PRIME/ME39/IPC 1

ACT No. of Pages: 6 Total Marks: 100 No of Questions: 7 Times Allowed: 3 Hrs

Question no.1 is compulsory. Answer any five from the rest

Working notes should form part of the answer 1 a) X Limited was making provisions up to 31-3-2012 for non-moving inventories based on no issues for the

last 12 months. Based on a technical evaluation the company wants to make provisions during the year 31-03-2013 in the following manner:

Total value of inventory ` 3 crores. Provision required based on 12 months ` 8 lakhs. Provision required based on technical evaluation ` 7.50 lakhs.

Does this amount to change in accounting policy? And Can the company change the method of provision?

b) Calculate the diluted earnings per share from the following information: ` Net Profit for the current year 85,50,000 No. of equity shares outstanding 20,00,000 No. of 8% convertible debentures of `100 each 1,00,000 Each debenture is convertible into ` 10 equity shares Interest expenses for the current year 6,00,000 Tax relating to interest expenses (say) 30%

c) MEC Limited could not recover an amount of ` 8 lakhs from a debtor. The company is aware that the

debtor is in great financial difficulty. The accounts of the company for the year ended 31-3-2013 were finalized by making a provision @ 25% of the amount due from that debtor. In May 2013, the debtor became bankrupt and nothing is recoverable from him. Do you advise the company to provide for the entire loss of ` 8 lakhs in books of account for the year ended 31-3-2013?

d) Supriya Ltd. received a grant of ` 2,500 lakhs during the accounting year 2013-14 from government for

welfare activities to be carried on by the company for its employees. The grant prescribed conditions for its utilization. However, during the year 2013-14, it was found that the conditions of grants were not complied with and the grant had to be refunded to the government in full. Elucidate the current accounting treatment, with reference to the provisions of AS (4 x 5=20 Marks)

2. A, R and M were carrying on business in partnership sharing profits and losses in the ratio of 5 : 4 : 3

respectively. The Trial Balance of the firm as on 31st March, 2013 was the following:

Particulars Debit (`)Credit (`)

Plant and Machinery at cost 1,05,000 — Stock 60,200 — Sundry Debtors 85,000 — Sundry Creditors — 1,05,200 Capital A/c: A — 70,000 R — 50,000

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M — 30,000 Drawings A/c: A 30,000 — R 25,000 — M 20,000 — Depreciation on Plant and Machinery — 35,000 Trading Profit for the year — 1,29,800 Cash at Bank 94,800 —

420,000 420,000 Additional Information:

a) Interest on Capital Accounts at 10% on the amount standing to the credit of Partners' Capital Accounts at the beginning of the year was not provided before preparing the above Trial Balance.

b) On 31st March, 2013 they formed a Private Limited Company Anagha (P) Ltd. to take over the partnership business.

c) You are further informed as under : (i) Plant and Machinery is to be transferred at ` 80,000. (ii) Equity Shares of ` 10 each of the company are to be issued to the partners at par in such

numbers to ensure that by reason of their share holdings alone, they will have the same rights of sharing profits and losses as they had in the partnership. Balance, if any in their Capital Accounts, will be settled by giving 7.5% Preference Shares at par.

(iii) Before transferring the business, the partners withdrew by cash from partnership the following amounts over and above the drawings as shown in the Trial Balance : (a) A —` 20,000; (b) R — ` 10,600; (c) M — ` 14,200.

(iv) All assets and liabilities except Plant and Machinery and the Bank Balance are to be transferred at their value in the books of the partnership as at 31st March, 2013.

You are required to prepare: i. Profit and Loss Adjustment Account for the year ending 31st March, 2013.

ii. Capital Accounts showing all the adjustments required to dissolve the partnership. iii. A statement showing the number of shares of each class to be issued by the company to each of

the partners to settle their accounts. iv. Balance Sheet of the company Anagha (P) Ltd. as on 31.03.2013 after takeover of the business.

(16 marks) 3. a) From the following figures of Well Life assurance Co. Ltd. prepare a Valuation Balance Sheet and Profit

Distribution Statement for the year ended 31st March 2014. Also pass necessary journal entries to record the above transactions with narrations:

Particulars ` (in lakhs) Balance of Life Assurance Fund as on 1.4.2013 334.30 Interim bonus paid in the valuation period 50.00 Balance of Revenue Amount for the year ended 31.3.2014 480.00 Net Liability as per valuer‘s Certificates as on 31.3.2014 330.00

The company declares a revisionary bonus of ` 185 per ` 1,000 and gave the policyholders an option to take bonus in cash `105 per `1,000. Total business conducted by the company was ` 1,200 lakhs. The company issued profit policy only, 3/5th of the policyholders in value opted for cash bonus.

(8 marks)

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b) Sahapur Electricity Ltd. Earned a profit of `19,40,000 during the year ended 31st March 2012 after charging interest on debentures amounting to `45,000 @ 7 ½%. You are required to show the disposal of profits assuming bank rate at 6% with the help of the following data:

Particulars Amount(`) Fixed assets at cost 2,50,00,000 Preliminary Expenses 5,00,000 Monthly average of current assets including amounts due from customers `6,00,000

36,00,000

Reserve Fund (represented by 6% Govt. Securities) 40,00,000 Total Depreciation written-off 77,00,000 Contingency Reserve Investment 10,00,000 Loan from Electricity Board 50,00,000 Tariff and Dividend Control reserve 2,00,000 Security Deposit received from customers 5,00,000 Development Reserve 5,00,000

(8 Marks) 4. Ketan Kumar acquires the business of M/s Shiv and Nath on payment of ` 1,20,000 on 31st March 2013.

The book value of assets and liabilities taken over by him as follows: ` Debtors 52,500 Furniture 4,500 Stock 69,000 Creditors 15,000

There was no change between 1st January, 2013 and 31st March, 2013 in the book value of the assets and liabilities not taken over. The same set of books has been continued after the acquisition and no entries of the acquisition have been passed except for the payment of ` 1,20,000 made by Ketan Kumar. From the following balance sheet and trial balance prepare Business Purchase Account, Profit and Loss Account for the year ended 31st December, 2013 and Balance Sheet at that date.

Liabilities ` Assets `Capital Accounts Furniture 4,500 Shiv 45,000 Investments 7,500 Nath 30,000 75,000 Insurance Policy 3,000 Bank Loan 27,000 Stock 60,000 Creditors 18,000 Debtors 45,000 1,20,000 1,20,000

On 31st December 2013 the trial balance is:

` `Stock 60,000Furniture 4,500Investment 7,500Insurance Policy 3,000Business Purchase account 1,20,000Bank Loan 27,000

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Capital: Shiv 45,000Nath 30,000Ketan 45,000Bank 4,500Debtors 72,000Creditors 22,500Purchases 4,80,000Expenses 18,000Sales 6,00,000

7,69,500 7,69,500Closing Stock ` 75,000 (16 Marks)

5 a) On 1-1-2007, a company issued ` 15,00,000 12% Debentures. According to the agreement, 25% of net profit is applied for redemption on first day of the next accounting year. By 31-12-2010, ` 9,00,000 debentures were redeemed. Payment of interest on debentures are made on 31st December every year. Profit for the year 2010 amounted to ` 9,00,000. On 31-12-2010, Investment in Own Debenture Account showed a balance of ` 2,70,000 (face value ` 3,00,000). On 1-1-2011, Own debentures were cancelled by applying 25% of the net profit for the year 2003. On the same date, a six months notice as per the agreement was given for redemption of debenture at 10% premium. On 1-7-2011, the remaining own debentures were cancelled and redemption process was completed. Pass the necessary journal entries. (8 Marks)

b) M/s P and Co., had four departments A,B,C and D. Each department being managed by manager whose commission was 10% of the respective departmental profit, subject to a minimum of ` 6,000 in each case. Interdepartmental transfers took place at a 'loaded' price as follows:

From Department A to Department B 10% above cost From Department A to Department D 20% above cost From Department C to Department D 20% above cost From Department C to Department B 20% above cost

For the year ending on 31st March, 2014 the firm had already prepared and closed the departmental Trading and Profit and Loss Account. Subsequently, it was discovered that the closing stocks of departments had included interdepartmentally transferred goods at loaded price instead of cost price. From the following information prepare a statement re-computing the departmental profit or loss:

Dept. A ` Dept. B` Dept. C `Dept D` Final Profit (Loss) (38,000) 50,400 72,000 1,08,000Inter departmental transfers included at loaded price in the departmental stock

70,000 - 4,800

(` 22,000 from Dept. A and ` 48,000 from Dept. C

(` 3,600 from Dept. C and ` 1,200 from Dept. A)

(8 Marks)

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6 a) From the following information, prepare Profit and Loss Account of Zed Bank Ltd. for the year ended 31.3. 2013:

(` in ’000) Interest and Discount 8,860 (Includes interest accrued on investments) Other Income 220 Interest expended 2,720 Operating expenses 2,830 Interest accrued on Investments 10 Additional Information: (a) Rebate on bills discounted to be provided for 30 (b) Classification of Advances: (i) Standard assets 4,000 (ii) Sub-standard assets 2,240 (iii) Doubtful assets−(fully unsecured) 390 (iv) Doubtful assets – covered fully by security Less than 1 year 100 More than 1 year, but less than 3 years 600 More than 3 years 600 (v) Loss assets 376 (c) Provide 35% of the profit towards provision for taxation. (d) Transfer 25% of the profit to Statutory Reserve.

b) Moon Star has a branch at Virginia (USA). The Branch is a non-integral foreign operation of the Moon

Star. The trial balance of the Branch as at 31st March, 2014 is as follows: Particulars US $ Dr. ` Cr. ` Office equipments 48,000 Furniture and Fixtures 3,200 Stock (April 1, 2011) 22,400 Purchases 96,000 Sales --- 1,66,400 Goods sent from H.O 32,000 Salaries 3,200 Carriage inward 400 Rent, Rates & Taxes 800 Insurance 400 Trade Expenses 400 Head Office Account --- 45,600 Sundry Debtors 9,600 Sundry Creditors --- 6,800 Cash at Bank 2,000 Cash in Hand 400 2,18,800 2,18,800

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The following further information’s are given: (1) Salaries outstanding $ 400. (2) Depreciate office equipment and furniture & fixtures @10% p.a. at written down value. (3) The Head Office sent goods to Branch for ` 15,80,000 (4) The Head Office shows an amount of ` 20,50,000 due from Branch. (5) Stock on 31st March, 2014 -$21,500. (6) There were no transit items either at the start or at the end of the year. (7) On April 1, 2012 when the fixed assets were purchased the rate of exchange was ` 43 to one $.

On April 1, 2013, the rate was 47 per $. On March 31, 2014 the rate was ` 50 per $. Average rate during the year was ` 45 to one $.

Prepare: (a) Trial balance incorporating adjustments given converting dollars into rupees. (b) Trading, Profit and Loss Account for the year ended 31st March, 2014 and Balance Sheet as on date

depicting the profitability and net position of the Branch as would appear in the books of Moon Star for the purpose of incorporating in the main Balance Sheet. (8 Marks)

7. Answer any four from the following: a) Autumn Ltd. issued 1,20,000 Equity shares of ` 10 each . It wanted to buy back 20,000 equity shares at

par. It issued 6% 2,000 Preference Shares of ` 100 each, the proceeds being utilized for the purpose of buy-back. Expenses relating to the buy-back amounted to ` 18,000. Pass necessary journal entries

b) Discuss on the classification of investments by a Banking company c) Ice crème Ltd. takes over Cake Ltd. on April 01, 2012 and discharges consideration for the business as

follows : (i) Issued 25,000 fully paid equity shares of ` 10 each at par to the equity shareholders of Cake

Ltd. (ii) Issued fully paid up 18% Preference Shares of ` 100 each to discharge the preference

shareholders (` 1,80,000) of Cake Ltd. at a premium of 10%. (iii) It is agreed that the debentures of ` Cake Ltd. (` 1,00,000) will be converted into equal

number and amount of 13% debentures of Ice crème Ltd. Calculate the purchase consideration.

d) Show the Journal entry to record the asset taken on finance lease in the books of the lessee 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.

e) AB Ltd. launched a project for producing product X in October, 2012. The Company incurred ` 20 lakhs towards Research and Development expenses upto 31st March, 2014. Due to prevailing market conditions, the Management came to conclusion that the product cannot be manufactured and sold in the market for the next 10 years. The Management hence wants to defer the expenditure write off to future years. Advise the Company as per the applicable Accounting Standard.

(4 x 4=16 Marks)

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PRIME ACADEMY 38th SESSION MODEL EXAM - IPC – ADVANCED ACCOUNTING SUGGESTED ANSWERS

1 (a) Basis of provisioning whether on no issues or on technical evaluation is the basis of making estimates and cannot be considered as Accounting Policy. As per AS 5, due to uncertainties inherent in business activities, many financial statement items cannot be measured with precision but can only be estimated. The estimation process involves judgments based on the latest information available. An estimate may have to be revised if changes occur regarding the circumstances on which the estimate was based, or as a result of new information, more experience or subsequent developments. The basis of change in provisioning is a guideline and the better way of estimating the provision for non-moving inventory on account of change. Hence, it is not a change in accounting policy. Accounting policy is the valuation of inventory on cost or on net realizable value or on lower of cost or net realizable value. Any interchange of this valuation base would have constituted change in accounting policy. Further, the company should be able to demonstrate satisfactorily that having regard to circumstances provision made on the basis of technical evaluation provides more satisfactory results than provision based on 12 months issue. If that is the case, then the company can change the method of provision.

(b) “In calculating diluted earnings per share, effect is given to all dilutive potential equity shares that were outstanding during the period.” As per para 26 of AS 20 ‘Earnings per Share’, the net profit or loss for the period attributable to equity shareholders and the weighted average number of shares outstanding∗ during the period should be adjusted for the effects of all dilutive potential equity shares for the purpose of calculation of diluted earnings per share. ̀Profit for the current year (assumed to be after tax) 85,50,000 Add: Interest expense for the current year 6,00,000 Less: Tax relating to interest expense (30% of ` 6,00,000) (1,80,000) Adjusted net profit for the current year 89,70,000 Note: Conversion of convertible debentures into Equity Share is a dilutive potential equity shares. Hence, to compute the adjusted profit the interest paid on such debentures will be added back as the same would not be payable in case these are converted into equity shares. Weighted average number of equity shares Number of equity shares resulting from conversion of debentures = (1,00,000 x 100)/10 = 10,00,000 Weighted average number of equity shares used to compute diluted earnings per share = [(20,00,000 x 12) + (10,00,000 x 9∗∗)]/12 = 27,50,000 shares Diluted earnings per share = 89,70,000/27,50,000 shares = ` 3.26 per share

(c) As per para 8 of AS 4, ‘Contingencies and Events Occurring after the Balance Sheet Date’, adjustments to assets and liabilities are required for events occurring after the balance sheet date if such event provides/relates to additional information to the conditions existing at the balance sheet date and is also materially affecting the valuation of assets and liabilities on the balance sheet date. As per the information given in the question, the company was aware that the debtor was already in a great financial difficulty at the time of closing of accounts. Bankruptcy of the debtor in May 2013 is only an additional information to the condition existing on the balance sheet date. Also the effect of a debtor becoming bankrupt is material as total amount of ` 8 lakhs will be a loss to the company. Therefore, the company is advised to provide for the entire amount of ` 8 lakhs in the books of account for the year ended 31st March, 2013.

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(d) As per para 11 of AS 12 ‘Accounting for Government Grants’, Government grants sometimes become refundable because certain conditions are not fulfilled. A government grant that becomes refundable is treated as an extraordinary item as per AS 5. The amount refundable in respect of a government grant related to revenue is applied first against any unamortized deferred credit remaining in respect of the grant. To the extent that the amount refundable exceeds any such deferred credit, or where no deferred credit exists, the amount is charged immediately to profit and loss statement. In the present case, the amount of refund of government grant should be shown in the profit & loss account of the company as an extraordinary item during the year 2013-14.

2

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Anagha (P) Ltd Balance Sheet as at 31st March, 2013

Particulars Note No Amount

1 2 ` 3 `

I. EQUITY AND LIABILITIES

(a) Share Capital 170000

(b) Reserves and Surplus

(c) Money Received against Share Warrants

2) Share Application Money Pending Allotment

(3) Non-current Liabilities:

(a) Long-term Borrowings

(b) Deferred Tax Liabilities (Net)

(c) Other Long-term Liabilities

(d) Long-term Provisions

(4) Current Liabilities :

(a) Short-term Borrowings

(b) Trade Payables 105200

(c) Other Current Liabilities

(d) Short-term Provisions

TOTAL 275000

II. ASSETS

(1) Non-current Assets:

(a) Fixed Assets

(i) Tangible Assets 80000

(ii) Intangible Assets

(iii) Capital Work-in-progress

(iv) Intangible Assets under Development

(b) Non-current Investments

(c) Deferred Tax Assets (Net)

(d) Long-term Loans and Advances

(e) Other Non-current Assets

(2) Current Assets:

(a) Current Investments

(b) Inventories 60200

(c) Trade Receivables 85000

(d) Cash and Cash Equivalents 50000

(e) Short-term Loans and Advances

(f) Other Current Assets

TOTAL 275000

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3 (a)

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Disposal A. Least of the following;

(i) 1/3 of surplus or 5% of Reasonable Return whichever is less 1/3 of ` 3,03,100 = ` 1,01,033 or

(ii) or, `15,15,500 x 5/100 = ` 75,775 Least of the above is `75,775 And, of the balance , i.e ` 2,27,325(3,03,100-75,775)

B. 50% or ½ = to be transferred to Tariff and development Control Reserve i.e.` 2,27,,325 x50/100

= ` 1,13,662 C. and , 50% or ½ = to be distributed among consumers by way of reduction of rate i.e. Consumers‘ Benefit Reserve = ` 1,13,663 113662+113663 = ` 3,03,100

(b) In the Books of Well Assurance Co. Ltd. Valuation Balance Sheet As at 31st March 2012 Liabilities Amount (`) Assets Amount (`)

Net Liabilities as per Actuarial Valuation 3,30,00,000 Life Insurance Fund 4,80,00,000 Surplus/Net Profit 1,50,00,000 4,80,00,000 4,80,00,000

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Distribution Statement, i.e. Distribution of Surplus Amount (`) Surplus/ Net Profit 1,50,00,000 Add: Interim Bonus Paid 50,00,000

2,00,00,000 Policyholders‘ shares @95% of `2,00,00,000 1,90,00,000 Less: Interim Bonus paid 50,00,000

1,40,00,000 Shareholders‘ Share @5% of `1,00,00,000 10,00,000 Journal Particulars L.F. Debit ̀ Credit ̀Life Assurance Fund A/c Dr. 1,50,00,000 To, Profit and Loss A/c 1,50,00,000 (Surplus/Net Profit transferred to P&L A/c as per Valuation Balance Sheet) Profit and Loss A/c Dr. 75,60,000 To, Bonus (in cash) Payable A/c 75,60,000 (Bonus paid in cash) Profit and Loss A/c Dr. 88,80,000 To, Life Assurance Fund A/c 88,80,000 (Revisionary Bonus payable transferred to Life assurance Fund) Workings:

1. Bonus Payable in Cash @ ` 105 per ̀ 1,000 On 7,20,00,000 (` 12,00,00,000 × 3/5) (7,20,00,000/1000) X 105 = ` 75,60,000

2. Revisionary Bonus @ ` 185 per ̀ 1,000 On 4,80,00,000 (` 12,00,00,000 ×2/5) (4,80,00,000/1000) X 185 =`88,80,00,000

4

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5 (a) Debentures Outstanding on 1-1-2011: ` 15,00,000 – 9,00,000 = 6,00,000. These are redeemed as follows: On 1-1-2011 : Cancellation of Own debentures of face value of ` 2,25,000 On 1-7-2011 : Redemption of ` 3,00,000 debentures held by outsiders by repayment. On 1-7-2011 : Cancellation of remaining own debentures.

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Debenture of Interest for 6 months on ` 3,75,000 3,00,000 (Outstanding Debentures) 75,000 (Own Debentures)

Journal Entries

(b)

Particulars Dr (`) Cr(`)

At the end of 1 year

Employees Compensation Expense A/c Dr 8,60,625

To Employee Stock Options Outstanding A/c 8,60,625

(Being the compensation expenses recognized in respect

of the ESOP)

Profit and Loss A/c Dr 8,60,625

To Employee Compensation Expense A/c 8,60,625

(Being Expenses of the year transferred to P & L A/c)

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At the end of Year 2

Employees Compensation Expense A/c Dr 8,60,625

To Employee Stock Options Outstanding A/c 8,60,625

(Being expense in respect of ESOP recognized for the year

Profit and Loss A/c Dr 8,60,625

To Employee Compensation Expense A/c 8,60,625

(Being Expenses of the year transferred to P & L A/c)

At the end of Year 3

Employees Compensation Expense A/c Dr 21,03,750

To Employee Stock Options Outstanding A/c 21,03,750

(Being expense in respect of ESOP recognized for the year

Profit and Loss A/c Dr 21,03,750

To Employee Compensation Expense A/c 21,03,750

(Being Expenses of the year transferred to P & L A/c) Working Note: A. No. of Employees expected to take options = 2,500 x .80 x .85 x .90 x .90 = 1377 B. No. of Options to be granted to each employee = 500 C. Fair Value of each option = ` 5 D. Total Fair Value of Options expected to vest (A x B x C) = ` 34,42,500 E. Amount of Fair Value of Options to be recognized as an expense 1st year

(34,42,500/4) = ` 8,60,625 2nd Year (34,42,500 x (2/4)- 8,60,625) – ` 8,60,625 = ` 8,60,625 3rd Year [(1530 employees x 500 options x ` 5) - (8,60,625+8,60,625)] = ` 21,03,750 Since vesting period has been revised in 3rd year all the remaining liabilities in respect of employees stock option plan has been recognized at the end of 3rd year and data for the 4th year has been ignored.

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6 (a)

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(b)

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7 (a)

(b) The investment portfolio of a bank would normally consist of both approved securities (predominantly government securities) and other securities (shares, debentures, bonds etc.). Banks are required to classify their entire investment portfolio into three categories: (i) Held-to-maturity: Securities acquired by banks with the intention to hold them up to maturity should be classified as ‘held-to-maturity‘ (ii) Held-for-maturity: Securities acquired by banks with the intention to trade by taking advantage of short–term price interest rate movements should be classified as held-for trading/maturity. (iii) Available-for-sale: Securities which do not fall within the above two categories should be classified as ‘available-for-sale‘.

(c) Calculation of purchase consideration :

(i) 25,000 equity shares @ ` 10 = ` 2,50,000 (ii) 18% Preference shares of ` 1,80,000 × 110% = ` 1,98,000

` 4,48,000 (iii) Not to be included in purchase consideration as it is payment to debenture holders.

(d) Journal entry in the books of Lessee Asset A/c Dr. 1,49,888

To Lessor 1,49,888 (Being recognition of finance lease as an asset and a liability) Working Note:

Year Lease Payments `

Discounting Factor (12.6%) Present Value `

1 40,000 0.89 35,600 2 40,000 0.79 31,600 3 40,000 0.70 28,000 4 40,000 0.622 24,880 5 40,000 0.552 22,080 5 14,000(GRV) 0.552 7,728

149,888

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(e) As per para 41 of AS 26 “Intangible Assets”, expenditure on research should be recognized as an expense when it is incurred. An intangible asset arising from development (or from the development phase of an internal project) should be recognized if, and only if, an enterprise can demonstrate all of the conditions specified in para 44 of the standard. An intangible asset (arising from development) should be de-recognised when no future economic benefits are expected from its use according to para 87 of the standard. Therefore, the manager cannot defer the expenditure write off to future years. Hence, the expenses amounting ` 20 lakhs incurred on the research and development project has to be written off in the current year ending 31st March, 2014.

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ATG

No. of Pages: 2 Total Marks: 100 No of Questions: 7 Times Allowed: 3 Hrs

Question No. 1 is compulsory and answer any five questions from the rest

1) Comment all the following Questions

a) Sri & Company, a firm of Chartered Accountants was appointed as statutory auditors of Aaradhana Company Ltd..Aaradhana Company Ltd. holds 51 % shares in Sarang Company Ltd. Mr. Sri, one of the partners of Sri & Company, owed Rs. 1,500 as on the date of appointment to Sarang Company Ltd. for goods purchased in normal course of business.

b) Ceiling on number of audits in a company to be accepted by an auditor. c) State any six basic elements of the Auditor's Report. d) Comment

(i) CARO, 2004 does not apply to a foreign company. (ii) The auditor shall communicate all significant findings with those charged with Governance. (4 x 5 = 20 Marks)

2) a) PQR Company Ltd. -removed their first auditor by passing a resolution in the meeting of the

Board of Directors for his removal without obtaining prior approval from the Central Government. Offer your comments in this regard. (5 Marks)

b) R & M Company, a firm of Chartered Accountants, was appointed as statutory auditors of XYZ Company Ltd. Draft an engagement letter accepting the appointment as auditors. (6 Marks)

c) Explain the concept of “Materiality” as discussed in SA 320. (5 Marks)

3) a) R.K. & Company are the auditors of PQR Company Ltd. The Managing Director of the Company

demands copies of the workingpapers from the auditors. Are the auditors bound to oblige the Managing Director? (4 Marks)

b) Mention briefly important points which an auditor will consider while conducting the audit of a club. (8 Marks)

c) Examination in Depth. (4 Marks)

4) Write shot notes on any four of the following: (a) Reliability of external confirmations. (b) Physical verification of fixed assets "at reasonable intervals". (c) Verification of credit sales. (d) Procedures to be performed by the auditor in expressing opinion on 'going concern' assumption. (e) Audit of discounted bills receivable dishonored

(4 x 4 =16 Marks)

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5) a) What do you mean by the term 'Sufficient Appropriate Audit Evidence'? State various factors

that help the auditor to ascertain as to what is sufficient appropriate audit evidence. (6 Marks)

b) Company can provide lower rate of depreciation than prescribed by Schedule XIV of the Companies Act; 1956. (2 Marks)

c) State briefly, how you will audit the following in a joint stock company: (i) Alternation of Share Capital (ii) Reduction of Capital (8 Marks)

6)

a) State the circumstances which could lead to any of the following in an Auditors Report: (i) A modification of opinion (ii) Disclaimer of opinion (iii) Adverse opinion (iv) Qualified opinion (8 Marks)

b) What are the points on which an auditor should concentrate while planning audit of an

N.G.O.? (4 Marks) c) Factors effecting form, contents and extent of audit. (4 Marks)

7)

a) Why are Computer Aided Audit Techniques (CAAT) required in EDP audit and Explain the advantages (of CAATs)? (8 Marks)

b) An audit of Expenditure is one of the major components of Government Audit. In the context of ‘Government Expenditure Audit’, write in brief, what do you understand by:

i. Audit against Rules and Orders ii. Audit of Sanctions

iii. Audit against Provision of Funds iv. Propriety Audit v. Performance Audit ( 8 Marks )

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PRIME ACADEMY 39th SESSION MODEL EXAM - IPC – AUDITING & ASSURANCE SUGGESTED ANSWERS

1)

a) Section 226(3) of the Companies Act, 1956 specifies that a person shall be disqualified to act as an auditor if he is indebted to the company for an amount exceeding one thousand rupees. This provision aims to ensure that the auditor is independent and under no financial obligation to the company. Where an auditor purchases goods or services from a company audited by him on credit, he is definitely indebted to the company and if the amount outstanding exceeds rupees one thousand, he is disqualified for appointment as an auditor of the company. Sub section(4) of the Section 226 further lays down that a person is not eligible for appointment as auditor of any company if he is disqualified from acting as auditor of that company’s subsidiary or holding company or of any other subsidiary of the same holding company. Similarly a firm of auditors acts through its partners hence no partner should be indebted even in his personal capacity to the entity being audited the debt arising from normal course of business of the entity should also be record for indebtedness. Conclusion: Accordingly, the partner Mr.Sri is disqualified to be appointed as auditor of the company as he is indebted to the company for an amount exceeding Rs. 1000. This disqualification is attracted even if it exists on any date during the relevant accounting year. Due to disqualification of Mr. Sri, Sri & Co., is also disqualified to be appointed as an auditor of Aaradhana Company Ltd.

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 company’s 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.

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c) Basic elements of the Auditor’s Report: As per SA 700(Revised), “Forming an Opinion and Reporting on Financial Statements”, the auditor’s report includes the following basic elements, ordinarily, in the following layout:

i. Title; ii. Addressee;

iii. Introductory Paragraph iv. Management’s Responsibility for the Financial Statements. v. Auditor’s Responsibility

vi. Auditor’s Opinion vii. Other Reporting Responsibilities

viii. Signature of the Auditor ix. Date of Auditor’s Report. x. Place of signature

d) (i) CARO, 2003 applies to all companies including foreign companies except Banking, Insurance, Sec. 25 Companies and Private Ltd. Companies subject to certain conditions. (ii) As per SA-260 “Communication with Those Charged with Governance”, the auditor shall

communicate the following significant findings from the audit, with those charged with governance: 1) The auditor’s views about significant qualitative aspects of the entity’s accounting practices,

including accounting policies, accounting estimates and financial statement disclosures. When applicable, the auditor shall explain to those charged with governance why the auditor considers a significant accounting practice, that is acceptable under the applicable financial reporting framework, not to be most appropriate to the particular circumstances of the entity;

2) Significant difficulties, if any, encountered during the audit; 3) Unless all of those charged with governance are involved in managing the entity:

(i) Significant matters, if any, arising from the audit that were discussed, or subject to correspondence with management; and

(ii) Written representations the auditor is requesting; and 4) Other matters, if any, arising from the audit that, in the auditor’s professional judgment, are

significant to the oversight of the financial reporting process.

2) a) Removal of first Auditor: As per clause (7) of Section 224, an auditor may be removed before the

expiry of his term by the company in general meeting, after obtaining the prior approval of the Central Government in that behalf, except that such approval is not required for the removal of the first auditor appointed by the Board of Directors. Under the proviso to sub section (5) of section 224, the first auditor appointed by the Board of Directors may be removed by merely passing an ordinary resolution in the general meeting. Conclusion:

In the instant case the first auditor appointed by the Board of Directors was removed by a resolution in the meeting of the Board of Directors in spite of the General Meeting as per the requirement of section 224 (5). There is of course no need for approval of the Central government. Due to contravention of the proviso of sub section (5) of Section 224, the auditor should qualify the audit report.

b) Engagement Letter for accepting the appointment as an Auditor: As per the SA 210, “Agreeing the Terms of Audit Engagements”, the draft of Engagement Letter is as follows: To the Board of Directors of XYZ Company Limited You have requested that we audit the financial statements of XYZ Company Limited, which comprise the Balance Sheet as at March 31, 2010, and the Statement of Profit & Loss, and Cash Flow Statement for the year then ended, and a summary of significant accounting policies and other explanatory information. We are pleased to confirm our acceptance and our understanding of this audit engagement by means of this letter. Our audit will be conducted with the objective of our expressing an opinion on the financial statements.

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We will conduct our audit in accordance with Standards on Auditing (SAs), issued by the Institute of Chartered Accountants of India (ICAI). Those Standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. Because of the inherent limitations of an audit, together with the inherent limitations of internal control, there is an unavoidable risk that some material misstatements may not be detected, even though the audit is properly planned and performed in accordance with SAs. In making our risk assessments, we consider internal control relevant to the entity’s preparation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. However, we will communicate to you in writing concerning any significant deficiencies in internal control relevant to the audit of the financial statements that we have identified during the audit. Our audit will be conducted on the basis that [management and, where appropriate, those charged with governance] acknowledge and understand that they have responsibility: a) For the preparation of financial statements that give a true and fair view in accordance with the

Financial Reporting Standards.2 This includes: The responsibility for the preparation of financial statements on a going concern basis. The responsible for selection and consistent application of appropriate accounting policies,

including implementation of applicable accounting standards along with proper explanation relating to any material departures from those accounting standards.

The responsibility for making judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the entity at the end of the financial year and of the profit or loss of the entity for that period.

b) For such internal control as [management] determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; and

c) To provide us with: (i) Access, at all times, to all information, including the books, account, vouchers and other

records and documentation, of the Company, whether kept at the head office of the company or elsewhere, of which [management] is aware that is relevant to the preparation of the financial statements such as records, documentation and other matters;

(ii) Additional information that we may request from [management] for the purpose of the audit; and

(iii) Unrestricted access to persons within the entity from whom we determine it necessary to obtain audit evidence. This includes our entitlement to require from the officers of the Company such information and explanations as we may think necessary for the performance of our duties as auditor. As part of our audit process, we will request from [management and, where appropriate, those charged with governance], written confirmation concerning representations made to us in connection with the audit. We also wish to invite your attention to the fact that our audit process is subject to 'peer review' under the Chartered Accountants Act, 1949 to be conducted by an Independent reviewer. The reviewer may inspect, examine or take abstract of our working papers during the course of the peer review.

We look forward to full cooperation from your staff during our audit. The form and content of our report may need to be amended in the light of our audit findings.

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Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our audit of the financial statements including our respective responsibilities.

R & M Co.

Chartered Accountants Firm’s Registration No.

………………………… (Signature)

Date : (Name of the Member) Place : (Designation3) Acknowledged on behalf of XYZ Company by …………………….. (Signature) Name and Designation Date

c) Concept of Materiality: As per SA 320 “Materiality in Planning and Performing an Audit”, financial

reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of financial statements. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that: Misstatements, including omissions, are considered to be material if they, individually or in the

aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements;

Judgments about materiality are made in the light of surrounding circumstances, and are affected by the size or nature of a misstatement, or a combination of both; and

Judgments about matters that are material to users of the financial statements are based on a consideration of the common financial information needs of users as a group. The possible effect of misstatements on specific individual users, whose needs may vary widely, is not considered.

1. Such a discussion, if present in the applicable financial reporting framework, provides a frame of reference to the auditor in determining materiality for the audit. If the applicable financial reporting framework does not include a discussion of the concept of materiality, the characteristics referred above provides the auditor with such a frame of reference.

2. The auditor’s determination of materiality is a matter of professional judgment, and is affected by the auditor’s perception of the financial information needs of users of the financial statements. In this context, it is reasonable for the auditor to assume that users: a) Have a reasonable knowledge of business and economic activities and accounting and a

willingness to study the information in the financial statements with reasonable diligence; b) Understand that financial statements are prepared, presented and audited to levels of

materiality; c) Recognize the uncertainties inherent in the measurement of amounts based on the use of

estimates, judgment and the consideration of future events; and d) Make reasonable economic decisions on the basis of the information in the financial

statements. 3. The concept of materiality is applied by the auditor both in planning and performing the audit, and

in evaluating the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report.

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3) a) Ownership and custody of working papers: As per SA-230 “Audit Documentation”, the working papers

are the property of the auditor, the auditor may, at his discretion make portion of or extracts from his working papers available to the client. In the instant case the managing director of the company has demanded copies of the working papers from the auditor. He has no right to obtain copies of the working papers from the auditor because they are the property of the auditor. However the auditor may at his discretion make portions of or extracts from the working paper to the managing director of PQR & Company Ltd. Conclusion: The auditor is not bound to oblige the managing director by supplying copies of the audit working papers.

b) Audit of a Club: A club is usually constituted as a company limited by guarantee. Therefore, various provisions of the Companies Act, 1956 relating to the audit of accounts of companies are also applicable to its audit. The special steps involved in such an audit are stated below: i) Vouch the receipt on account of entrance fees with members’ applications, counterfoils issued to

them, as well as on a reference to minutes, of the Managing Committee. ii) Vouch member’s subscriptions with the counterfoils of receipt issued to them, trace receipts for a

selected period to the Register of Members; also reconcile the amount of total subscriptions due with the amount collected and that outstanding.

iii) Ensure that arrears of subscriptions for the previous year have been correctly brought over and arrears for the year under audit and subscriptions received in advance have been correctly adjusted.

iv) Check totals of various columns of the Register of members and tally them across. v) See the Register of Members to ascertain the Member’s dues which are in arrear and enquire

whether necessary steps have been taken for their recovery; the amount considered irrecoverable should be mentioned in the Audit Report.

vi) Verify the internal check as regards members being charged with the price of foodstuffs and drinks provided to them and their guests, as well as, with the fees chargeable for the special services rendered, such as billiards, tennis, etc.

vii) Trace debits for a selected period from subsidiary registers maintained in respect of supplies and services, to members to confirm that the account of every member has been debited with amounts recoverable from him.

viii) Vouch purchase of sports items, furniture, crockery, etc. and trace their entries into the respective stock registers.

ix) Vouch purchases of foodstuffs, cigars, wines, etc., and test their sale price so as to confirm that the normal rates of gross profit have been earned on their sales. The stock of unsold provisions and stores, at the end of year, should be verified physically and its valuation checked.

x) Check the stock of furniture, sports material and other assets physically with the respective stock registers or inventories prepared at the end of the year.

xi) Inspect the share scrips and bonds in respect of investments, check their current values for disclosure in final accounts; also ascertain that the arrangements for their safe custody are satisfactory.

xii) Examine the financial powers of the secretary and, if these have been exceeded, report specific care for confirmation by the Managing Committee.

(c) 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

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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. The invoice and statement of account received from the supplier. ii. 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.

4) a) Reliability of external confirmations: As per SA 505 “External Confirmation”, the reliability of external

confirmations depends among other factors, upon the application of appropriate procedures by the auditor in designing the external confirmation request, performing the external confirmation procedures, and evaluating the results of the external confirmation procedures. The factors that affect the reliability of confirmations include:

i. The control which the auditor exercises over confirmation request and responses; ii. The character of respondents and

iii. Any restrictions included in the response or imposed by the management

b) Physical verification of fixed assets "at reasonable intervals": Clause 4(i) (b) of CARO 2003 requires the auditor to comment whether the fixed assets of the company have been physically verified by the management at reasonable interval. “Reasonable Intervals” depends upon the circumstances of each case. The factors to be considered in this regard includes the number of assets, nature of assets, relative value of assets, difficulty in verifications, situation and spread of the assets etc.

The management may decide about the periodicity of physical verification of fixed assets considering the above factors while an annually verification may be reasonable; it may impracticable to carry out the same in some cases. Even in such cases the verification program should be such that all assets are verified at least once in every three years where verification of all assets is not made during the year, it will be necessary for the auditor to report the fact, but if he is satisfied regarding the frequency of verification, he should also make a suitable comment to that affect

The auditor is required to state whether any material discrepancies were noticed on verification and, if so, whether the same have been properly dealt with in the books of account.

It would be appropriate for the auditor to obtain a management representation letter confirming that the fixed assets are physically verified by the company in accordance with the policy of the company. The management representation letter should also mention the periodicity of the physical verification of fixed assets. The letter should also include the details of the material discrepancies noticed during the physical verification of the fixed assets. If no discrepancies were noticed during the physical verification, the management representation letter should also mention this fact.

c) Verification of the credit sales: The credit sales should be verified by reference to copies of invoices

issued to customers and, in the process, attention should be paid to the following matters : i) that each item of sales relates to the period of account under audit; ii) that the goods are those that are normally dealt in by the concern. iii) that the sale price has been correctly arrived at and the copy of the requisition slip issued by

the Sales Department and the copy of the Despatch Note showing the date and mode of despatch of goods are attached with the invoice.

iv) that the amount of the invoice has been adjusted in an appropriate account; and v) that the sale has been authorised by a responsible official and in token thereof he has

initialed the invoice; also that any alteration in the invoice has been attested by the same person.

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d) Procedures to be performed by the auditor in expressing opinion on 'going concern' assumption: As per SA 570, “Going Concern”, the following are the relevant procedures that are relevant in this connection: Analyze and discuss cash flow, profit and other relevant forecasts with management. Review events after the balance sheet date for items affecting the entity's ability to continue as a

going concern. Analyze and discuss the entity's latest available interim financial statements. Review the terms of debentures and loan agreements and determine whether any have been

breached. Read minutes of the meetings of shareholders, the board of directors and important committees

for reference to financing difficulties. Review the status of matters under litigation and claims. Confirm the existence, legality and enforceability of arrangements to provide or maintain financial

support with related and third parties and assess the financial ability of such parties to provide additional funds.

Consider the entity's position concerning unfilled customer orders. e) Audit of Discounted Bills Receivable Dis honoured

i) Obtain the schedule of discounted bills receivable dis honoured. ii) Check the entry in bank statement regarding the amount of bills dis honoured and see that the

bank has debited the account of client. iii) Verify the bills receivable returned by the bank along with bank’s advice. iv) See that the dis honoured 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.

5)

a) Meaning of sufficient appropriate audit evidence: SA 200 on ‘Basic Principles Governing an Audit’ states “the auditor should obtain sufficient appropriate audit evidence through performance of compliance and substantive procedures to enable him to draw reasonable conclusions there from on which to base his opinion on the financial information”. SA 500 on ‘Audit Evidence’ further expounds this concept. According to it, sufficiency and appropriateness are interrelated and apply to evidence obtained from both compliance and substantive procedures. Sufficiency refers to the quantum of audit evidence obtained while appropriateness is related to its relevance and reliability. Normally, the auditor finds it necessary to rely on audit evidence which is persuasive rather than conclusive. He may often seek evidence from different sources or of different nature to support the same assertions.

Various factors to ascertain sufficient and appropriate audit evidence: The various factors which influence the auditor’s judgment as to what is sufficient and appropriate audit evidence are as under:

i) Degree of risk of misstatements which may be affected by factors such as the nature of items, adequacy of internal control, nature and size of businesses carried out by the entity, situations which may exert an unusual influence on management and the financial position of the entity.

ii) The materiality of the item. iii) The experience gained during previous audits. iv) The results of auditing procedures, including fraud and errors which may have been found. v) The type of information available. vi) The trend indicated by accounting ratios and analysis.

The auditor obtains the evidence through compliance procedures and substantive procedures to satisfy assertions contained in the financial statements.

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b) It is permissible for the entity to charge deprecation on its assets at rate different from schedule XIV rates provided those rates are higher than the schedule rates based on technical estimation or otherwise allowed under Section 205 of the Act. The rates as contained in Schedule XIV are minimum rates and therefore a company cannot provide lower rate of depreciation than prescribed by Schedule XIV of the Companies Act, 1956.

c) (i) Alteration of Share Capital A company, having a share capital, if so authorized by its Articles, may alter its share capital by an ordinary resolution without confirmation of the Court, in any of the manners authorized by Section 94. Each alteration made should be noted in every copy of the Memorandum and Articles issued subsequent to date of the alteration (Section 40). The auditor’s duties in the circumstances shall be:

i. to verify that the alteration of capital is authorized by the Articles; ii. to inspect the minutes of the shareholders authorizing the alteration;

iii. to obtain Allotment Lists containing details of the new holdings of share or stock by each member and to verify the same with the entries.

iv. to inspect the directors’ resolution in regard to allotment, consolidation, conversion or sub-division passed pursuant to the resolution of the members;

v. to examine the cancelled share certificates, if any, and agree the same with the counterfoils of new certificates issued;

vi. to see that the procedure, prescribed by the Articles in this regard, has been complied with; vii. to verify that the share capital account is correctly shown in the Balance Sheet; and

viii. to see that the necessary intimation to the Registrar contemplated by Section 95 has been sent.

(ii) Reduction of Capital (Section 100): The duties of the auditor in this regard are following: i. Verifying that the meeting of the shareholder held to pass the special resolution was properly

convened; also that the proposal was circularised in advance among the members. ii. Confirming that the Articles of Association authorise reduction of capital.

iii. Examining the order of the Tribunal confirming the reduction and seeing that a copy of the order and the minutes have been registered and filed with the Registrar of Companies.

iv. Inspecting the Registrar’s Certificate as regards reduction of capital. v. Vouching the journal entries recorded to reduce the capital and to write down the assets by

reference to the resolution of shareholders and other documentary evidence; also seeing that the requirements of Revised Schedule VI, Part I, have been complied with.

vi. Confirming that the revaluation of assets have been properly disclosed in the Balance Sheet. vii. Verifying the adjustment made in the members’ accounts in the Register of Members and

confirming that either the paid up amount shown on the old share certificates have been altered or new certificates have been issued in lieu of the old, and the old ones have been cancelled.

viii. Confirming that the words “and reduced”, if required by the order of the Tribunal, have been added to the name of the company in the Balance Sheet.

ix. Verifying that the Memorandum of Association of the company has been suitably altered.

6) a) i) The auditor shall modify the opinion in the auditor’s report when:

a. The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole are not free from material misstatement; or

b. The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from material misstatement.

ii) The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive.

The auditor shall disclaim an opinion when, in extremely rare circumstances involving multiple uncertainties, the auditor concludes that, notwithstanding having obtained sufficient appropriate audit evidence regarding each of the individual uncertainties, it is not possible to form an opinion

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on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements.

iii) The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.

iv) The auditor shall express a qualified opinion when: (a) The auditor, having obtained sufficient appropriate audit evidence, concludes that

misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements; or

(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion, but the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive.

b) While planning the audit of an N.G.O, the auditor should concentrate on the following:

i. Knowledge of the NGO's work, its mission and vision, an area of operations and environment in which it operates.

ii. Updating knowledge of relevant statutes especially with regard to recent amendments, circulars, judicial decisions viz. Foreign Contribution (Regulation) Act 1976, Societies Registration Act, 1860, Income Tax Act 1961 etc. and the Rules related to the statutes.

iii. Reviewing the legal form of the Organization and its Memorandum of Association, Articles of Association, Rules and Regulations.

iv. Reviewing the NGO's Organization chart, Financial and Administrative Manuals, Project and Programme Guidelines, Funding Agencies Requirements and formats, budgetary policies if any.

v. Examination of minutes of the Board/Managing Committee/Governing Body/Management and Committees thereof to ascertain the impact of any decisions on the financial records.

vi. Study the accounting system, procedures, internal controls and internal checks existing for the NGO and verify their applicability.

vii. Setting of materiality levels for audit purposes. viii. The nature and timing of reports or other communications.

ix. The involvement of experts and their reports. x. Review the previous year's Audit Report.

c) As per SA-230 on “Audit Documentation”, the form, content and extent of audit documentation depend on the following factors : 1. The size and complexity of the entity. 2. The nature of the audit procedures to be performed. 3. The identified risks of material misstatement. 4. The significance of the audit evidence obtained. 5. The nature and extent of exceptions identified. 6. The need to document a conclusion or the basis for a conclusion not readily determinable from the

documentation of the work performed or audit evidence obtained. 7. The audit methodology and tools used.

7) a) Computer Aided Audit Techniques (CAATs): The use of computers may result in the design of

Systems that provide less visible evidence than those using manual procedures. CAATs are such Techniques applied through the computer which are used in the verifying the data being

Processed by it. System characteristics resulting from the nature of EDP processing that demand the use of Computer Aided Audit Techniques (CAAT) are:

i. Absence of input documents: Data may be entered directly into the computer systems without supporting documents. In on-line transaction systems, written evidence of individual data entry authorization, e.g., credit limit approval may not be available.

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ii. Lack of visible transaction trail: Certain data may be maintained on computer files only. In a manual system, it is normally possible to follow a transaction through the system by examining source documents, books of account, records, files and reports. In an EDP environment, however, the transaction trail may be partly in machine-readable form, and it may exist only for a limited period of time.

iii. Lack of visible output: In a manual system, it is normally possible to examine visually the results of processing. In EDP systems, the results of processing may not be printed or only a summary data may be printed. Thus, the lack of visible output may result in the need to access data retained on machine readable files.

iv. Ease of Access to data and computer programmes: Data and computer programmes may be altered at the computer or through the use of computer equipment at remote locations. Therefore, in the absence of appropriate controls, there is an increased potential for unauthorized access to, and allocation of, data and programmes by persons inside or outside the entity.

Advantages of CAAT: i. Audit effectiveness: The effectiveness and efficiency of auditing procedures will be improved

through the use of CAAT in obtaining and evaluating audit evidence, for example – a. Some transactions may be tested more effectively for a similar level of cost by using the

computer. b. In applying analytical review procedures, transactions or balance details of unusual items may be

reviewed and reports got printed more efficiently by using the computer. ii. Savings in time: The auditor can save time by reviewing the EDP controls using CAAT than through

other audit procedures. iii. Effective test checking and examination in depth: CAAT permits effective examination in depth of

selected transactions since the auditor constructs the lost audit trail. b) Government Expenditure Audit: Audit of government expenditure is one of the major components of

government audit conducted by the office of C & AG. The basic standards set for audit of expenditure are to ensure that there is provision of funds authorized by competent authority fixing the limits within which expenditure can be incurred. Briefly, these standards are explained below: (i) Audit against Rules & Orders: The auditor has to see that the expenditure incurred conforms to

the relevant provisions of the statutory enactment and is in accordance with the financial rules and regulations framed by the competent authority.

(ii) Audit of Sanctions: The auditor has to ensure that each item of expenditure is covered by a sanction, either general or special, accorded by the competent authority, authorizing such expenditure.

(iii) Audit against Provision of Funds: It contemplates that there is a provision of funds out of which expenditure can be incurred and the amount of such expenditure does not exceed the appropriations made.

(iv) Propriety Audit: It is required to be seen that the expenditure is incurred with due regard to broad and general principles of financial propriety. The auditor aims to bring out cases of improper, avoidable, or in fructuous expenditure even though the expenditure has been incurred in conformity with the existing rules and regulations. Audit aims to secure a reasonably high standard of public financial morality by looking into the wisdom, faithfulness and economy of transactions.

(v) Performance Audit: This involves that the various programmes, schemes and projects where large financial expenditure has been incurred are being run economically and are yielding results expected of them. Efficiency-cum performance audit, wherever used, is an objective examination of the financial and operational performance of an organization, programme, authority or function and is oriented towards identifying opportunities for greater economy, and effectiveness.

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INSNo. of Pages: 2 Total Marks: 100

No. of Questions: 10 Time Allowed: 3 Hrs PART A (50 Marks)

1. Fill up the blanks a. ___________ is a memory that stores copies of data from the most frequently used main

memory locations so that processors or registers can access it more rapidly than main memory. b. ___________ is a device that forms a barrier between a secure and an open environment when

the latter environment is usually considered hostile. c. ___________ is a multiport connecting device that is used to interconnect LAN devices and

extend the physical length of a network. d. ___________ constructs, transmits, receives and processes data to and from a host to network e. ___________ is used on the internet for transferring files to and from a remote host

(5 x 1= 5 Marks) 2. Write short notes on:

a. Computer network b. Voice over internet protocol c. Wi-Fi d. Web casting e. Six Sigma (5 x 2 = 10 Marks)

3. Explain the following

a. What is intrusion detection system? Name the primary IDS technologies. b. Executive information system c. Virtual memory d. Operating system e. What is hardware encryption and software encryption (5 x 3 = 15 Marks)

4. Answer the following:

a. Distinguish between Star network and ring network b. Explain the need for information technology in an organization. (2 x 5 = 10 Marks)

5. The following rules are applied in calculating the taxable income of employees of an organization:

Taxable income = gross income less investments if the investments are less than 1 lac otherwise Taxable income = gross income less 1 lac

Following rules are applied to calculate the income tax on the taxable income Taxable Income Income Tax 0 – 2 Lacs Nil2 – 5 Lacs 10% on the excess of 2 Lacs 5 Lacs – 10 Lacs 30,000 + 20% on the excess of 5 Lacs 10 Lacs and above 1,30,000 + 30% on the excess of 10 Lacs

Also an education cess of 3% is levied on the income tax. Employee number, name, gross income, investment amount is given as input. Draw a flow chart to calculate the income tax payable by each employee. (10 Marks)

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PART B (50 Marks)

1. Briefly define the following:

a. Environmental scanning b. Corporate strategy c. Globalization d. Retrenchment strategy e. Marketing mix (5 x 1 = 5 Marks)

2. Write short notes on the following:

a. Strategic control b. Synchro marketing c. ADL Matrix d. Corporate culture e. Co-generic merger (5 x 2 = 10 Marks)

3. Explain the following:

a. Importance of strategic management b. Business process reengineering c. Distinguish between micro and macro environment d. What are the three major R&D approaches for implementing strategies?

(4 x 4= 16 Marks) 4. Answer the following:

a. Discuss the Porters model for systematically diagnosing the significant competitive pressures in the market.

b. What is strategic change? What are the steps involved to initiate the strategic change? (2 x 5 = 10 Marks)

5. State with reason whether the following is true or false a. Network structure creates virtual organizations b. One or two key success factors may outrank others c. Technology and business are highly interrelated and interdependent d. For a small entrepreneur vision and mission are irrelevant e. Strategies may require changes in organization structure f. SBU concept facilitates multi business operations g. Internet can be economical means of delivering customer service h. Growth share matrix is popularly used for resource allocation i. A strategic vision is a roadmap of company’s future

(9 x 1= 9Marks)

PRIME/ME39/IPC 1

PRIME ACADEMY 39th SESSION MODEL EXAM – IPC

INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT SUGGESTED ANSWERS

PART A - INFORMATION TECHNOLOGY 1.

a. Cache memory b. Fire wall c. Hub d. Network interface card e. File transfer protocol

2.

a. Computer Network: Computer network is a collection of computers and other hardware interconnected by communication channels that allow sharing of resources and information. Where atleast one process in one device is able to send/receive data to/from at least one process residing at a remote device, then the two devices are said to be in network. A network is a group of devices connected to each other.

b. Voice over internet protocol: is one of the communication tools provided by the information to technology to the enterprise to communicate quickly and effectively. VOIP telephones and smart phones offer high tech ways for the employees to communicate. Skype is one such popular VOIP service which allows people across the world to make free, unlimited, superior quality voice calls via its innovative peer to peer software.

c. Wi-Fi: Wi-Fi stands for wireless fidelity that describes the underlying technology of wireless local

area network based on IEEE 802.11 specifications. It is used for mobile computing devices, internet and VOIP phone access, gaming applications, consumer electronics, public transport and mobile commerce etc.

d. Web casting: Web casting is a media presentation distributed over the internet using streaming

media technology to distribute a single content source to many simultaneous listeners and viewers. A webcast may either be distributed live or on demand. Essentially, webcasting is broadcasting over the internet.

e. Six sigma: Six sigma is a set of strategies, techniques and tools for process improvement. It seeks

to improve the quality of process outputs by identifying and removing the causes of defects and minimising variability in manufacturing and business processes.

3. a. Intrusion detection system:

i. IDS is a device or software application that monitors network or system activities for malicious activities or policy violations and produces reports to a management station.

ii. The goal of intrusion detection is to monitor network assets to detect anomalous behaviour and misuse.

iii. The primary IDS technologies are network intrusion detection, host based intrusion detection, hybrid intrusion detection and network node intrusion detection.

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b. Executive Information System: i. EIS is the nature of IS used by executive to access and administer the data they entail to make

informed business decisions. ii. In the hierarchical structure of information systems, the EIS is at the pinnacle and is designed

to renovate all significant data into aggregated information that makes sense and brings value to the by and large business strategy.

iii. The typical information mix presented to the executive may include financial information, work in process, inventory figures, sales figures etc.

c. Virtual memory: i. Virtual memory is an imaginary memory area supported by some operating systems in

conjunction with hardware. If a computer lacks RAM (Random Access Memory) needed to run a program or operation, Windows uses virtual memory to compensate.

ii. Virtual memory combines computers RAM with temporary space on hard disk. iii. When RAM runs low, virtual memory moves the data from RAM to space called a paging file,

thus freeing up RAM to complete its work. Thus, virtual memory is an allocation of hard disk space to help RAM.

d. Operating system: i. An operating system is a set of computer programs that manages computer hardware

resources and acts as an interface with computer applications programs. ii. The operating system is a vital component of the system software in a computer system.

iii. Application programmes usually require an operating system to function that provides a convenient environment to users for executing their programs. Some examples of operating systems used nowadays are Windows 7, Windows 8, Linux, Unix etc.

e. Hardware encryption: hardware encryption devices are available at a reasonable cost and can support high speed traffic. If the internet is being used to exchange information among the branch offices or development collaborators for instance use of such devices can ensure that all traffic between these offices is secure. Software encryption: this is typically employed in conjunction with specific applications. Certain electronic mail packages, for example, provide encryption and decryption for message security.

4. a. Star network and ring network

Star Network Ring network The central unit in the network acts as the traffic controller among all the other computers tied to it under centralised approach.

Local computer processors are tied together sequentially in a ring with each device being connected to two other devices under a decentralised approach.

A node failure does not bring down the entire network. Failure of server affects the whole network.

Failure of one computer on the network can affect the whole of the network.

New nodes can be easily added without affecting the rest of the network.

Moving, adding and changing the nodes can affect the network.

A star network is well suited to companies with one large data processing facility shared by a number of smaller department.

Ring networks offer high performance for small number of workstations or for larger networks where each station has similar work loads.

It is easier to diagnose network problems with the help of central hub.

It is difficult to trouble shoot a ring network.

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b. Need for information technology

i. IT allows enterprises to work more efficiently and to maximise productivity. Faster communication, electronic storage and the protection of records are advantages that IT can provide to any enterprise.

ii. IT enables business enterprises to differentiate their products and services from that of their competitors.

iii. Those enterprises that leverage IT for competitive advantage often differ from the competitors in two ways 1. They view IT as strategic business enabler instead of viewing it as cost component 2. They work to maximise the efficiency of their IT operations so that they can focus their

resources to providing value and responding to rapidly changing business conditions. iv. Reasons for use of IT for businesses are communication capabilities, data and information

management and automated process.

5. Flow Chart:

B

NO YES

Start

CAWL

READ, ENO, NAME,GROSS, INV

IF INV≥1 LAC?

TNIC=GROSS-INVTNIC=GROSS-1LAC

PRIME/ME39/IPC 4

YES

NO

YES

NO

YES

NO NO B

YES

IF TNIC≤2LACS?

IF TNIC≤5LACS?

IF TNIC≤10LACS?

IT = 0

IT = GROSS-2LACS*0.1

IT = 30,000+(GROSS-5LACS)*0.2

IT = 1,30,000+(GROSS-10LACS)*0.3

ECESS=IT*0.03

ITPAY=IT+ECESS

PRINT ENO, NAME,GROSS, ITPAY

IF LAST EMPLOYEE?

STOP

PRIME/ME39/IPC 5

Terms Used: ENO = Employee Number ENAME = Employee Name GROSS = Gross Income INV = Investment TINC = Taxable Income IT = Income Tax ECESS = Education Cess ITPAY = Total Income Tax Payable CAWL = Clear all working locations

PART B = STRATEGIC MANAGEMENT 6.

a. Environmental scanning: Environmental scanning can be defined as the process by which organisations monitor their relevant environment to identify opportunities and threats affecting their business for the purpose of taking strategic decisions.

b. Corporate strategy: It is basically the growth design of the firm. It spells out the growth objective-the direction, pace and timing of the firms growth.

c. Globalisation: Refers to the process of integration of the world into one huge market. d. Retrenchment strategy: A strategy through which the business organisation can redefine its

businesses by divesting a major product line or market. e. Marketing mix: It is a set of controllable marketing variables that the firm blends to produce the

response it wants in the target market.

7. a. Strategic control: Refers to the operational understanding by corporate officers of the strategies

being implemented within the firms separate business units. b. Synchro Marketing: When the demand for a product is irregular due to season, some parts of

the day or on hour basis, causing idle capacity or overworked capacity, synchro marketing can be used to find ways to alter the same pattern of demand through flexible pricing, promotion and other incentives.

c. ADL Matrix: The ADL matrix which has derived its name from Arthur D Little is a portfolio analysis method that is based on product lifecycle. The approach forms a two dimensional matrix based on stage of industry maturity and the firms competitive position, environmental assessment and business strength assessment.

d. Corporate culture: Refers to a Company’s values, beliefs, business principles, traditions, way of operating and internal work environment. Every corporation has a culture that exerts powerful influences on the behaviour of managers.

e. Co-generic merger: In co-generic merger two or more merging organisations are associated in some way or the other related to the production processes, business markets, or basic required technologies. Such merger include the extension of product line or acquiring components that are required in daily operations.

8. a. Importance of strategic management:

i. Strategic management helps organisations to be more proactive rather than reactive in dealing with its future. It facilitates to work within vagaries of environment and remains adaptable with the turbulence or uncertain future. Therefore they are able to control their own destiny in a better way.

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ii. It provides better guidance to entire organisation on the crucial point what it is trying to do. Also provides framework for all major business decisions of an enterprise such a decision on businesses, products, markets, organisations, structure etc.

iii. It facilitates to prepare the organisation to face the future and act as pathfinder to various business opportunities. Organisations are able to identify the available opportunities and identify ways and means as to how to reach them.

iv. It serves as a corporate defence mechanism against mistakes and pitfalls. It helps organisations to avoid costly mistakes in a product market choices or investments.

v. Over a period of time strategic management helps organisation to evolve certain core competencies and competitive advantages that assist in the fight for survival and growth.

b. Business process reengineering i. It refers to the analysis and redesign of workflows both within and between the organisation

and the external entities its objective is to improve performance in terms of time, cost, quality and responsiveness to customers.

ii. It implies giving up old practices and adopting the improved once. It is an effective tool of realising new strategies.

iii. Improving business processes is paramount for businesses to stay competitive in today’s marketplace.

iv. New technologies are rapidly bringing new capabilities to businesses thereby raising the strategically options and the need to improve business processes dramatically. Even the competition has become harder. In today’s marketplace major changes are required to just stay even.

c. Micro Vs. Macro Environment i. Micro environment refers to the forces that are very close to the company and affects its

ability to do routine functions. Macro environment refers to all forces that are part of larger periphery and distantly affect organisation and micro environment.

ii. Micro environment includes company itself its suppliers, marketing intermediaries, customer markets and competitors. Whereas macro environment includes demography, economy, natural forces, technology, politics, legal and socio culture.

iii. The elements of micro environment are specific to the said business and affects its working on short term basis. The elements of macro environment are general environment and affect the working of all the firms in an industry.

d. R & D approaches for implementing strategies i. The first strategy is to be the first firm to market new technological products. This is

glamorous and exciting strategy but also a dangerous one. Firms such as 3M and General Electric have been successful with this approach, but many other firms have fallen with rival firms seizing the initiative

ii. The second R&D approach is to be an innovative initiator of successful products thus minimising the risks and costs of start up. This approach entails allowing a pioneer firm to develop the first version of the new product and to demonstrate that a market exists. Then, laggard firms develop a similar product. This strategy requires excellent R&D personnel and an excellent marketing department.

iii. The third R&D strategy is to be a low cost producer by mass producing products similar to but less expensive than products recently introduced. As a new product is accepted by customers price becomes increasingly important in making buying decisions. Also mass marketing replaces personal selling as the dominant selling strategy.

PRIME/ME39/IPC 7

9. a. Five forces model of Michael Porter is a powerful and widely used tool for systematically

diagnosing the significant competitive pressures in the market and assessing their strength and importance. These five forces are: i. Threat of new entrants: the new capacity and product range that new entrants bring in throw

up new competitive pressure. The bigger the new entrant the more severe is the competitive pressure. They place a limit on the price and affect the profitability of existing players.

ii. Bargaining power of customers: the bargaining power of the customers not only influences the price that the producers can charge but also influences in many case the cost and the investment of the producer because powerful buyers usually bargain for better services which involves cost and investment on the part of producer.

iii. Bargaining power of suppliers: suppliers too exercise considerable bargaining power. The bargaining power of the suppliers determines the cost of materials and other inputs of the industry and therefore industry attractiveness and profitability.

iv. Rivalry among current players: for any player the competitors influence the strategic decisions at different strategic levels. The impact is more evident at the functional level in the prices being changed, advertising and pressures on cost and so on.

v. Threats from substitutes: substitute products are a latent source of competition in an industry. Substitute products offering price advantage and performance improvement to the customer can drastically alter the competitive character of the industry.

b. The changes in the environmental forces often require businesses to make modifications in their existing strategies and bring out new strategies. Strategic change is a complex process and it involves a corporate strategy focussed on new markets, products, services and new ways of doing business. For initiating strategic change three steps can be identified as under: i. Recognise the need for change: diagnose which facets of the corporate culture are strategy

supportive and which are not. This means, going for environmental scanning involving appraisal of both internal and external capabilities may it be through SWOT analysis.

ii. Create a shared vision to manage the change: objectives and vision of both individuals and organisations should coincide. Senior managers need to constantly communicate the vision not only to inform but also to overcome the resistance through proper communication.

iii. Institutionalise the change: this stage requires the 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 days of thinking or doing things. Any deviation should be brought into notice so that necessary corrective actions are taken.

10. Marketing strategy techniques: a. Social marketing: It refers to the design, implementation, and control of programs seeking to

increase the acceptability of a social idea, cause or practice among a target group. b. Augmented marketing: It is provision of additional customer services and benefits built

around the care and actual products that relate to introduction of hi-tech services like movies on demand, online computer repair services, secretarial services etc.

c. Direct marketing: Marketing through various advertising media that interacts directly with customers, generally calling for the customers to make direct response.

d. Relationship marketing: The process of creating, marketing and enhancing strong value laden relationships with customers and other stakeholders. To provide special benefits to select customers to strength bond. It will go long way in strengthening relationships.

e. Services marketing: It is applying the concepts, tools and techniques of marketing to services. f. Person marketing: Person marketing consists of activities undertaken to create, maintain, or

change attitudes and behaviour towards particular people. For example, politicians, sports star, film stars etc.

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g. Organisation marketing: It consists of activities undertaken to create, maintain or change attitudes and behaviour of target audiences towards the organisation. Both profit and non-profit organisation practice organisation marketing.

h. Place marketing: place marketing involves activities undertaken to create, maintain or change attitudes and behaviour towards particular places say, business sites marketing, and tourist marketing.

i. Enlightened marketing: A marketing philosophy holding that a Company’s marketing should support the best long run performance of the marketing system. Its five principles include customer oriented marketing, innovative marketing, value marketing, sense of mimission marketing and societal marketing.

j. Differential marketing: A market coverage strategy in which a firm decides to target several market segments and designs separate offer for each.

k. Synchro marketing: When the demand for a product is irregular due to season, some parts of the day or on hour basis, causing idle capacity or overworked capacity, synchro marketing can be used to find ways to alter the same pattern of demand through flexible pricing, promotion and other incentives.

l. Concentrated marketing: a market-coverage strategy in which a firm goes after alarge share of one or few sub markets.

m. Demarketing: Marketing strategies to reduce demand temporarily or permanently. The aim is not to destroy demand but only to reduce or shift it. This happens when there is overfull demand.