PRIME ACADEMY 31st SESSION MODEL EXAM - PCC – ADVANCED ACCOUNTING QUESTION PAPER ATG No. of Pages: 6 Total Marks: 100 No of Questions: 8 Time Allowed: 3 Hrs All are compulsory All workings should form part of the answers 1. Following is the Balance Sheet as at March 31, 2010 LIABILITIES Max Ltd Rs. Mini Ltd Rs. ASSETS Max Ltd Rs. Mini Ltd Rs. 1,500 500 180 - 600 415 1,000 400 170 15 200 225 20 1,500 651 393 26 192 2 411 - 760 440 680 130 - - - Share Capital: Equity Shares of Rs.100 each 9% Preference shares of Rs. 100 each General Reserve Profit and Loss Account 12% Debentures of Rs. 100 each Sundry Creditors 3,195 2,010 Goodwill Other Fixed Assets Debtors Stock Cash at Bank Own Debentures ( Nominal value of Rs. 2,00,000) Discount on issue of Debentures Profit and Loss account 3,195 2,010 On 1.4.2010, Max Ltd adopted the following scheme of reconstruction: i. Each equity share shall be sub-divided into 10 equity shares of Rs. 10/-each fully paid up; 50% of the equity share capital would be surrendered to the company. ii. Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive 90% of the dividend claim and accept payment for the balance. iii. Own Debentures of Rs. 80,000 were sold at Rs. 98cum – interest and remaining own debentures were cancelled iv. Debenture holders of Rs. 2,80,000 agreed to accept one machinery of book value of Rs. 3,00,000 in full settlement. v. Creditors, debtors and stocks were valued at Rs. 3,50,000 Rs. 5,90,000 and Rs. 3,60,000 respectively. vi. The goodwill, discount on issue of debentures and profit and loss (Dr) are to be written off. vii. The company paid Rs. 15,000 as penalty to avoid capital commitments of Rs.3,00,000 On 2.4.2010. a scheme of absorption was adopted. Max Ltd. would take over Mini Ltd. The Purchase consideration was fixed as below: a) Equity shareholders of Mini Ltd will be given 50 Equity shares of rs. 10/- each fully paid up in exchange for every 5 shares held in Mini Ltd. PRIME / ME31 / PCC 1
Transcript
PRIME ACADEMY 31st SESSION MODEL EXAM - PCC – ADVANCED ACCOUNTING
QUESTION PAPER
ATG No. of Pages: 6 Total Marks: 100 No of Questions: 8 Time Allowed: 3 Hrs
All are compulsory
All workings should form part of the answers
1. Following is the Balance Sheet as at March 31, 2010 LIABILITIES Max Ltd
Rs. Mini Ltd Rs.
ASSETS Max Ltd Rs.
Mini Ltd Rs.
1,500
500 180
- 600
415
1,000
400 170 15
200 225
20
1,500 651 393 26
192
2 411
-
760 440 680 130
-
-
-
Share Capital: Equity Shares of Rs.100 each 9% Preference shares of Rs. 100 each General Reserve Profit and Loss Account 12% Debentures of Rs. 100 each Sundry Creditors
3,195 2,010
Goodwill Other Fixed Assets Debtors Stock Cash at Bank Own Debentures ( Nominal value of Rs. 2,00,000) Discount on issue of Debentures Profit and Loss account 3,195 2,010
On 1.4.2010, Max Ltd adopted the following scheme of reconstruction:
i. Each equity share shall be sub-divided into 10 equity shares of Rs. 10/-each fully paid up; 50% of the equity share capital would be surrendered to the company.
ii. Preference dividends are in arrear for 3 years. Preference shareholders agreed to waive 90% of the dividend claim and accept payment for the balance.
iii. Own Debentures of Rs. 80,000 were sold at Rs. 98cum – interest and remaining own debentures were cancelled
iv. Debenture holders of Rs. 2,80,000 agreed to accept one machinery of book value of Rs. 3,00,000 in full settlement.
v. Creditors, debtors and stocks were valued at Rs. 3,50,000 Rs. 5,90,000 and Rs. 3,60,000 respectively.
vi. The goodwill, discount on issue of debentures and profit and loss (Dr) are to be written off. vii. The company paid Rs. 15,000 as penalty to avoid capital commitments of Rs.3,00,000
On 2.4.2010. a scheme of absorption was adopted. Max Ltd. would take over Mini Ltd. The Purchase consideration was fixed as below:
a) Equity shareholders of Mini Ltd will be given 50 Equity shares of rs. 10/- each fully paid up in exchange for every 5 shares held in Mini Ltd.
PRIME / ME31 / PCC 1
b) Issue of 9% Preference shares of Rs. 100 each in the rate of 4 preference shares of Rs. Max Ltd for every 5 preference shares held in Mini Ltd
c) Issue of one 12% Debenture of Rs. 100 each of Max Ltd for every 12% debentures in Mini Ltd. You are required to give journal entries in the books of Max Ltd, and draw the resultant Balance sheet as at 2nd April, 2010. (20 Marks)
2. On April 1, 2009 Mr X bought for Rs. 50,000 a business whose asset and liabilities are shown below. The business carried on its operations in a rented shop from which it sold cosmetics and confectionery. The Business did not keep double entry accounts but you are provided with the following information:
Balance Sheet of the Company as on 31st March 2009
LIABILITIES Rs. ASSETS Rs.
50,000 10,500
2,500 2,000
500
30,000
5,000 3,000
500 2,500
23,500 1,000
Capital Profit and Loss account Creditors:
Cosmetics Confectionary Outstanding Rent
65,500
Fixed Assets: Furniture & Fixtures (at cost) Current Assets: Stock of cosmetics (at cost) Stock of Confectionary(at cost) Sundry Debtors: Confectionary Prepaid: Rent & Insurance Balance with Bank Cash in Hand
65,500
Analysis of the Bank statements for the year ended March 31,2010 Rs. Paid in Cash 2,45,000 Withdrawn for Purchase of cosmetics 1,00,000 Purchase of confectionary 1,10,000 Repairs 4,000 Rent 6,000 Rates & Insurance 10,000 Electricity 4,000 Mr X 15,000 The following were paid in cash: Salaries 15,000 Confectionary Purchase 1,500 Trade Expenses 1,250 Cosmetic purchase 5,000
PRIME / ME31 / PCC 2
Mr X had taken from the shop cosmetics for his own consumption and paid into the till the cost price of Rs. 4,550 The following are the gross profit percentages with reference to sales Cosmetics - 9% Confectionery – 30% On 31st March, 2010 there were
Stock at cost Rs.
Debtors/prepayment and cash Rs.
Liabilities Rs.
Cosmetics 4,850 Nil 2,000 Confectionery 3,500 1,000 3,000 Rent 500 Rates & Taxes 2,750 Cash in hand 250 Accountancy/Auditfee 2,000 Mr X has instructed you to regard any shortage in cash as being due to amounts withdrawn by him. You are required to prepare:
1. The Trading and Profit and Loss account for the year ended March 31st 2010 showing separately the gross profit from (i) Cosmetics and (ii) Confectionery
2. The Balance sheet as at March 31, 2010 3. Total Debtors and Total Creditors Accounts; and 4. An Account in columnar from for cash and bank transactions. (16 Marks)
3. From the following information prepare the set of final accounts of the Marine Insurance company ltd as at 31st March 2010
Outstanding claims due and intimated as on 31st March 2010, Rs.60,000. Dividend at 8% has been proposed by the directors out of current profits. Transfer 30% of current profits to General
Particulars Rs. Particulars Rs. Reserve fro unexpired risk (1.4.2009) Additional reserve (1.4.2009) Preminum less reinsurance Miscellaneous receipts Claims outstanding (1.4.2009) Claims paid Commission Expenses of Management General reserve Share Capital Investments Audit fees Directors’ sitting fees Interest on Investments
Income tax deducted on interest Depreciation General Charges Outstanding premium Deposit with controller of Insurance Furniture and Fittings Amounts due by agents Cash in Deposit account Outstanding dividends on investments Amounts due to re-insurers Sundry creditors Cash at Bank SundryDebtors
24,800 5,000
12,000 42,000
5,00,000 52,000 21,000
2,00,000 12,000 80,000 24,000 16,000 32,460
PRIME / ME31 / PCC 3
Reserve. Additional reserve is to be maintained @ 10%. Share capital consists of equity shares of Rs. 100 each on which Rs. 50 per share has been called and paid up. (8 Marks)
4. Y Ltd sells products on hire purchases terms, the price being cost plus 33 1/3% . From the following particulars for 2009, prepare the Hire Purchase Stock Account, the Shop Stock Account, the Hire purchase Debtors Account, the Stock Reserve Account and the Hire purchase Adjustment account (for profit):
Particulars
Rs.
Particulars
Rs.
2009, January, 1 Stock out on hire at hire purchase price Stock in hand, at shop Instalments due (customers still paying)
1,20,000 15,000 9,000
2009, December, 31 Stock out on hire at hire purchase price Stock in hand at shop Installments due (customers still paying) Cash received during the year
1,38,000 21,000 15,000 2,40,000
(8 Marks)
5. A and B are in partnership, sharing profits and losses in the ratio of 3:2 respectively. Interest is charged on partners’ drawings @ 8% P a On 1.1.2009, C was admitted into partnership, with future profits or losses to be shared equally and interest on drawings to continue @ 8% p.a. He brought in Rs. 52,000 as his share of capital. Goodwill was calculated as twice the average profits before interest in those years were: Details of Drawings and profits before interest in those years were:
Drawings: 2006 – Rs. 20,000 2007 – Rs. 30,000 2008 – Rs. 37,500 Profit before interest: 2006 – Rs. 30800; 2007 – Rs. 30,200; 2006 – Rs. 31,000 The partners’ Capital balances on 31.12.2008 were A: Rs 45000; B Rs. 35,000 Net profit for 2009 was Rs. 60,000 before interst Drawings at the end of 2009 totalled: A –Rs 24,000; B – Rs. 22,000; C Rs. 20,000
Prepare Profit and Loss Appropriation Account for the year ended 31.12.2009 and the partners’ Capital accounts. Assume that all drawings were made on the first day of the year. (8 Marks)
PRIME / ME31 / PCC 4
6. An electricity company decided to replace some parts of its plants by an improved plant. The plant to
be replaced was built in 1995 for Rs. 35,00,000. It is estimated that it would cost Rs. 65,00,000 to build a new plant of the same size and capacity. The cost of the new plant as per the improved design was Rs. 1,05,00,000 and in addition, material belonging to the old plant valued at Rs. 3,80,000 was used in the construction of the new plant. The balance of the plant was sold for Rs. 3,00,000. Compute the amount to be written off to revenue and the amount to be capitalized. Also prepare Plant account and Replacement account. (8 Marks)
7. J Ltd presents you the following information for the year ended 31st March, 2010
(Rs. In lacs) i. Net profit before tax provision 36,000 ii. Dividend 10,202 iii. Income tax paid 5,100 iv. Book value of assets sol 222 v. Loss on sale of assets 48 vi. Depreciation debited in P & L account 24,000 vii. Capital grant received – amortized in P& L a/c 10 viii. Book value of investment sold 33,318 ix. Profit on sale of Assets 120 x. Interest income from investment credited in P& L account 3,000 xi. Interest expenditure debited in P& L account 12,000 xii. Interest actually paid ( Financing activity) 13,042 xiii. Increase in working capital 67,290 xiv. (Excluding cash and Bank Balances) xv. Purchase of Fixed Assets 22,092 xvi. Expenditure on Construction work 41,688 xvii. Grant received for capital projects 18 xviii. Long term borrowings from Bank 55, 866 xix. Provision for income tax-debited in P& L account 6,000
Cash and bank balance as on 1.4.2009 6,000
xx. Cash and bank balance as on 31.3.2010 8,000
You are required to prepare a cash flow statement as per AS – 3 (Revised)
(16 Marks)
8. Answer the following: (1) Mr Neutral purchased goods from Mr. Positive on two month’s credit. The purchases were made
on the following dates: Rs.
3rd March,2010 750 13th April, 2010 500 8th May, 2010 700
PRIME / ME31 / PCC 5
5th June, 2010 1,000 20th July, 2010 600 He wishes to pay the total amount of Rs. 3,550 on the basis of average due date.
i. Find out average due date. ii. If he desires to make the whole payment on 22nd September, 2010, what will be the
amount of interest @ 10% p.a ? (2) How will you treat the following as per AS – 11 (revised)
i. Debtors include amount due from X Limited , USA, for Rs. 6,00,000 which was recorded at $1= Rs. 39.20 – the prevailing exchange rate on the date of sales. The exchange rate on the Balance sheet date was $1= Rs.40.10
ii. A long- term loan was obtained from Y Limited, amounting to Rs. 20,00,000, which was recorded at $1= Rs. 36.20 – the prevailing exchange rate on the date of transaction. The Exchange rate on the Balance sheet date was $1= Rs. 37.40
(3) What is a Employee stock purchase scheme? State the SEBI guidelines for ESPS? (4) Mention the cost that are excluded from the cost of inventories? (4x 4=16Marks)
PRIME / ME31 / PCC 6
PRIME ACADEMY 31st SESSION MODEL EXAM - PCC – ADVANCED ACCOUNTING
SUGGESTED ANSWERS
1.
Journal Rs. Rs. 2010 April
1 Equity Share capital (Rs. 100) a/c Dr To Equity share capital (Rs. 10) a/c (Being 15,000 Equity shares of Rs.100 each converted into 1,50,000 equity shares of Rs. 10 each fully paid as per special resolution No dated)
1,500,000
1,500,000
2010 April
1 Equity share capital account Dr To Capital Reduction a/c (Being the reduction in share capital to the extent of 50% as per Special Resulution No Dated confirmed by the court order vide order dated…)
750,000
750,000
2010 April
1 Capital Reduction a/c Dr To Bank a/c (Being the payment of arrear preference dividend in Cash to the extent of 10% of the total arrear)
13,500
13,500
2010 April
1 Bank a/c Dr To Own Debentures a/c To Capital Reduction a/c ( Note 1) (Being the sale of 800 own debentures @ Rs. 98. The profit on sale of own debentures transferred To Capital Reduction Account)
78,400
76,800 1,600
2010 April
1 12% Debentures a/c Dr To Own Debentures a/c To Capital Reduction a/c (Being the cancellation of 1,200 own debentures. Profit on cancellation has been transferred to Capital Reduction account )
120,000
115,200
4,800
2010 April
1 12% Debentures a/c Dr Capital Reduction a/c Dr To Machinery a/c (Being machinery of Rs. 3,00,000 taken over By the Debentureholders for Rs. 2,80,000)
280,000 20,000
300,000
2010 April
1 Creditors a/c Dr To Capital Reduction a/c (Being the reduction in the liability to creditors)
65,000
65,000
2010 April
1 Capital Reduction a/c Dr To Bank a/c (Being the penalty paid to capital
15,000
15,000
PRIME / ME31 / PCC 7
commitments) 2010 April
1 Capital Reduction a/c Dr To Profit and Loss a/c To Goodwill a/c To Discount on issue of Debentures a/c To Debtors To Stock a/c To Capital Reserve a/c (Being the capital reduction balance utilised for the purpose of writing off profit and loss account, Discount on issue of Debentures, goodwill, Debtors and stock. The unutilised balance of Capital reduction account transferrred to Capital Reserve Account)
772,900
411,000 20,000 2,000
61,000 33,000
245,900
2010 April
2 Business Purchase a/c To Liquidator of Mini Ltd a/c (Being the purchase consideration payable to Mini Ltd)
1,320,000
1,320,000
2010 April
2 Fixed Assets a/c Dr Stock a/c Dr Debtors a/c Dr Cash at Bank a/c Dr To Sundry Creditors a/c To 12% Debentures of Mini Ltd a/c To Profit and Loss a/c To General Reserve ( Note III) To Business Purchase a/c (Being the incorporation of all assets and liabilities And reserve of Mini Ltd at book values on amalgamation. The difference between share capital issued and The Amount of share capital of Mini Ltd adjusted against General Reserve)
7,60,000 6,80,000 4,40,000 1,30,000
225,000 200,000 15,000
250,000 1,320,000
2010 April
2 Liquidators of Mini Ltd a/c Dr To Equity Share Capital a/c To 9% Preference Share Capital a/c (Being the issue of equity shares and preference Shares against purchase consideration)
1,320,000
1,000,000
320,000
2010 April
2 12% Debentures of Mini Ltd a/c Dr To 12% Debentures a/c (Being the issue of new debentures to the Debenturesholders of Mini Ltd)
200,000
200,000
Balance Sheet of Max Ltd as at 2nd April, 2010 Liabilities Rs. Asssets Rs.
Share Capital
Fixed Assets Other Fixed Assets (Note IV)
19,60,000
PRIME / ME31 / PCC 8
Authorised Share Capital Equity shares Preference shares
Issued and Subscribed Capital 1,75,000 Equity Shares of Rs. 10/-each 82,000, 9% Preference Shares of Rs.10/-each (out of the above one lakh equity share of Rs, 10/-each and 32,000 Preference shares of Rs. 10/-each have been issued Pursuant to contract without payment Being received in cash) Reserves & Surplus General Reserve (Note VIII) Profit and Loss account Capital Reserve Secured Loans 12% Debentures (Note IX) Unsecured Loans Current Liabilities & Provisions Creditors (Note X)
? ?
17,50,000 8,20,000
4,30,000 15,000
2,45,900
4,00,000
0
5,75,000
42,35,900
Investments Current Assets, Loans and Advances
(A) Current Assets Stock (Note V) Debtors (Note VI) Cash at Bank (Note VII)
10,40,000 10,30,000 2,05,900
42,35,900
Working Notes: Rs.
I Sale of Value of Own debentures ( 800*98) 78,400
Less: Cost of 800 debentures ( Rs 192000/2000*800) 76,800
Profit on sale of own debentures 1,600 Own Debentures were sold cum- interest @ Rs 98/- each. But the date of interest has not been given in the question. Therefore, it has been assumed that the date of sale and date of interest are same
Note: It should be noted that consideration for debenture holders will not be included in the purchase consideration. These debentures will be taken over by Max Ltd and thereafter discharged by issuing new debentures in Max Ltd.
III Calculation of Reserve on amalgamation Share capital of Mini Ltd ( Equity + Preference share) 14,00,000 Less: Share capital issued by Max Ltd 1,320,000 80,000 Add: Reserve from Balance sheet of Mini Ltd 170,000 250,000
IV Other Fixed Assets
Max Ltd.'s other assets as per Balance sheet 1,500,000 Less: Machinery taken over by the creditors at the time of Cap reduction 300,000 1,200,000 Add: Mini Ltd's Other assets (taken over) 760,000 1,960,000 V Stock Max Ltd.'s stock as per Balance sheet 393,000
Less: Written off as per scheme of reconstruction
33,000 360,000 Add: Mini Ltd.'s stock taken over 680,000 1,040,000
VI Debtors
Max Ltd.'s Debtors as per Balance sheet 651,000
Less: Written off as per scheme of reconstruction
61,000 590,000 Add: Mini Ltd.'s Debtors taken over 440,000
PRIME / ME31 / PCC 10
1,030,000
VII Cash at Bank Max Ltd.'s Cash at Bank as per Balance sheet 26,000
Less: Penalty paid 15,000
11,000
Add: Sale of own debentures 78,400
89,400 Less: Payment of Preference Dividend 13,500 75,900
Add: Mini Ltd's Cash at Bank taken over 130,000
205,900
VIII Total Reserve Max Ltd's General Reserve as per Balance sheet 180,000 Add: Reserve arising from acquistion ( Note III) 250,000 430,000
IX Debentures Max Ltd's Debentures as per Balance sheet 600,000 Less: Own Debentures cancelled 120,000 480,000 Less: Debentureholders paid by machinery 280,000 200,000
Add: Debentures issued to the Debentureholders of Mini Ltd
200,000 400,000 X Creditors Max Ltd's Creditors as per Balance sheet 4,15,000 Less: Adjusted on Capital Reduction 65,000
3,50,000 Add: Mini Ltd's Creditors taken over 2,25,000 5,75,000
PRIME / ME31 / PCC 11
2. MR X Trading and Profit and Loss account for the year ended 31.03.2010
Particulars Cosmetics Rs.
Confectionery Rs.
Total Rs.
Particulars Cosmetics Rs.
Confectionary Rs.
Total Rs.
To Opening stock To Purchase To Gross Profit c/d To Salaries To Rates & Insurance Add:Paid in 08-09 Less: paid for 09-10 To Rent Add: O/s for 08-09 Less: O/s for 09-10 To Repairs To Electricity To Trade Expenses To Accountancy/Audit fee Net Profit
5,000 1,04,500
9,900
1,19,400
3,000 1,12,500
48,000
1,63,500
10,000 2,500
12,500 2,750
______
6,000 5,00
6,500
500 _______
2,17,000
65,900
2,82,900
15,000
9,750
6,000
4,000 4,000
1,250
2,000
15,900
57,900
By Sales By Drawings By Closing st By Gross profit b/d Cosmetics Confectionary
1,10,000
4,550 4,850
1,19,400
1,60,000
3,500
1,63,500
9,900 48,000
2,70,000
4,550 8,350
2,82,900
57,900
57,900
Balance Sheet of Mr. X as at 31st March 2010
Liabilities Rs. Rs. Assets Rs. Capital Opening Balance Add: Net Profit Less: Drawings
60,500 15,900 76,400
22,050
54,350
Furniture and Fittings (at cost) Stock in Trade Cosmetics Confectionary Sundry Debtors: Confectionary Cash at Bank Cash in hand
Revenue Account for the year ended 31st March, 2010
Particulars Schedule Rs. Preminum earned –net Total (A) Total (A) Claims incurred -net Commission Operating Expenses related to Insurance Business Total (B) Total (A)
1 2 3 4
4,74,260
4,74,260
3,70,000
35,000
84,400
PRIME / ME31 / PCC 14
Operating profit/(Loss)from Marine Insurance Business (A-B)
(a) Fire Insurance (b) Marine Insurance (c) Miscellaneous Insurance
2. Income from Investments 3. Other Income (to be specified)
Profit Before tax Provision for Taxation Appropriations Proposed final dividend Transfer to general reserve (30% of Rs. 73,460-Profit after tax) Balance of profit/loss brought forward from last year Balance carried forward to Balance sheet
(15,140)
1,06,000 7,400
98,260 24,800
40,000 22,038
0 11,422
Balance sheet as at 31st March, 2010 Particulars Schedule Rs.
Source of Funds Share Capital Reserves & Surplus Application of Funds Investments Loans Fixed Assets Current Assets:
Cash and Bank Balances Advances and Other Assets
Sub-total(A)
Current Liabilities Provisions
5 6
8
10
11 1 2
5,00,000 1,19460
12,40,000
52,000
2,16,000 1,07,460
3,23,460
1,64,000 PRIME / ME31 / PCC 15
Sub-total (B)
Net Current Assets (C )=(A-B) Miscellaneous Expenditure(to the extent not written off or adjusted) Debit Balance in Profit and Loss account ( Shareholders' Account)
8,32,000
9,96,000 (6,72,540)
6,19,460
Schedule 1 – Preminum Earned
Particulars Rs. Rs. Preminum received Less Re –insurance Adjustment for changes in Reserve for unexpired risk
Opening Balance of reserve (Rs. 4,96,600+Rs. 49,660) Less: Closing balance of Reserve (Rs. 7,20,000+Rs. 72,000)
Total Preminum earned
5,46,260 7,92,000
7,20,000
(2,45,740)
4,74,260
Schedule – 2 Claims incurred (net)
Particulars Rs. Rs. Claim paid Add: Claims outstanding at the end of the year Less: Claims outstanding at the beginning of the year
Particulars Rs. Rs. Expenses on Management General Charges Audit fees Director’s Sitting fees Depreciation
54,000 12,000 10,000 3,400 5,000
84,400
PRIME / ME31 / PCC 16
Schedule –5 Share Capital
Particulars Rs. Rs. Issued Capital – 10,000 Equity shares of Rs. 100 each Called up and paid up capital – 10,000 Equity shares of Rs. 100 each Rs. 50 paid up
10,00,000
5,00,000
Schedule –6 Reserves & Surplus
Particulars Rs. Rs. General Reserve: Opening Balance Add: Addition during the year Balance of Profit and Loss account
86,000 22,038
1,08,038
11,422 _________
1,19,460
Schedule –8 Investments
Particulars Rs. Rs. Deposit with Controller of Insurance Other Investments
5,00,000 7,40,000
12,40,000
Schedule –10 Fixed Assets
Particulars Rs. Rs. Furniture and Fittings
52,000
52,000
Schedule –11 Cash and Bank Balances
Particulars Rs. Rs. Cash at Bank At Bank on Deposit account
16,000 2,00,000
2,16,000
PRIME / ME31 / PCC 17
Schedule –12 Advances and Other Assets
Particulars Rs. Rs. Preminum Outstanding Debtors Outstanding dividend on investment Balance due by agent
42,000 32,460 12,000 21,000
1,07,460
Schedule –13 Current Liabilities
Particulars Rs. Rs. Balance due to Other insurance companies Sundry Creditors Claims outstanding
80,000 24,000 60,000
1,64,000
Schedule –14 Provisions
Particulars Rs. Rs. Reserve for unexpired Risk Proposed dividend Provision for Taxation Less: Tax Deducted at source
24,800 24,800
7,92000 40,000
0
8,32,000
4. In the Books of Y LTD
Hire Purchase Stock Account
Particulars Rs. Particulars Rs. Jan 09 Dec 09
1 31
To Balance b/d (at HP price) To Goods sold on Hire purchase account
1,20,000
2,64,000
3,84,000
Dec 09
31
By Hire purchase Debtors account By Balance c/d
2,46,000
1,38,000
3,84,000
Shop Stock Account
Particulars Rs. Particulars
Rs.
Jan 09 Dec 09
1
To Balance b/d
15,000
By Hire purchase
2,46,000
PRIME / ME31 / PCC 18
31
To Purchase a/c 2,04,000
2,19,000
Dec 09 31
Debtors account By Balance c/d
1,38,000
2,19,000
HIRE PURCHASE DEBTORS ACCOUNT
Particulars Rs. Particulars Rs. Jan 09 Dec 09
1 31
To Balance b/d To Hire purchase stock account
9,000
2,46,000
2,55,000
Dec 09
31
By Cash By Balance c/d
2,40,000
15,000
2,55,000
Stock Reserve Account
Particulars Rs. Particulars Rs. Jan 09 Dec 09
1 31
To Hire Purchase Adjustment To Balance c/d
30,000
34,500
64,500
Jan 09 Dec 09
1 31
By Balance b/d By Hire purchase Adjustment account
30,000
34,500
64,500
Hire Purchase Adjustment account
Particulars Rs. Particulars Rs. Jan 09 Dec 09
1 31
To Stock Reserve account (Note3) To Profit and Loss account
34,500
61,500
96,000
Jan 09 Dec 09
1 31
By Stock Reserve (Note 1) By Goods sold on Hire Purchase account (Note 2)
30,000
66,000
96,000
PRIME / ME31 / PCC 19
Working Notes:
1) Goods are sold at a profit of 331/3% on cost. It means, if the cost is Rs. 100, the profit is Rs. 33.33 and hire purchase price = Rs. 100+33.33=Rs.133.33. Therefore, loading on hire purchase price =33.33/133.33=1/4. Loading on opening balance of hire purchase stock ¼ of Rs. 1,20,000=Rs. 30,000.
2) Loading on goods sold on hire purchase =1/4 of Rs. 2,64,000=Rs. 66,000 3) Loading on closing balance on hire purchase stock =1/4 of Rs.1,38,000 = Rs. 34,500
5. Profit and Loss Appropriation Account for the year ended 31st December,2009
Particulars Rs. Rs. Particulars Rs. Rs. To Share of Profit account A B C
21,760 21,760 21,760
65,280
By Net Profit b/d By Interest on Drawings A B C
1,920 1,760 1,600
60,000
5,280
Partners’ Capital Account
Date Particulars
A Rs.
B Rs.
C Rs.
Date Particulars A Rs.
B Rs.
C Rs.
1Jan 09 To A Capital To B Capital To Drawings To Interest on drawings To Balance c/d
24,000
1,920
58,440
83,460
22,000
1,760
27,400
51,160
17,600 4,400 20,000
1,600
30,160
73,760
1Jan 09 By balance b/d By Bank By C Capital account By Share of Profit
45,000
0
17,600
21,760
83,460
25,000
0
4,400
21,760
51,160
0
52,000
0
21,760
73,760
Workings
Total Profit for three years : Rs. (30,800+30,200+31,000) Rs. 92,000
Add: Interest on drawings for three years @ 8% on Rs. (20,000+30,000+37,500) Rs. 7,000
___________
Total Profit for three years after Interest on drawings Rs. 99,000
PRIME / ME31 / PCC 20
Therefore Goodwill= Rs. 99,000*2/3 = Rs. 66,000
Statement Showing required Adjustment for Goodwill
Particulars A Rs.
B Rs.
C Rs.
Right of goodwill before admission (3:2) Right of goodwill after admission (1:1:1) Sacrifice (-)/Gain (+)
39,600 22,000
(17,600)
26,400 22,000
4,400
0 22,000
22,000
Journal Entry:
Rs. Rs.
C Capital account Dr 22,000
To A Capital account 17,600
To B Capital account 4,400
6.
PLANT ACCOUNT
Particulars Rs. Particulars Rs. To Balance b/d To Cost of Construction: Cash (1,05,00,000-65,00,000) Cost of materials used
35,00,000
40,00,000
3,80,000
78,80,000
By Balance c/d 78,80,000
78,80,000
REPLACEMENT ACCOUNT
Particulars Rs. Particulars Rs. To Bank account (Portion to be written off out of the replacement cost)
65,00,000
65,00,000
By Bank account By Plant account By Revenue account
3,00,000
3,80,000 58,20,000
65,00,000
PRIME / ME31 / PCC 21
Workings
Calculation of amount chargeable to revenue
Estimated current cost of replacing old plant Rs. 65,00,000
Less: Value of replacing old plant 3,00,000
Less: Value of materials belonging to the old plant
Used in the construction of new plant 3,80,000
--------------------
Rs. 6,80,000
---------------
Total Rs. 58,20,000
Calculation of amount to be captialised
Rs. Rs.
Cost of building new plant (cash) 1,05,00,000
Add: Value of materials belonging to the old plant used
In the construction of new plant 3,80,000
--------------------
1,08,80,000
Less: Estimated current cost of replacing of plant 65,00,000
____________
Total 43,80,000
7. Cash Flow Statement As Per AS – 3
Cash flow from operating activities Rs.inlacs Net profit before tax provision 36,000 Add: Non cash expenditures:
Depreciation 24,000 Loss on sale of assets 48
PRIME / ME31 / PCC 22
interest expenditure 12,000 36,048 72,048 Less: Non cash income
Amortisation of capital grant received -10 Profit on sale of investments -120 Interest income from investments -3,000 -3,130
Operating profit 68,918 Less: Increase in working capital -67,290
Cash from operations
1,628
Less: Incometax paid -5,100 Net cash used in operating activities -3,472 Cash flow from investing activities
Sale of assets (222-48) 174
sale of investments (33,318+120) 33,438 Interest income from investments 3,000
Purchase of Fixed Assets -22,092
Expenditure on construction work -41,688 Net cash used in investing activities -27,168 Cash flow from financing activities Grants from capital projects 18 Long term borrowings
55,866 Interest Paid -13,042 Dividend paid -10,202 Net cash from financing activities 32,640 Net increase in cash 2,000 Add: Cash and Bank balances as on 1.4.2009 6,000 Cash and Bank Balances as on 31.3.2010 8,000
8. (1) Calculation of Average Due Date Due Date Amount No of days Products May 3 Rs. 750 0 0 June 13 Rs. 500 41 20,500 July 8 Rs. 700 66 46.200 August 5 Rs.1,000 94 94,000 Sept 20 Rs. 600 140 84,000 Rs. 3,550 Rs. 2,44,700
PRIME / ME31 / PCC 23
Average Due Date= May 3 +( 2,44,700/3,550)= 9th July
Desired Date of Payment =22.09.2010 . Difference between due date and desired date of payment =20+31+22 = 73 days
Interest = Rs. 3,550*10/100*73/365 = Rs. 71
(2) As -11(revised) Provides for the following
a) A foreign currency transaction should be recorded by applying the exchange rate between the reporting currency and the foreign currency at the date of the transaction.
b) Monetary items in the balance sheet should be reported using the closing rate c) Exchange rate differential in respect of foreign currency deferred liability relatable to fixed assets
will have to be absorbed in the statement of Profit and Loss. (i) Intial recognition : Rs. 6,00,000/Rs. 39.20 = $ 15,306
Rate at the balance sheet date : $1 = Rs 40.10
Debtors to be shown on the Balance sheet date : 15306*Rs. 40.10 = Rs. 6,13,770
Therefore, the exchange difference is a gain of Rs. 13,770(Rs. 6,13,770-6,00,000)
This should be credited in the statement of Profit and Loss
(ii) Intial recognition : Rs. 20,00,000/Rs. 36.20 = $ 55249
Rate at the balance sheet date : $1 = Rs 37.40
Long term Loan to be shown on the Balance sheet date : 55249*Rs. 37.40 = Rs. 20,66,312
Therefore, the exchange difference is a loss of Rs. 66,312(Rs. 20,66,312- Rs20,00,000)
This should be debited in the statement of Profit and Loss.
(3) Employee stock Purchase scheme (ESPS)
Employee stock purchase scheme (ESPS) means a scheme under which the company offers shares to employees as part of the public issue or otherwise.
In this respect some of the important SEBI Guidelines are given below:
1. No EPS shall be offered to employees of the company unless the shareholders of the company approve ESPS by passing a special resolution in the general meeting.
2. An employee shall be eligible to participate in the ESPS. 3. An employee is a promoter or belongs to a promoter group shall not be eligible to participate in the
ESPS. 4. A Director who either by himself or through his relatives or through any body corporate, directlyor
indirectly hold more than 10% of the outstanding equity shares of the company shall not be eligible to participate in the ESPS.
5. The number of shares offered may be different for different categories of employees.
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6. Shares issued under an ESPS shall be locked in for a minimum period of one year from the date of allotment.
(4) In determining the cost of inventories, it is appropriate to exclude certain costs and recognize them as expense in the period in which they are incurred.
Examples of such costs are:
1. Abnormal amounts of wasted materials, labour or other production costs. 2. Storage cost, unless production process require such storage. 3. Administrative Overheads that do not contribute to bringing the inventories to their present location
and condition. 4. Selling and Distribution costs.
PRIME / ME31 / PCC 25
PRIME ACADEMY 31st SESSION MODEL EXAM - PCC - AUDITING AND ASSURANCE
QUESTION PAPER
AIT No. of Pages: 2 Total Marks: 100 No of Questions: 8 Time Allowed: 3 Hrs
All are compulsory
1. Answer any ten questions
a) The primary responsibility for the prevention and detection of fraud and error rests with auditor of the company. Comment.
b) In case of difference of opinion among the joint auditors, the joint auditors are bound by the view of majority of joint auditors. State it is true or false with reasons
c) Rs.5 lakhs paid by a pharma company to the legal advisor defending the patent of a product treated as Capital Expenditure. Is the treatment correct?
d) State whether a casual vacancy of auditor created on account of resignation can be filled by the Board of Directors?
e) What is the meaning of good evidence? Give an example. f) The auditor has to ensure that material items are properly and distinctly disclosed in the
financial statements. What are the material items? g) The members of C Ltd. preferred a complaint against the auditor stating that he has
failed to send the auditors report to them. Comment? h) ULT company is a private company with unlimited liability. It has paid up share capital
of Rs.20 lakhs. Will CARO 2003 be applicable to it? i) When an adverse opinion is expressed? j) Cost auditor of CD Ltd. is appointed by the Board of Directors by passing a board
resolution. k) The auditor of a company wanted to see the minutes book of Directors meetings. The
Chairman of the company refused for the same on the ground that matters of confidential nature were contained therein. Comment.
l) As per view of a director of TCG Ltd, 'the primary responsibility of prevention and detection of fraud and errors is of auditor'. Comment.
(10x2 = 20 marks)
2. a) "For initial audit engagements, the auditor should obtain sufficient appropriate audit
evidence as per AAS 22".Comment. (8 Marks)
b) What is auditor's report? What are the basic elements of auditor's report as per AAS 28 (The Auditor's Report on Financial Statements).
(12 Marks) 3.
a) In an CIS environment, an entity establishes an organizational structure and procedures to manage the CIS activities. What are the characteristics of an CIS organizational structure? (5 Marks)
PRIME / ME31 / PCC
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b) While auditing the books of PE Pvt. Ltd. it is found that personal expenditure of Mr. FreeFlow, a director of the company, has been met by the company. How will this expenditure be vouched?
(5 Marks) 4.
a) SDB Ltd. is a company in which 13% of the subscribed capital is held by a public financial institution and 14% of the subscribed capital is held by a Government company. State whether SDB Ltd. is required to pass a special resolution for the appointment of auditor.
(5 Marks) b) Whether the auditor can exercise lien on the client's documents in his possession for
non-payment of fees for work done for the client? (5 Marks)
5. State the special steps involved in the audit of a club. (10 marks)
6. a) Which are the different organizations that require audit under law?
(5 Marks) b) The paid up capital and reserves of the BC Ltd. is Rs.51 lakhs as at the
commencement of the financial year 2005-2006. Is BC Ltd required to have an internal audit system? Explain with reasons
(5 Marks) 7.
a) How would you verify the issue of bonus shares? (6 Marks)
(OR)
What is audit risk? What are the different components of audit risk? (6 Marks)
(b) What are the significant matters observed during the course of audit, a record of which should be kept in the audit note book?
(4 Marks) 8.
Write short notes on any two of the following:
a) Internal Control Questionnaire b) Director's Responsibility Statement c) Intangible Assets
(2x5 =10marks)
PRIME / ME31 / PCC
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PRIME ACADEMY 31st SESSION MODEL EXAM - PCC - AUDITING AND ASSURANCE
SUGGESTED ANSWERS
1. a) As per MS 4 (The Auditor’s Responsibility To Consider Fraud and Error in an Audit of
Financial Statements) the primary responsibility for the prevention and detection of fraud and error rests with both those charged with the governance and the management of an entity. Therefore the given statement is not true.
b) As per MS 12 (Responsibility of Joint Auditors) in case of difference of opinion among
the joint auditors, the joint auditors having different view may report separately and in any case, are not bound by the views of the majority of joint auditors. Therefore the given statement is false.
c) Payment of legal fees is normally revenue expenditure irrespective of the amount
involved unless same is incurred to bring any new asset into existence. By the given expenditure neither any endurable benefit can be obtained in future in addition to what is presently available nor the capacity of the asset would be increased. Hence, treating such expenditure as capital expenditure is incorrect.
d) A casual vacancy in the office of the auditor can be filled by the Board of Directors,
provided such vacancy has not been caused by the resignation of the auditor. In 2 case of a casual vacancy arising on account of resignation, only the company in general meeting can fill the vacancy by appointing another auditor.
e) By “good evidence” we mean a highly satisfactory evidence available without any
special effort or cost. For cash in hand the best evidence is ‘count’; in respect of investment pledged with a bank, the banker’s certificate.
f) “Accounting Standard 1 defines, material items as relatively important and relevant
items, i.e. “items the knowledge of which would influence the decisions of the users of the financial statements”. Whether or not the knowledge of an item would influence the decisions of the users of the financial statements is dependent on the particular facts and circumstances of each case.
g) Section 227 of the Companies Act, 1956 lays down the powers and duties of auditor.
As per provisions of the law, it is no part of the auditor’s duty to send a copy of his report to members of the company. The auditor’s duty concludes once he forwards his report to the company. Hence in the given case, the auditor cannot beheld liable for the failure to send the report to the shareholders.
h) The term “private limited company”, as used in the CARO, should be construed to
mean a company registered as a “private company” {as defined in clause (iii) of subsection (1) of section 3 of the Act) and which has a limited liability. In other words, the Order would be applicable to private unlimited companies irrespective of the size of their paid-up capital and reserves, turnover, borrowings from banks/financial institutions.
PRIME / ME31 / PCC
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i) An adverse opinion should be expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.
j) According to sub-section (2) of section 233(B), a cost auditor shall be appointed by the
Board of Directors of the company in accordance with the provisions of subsection (1B) of section 224 and with the previous approval of the Central Government. Thus Board of Directors is entitled to appoint the cost auditor with the previous approval of the Central Government.
k) Under section 227(1) of the Companies Act, 1956, the auditor of a company has the
right of access at all times to books and accounts and vouchers of the company whether kept at the head office of the company or elsewhere. Further, he is also entitled to require from the officers of the company such information and explanations which he considers necessary for the proper performance of his duties. Therefore, he has a statutory right to inspect the directors’ minutes book.
l) As per AAS 5 (Auditor’s Responsibility to Consider Fraud and Error in an Audit of
Financial Statement), the primary responsibility of prevention and detection of fraud and errors is of management and those charged with governance and not of the auditor. Therefore view of the director of TCG Ltd is wrong.
2. a) AAS 22 on, “Initial Engagement-Opening Balances”, establishes standards regarding
audit of opening balances in case of initial engagements, i.e., when the financial statements are audited for the first time or when the financial statements for the preceding period were audited by another auditor. it requires that the auditor should obtain sufficient appropriate audit evidence for initial audit engagements that:
i. The closing balances of the preceding period have been correctly brought
forward to the current period; ii. The opening balances do not contain misstatements that materially affect the
financial statements for the current period; and iii. Appropriate accounting policies are consistently applied.
As far as sufficiency and appropriateness of the audit evidence is concerned, the auditor needs to obtain regarding opening balances, would depend on the following matters:
i. The accounting policies followed by the entity. ii. Whether the auditor’s report contained an unqualified opinion, a qualified
opinion, adverse opinion or disclaimer of opinion where the financial statements for the preceding period were audited.
iii. The nature of the opening balances, including the risk of their misstatement in the financial statement for the current period.
iv. The materiality of the opening balances relating to the financial statements for the current period.
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When the financial statements for the preceding period were audited by another auditor, the current auditor may be able to obtain sufficient appropriate audit evidence regarding opening balances by perusing the copies of the audited financial statements. Ordinarily, the current auditor can place reliance on the closing balances contained in the financial statements for the preceding period, except when during the performance of audit procedures for the current period the possibility of misstatements in opening balances is indicated.
b) As per AAS 28 (The Auditor’s Report on Financial Statements) The auditor’s report is a
clear written expression of opinion on the financial statements taken as a whole. Basic Elements Of Auditor’s Report: The auditor’s report includes the following basic elements, ordinarily, in the following layout:
i. Title: The auditor’s report should have an appropriate title. It may be
appropriate to use the term “Auditor’s Report” in the title.
ii. Addressee: The auditor’s report should be appropriately addressed as required by the circumstances of the engagement and applicable laws and regulations. Ordinarily, the auditor’s report is addressed to the authority appointing the auditor.
iii. Opening or introductory paragraph: The auditor’s report should identify
the financial statements of the entity that have been audited, including the date of and period covered by the financial statements. The report should include a statement that the financial statements are the responsibility of the entity’s management and a statement that the responsibility of the auditor is to express an opinion on the financial statements based on the audit.
iv. Scope paragraph: The auditor’s report should describe the scope of
the audit by stating that the audit was conducted in accordance with auditing standards generally accepted in India. The Auditing and Assurance Standards issued by the Institute of Chartered Accountants of India establish the auditing standards generally accepted in India. The report should include a statement that the audit was planned and performed to obtain reasonable assurance whether the financial statements are free of material misstatement.
The auditor’s report should describe the audit as including:
i. Examining, on a test basis, evidence to support the amounts and disclosures in financial statements;
ii. Assessing the accounting principles used in the preparation of the financial statements;
iii. Assessing the significant estimates made by management in the preparation of the financial statements; and
iv. Evaluating the overall financial statement presentation. The report should include a statement by the auditor that the audit provides a reasonable basis for his opinion.
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c) Opinion paragraph: The opinion paragraph of the auditor’s report should clearly indicate the financial reporting framework used to prepare the financial statements and state the auditor’s opinion as to whether the financial statements give a true and fair view in accordance with that financial reporting framework and, where appropriate, whether the financial statements comply with the statutory requirements.
The term used to express the auditor’s opinion, “give a true and fair view”, indicates, amongst other things, that the auditor considers only those matters that are material to the financial statements.
In addition to an opinion on the true and fair view, the auditor’s report may need to include an opinion as to whether the financial statements comply with other requirements specified by relevant statutes or law.
d) Date of the report: The date of an auditor’s report on the financial statements is the date
on which the auditor signs the report expressing an opinion on the financial statements. The date of report informs the reader that the auditor has considered the effect on the financial statements and on the report of the events and transactions of which the auditor became aware and that occurred up to that date.
Since the auditor’s responsibility is to report on the financial statements as prepared and presented by management, the auditor should not date the report earlier than the date on which the financial statements are signed or approved by management.
e) Place of signature: The report should name specific location, which is ordinarily the city
where the audit report is signed.
f) Auditor’s signature: The report should be signed by the auditor in his personal name. Where the firm is appointed as the auditor, the report should be signed in the personal name of the auditor and in the name of the audit firm. The partner/proprietor signing the audit report should also mention the membership number assigned by the Institute of Chartered Accountants of India. A measure of uniformity in the form and content of the auditor’s report is desirable because it helps to promote the reader’s understanding of the auditor’s report and to identify unusual circumstances when they occur. A statute governing the entity or a regulator may require the auditor to include certain matters in the audit report or prescribe the form in which the auditor should issue his report. In such a case, the auditor should incorporate in his audit report, the matters specified by the statute or regulator and/or report in the form prescribed by them in addition to the requirements of this AAS.
3.
a) In an CIS environment, an entity will establish an organizational structure and procedures to manage the CIS activities. Characteristics of an CIS organizational structure include:
i. Concentration of functions and knowledge: Although most systems employing CIS methods will include certain manual operations, generally the number of persons involved in the processing of financial information is significantly
PRIME / ME31 / PCC
6
reduced. Furthermore, certain data processing personnel may be the only ones with a detailed knowledge of the interrelationship between the source of data, how it is processed and the distribution and use of the output. It is also likely that they are aware of any internal control weaknesses and, therefore, may be in a position to alter programs or data while stored or during processing. Moreover, many conventional controls based on adequate segregation of incompatible functions may not exist, or in the absence of access and other controls, may be less effective.
ii. Concentration of programs and data: Transaction and master file data are often concentrated, usually in machine-readable form, either in one computer installation located centrally or in a number of installations distributed throughout an entity. Computer programs which provide the ability to obtain access to and alter such data are likely to be stored at the same location as the data. Therefore, in the absence of appropriate controls, there is an increased potential for unauthorized access to, and alteration of, programs and data.
b) Personal Expenses of Directors:
i. Check the articles of association, service contract, minutes of general meeting,
etc., to check the authorisation for such payment. ii. Enquire to ensure that personal expenses are not camouflaged in any other
revenue items as contemplated under section 227(IA) of the Companies Act, 1956.
iii. Ascertain compliance with disclosure according to requirements of Schedule VI to the Companies Act, 1956.
iv. Check documentary evidences to examine the payments reimbursed. v. Check compliance with requirements of CARO, 2003.
4.
a) In terms of section 224A, a company in which not less than 25% of the subscribed capital is held by : (i) a public financial institution or a government company or the Central Government, or any State Government, or (ii) any financial or other institution established by any Provincial or State Act in which a State Government, holds not less than 51% of the subscribed share capital, (iii) a nationalised bank or an insurance company carrying on general insurance business; or (iv) any combination of the above categories, shall appoint or re-appoint an auditor in the annual general meeting only by passing a special resolution.
As SBD Ltd. is a company in which 13% of the subscribed capital is held by a public
financial institution and 14% of the subscribed capital is held by a Government company, SBD Ltd. is required to pass a special resolution for the appointment of auditor.
b) Auditor’s Lien: Under the general principles of aw, if any person has lawful possession of
the property of another person, on which he has worked, he may retain such property for non payment of any amount outstanding in respect of work done on the property.
Accordingly, the auditor may exercise lien on the client’s documents in his possession for non payment of fees for work done for the client. Regarding books of
PRIME / ME31 / PCC
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account of a company, it may be noted that as per section 209 of the Companies Act, 1956, these must be kept at the registered office of the company. However, all or any of the books of account may be kept at any other place in India pursuant to a Board’s Resolution, and notice must be filed with the Registrar.
Thus, as per such a resolution, if the Board of a company hands over the books of account to the auditor, the auditor may exercise his lien for non payment of fees. However, reasonable facilities must be provided for inspection of the books of account by the directors, members and other authorised persons.
The auditor needs to observe provisions of the Companies Act, 1956. Further, in respect of auditor exercising the lien, the views of the Institute of Chartered Accountants of England and Wales are worth noting:
i. Documents must belong to the client who owes the money, and these documents must come to the possession of the auditor on the client’s authority.
ii. The auditor can retain such documents, only if he has done work on such documents, on which fees have not been paid.
5. 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:
(a) 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.
(b) 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.
(c) 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.
(d) Check totals of various columns of the Register of members and tally them across. (e) 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.
(f) 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.
(g) Trade 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.
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(h) Vouch purchase of sports items, furniture, crockery, etc. and trace their entries into the respective stock registers.
(i) 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.
(j) 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.
(k) 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.
(I) Examine the financial powers of the secretary and, if these have been exceeded, report specific care for confirmation by the Managing Committee.
6. a) Audit required under law: The organisations that require audit under law are the
following: i. Companies governed by the Companies Act, 1956; ii. Banking companies governed by the Banking Regulation Act, 1949; iii. Electricity supply companies governed by the Electricity Supply Act,
1948; iv. Co-operative societies registered under the Co-operative Societies
Act, 1912; v. Public and charitable trusts registered under various Religious and
Endowment Acts; vi. Corporations set up under an Act of Parliament or State Legislature
such as the Life Insurance Corporation of India. vii. Specified entities under various sections of the Income-tax Act, 1961:
b) Clause 4(vii) of CARO, 2003 requires the auditor to comment whether the company has
an internal audit system commensurate with the size and nature of the business. The clause is required to be commented upon by the auditor in case of companies having a paid-up capital and reserves exceeding rupees 50 lakhs as at the commencement of the financial year concerned, or having an average annual turnover exceeding five crores rupees for a period of three consecutive financial years immediately preceding the financial year concerned. This clause has a mandatory application for the listed companies irrespective of the size of paid-up capital and reserves or turnover.
It is important to note that the Companies Act, 1956 does not require a company to necessarily have an internal audit system. However, where such a system does not exist, the Order requires the auditor to mention the fact in his report. Since Order refers only to such companies which are either listed or companies having a paid-up capital and reserves in excess of rupees 50 lakhs or an average annual turnover in excess of rupees 5 crores for a period of three consecutive financial years immediately preceding the financial year concerned, it is desirable that BC Ltd. has an internal audit system. It is equally important to note that the internal audit system is a part of the overall internal control system. Therefore, the scope of the internal audit and the extent of its coverage will, to some extent, depend upon the existence or otherwise of other forms of internal control. This is also a factor to be considered when evaluating the adequacy of the internal audit system.
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7. a) Verification of Issue of Bonus Shares: Primarily, it should be ascertained whether the
Articles permit capitalisation of profits; also whether the company had a sufficient number of unissued shares for allotment as bonus shares. In addition, the following steps should be taken:
i. Inspect the Minute book of Shareholders for the resolution authorising
declaration of the Bonus and Director’s Minute for resolution appropriating profits for being applied in payment of shares to be allotted to shareholders as bonus shares;
ii. Trace the allotment of shares as per particulars contained in the
Allotment Book or sheets into the Register of Members; and
iii. Confirm that all statutory requirements relevant to the issue of shares have been complied with, viz., the filing of the particulars of the bonus shares allotted with the Registrar together with a copy of the resolution pursuant to which allotment has been made.
iv. Confirm that the. issue of fully paid up bonus shares in pursuance of
subsection (3) of Section 205 has been kept in abeyance in respect of shares where any instrument of transfer of such shares has been delivered to the company for registration and the transfer of such shares has not been registered by the company as required by the provisions of section 206A of the Companies (Amendment) Act, 1988.
v. Ensure that SEBI Guidelines relating to issue of bonus shares have
been complied with. The balances in the Securities Premium Account and Capital Redemption Reserve Account, which are not available for distribution as dividend, can be utilised for allotment of fully paid bonus shares to the members and the balance in the above- mentioned account are usually first utilised for the purpose. All applications for bonus issue have to be signed by a person not below the rank of a Director together with a certificate indicating that the information furnished is true and correct and that all the data acquired in the application form and guidelines has been furnished.
OR Audit Risk : Audit risk is the risk that an auditor may give an inappropriate opinion on financial information which is materially misstated. An auditor may give an unqualified opinion on financial statements without knowing that they are materially misstated. Such risk may exist at overall level, while verifying various transactions and balance sheets items. There are three components of audit risk:
(i) Inherent risk: is a risk that material errors will occur. Inherent risk is the susceptibility of an account balance or class of transactions to misstatement that could be material, individually or when aggregated with misstatements in other balances or classes, assuming that there were no related internal controls.
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(ii) Control Risk: is the risk that the client’s system internal control will not prevent or correct such errors, to assess control risk, the auditor should consider the adequacy of control design as well as test adherence to control procedure.
(iii) Detection Risk: is the risk that an auditor’s procedures will not detect a misstatement that exists in an account balance or class of transactions that could be material, individually or when aggregated with misstatements in other balances or classes. The level of detection risk relates directly to the auditor’s procedures, Some detection risk would always be present.
The inherent and control risks are functions of the entity’s business and its environment and the nature of the account balances or classes of transactions, regardless of whether an audit is conducted. Even though inherent and control risks cannot be controlled by the auditor, the auditor can assess them and design his substantive procedures to produce on acceptable level of detection risk, thereby reducing audit risk to an acceptable low level.
b) Significant matters observed during the course of audit, a record of which should be
kept in the Audit Note Book: (a) ‘Audit queries not cleared immediately e.g. missing receipts, vouchers,
etc. (b) The mistakes or irregularities observed during the course of audit e.g.
cases of failure to comply with the requirements of the Companies Act, 1956 or the provisions contained in the Memorandum or Articles; a change in the basis of valuation of finished stock and work-in-process or in the computation of depreciation; failure to provide adequate depreciation, etc.
(c) Unsatisfactory book-keeping arrangements, costing method, internal or financial administration or organisation.
(d) Important information about the company which is not apparent from the accounts.
(e) Special points requiring consideration at the time of verification of final accounts.
(f) Important matters for future reference. 8.
a) Internal Control Questionnaire: This is a comprehensive series of questions concerning internal control. This is the most widely used form for collecting information about the existence, operation and efficiency of internal control in an organisation.
An important advantage of the questionnaire approach is that oversight or ommission of significant internal control review procedures is less likely to occur with this method. With a proper questionnaire, all internal control evaluation can be completed at one time or in sections. The review can more easily be made on an interim basis. The questionnaire form also provides an orderly means of disclosing control defects. It is the general practice to review the internal control system annually and record the review in detail. In the questionnaire, generally questions are so framed that a ‘Yes’ answer denotes satisfactory position and a ‘No’ answer suggests weakness. provision is made for an explanation or further details of ‘No’ answers. In respect of questions not relevant to the business, ‘Not Applicable’ reply is given.
PRIME / ME31 / PCC
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The questionnaire is usually issued to the client and the client is requested to get it filled by the concerned executives and employees. If on a perusal of the answers, inconsistencies or apparent incongruities are noticed, the matter is further discussed by auditor’s staff with the client’s employees for a clear picture. The concerned auditor then prepares a report of deficiencies and recommendations for improvement.
b) Directors Responsibility Statement : Section 217(2AA)]: Director’s responsibility
statement is aimed at highlighting the accountability of the directors with a view to ensuring good corporate governance. Director’s responsibility statement shall disclose the following particulars:
(i) that in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures;
(ii) that the directors had selected such accounting policies and applied
them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit or loss of the company for that period;
(iii) that the directors had taken proper and sufficient care for the
maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
(iv) that the directors had prepared the annual accounts on a going
concern basis.
c) Intangible Assets: An intangible asset is that asset which does not have a physical identity but which is used by the enterprise for production or supply of goods or for retails to other or for administrative purpose. Such assets does not have any physical existence but their presence in the business is indicated with a value placed thereon. These assets include rights and benefit to owners subject to their being useful. For example : goodwill, patents, copyright etc. AS 26, “Intangible Assets”, applies to, among other things, expenditure on advertising, training, startup, research and development activities. Research and development activities are directed to the development of knowledge. Therefore, although these activities may result in ah asset with physical substance (for example, a prototype), the physical element of the asset is secondary to its intangible component, that is the knowledge embodied in it. This standard also applies to rights under licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights. An intangible asset should measured at cost. After initial recognition an intangible asset should be carried at its cost less any accumulated amortisation and any impairment losses. Auditor should also ensure that proper disclosure is made in the financial statements about the carrying amount, amortisation methods, useful lives, etc.
PRIME / ME31 / PCC
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PRIME / ME31 / PCC 1
PRIME ACADEMY 31st SESSION MODEL EXAM - PCC – LAW ETHICS AND COMMUNICATIONS
QUESTION PAPER
LTO No. of Pages: 2 Total Marks: 100 No of Questions: 8 Time Allowed: 3 Hrs
All are compulsory Question No. 1 is compulsory and any 4 from part I
PART- I
1. a) A agrees to pay B if Sun rises in West next morning? The contract is
(i) Valid (ii) b)Void (iii) Voidable (iv) None of the above.
(1 Mark) b) Which of the following is a Valid Promissory Note?
(i) “ A, I owe sum amount” (ii) “A, I owe you Rs.1,000” (iii) “I promise to pay A or order,Rs.1,000” (iv) “I promise to pay the bearer Rs.1,000”
(1 Mark) c) Acceptance is required only in case of
(i) Bill of Exchange (ii) Cheque (iii) Promissory Note (iv) All of these
(1 Mark) d) Once the Bonus Act is applicable on an Establishment , the Act will continue to apply even if the
number of employees come below the required minimum (i) True (ii) False
(1 Mark) e) For Calculation of Gratuity the Amount payable under the Payment of Gratuity
Act,1972 , the number of days in a month is taken as (i) Actual number of days on employment (ii) 26 days (iii) 15 days (iv) 30 days
(1 Mark) f) There are Contracts which need not be performed. Explain? (5 Marks)
g) Explain and Differentiate between Promissory Note and Bill of Exchange? (10 Marks)
PRIME / ME31 / PCC 2
2. a) Write a short note on Employee –Deposit Linked Insurance Scheme? (4 Marks) b) A decided to rent his Hall to B for performance of a Music Concert . But two days before the Music
Concert the Music Hall is destroyed by Fire? B sues A? Will B succeed? (6 Marks) 3.
a) If the members composing a Company die or disassociate themselves, the company also gets extinct? Is it a Correct Statement? (5 Marks)
b) What are the Similarities and Dissimilarities between the Guarantee Company and the Company
having Share Capital? (5 Marks)
4.
a) What is an Abridged Prospectus? (5 Marks)
b) Write a Short Note on Small Depositor? (5 Marks) 5. Whether a Company can Buy Back its Own Shares? (10 Marks) 6.
a) What is the difference between Reduction of Share Capital and Diminution of Share Capital? (5 Marks)
b) What do you mean by issue of Sweat Equity? (5 Marks)
PART II
7. a) What do you mean by Ethical Conflict Resolution? What are the Fundamental Principles relating to
ethics? (10 Marks)
b) What does Business Ethics in an Organization relate to? List out the Benefits of Business Ethics?
(10 Marks)
PART III 8.
a) Distinguish between Oral and Written Communication?
(10 Marks)
b) What are the Contents you think an Annual Report should have? (10 Marks)
PRIME / ME31 / PCC 3
PRIME ACADEMY 31st SESSION MODEL EXAM - PCC – LAW ETHICS AND COMMUNICATIONS
SUGGESTED ANSWERS
PART I
1. a. b)
b. c)
c. a)
d. a)
e. b)
f. Contract would not require performance under circumstances spelt out in S.62 to S.67 of the Indian
Contract Act,1872/
These circumstances are (i) Novation (ii) Rescission (iii) Alteration (iv) Remission
Each of 4the above need to be explained by the Candidate- in brief.
g. Promissory Note is an Instrument ( not being a bank note or a Currency-note) in
writing containing an unconditional undertaking ,signed by the maker to pay a certain sum of money only to or to the order of , a certain person or to the bearer of the instrument (S.4)
A Bill of Exchange a instrument in writing containing an unconditional order signed by the maker ,directing a certain person to pay a certain sum of money only to , or to the order of certain person to the bearer of the instrument (S.4)
Then there are 8 differences- the Candidate is expected to reproduce 4 as part of his answer)
2.
a) Employees Deposit Linked Insurance Scheme- S.6C of the Employees Provident Fund Act, that the Central Government may , by notification in the Official Gazette ,frame a scheme to be called Employees Deposit Linked Insurance Scheme for the purpose of Providing Life Insurance benefits to the employees of any establishment or class of establishments to which the act applies.
A brief note further on this will have to be written by the candidate
b) The Candidate ought to explain the Effects of Failure to Perform at a Time Fixed In a Contract in which
Time is the Essential. S.5 Then, Comment on S.56 Impossibility of Performance.
PRIME / ME31 / PCC 4
Then, special mention of Supervening Impossibility- under which (i) Accidental Destruction of The subject matter of the Contract (Case of Taylor Vs. Caldwell) (ii) Non existence or Non Performance of Certain State of things (iii) Incapacity to perform a Contract of personal service (iv) Doctrine of Frustration
3.
a) NO. Even if all the members of a Company Die the Company does not get extinct. The Student need to explain the features of Companies act , with special reference to Perpetual Succession and Common Seal.
b) The Similarities and Dissimilarities between the Guarantee Company and the Company and the Company having Share Capital- First explain what is a Company Limited by Shares Then explain Company Limited by Guarantee S.12(2) (b) The student is first explain the similarities or common features and then the dissimilarities. Then the Case of Narendra Kumar Agarwal and Vs.Saroj Maloo
4.
a) As per the Definition of Companies (Amendment )Act,2000 , abridged Prospectus means a Memorandum containing such salient features of a Prospectus as may be prescribed [ S.2 (1) ] The Candidate has also to explain the Exceptions about four in number ,which need not accompany the Applications sent out.
b) S.58 AA ,Companies (Amendment ) Act,2000 A small depositor means a depositor who has deposited in a financial year a sum not exceeding twenty thousand rupees in a company and includes his successors, nominees and legal representatives. Within 60 days, inform to CLB, if default has occurred . The Student should also write on Restrictions of the Company- there are about 9 points- at least 5 of them have to be reproduced in the exam.
5. S.77 A , PROVIDES FOR A COMPANY TO BUY BACK ITS OWN SHARES. Subject to certain conditions and regulation. Points to be explained by student under following heads:
Sources for Funds for Buy Back of Shares Conditions for Buy Back Procedure before Buy Back Time Limit for Buy Back Buy Back from Whom Declaration of Solvency
PRIME / ME31 / PCC 5
Extinguishment of Securities Cooling Period Register of Buy Back Filing of Buy Back Returns Penalty for Default Transfer of Certain sums to Capital Redemption Reserve Prohibition of Buy Back in Certain Circumstances- S. 77 B
6. a) S.100 to be explained –Reduction of Share Capital .\
S.94 (1) (e) and S.94 (3) There are about 5 differences which have to be written by the Candidate.
b) Sweat Equity Shares- S. 79 A to explain
Then 4 conditions for such issue including the exceptions exception have to be explained properly.
PART II 7.
a) While evaluating compliance with the Fundamental Principles, a finance and accounting professional may be required to resolve a conflict in the application of fundamental principles. The student is supposed to comment on the process consisting of 5 steps. List out the 5 Fundamental Principles relating to Ethics.- Integrity, Objectivity, Confidentially, Professional Competence and due care, Professional Behavior Explain each of these in few lines.
b) Being ethical in business requires acting with an awareness of : The need for complying with rules How products affect the employees and the society- both positively and negatively.
Benefits of Business Ethics – 8 in number Attention to business ethics has substantially improved society, Ethics programme helps to maintain a moral course in turbulent times. Ethics Programme cultivate strong teamwork and productivity, Ethics support employee growth, Ethics help ensure that the policies are legal, Ethics programme helps avoid criminal acts “ of omission” and can lower fines. Help to manage values associated with quality management strategic planning and diversity management., promote a strong public image.
PART III 8. a) The student is to write a note on the meaning of Oral Communication and then a note on Written
Communication- then list out the differences between them- about 8 in number- at least 6 should be mentioned in the answer.
b) Write a note on the importance of an Annual Report- being a Public Document and then list out at least 20 contents out of 26 contents required. Company information, Organization structure, Leadership team, People, Technology, International Operations, Corporate Social Responsibility, Directors report, Independent Financials, Consolidated Financials. Graphs, Management Discussion and Analysis, Auditors Reports, Balance Sheets, Profit and Loss Statement, Cash Flow Statement, Schedule forming part of accounts… …………. Including Notes forming part of Accounts.
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