System Flowchart: It is designed to present an overview of the data flow through all parts of a data processing system reflecting the relationship between inputs, processing and outputs. It includes the sources from which input data is prepared and the medium or device used; the processing steps or sequence of operations involved; and the intermediary and final output prepared and the medium and devices used for their storage. (iv) SQL: SQL (Structured Query Language) is a computer programming language used to manipulate information in Relational Database Management Systems (RDBMS). It has a set of commands to create, update and access data from a database allowing users to raise ad-hoc queries/questions interactively without the help of programmers. It is widely used by many database software systems, including MySQL, SQL Server, Postgre SQL, and the Oracle Database etc. (v) Fifth Generation Language: A fifth-generation language (abbreviated 5GL) is a programming language based around solving problems using constraints given to the
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program, rather than using an algorithm written by a programmer. This way, the programmer only needs to worry about what problems need to be solved and what conditions need to be met, without worrying about how to implement a routine or algorithm to solve them. These are used mainly in Artificial intelligence research, fuzzy logic and neural networks.
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SECTION B Question No. 8 is compulsory Answer any five questions from the rest Question 8 (a) Explain the factors that affect the strength of competitive pressures from substitute products. (3 Marks) (b) "Strategy is partly proactive and partly reactive." Do you agree? Give reasons for your answer. (3 Marks) (c) What is Divestment strategy? When is it adopted? (3 Marks) (d) Explain any three prominent areas where Human Resource Manager can play a strategic role. (3 Marks) (e) 'A network structure is suited to unstable environment Elaborate. Answer (a) Substitute products are a latent source of competition in an industry. In many cases they become a major constituent of competition. With regards to substitute products, factors such as prices, easy availability, and how best they are able to satisfy the needs of customers, determine the amount of competition through them. Substitute products offering a price advantage and/or performance improvement to the consumer can drastically alter the competitive character of an industry. And they can bring it about all of a sudden. Wherever substantial investment in R&D is taking place, threats from substitute products can be expected. Substitutes, too, usually limit the prices and profits in an industry. (b) Yes, strategy is partly proactive and partly reactive. In proactive strategy, organizations will analyze possible environmental scenarios and create strategic framework after proper planning and set procedures and work on these strategies in a predetermined manner. However, in reality no company can forecast both internal and external environment exactly. Everything cannot be planned in advance. It is not possible to anticipate moves of rival firms, consumer behaviour, evolving technologies and so on. There can be significant deviations between what was visualized and what actually happens. Strategies need to be attuned or modified in light of possible environmental changes. There can be significant or major strategic changes when the environment demands. Reactive strategy is triggered by the changes in the environment and provides ways and means to cope with the negative factors or take advantage of emerging opportunities. (c) Divestment strategy involves the sale or liquidation of a portion of business, or a major division, profit centre or SBU. Divestment is usually a part of rehabilitation or restructuring plan. (3 Marks)
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A divestment strategy may be adopted due to various reasons: When a turnaround has been attempted but has proved to be unsuccessful. A business that had been acquired proves to be a mismatch and cannot be integrated within the company. Persistent negative cash flows from a particular business create financial problems for the whole company. Severity of competition and the inability of a firm to cope with it. Technological upgradation is required if the business is to survive but where it is not possible for the firm to invest in it. A better alternative may be available for investment.
(d) The prominent areas where the human resource manager can play strategic role are as follows: 1. Providing purposeful direction: The human resource management must be able to lead people and the organization towards the desired direction involving people. The management has to ensure harmony between organisational objectives and individual objectives. Objectives are specific aims which must be in the line with the goal of the organization and the all actions of each person must be consistent with them. Creating competitive atmosphere: In the present business environment, maintaining competitive position or gains is an important objective of any business. Having a highly committed and competent workforce is very important for getting a competitively advantageous position. Facilitation of change: The human resource manager will be more concerned about furthering the organization not just maintaining it. He has to devote more time to promote acceptance of change rather than maintaining the status quo. Diversion of workforce: In a modern organization, management of diverse workforce is a great challenge. Workforce diversity can be observed in terms of male and female, young and old, educated and uneducated, unskilled and professional employee and so on. Maintaining a congenial healthy work environment is a challenge for HR Manager. Motivation, maintaining morale and commitment are some of the key task that a HR manager has to perform. Empowerment of human resources: Empowerment involves giving more power to those who, at present, have little control what they do and little ability to influence the decisions being made around them. Building core competency: The human resource manager has an important role to play in developing core competency by the firm. A core competence is a unique strength of an organization which may not be shared by others. Organization of business around core competence implies leveraging the limited resources of a firm.
2.
3.
4.
5.
6.
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It needs creative, courageous and dynamic leadership having faith in organizations human resources. 7. Development of works ethics and culture: A vibrant work culture will have to be developed in the organizations to create an atmosphere of trust among people and to encourage creative ideas by the people. Far reaching changes with the help of technical knowledge will be required for this purpose.
(e) Network structure is a newer and somewhat more radical organizational design. The network structure could be termed a "non-structure" as it virtually eliminates in-house business functions and outsource many of them. An organisation organized in this manner is often called a virtual organization because it is composed of a series of project groups or collaborations linked by constantly changing non-hierarchical, cobweb-like networks. The network structure becomes most useful when the environment of a firm is unstable and is expected to remain so. Under such conditions, there is usually a strong need for innovation and quick response. Instead of having salaried employees, it may contract with people for a specific project or length of time. Long-term contracts with suppliers and distributors replace services that the company could provide for itself. Question 9 (a) State with reasons which of the following statements is correct or incorrect. (i) (ii) Answer (a) (i) Correct: A business portfolio is a collection of businesses and products that make up the organisation. Portfolio analysis is a tool by which management identifies and evaluates its various businesses. In portfolio analysis top management views its product lines and business units as a series of investments from which it expects returns. The best business portfolio is the one that best fits its strengths and weaknesses to the opportunities and threats in the environment. Through portfolio analysis, organisations are able to compare its various businesses and categorize them in various strata as promising, growing, without good future and so on. Incorrect: Benchmarking is an approach of setting goals and measuring productivity based on best industry practices and is a process of continuous improvement in search for competitive advantage. However, it is not panacea for all problems. Rather, it studies the circumstances and processes that help in superior performance. Better processes are not merely copied. Efforts are made to learn, improve and evolve them to suit the organizational circumstances. Portfolio analysis helps the strategists in identifying and evaluating various businesses of a company. Benchmarking is a remedy for all problems faced by organizations. (2 x 2 = 4 Marks) (3 Marks)
(b) State the three elements of a strategic vision.
(ii)
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(b) A strategic vision steers an organization in a particular direction, charts a strategic path for it to follow in preparing for the future, and moulds organizational identity. The three elements of a strategic vision are: 1. 2. 3. Coming up with a mission statement that defines what business the company is presently in and conveys the essence of Who we are and where we are now? Using the mission statement as basis for deciding on a long-term course making choices about Where we are going? Communicating the strategic vision in clear, exciting terms that arouse organization wide commitment.
Question 10 Explain the meaning of the following concepts: (i) (ii) Demographic Environment Strategic Business Unit
(iii) ADL Matrix (iv) Best-cost provider strategy (v) Synchro-marketing (vi) Premise control (vii) Six sigma Answer (i) Demographic Environment: The term demographics denote characteristics of population in an area, district, country or in world. Some of the demographic factors have great impact on the business. Factors such as general age profile, sex ratio, income, education, growth rate affect the business with different magnitude. Strategic Business Unit: A strategic business unit (SBU) is a unit of the company that has a separate mission and objectives which can be planned independently from other company businesses. SBU can be a company division, a product line within a division or even a single product/brand, specific group of customers or geographical location. The SBU is given the authority to make its own strategic decisions within corporate guidelines as long as it meets corporate objectives. (7 x 1 = 7 Marks)
(ii)
(iii) ADL Matrix: The ADL matrix which has derived its name from Arthur D. Little is a portfolio analysis method that is based on product life cycle. The approach forms a two dimensional matrix based on stage of industry maturity and the firms competitive position, environmental assessment and business strength assessment.
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(iv) Best-cost provider strategy: Best-cost provider strategy involves providing customers more value for the money by emphasizing low cost and better quality difference. It can be done: (a) through offering products at lower price than what is being offered by rivals for products with comparable quality and features or (b) charging similar price as by the rivals for products with much higher quality and better features. (v) Synchro-marketing: When the demand for the product is irregular causing idle capacity or over-worked capacities, synchro-marketing can be used to find ways to alter the pattern of demand so that it equates more suitably with the pattern of supply. It can be done through flexible pricing, promotion, and other incentives. (vi) Premise control: A strategy is formed on the basis of certain assumptions or premises about the complex and turbulent organizational environment. Premise control is a tool for systematic and continuous monitoring of the environment to verify the validity and accuracy of the premises on which the strategy has been built. It primarily involves monitoring two types of factors: (a) Environmental factors such as economic (inflation, liquidity, interest rates), technology, social and regulatory. (b) Industry factors such as competitors, suppliers, substitutes. It is neither feasible nor desirable to control all types of premises in the same manner. Different premises may require different amount of control. Thus, managers are required to select those premises that are likely to change and would severely impact the functioning of the organization and its strategy. (vii) Six sigma: Six sigma is a highly disciplined process that helps in developing and delivering near-perfect products and services. It strives to meet and improve organizational outputs in terms of quality, cost, scheduling, manpower, new products and so on. It works continuously towards revising the current standards and establishing higher ones. It means taking systemic and integrated efforts towards improving quality and reducing cost. Question 11 (a) How would you analyse the meaning and importance of Efficiency and Profitability as objectives of business? (2+2 = 4 Marks) (b) Trace the role of information technology in business process reengineering. Answer (a) Enterprises pursue multiple objectives rather than a single objective. In general, we may identify a set of different business objectives pursued by a large cross-section of enterprises. Efficiency and profitability are two of the important objectives of any (3 Marks)
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business. Efficiency is the relationship between input and output whereas profitability is the relationship between profits and investments. Efficiency: Business enterprise seek efficiency in rationally choosing appropriate means to achieve their goals, doing things in the best possible manner and utilising resources in a most suitable combination. In a sense, efficiency is an economic version of the technical objective of productivity designing and achieving suitable input output ratios of funds, resources, facilities and efforts. Efficiency is a very useful operational objective. Profitability: It is generally asserted that private enterprises are primarily motivated by the objective of profit. Some may go even further and emphasise that profit is the sole motive of business enterprises. All other objectives are facilitative objectives and are meant to be serve the profit motive. It is pointed out that private business enterprises are operated on behalf of and for the benefit of the owners who have assumed the business risk of investing their funds.
(b) The Role of IT in BPR: The accelerating pace at which information technology has developed during the past few years had a very large impact in the transformation of business processes. Various studies have conclusively established the role of information technology in the transformation of business processes. Information technology is playing a significant role in changing the business processes. A reengineered business process, characterized by IT-assisted speed, accuracy, adaptability and integration of data and service points, is focused on meeting the customer needs and expectation quickly and adequately, thereby enhancing his/her satisfaction level. With the help of tools of information technology organizations can modify their processes to make them automatic, simpler, time saving. Thus IT can bring efficiency and effectiveness in the functioning of business. Question 12 (a) What is Corporate Strategy? How would you argue that 'corporate strategy 'ensures the correct alignment of the firm with its environment'? (1+3 = 4 Marks)
(b) Explain the concept of Experience Curve and highlight its relevance in strategic
management. Answer (a) Corporate strategy helps an organisation to achieve and sustain success. It is basically concerned with the choice of businesses, products and markets. It is often correlated with the growth of the firm. Corporate strategy in the first place ensures the growth of the firm and its correct alignment with the environment. Corporate strategies are concerned with the broad and long-term questions of what businesses the organization is in or wants to be in, and what it wants to do with those businesses. They set the overall direction the organization will (3 Marks)
58
follow. It serves as the design for filling the strategic planning gap. It also helps to build the relevant competitive advantages. A right fit between the firm and its external environment is the primary contribution of corporate strategy. Basically the purpose of corporate strategy is to harness the opportunities available in the environment and countering the threats embedded therein. With the help of corporate strategy, organizations match their unique capabilities with the external environment so as to achieve its vision and mission. (b) Experience curve is similar to learning curve which explains the efficiency gained by workers through repetitive productive work. Experience curve is based on the commonly observed phenomenon that unit costs decline as a firm accumulates experience in terms of a cumulative volume of production. The implication is that larger firms in an industry would tend to have lower unit costs as compared to those of smaller organizations, thereby gaining a competitive cost advantage. Experience curve results from a variety of factors such as learning effects, economies of scale, product redesign and technological improvements in production. The concept of experience curve is relevant for a number of areas in strategic management. For instance, experience curve is considered a barrier for new firms contemplating entry in an industry. It is also used to build market share and discourage competition. Question 13 Distinguish between the following: (a) Logistic Management and Supply Chain Management. Answer (a) Supply chain management is an extension of logistic management. However, there are differences between the two. Logistical activities typically include management of inbound and outbound goods, transportation, warehousing, handling of material, fulfillment of orders, inventory management and supply/demand planning. Although these activities also form part of supply chain management, the latter is much broader. Logistic management can be termed as one of its part that is related to planning, implementing, and controlling the movement and storage of goods, services and related information between the point of origin and the point of consumption. Supply chain management is an integrating function of all the major business activities and business processes within and across organisations. Supply Chain Management is a systems view of the linkages in the chain consisting of different channel partners suppliers, intermediaries, third-party service providers and customers. Different elements in the chain work together in a collaborative and coordinated manner. Often it is used as (4 Marks) (b) Vertically Integrated Diversification and Horizontally Integrated Diversification. (3 Marks)
59
a tool of business transformation and involves delivering the right product at the right time to the right place and at the right price. (b) In vertically integrated diversification, firms opt to engage in businesses that are related to the existing business of the firm. The firm remains vertically within the same process. Sequence moves forward or backward in the chain and enters specific product/process steps with the intention of making them into new businesses for the firm. On the other hand, horizontal Integrated Diversification is the acquisition of one or more similar business operating at the same stage of the production-marketing chain that is going into complementary products, by-products or taking over competitors businesses. Question 14 Write short notes on the following: (a) Steps for initiating a strategic change. (b) Internet Technology. OR Characteristics of a Global Company. Answer (a) For initiating strategic change, three steps can be identified as under: (i) Recognize the need for change: The first step is to diagnose which parts of the present corporate culture are strategy supportive and which are not. This basically means going for environmental scanning involving appraisal of both internal and external capabilities and then identify the problems/improvement areas and determine scope for change. Create a shared vision to manage change: Objectives and vision of individuals and organization should coincide. Strategy implementers have to convince all those concerned that the change in business culture is not superficial or cosmetic. The actions taken have to be fully indicative of managements seriousness to new strategic initiatives and associated changes. (3 Marks) (4 Marks) (3 Marks)
(ii)
(iii) Institutionalise the change: This is basically an action stage which requires implementation of changed strategy. Creating and sustaining a different attitude towards change is essential to ensure that the firm does not slip back into old ways of thinking or doing things. Besides, change process must be regularly monitored and reviewed to analyse the after-effects of change. Any discrepancy or deviation should be appropriately addressed. (b) EITHER The Internet is an integrated network of banks of servers and high-speed computers, digital switches and routers, telecommunication equipments and lines, and individual
60
computers. The backbone of the internet consists of telecommunication lines crisscrossing countries, continents, and the world that allow computers to transfer data in digital form at very high speed. Internet has made significant changes in the way businesses are being conducted. Communications has become faster, with many interlinkages promoting globalization. While markets have expanded, the competition has also increased manifolds. Ecommerce is a new area which has developed on account of internet technology. OR In simple economic terms, globalization refers to the process of integration of world into one huge market. At the company level, globalization means two things: (a) the company commits itself heavily with several manufacturing locations around the world and offers products in several diversified industries and (b) it also means ability to compete in domestic markets with foreign competitors. The global company views the world as one market minimizing the importance of national boundaries. A global company has three attributes: (i) (ii) It is a conglomerate of multiple units located in different parts of the globe but all linked with common ownership. Multiple units draw a common pool of resources such as money, credit, patents, trade name, etc.
(iii) The units respond to common strategy.
EXAMINERS COMMENTS ON PERFORMANCE OF THE CANDIDATES PAPER 5: ADVANCED ACCOUNTING Specific Comments Question 1.(a) Many candidates were confused regarding provisioning rate for secured and unsecured portion of the doubtful assets (up to one year). Few of them wrongly made provisions on the amount of ECGC coverage instead of making provisions on the value of security held. (b) Some candidates failed to give total liability of underwriters including firm underwriting while some erred in allocation of unmarked applications including firm underwriting to all the three underwriters. (c) Most of the candidates went wrong in the computation of purchase tax. They calculated purchase tax on purchase cost of the software after deducting discount and without adding import duty paid on the software acquired from abroad. (d) Some candidates wrongly passed a journal entry for goods dispatched to branch and not received by them till 31st March, 2012 instead of mentioning No entry will be passed in the books of the Head Office. Question 2. Most of the candidates were unable to calculate correct amount of goodwill and wrongly prepared the statement showing final settlement among partners for distribution of Preference and Equity shares in PQR Pvt. Ltd. Also, candidates failed to realize that the partnership firm was converted into a company; therefore, the Balance Sheet of PQR Pvt. Ltd. should be prepared as per the Revised Schedule VI only. Overall performance of the candidates was below average. Question 3.(a) Candidates were unable to pass correct journal entries for redemption of preference shares out of free reserves and cancellation of investment in own debentures. Also profit on cancellation of own debentures was wrongly transferred to Profit and Loss account instead of transferring it to capital reserve account. (b) Some of the candidates were unable to state the situations as to when the lease will be classified as finance lease. Question 4. The candidates were not able to calculate the correct amount of Purchase Consideration and also failed to prepare Balance Sheet and Notes to Accounts as per the Revised Schedule VI. Some candidates were also confused on sale, cancellation and settlement of debentures for machinery. Question 5.(a) Specified format of Profit and Loss account as per the Banking Regulations Act had not been followed by most of the candidates. Further, few candidates made wrong adjustment for Rebate on bills discounted as on 31st March, 2011 and 31st March, 2012.
62
Question 6.(a) Some candidates were not able to calculate cum and ex-interest value of debentures purchased while few made mistake in determining the amount of debenture interest due and passing correct journal entries for the same. Question 7.(a) and (b) In part (a) and (b), though candidates were able to determine the correct value of the asset to be capitalised yet they failed to pass correct journal entries to record the same. (c) Candidates were not able to give the answer to this part in line with the provisions of AS 29. The answers given by them were very vague. (d) Candidates were not able to list down all the specified conditions for issue of sweat equity shares by joint stock companies. PAPER 6: AUDITING AND ASSURANCE Specific Comments Question 1.(a) Many candidates answered the question in a general manner and did not mention the specific provisions of the Companies Act, 1956 such as issue should be authorised by an ordinary resolution of the company sanctioned by the Central Govt etc. (b) Many Candidates were not aware of the guidelines issued by the Council of the Institute of Chartered Accountants of India which provide restriction in respect of private companies as well. (c) Major points were left in the answer given by many candidates. Some candidates wrote about rates and methods of depreciation instead of stating the purposes of providing depreciation. (d) The provision requiring the filling of casual vacancy caused by resignation of the auditor by the general meeting in consonance with the principle of auditors independence was not explained by many candidates. Moreover, some candidates mentioned the provisions of first auditors. Question 2.(a) Most of the candidates could not explain the concept of True and Fair view and discussed about auditors role and approach in auditing. Candidates were lacking in conceptual clarity. (b) Some candidates answered giving fundamental accounting assumptions instead of mentioning the areas in which different accounting policies are encountered. Question 3.(a) Many candidates showed lack of the understanding of the topic and mentioned irrelevant points like appointment, retirement, salary, removal and appointment of auditor of PSUs etc., instead of specifically answering the duties of CAG. Also, some candidates discussed about CAGs appointment, remuneration and termination instead of stating the duties of CAG.
EXAMINERS COMMENTS
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(b) Some candidates wrote about types of auditors opinion instead of basic elements of the auditors report. Question 4.(a) Very few candidates had attempted this question and those who answered failed to understand the question and discussed, in a general way, about the procedure of designing a confirmation letter instead of factors to be considered while designing a confirmation request. (b) Candidates mentioned only few important distinction points and repeated those points only. Few candidates wrote similarities rather than bringing out the distinction points. Question 5.(b) Few candidates answered this question satisfactorily. Many candidates discussed the procedure of issue of shares instead of verification of application and allotment money received on shares issued for cash. Question 6.(a) Many candidates were not able to explain the meaning of working papers properly. Moreover, some candidates did not refer to SA 230 on Audit Documentation. Also, contents of the Current File were mixed with permanent file. (b) Points regarding boarding and lodging, travelling rules, sanction etc. were not covered by many candidates and they discussed, generally, about cash/bank payment, voucher and treatment in Profit and Loss Account. Question 7.(b) Many candidates lacked the knowledge of SA 230 and Section 209 of the Companies Act, 1956. Also, some candidates mentioned the rights and duties of auditors. (c) Many candidates did not mention the nature, factors and causes of inherent risk and mainly discussed about type of risks. Also, some candidates answered sampling risk rather than discussing about the inherent risk. PAPER 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT SECTION A: INFORMATION TECHNOLOGY Specific Comments Question 1. Being a compulsory question, almost all the candidates answered this question. This question has ten sub parts in which candidates were required to describe briefly about various terms used in Information Technology. Most of the candidates could answer it fairly well except for the parts like Buffering and Data Transformation where they got confused with Internet Buffering and Data Transfer from one place to another. Question 2.(a) This was a basic question on the definition of software and its various types. Almost all the candidates wrote the correct answer and accordingly, they were able to score good marks. (b) Most of the candidates have answered very well by describing various components of an Expert System.
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Question 3.(a) This part was based on the salient features of hierarchical database, which was answered well by a few candidates only. (b) This question requires defining Data Warehouse and explaining various concerns in using data warehouse. Most of the candidates could define the term data warehouse; however, many of them wrote about requirements of data warehouse rather than concerns of using it. Question 4.(a) Most of the candidates were able to discuss the ring topology and its advantages and disadvantages correctly. Hence, their performance was found to be good for this part. (b) Most of the candidates wrote the correct answer by differentiating Serial Transmission and Parallel Transmission and accordingly, their performance was good for this part. Question 5.(a) In this question, candidates were expected to describe the technical functionality of Customer Relationship Management (CRM). Most of the candidates performed poorly in this question, mainly because of not understanding the concept of CRM with reference to Information Technology. (b) Similarly, in this part, candidates were expected to describe the tactical level of activities in Supply Chain Management (SCM). But, due to not understanding the concept of SCM with reference to Information Technology, poor performance was observed for this part also. Question 6. This question was based on a flowchart to print the square of odd numbers between 10 to 50 and also print the sum of their square. The performance of most of the candidates was found to be good. Question 7. In this question, a brief description of four technical terms was required to write. Out of these terms, most of the candidates could not explain System flow chart as they got confused with program flow chart and 5GL, which they might do not know. SECTION B: STRATEGIC MANAGEMENT General Comments Many candidates were not able to exhibit knowledge of key concepts that was required while answering the questions. This resulted in sketchy and vague answers. Lengthy and unnecessary explanations were given in many cases. The candidates should study all the topics in the subject comprehensively and write precise and relevant answers. The presentation of the answers was also found wanting in several cases. Answers lacked logical flow and proper language. Examinees should improvise on their writing skills. A thorough preparation with reading and writing practice of the subject is required to maintain the level of knowledge expected from the candidates.
EXAMINERS COMMENTS
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Special Comments Question 8. The performance of the candidates was not up to the mark as the answers provided by them were not of expected quality. This question was divided into five parts. In part (a), majority of the candidates were able to explain the factors that affect the strength of competitive pressures from substitute products. In part (b) the candidates were not able to properly explain the concept of reactive strategy. In part (c), majority of the candidates were able to explain divestment strategy with its reasons for adoption. In part (d), majority of the candidates wrote functions instead of strategic role of human resource manager. Similarly, in part (e) most of the examinees misunderstood the concept of network structure and explained it as networking. Question 9. Although majority of the candidates were able to identify correctness or incorrectness of the statements, they were not able to corroborate their answers with reasoning. Candidates were short of conceptual clarity required in portfolio analysis and benchmarking. In part (b), the performance of the candidates was unsatisfactory due to lack of knowledge of concept. Question 10. This question was divided into seven parts of one mark each. Majority of the candidates attempted this question and the performance was average. Candidates gave vague and irrelevant answers without any basis. Question 11. Although, the candidates attempted both the parts of the question; they could not write good answers. The answer of the examinees reflected that most of them were not able to explain the importance of efficiency as an objective of business. The examinees were also not fully conversant with the role of information technology in business process reengineering. Question 12. The overall performance of the examinees in this question was poor. Majority of the candidates explained the corporate strategy but were unable to explain the firms alignment with its environment through corporate strategy. In part (b) many students wrote about product life cycle instead of experience curve. Only few students were able to explain the relevance of experience curve in strategic management. Question 13. Majority of the candidates were able to write satisfactorily the differences between logistics and supply chain management but were unable to differentiate conceptually between vertically integrated and horizontally integrated diversification. Question 14. Most of the examinees were unable to explain correctly the steps for initiating a strategic change. They gave vague and incorrect answers. In the second part of the question they explained internet technology in general terms and explicate advantages of global company instead of its characteristics.

Sa Nov2012 - Ipcc GR II

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INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION GROUP II

ers who when answ estions who

rious knowledgequcu estions

who w o h wha t ers

The Institute of Chartered Accountants of India

SUGGESTED ANSWERS TO QUESTIONS SET AT THE

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION GROUP II

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

Website Department/Committee : E-mail Price ISBN No. Published by

www.icai.org Board of Studies

Examiners comments on the performance of the candidates

(iii) Entry Tax : 5 % (Recoverable later from tax department)

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

PAPER 5 : ADVANCED ACCOUNTING

(11,400) 15,600 20,000 35,600

(7,600) 400 14,000 14,400

19,000 10,000 10,000

16,000 44,000 60,000

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

PAPER 5 : ADVANCED ACCOUNTING

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

PAPER 5 : ADVANCED ACCOUNTING

In the books of Partnership Firm Partners Capital Accounts P Q R P Q R

Balance 50,000 30,000 20,000

5,000 10,000 1,90,000

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

Computation of Purchase consideration

PAPER 5 : ADVANCED ACCOUNTING

6,310 400 40 11,750

2,750 5,000 4,000 11,750

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

PAPER 5 : ADVANCED ACCOUNTING

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

PAPER 5 : ADVANCED ACCOUNTING

2 411 4,100 2,600

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

PAPER 5 : ADVANCED ACCOUNTING

78,400 76,800 1,600

1,20,000 1,15,200 4,800

3,00,000 20,000 3,20,000

10,04,400 25,000 12,000 20,000 2,000 4,11,000 20,000 5,14,400

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

PAPER 5 : ADVANCED ACCOUNTING

Non-Current Liabilities (a) Long-term borrowings 3 4 Total 3,80,000 8,15,000 57,34,400

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

2,00,000 5,60,000 (60,000) 3,15,000

PAPER 5 : ADVANCED ACCOUNTING

Less: Share Capital issued by K Ltd.

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

PAPER 5 : ADVANCED ACCOUNTING

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

IV. V. VI. VII. VIII.

35,000 12,000 38,000 65,340 30,000 5,70,340

PAPER 5 : ADVANCED ACCOUNTING

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

1,00,000 95,000 5,000

PAPER 5 : ADVANCED ACCOUNTING

1,78,200 6,000 1,84,200

1,80,000 1,78,200 1,800

28,800 28,800 72,800 72,800

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2012

(b) Calculation of correct Departmental Profit Department A Department B Department C

4,000 40,000 (1,950) 38,050 (3,805) 34,245