June 2010 Examination

Section I Commercial and Industrial Law

Question 1: Comment on the following statements based on legal provisions
(No marks for wrong reasons / justifications)
a) Gratuity can be attached in execution of a decree or order of any civil,
revenue or criminal court.
b) During 2001 − 2002, the number of employees were 50 and subsequently
reduced to 10 during 2009 − 2010. Employer discontinued deductions as
EPF not applicable due to reduction in employees.
c) Mr. Roy sells by auction, to Mr. Paul a cow which Mr. Roy knows to be
unsound. Mr. Roy says nothing to Mr. Paul about cow's unsoundness.
This is a clear case a fraud by Mr. Roy.
d) Sale and Agreement to sale are same.
e) Cheque for Rs. 2,00,000 issued by Mr. Nair was returned unpaid with
remarks 'Account Closed', hence drawee has no remedy.
f) Rights to Information Act 2004 provides that Public Information Officer
is required to furnish the information within 15 days from the date of
receipt of application with a fee Rs. 50/-
g) Mr. Tarafder instructsMr. Kinkar a merchant to buy a ship for him. Mr.
Kinkar takes the services of a renowned ship surveyor to choose a sea
worthy ship for Mr. Tarafder. The ship turns out to be unsea worthy and
is lost. Mr. Kinkar who is agent is responsible.
Answer 1:
a) False. This protection is specifically provided in the Payment of
Gratuity Act, 1972 that the gratuity cannot be attached by an order
of the court.
b) EPF Act 1952 provides that once the Act is applied to any
establishment, it shall continue to be applied even when
subsequently the number of employees has reduced. Employer
action is wrong in the eyes of law. EPF scheme shall continue.
c) Mere silence over a fact does not amount to fraud as per the
Indian Contract Act. Mr. Paul has all the opportunities to examine
the cow. Mr. Roy is not supposed to bring to light the unsoundness
of cow.
d) No. They are not same. In sale the consideration moves with the
sale at the present date while in agreement to sale the
consideration will move at a future date when the sale would take
place.
e) The drawee has a remedy under the Negotiable Instrument Act
and can serve a notice to the drawer within 15 days of dishonour
of cheque and demand the payament.
f) As per RTI Act 2004, the fee is Rs. 10 and not Rs. 50. The Public
Information Officer is bound to provide information within 30 days
subject to certain conditions.
g) Mr. Kinkar is not responsible as Mr. Tarafder is also supposed to
see the seaworthiness of the ship before buying. Mr. Kinkar is
acting as agent and he has all the rights to appoint another person
as agent as this is a case of technical expertise. Mr. Kinkar cannot
be charged of negligence as he has appointed a renowned firm for
the survey.
Question 2:
a) Mr. A agrees to sell a house to Mr. B for Rs. 100,000, but if Mr.
B uses the house as 'Gamble house', then Mr. B shall pay Rs.
150,000. Explain the legality.
b) A contract without adequate consideration is not a contract.
Offer your views.
c) Discussion the position of agents appointed by Minor.
d) An exchange of goods with goods is a sale. Comment with
Rules position.
e) When sale is complete in an Auction ?
f) Factories Act, provides certain precautions in case of fire − Give
details.
g) Under what circumstances compensation is not payable
(Workman's Compensation Act).
Answer 2:
a) The Contract is valid if the purpose is lawful and is void if the
purpose is unlawful. First part is a valid contract while the second
part is void as using the house as 'gambling house' is unlawful.
Consideration does not matter is deciding the lawfulness of the
purpose.
b) Repeat Question. Please see : Solved scanner : Page 6.9 Chapter
2 Consideration Dec 2001.
c) Minor is not supposed to take decisions. He can neither enter into
a contract nor can he appoint agent. Such agents will deemed to
be not appointed at all and their appointment will be null and void
in the eyes of law.
d) Exchange of goods with goods is not sale, but it is called barter
exchange. Sale is defined in Sale of Goods Act as transfer of
property in goods for a price.
e) Auction sale is complete when the auctioneer announces the
completion in any formal manner e.g. by falling the hammer.
f) The precautions required in case of fire as per Factories Act, are
as follows:
(i) All precautions and measures should be taken to
prevent the occurrence of fire inside the factory and
outside the factory.
 (ii) Fire escape should be provided. This should be
adequate for all the employees.
(iii) All necessary equipments and facilities should be
provided to fight and put out the fire.
(iv) All workers must be trained regarding what they should
do in case of fire. All must know where the escape is.
(v) The state govt. has powers to give directions in this
regard.
(vi) The Chief Inspector has all the powers, if in his opinion,
the measures and precautions taken by factory to deal
with fire, are inadequate, he may direct the factory to
provide more facilities, equipments and arrangements
in the factory. He may also frame a time schedule for
this.
g) Compensation is not payable in the following cases :
(i) The employee was under the influence of drugs /
alcohol at the time of accident.
(ii) Disablement was for a period less than 4 days.
(iii) Worker was not following safety rule.
(iv) Worker was not using the required equipment or
safety measure e.g. helmet, belt etc.
(v) The worker has refused for medical examination
even when the employer was paying the cost of
such examination.
3 (a) Write Short Notes on any four :
1. (i) Undue Influence : When two parties enter into contract with each
other and one of the parties is in position to dominate the will of the
other and uses that position to obtain an unfair advantage over the
other party, such contract is said to be induced by ' undue influence.'
If a person having a dominant position over another person and he
enters into contract with such person then the burden of proof that the
contract was not done under undue influence, is on the person
holding the dominant position.
A person is said to be having a dominant position if (i) he makes
contract with a person who is not of sound mind because of age,
illness, mental instability or bodily distress etc. (ii) he holds some
control over the other person (iii) he holds some monetary
obligation over the other person.
2. Right of Resale : If the seller has not received the payment from
the buyer, he is called unpaid seller. The unpaid seller has the right to
resell those goods provided he gives proper notice to the buyer in this
regard. The buyer should be given reasonable time to pay the balance
amount and if he fails to pay, unpaid seller may resell the goods and he
also has right to recover the damages occurred to him by breach of
contract, from the buyer. If such notice has not been given, the unpaid
seller has no right to recover the damages from the original buyer nor he
(unpaid seller) has any right over the profit arising out of such sale. The
second buyer gets the good title after such resale. The seller can retain
any profit on account of such sale.
3. Industrial Disputes : Industrial Dispute means : any dispute or
difference between (a) employer and employees (b) employer and
employer (c) employee and employee. The dispute should be connected
with (a) employment (b) non-employment (c) terms of employment (d)
conditions of working ; of any person.
4. Working Hours for Children : No child shall be employed or
permitted :
(i) to work in any factory for more than four and half hours in any day ;
(ii) during the night ; (iii) not more than two shifts and shifts should be 5
hours apart (iv) no child shall be allowed to work in any factory on any
day on which he has already been working in any other factory (v) no
female child shall be allowed to work in any factory except between 8
am to 7 plant & machinery;
5. Consumer as per Consumer Protection Act 1986 : This is repeat
question of Dec 2007 (6a). For answer Please see Chapter 21 page s
6.95
Question 3 (b) : Give correct answer if the following statements are
wrong :
(i) When person becomes or ceases to be, designated member,
notice is delivered to the Registrar within 30 days;
(ii) Where there is any change in the name or address of a
member, notice is delivered to the Registrar within 30 days.
Answer : In first case, the notice to the Registrar be delivered within 14 days
and in (ii) within 28 days.
Question 4:
(a) Mr. Roy gives Mr. Ghosh on hire, a horse for own riding but Mr. Ghosh
drives the horse in his carriage. What action Mr. Roy can take?
(b) A saved life of B when B was drowning. Later A sued B for remuneration
/ reward because saving life was the consideration received by B. State
based on rules whether A would succeed.
(c) Sale and Bailment are same. Do you agree ?
(d) Manager of the factory fixed working hours of woman from 6 pm 1 am
during the period from Monday to Friday of first week of May 2010.
Whether it is permissible, cite the rule position.
(e) As per the Factory Act, '' first aid boxes'' shall be provided and
maintained not less than one for every 200 workers ordinarily engaged.
(f) When and to whom the gratuity is payable.
(g) What is negotiable ?
Answer :
 (a) This is contract of bailment. Mr. Ghosh has not followed the
conditions of bailment and he action to use the horse in his
carriage in not as per the terms of bailment. It is now up to Mr.
Roy to continue with or terminate the bailment.
(b) There was no contract or agreement between A and B in this
respect. As there was no contract at the first place, the question of
any consideration does not arise whatsoever. It was a voluntary
act on part of A hence A will not succeed.
(c) No, they are not same. There are many points of difference
between them as given below :
A sale involves transfer of ownership and physical Bailment involves physical tr
transfer of property. is not disturbed.
Parties involved are called seller and buyer. Parties involved are called ba
The property is never taken back after transfer. Property is taken back as pe
Contract is over when buyer takes the possession of Contract is not over when ba
property after payment. the property is to be returned
(d) As per the provisions of Factory Act, the working hours for women
are between 6.00 am to 7.00 pm. No woman shall be allowed to
work from 7.00 pm to 6.00 am. The state government has powers
to alter the above limits but in no case the women will be allowed
to work in any factory between 10.00 pm to 6.00 am. Hence the
manager's decision is incorrect in the eyes of law.
(e) As per the Factory Act, '' first aid boxes'' shall be provided and
maintained not less than one for every 150 (not 200 as given) workers
ordinarily engaged.
(f) Gratuity is payable to employees who have rendered continuous
service for minimum 5 years in following circumstances :
(i) On the superannuation (ii) on his/her retirement or resignation
(iii) on his / her death or disablement. In case of death, gratuity is
paid to the nominees or to his / her legal heirs, if there was no
nominee. In case of death, the condition of continuous service of 5
years is not applicable.
(g) Negotiable means transferable on delivery. When an instrument
i.e. promissory note, bill of exchange or cheque is transferred to any
person to make him holder, the instrument is said to be negotiated.
Question 5 : Comment on the following statements based on legal
provisions (no marks for wrong reasoning).
(a) US GAAP is not different from India GAAP.
(b) Auditor is not liable in case of honorary Audit.
(c) Besides statutory audit by a Chartered Accountant, Comptroller
and Auditor General of India conduct audit of Govt. Companies,
hence Internal audit is not necessary in Govt. companies.
 (d) Cost audit is submitted to the company within 90 days from the
end of company's financial year.
(e) Scope of management audit is limited to review the audit reports
of statutory auditor and internal auditor.
(f) CARO is not applicable to Private company.
(g) To comply with CARO, Auditor is to comment in his report on ''
Application of Term Loan''. − Comment.
Answer 5:
(a) False. There are many differences between them, major ones
being in the cases of depreciation, R&D expenditure, investment in
own shares etc. (Suggestive reading :The difference between India
GAAP and US GAAP has been given on page S 6.133 Chapter 1:
Audit techniques and practices.)
(b) False. The auditor has to conduct and conclude his audit as per
the directives and guidelines given in the Company's Act 1956.
The quantum of fees does not decide the scope, standard or
strength of audit. The auditor's liability exists for the audit
conducted by him. It does not matter whether he has conducted
the audit with fees or on honorary basis.
(c) Internal audit is different and distinct from the audits conducted by
CA or by CAG. According to CARO, internal audit is mandatory in
case of listed companies and other non-listed companies having a
paid up capital and reserves exceeding Rs. 50 lacs or the
companies whose average turnover in last three years exceeds
Rs. 500 lacs. Hence internal audit is also compulsory for the govt.
companies who fall under the mentioned category.
(d) False. Cost audit report is submitted to the Central Govt. with a
copy to company within 180 days from the end of financial year to
which the cost audit report relates.
(e) False. The objectives of management audit are (i) to detect and
correct the human limitations of top management; (ii) to improve
upon management’s productivity; (iii) to avoid possible losses
arising from inefficient management and (iv) to study the current
state of all affairs of the management and suggest suitable
measures for improvement.
(f) : CARO 2003 is applicable to every company except :
1. A Banking Company 2. An Insurance Company 3. A
company licensed to operate as per the provisions of
section 25 of the Companies Act 1956. 4. A private
limited company which has a paid up capital and
reserves of not more than Rs. 50 lakhs after writing
off the accumulated losses and other fictitious assets.
 5. Private Ltd. company whose turnover does not
exceed Rs. 5 crores.
(g) : This is point 16 of CARO 2003. Application of Term Loan :
Whether loans taken, were used in the same purpose for which
these were taken.
Question 6 :
(a) Find out the difference between US GAAP and India GAAP in
respect of R & D.
(b) What are the basic items / areas you will consider for review of
Fixed Capital / Assets ?
(c) State the matters that should be considered to determine the
effects of Computerised Information System environment on the
audit.
(d) Internal Check is said to have some fundamental aims. If so give
details.
(e) Articles of Association of ABC Ltd. provide that Fixed Deposits
Receipts should not be shown to statutory auditor. Accordingly,
Manager (accounts) refused to show. State the legality.
Answer 6 :
(a) Indian GAAP allows the R and D expenditure to be capitalised
under certain conditions like technical feasibility, resource
availability etc. In the US GAAP R and D costs are treated as
expenses. If the Plant & machinery has future use, it can be
capitalised.
(b) The basic items which can be considered are many; some of them
are the following :
(i) Assets register, whether it is maintained properly, updated
regularly. Who maintains it and who verifies and signs it.
(ii) Policy of depreciation: Whether consistently followed. AS – 6
i.e. Depreciation accounting is followed. Any change in policy of
depreciation has been properly disclosed and its impact has been
assessed and incorporated.
(iii) Policy of acquisition of fixed assets. How the assets are
purchased? Who authorizes the payment ? Whether purchase
committee is formed for this purpose ? Whether price paid for
its acquisition is okay ?
(iv) Insurance policy : Whether all assets are ensured adequately
against possible contingencies ?
(v) Verification of assets : How and by whom, the assets are
verified physically ? What is the interval between two
successive verification ? Has any discrepency
 (vi) Policy of writing off or disposal : How the assets are disposed ?
Who certifies the disposal ? Entries are recorded in the assets
register or not?
(vii) Utilisation of Fixed assets : Optimum utilisation being ensured
by the management, what is the Fixed assets turnover ratio and
how it stands against the industrial standard.
(viii) CARO 2003 requires in its first point regarding Fixed assets :
a. Company is maintaining proper records of fixed assets ;
b. Fixed assets are frequently verified by the management;
c. Material discrepancy found during verification are accounted
properly
d. Any disposal of fixed assets has affected the going concern
concept or not.
(c) Although the overall objective and scope does not change in EDP
or CIS (computerized information system) environment, however, the
use of computers changes the processing, transfer and storage of
information in a very significant manner. Accordingly the procedures
followed by the auditor in his study and evaluation of accounting system
and related internal control may be considerably affected by the Cis
environment. This calls for adequate knowledge of Cis, understanding of
computer hardware, software and processing system on the part of
auditor.
The use of computers and computer assisted audit techniques leads to
drastic improvements in the effectiveness and efficiency of auditing
procedures and performance. For example some transactions may be
tested more effectively than manual system. The CIS does not cause
any change in central objective of auditing but it does change the audit
process itself as below:
1. Skill and Competence : It is imperative to know how the cis
environment affects the study and evaluation of internal control
system of the entity. The auditor should have understanding of
computer hardware, software and application of various
techniques in relation to accounting and auditing. He should have
sufficient knowledge of cis to implement the auditing procedures
and approaches.
2. Planning : CIS of the auditee has direct relation with the planning
of audit. The auditor should collect the information relating to cis
e.g.
a) The computer hardware, software and its extent of application in
the entity.
b) Any revision in the existing system, introduction of new application
system;
c) Planning of audit of various application processes ;
 d) Determine the degree of reliance on internal control of cis.
e) Planning auditing procedures using computer-assisted audit
techniques.
3. Accounting system and Internal control : Internal control objectives
apply to all areas, whether manual or automated. Therefore,
conceptually, control objectives in an IS environment remain unchanged
from those of a manual environment. However, control features may be
different. If the auditor plans to rely on internal control in conducting his
audit, he should ensure adherence to manual and controls as prescribed
in the charter.
4. Audit evidence : A Cis environment may altogether alter the scene
of audit evidence. Computer assisted audit techniques may be required
to enhance the effectiveness as well as efficiency of the audit.
Generalised audit software may also be called for assistance in audit in
cis environment.
(d) The internal check system should have some fundamentals like the
following :
(i) The basic objective is to prevent fraud and error and
misappropriation of resources. This should always be kept in mind.
(ii) Some check points should be designed and these should be
entrusted to specific persons.
(iii) Segregation of duties is essential component of any internal
check system.
(iv) The flow of work from start to finish should be smooth enough.
No breakers or bottlenecks should come in the way.
(v) It should be designed in such a way where work of one person
should be automatically checked by another person.
(e) Restriction of the rights of statutory auditor:
To enable the statutory auditor to perform the duties, certain rights are
vested in him vide section 227 of the Company's Act 1956, viz. (i) Right
to access the books and records at all times, (ii) right to acquire
information and explanation from officers, and (iii) right to attend AGM.
All these rights are vested in him by the Act itself and the company
cannot restrict any of these rights. Any resolution taken at a general
meeting of shareholders or any provision in the Articles of Association of
the company restricting the rights of auditor is invalid. The company
cannot override the provisions of the Act. The manager accounts should
show the required documents to the auditor and if he does not do so, the
auditor should qualify his report accordingly.
Question 7:
a) A sum of Rs. 400,000 which was spent on trial production
was included in production cost. Give correct answer if this
was wrong.
 b) What are the disclosure requirement if the assets of the
company are revalued?
c) Statutory auditor is to give a certificate regarding compliance
of corporate governance which is annexed with the Director's
report. What are the documents and records to be checked
by you before signing the certificate ?
d) What are the control measures which the auditor is
concerned with in a computer information system ?
e) State, what are the terms to be verified for conducting ''
stores accounting''?
f) How will you verify the interest received ?
Answer 7 :
a) Trial production is part of the cost of the asset because it is
required to bring the asset in operating condition. All expenses
before the machine is ready for commercial production should be
capitalised as part of machine. The expense of Rs. 4.0 lakhs
should therefore be capitalised and should not be treated as
production overheads. According to AS-10 (accounting of fixed
assets), the cost of fixed assets includes any directly attributable
cost of bringing the asset to the working condition for its intended
use. AS-10 makes it clear that expenditure incurred on start up
and commission of the project including the expenditure on test
runs less income from sale of products, forms cost of the asset
and is therefore capitalised. Rs. 4.0 lakhs should be capitalised as
deferred revenue expenditure to be written off over a period of say
3 to 5 years.
In the light of above, the inclusion of trial run cost in production
overheads is wrong.
b) This relates to AS − 10. AS 10.13 requires the compliance of Part I
of Schedule VI of the Company's Act 1956 which states that the
following details of fixed assets to be disclosed in balance sheet :
• Original cost, Additions to / Deductions from the fixed assets
during the year,
• Total depreciation up to the end of the year and sum written
off or added due to revaluation;
• Each balance sheet for the first five years, subsequent to the
date of reduction or addition on account of revaluation or
reduction of capital should disclose such reduction or addition.
c) The Corporate Governance Report requires following points to be
checked by auditor during the audit : (i) Minutes of BOD’s
meetings (ii) Minute book of general body meeting (iii) Minute book
of Audit committee (iv) Corporate Governance Report (v)
Mandatory annual intimations filed by each director about
 directorship in other companies (vi) Consistency of segment wise
information with the segment information disclosed in financial
statements in according with AS − 17.and (vii) Adequacy of
Internal control system consistency with the opinion expressed by
him under CARO 2003.
d) Under computer information system, some of the controls with
which the auditor is concerned are as follows : (i) Password (ii)
Edit Test (iii) Batch cancellation stamp (iv) Fire walls (v) finance
control total (vi) Audit trails (vii) General controls and application
controls. This is sufficient for 2 marks, if the question is for more
marks, pointwise details should be given.
e) For conducting the audit of 'store accounting' the auditor should
consider the following : (i) internal check system regarding the
receipt and issue of materials from stores (ii) adequacy, efficiency
and efficacy of internal control system regarding stores (iii) is there
any manual, directives and guidelines set up by the management
in this regard (iv) what is the frequency of physical checking of
store items (v) how the discrepancy between physical stock and
stock as per books, is treated in books of accounts (vi) what
actions have been taken by the management for the discrepancy ;
f) The interest is received by the organization from many sources viz.
fixed deposits with banks, securities like bonds and debentures,
investments in other financial institutions, loans given to outsiders,
securities deposits with authorities etc. The interest received on
each of these should be verified with the documents. It should also
be seen such interests have been properly entered in the cash
book and duly deposited in bank. Interest accrued management
and not paid should find place in balance sheet.
Question 8:
a) How will you verify petty cash ?
b) How will you verify provisions for taxation ?
c) What is expected under CARO regarding (a) internal audit and
(b) fraud?
d) Under what circumstances, the auditor has to qualify his report
?
e) Name 4 such circumstances under which the Management
Audit is useful.
Answer 8:
a) The most rudimentary point in vouching the cash balance is that
the date and time of checking should be known to nobody other
than auditor himself. Cash should be preferably checked in
remote branches. Surprise checks of cash balance, are also
advisable. If possible, the cash balance at the balance sheet
 date should be checked, however, if it has not been done, the
cash balance may be checked on surprise basis at a later date
and reconciliation to cash balance at the balance sheet date
may be made.
Cash balance consists of many components viz. cash, petty cash,
postage and revenue stamps, cash at branches, cash with agents.
Unduly large balances during any part of the year, of cash, call for
explanation from senior official of the entity. Similar principles and
procedures may be employed for verification of petty cash.
b) Verification for provision for taxation :
(i) Guidance notes issued by ICAI should be consulted to
ascertain the basis for provision for taxation.
(ii) According to AS − 4, deferred tax liability requires a
provision and a suitable disclosure.
(iii) Get a statement of income. See that provision for taxation
has been adequately made in the current year taking into
account the profit made.
(iv) Check the vouchers of advance payments of tax.
(v) Actual tax liability and advance payment of tax be
compared. See suitable adjustments have been made
for additional demand / refund of tax.
(vi) Examine whether assessment is completed and
rectified in the same year.
c) Internal Audit System in certain companies :
a) Whether the company has an internal audit system commensurate
with the size and nature of its business.
b) The above is applicable if : (i) Paid up capital and reserves
exceeding Rs. 50 lakhs as at commencement of the financial year
OR (ii) annual turnover exceeding Rs. 500 lakhs for three
consecutive financial years immediately preceding the FY
concerned.

Fraud : Whether any fraud on or by the company, has been noticed

or reported during the year, if yes, nature and amount involved is to be
indicated.

d) Where the auditor gives an opinion subject to certain objections,

conditions and/or reservations, s/he is said to have given a qualified
opinion. In the following circumstances, the auditor has to qualify his
report :
(i) She cannot conduct audit satisfactorily due to non-availability of
certain books of accounts or records or information or explanation
necessary for conduct of his audit work.
(ii) She finds that the Balance sheet and Profit and loss a/c have not
been prepared in accordance with accepted accounting principles.
(iii) She finds that inadequate / excessive provisions have been made in
respect of bad and doubtful debts, depreciation etc.
(iv) She detects that the company has created certain secret reserves.
(v) In her opinion, the provision for taxation is not proper / adequate.
(vi) AS − 2, has not been followed in inventory valuation.

(e) The objectives of management audit are (i) to detect and

correct the human limitations of top management; (ii) to improve upon
management’s productivity; (iii) to avoid possible losses arising from
inefficient management and (iv) to study the current state of all affairs of
the management and suggest suitable measures for improvement. (v)
The following are some of the circumstances in which the management
audit may be useful :
(a) While advancing loans, the lending institutions may require
the management audit to be conducted;
(b) Foreign investors / collaborators usually demand
management audit report before releasing funds for growth
and expansion;
(c) Company may itself feel the necessity of management
audit for evaluating its performance, efficiency and efficacy;
(d) When one company wants to acquire another company, it
may insist on conduct of management audit before
acquisition;
(e) Social image may be bettered by conduct of management
audit as it is not mandatory in nature.