Suggested Answer ICAB Knowledge Level Nov-Dec 2016

Suggested Answers

Knowledge LevelNovember-December 20 1 6

The lnstitute of CharteredAccountants of Bangladesh

THE INSTITUTE OF

CHARTEREDACCOUNTANTS

OF BANGITDESH

SUGGESTED ANSWERCA Professional StageKnowledge Level

The Institute of CharteredAccountants of Bangladesh

The learning materials have been prepared by the Institute of Chartered Accountants ofBangladesh

First edition March 2017

All rights reserved. No part of this publication may be reproduced in any form or by any means orstored in any retrieval system, or transmitted in, any form or by any means, electronic, mechanical,photocopying, recording or otherwise without prior permission of the publisher.

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Knowledge LevelNovember-December 20 1 6

Contents

Pages

2. Accounting

1. Assurance

5. Taxation-I

05

3. Business & Finance

l1

30

52

67

74

4. Management Information

6. Business & Company Law

7. Information Technology

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ASSURANCENov-Dec 2016

Queslioryl

a. Define 'expectations gap and give three examples of misunderstandings whichcontribute to the expectations gap. 3

Answer:

The 'expectations gap' is defined as the difference between the apparent public perceptions about

responsibilities of auditors and the legal and professional in reality.

Three examples of misunderstandings which contribute to the expectations gap are:

1. The responsibility of preparation of financial statements

2. The type and extent of work undertaken by auditors

3. The level of assurance given by auditors

b. The key benefit of assurance is the independent professional verification being given to

the users. In addition, assurance gives some subsidiary benefits. What are those

subsidiary benefits? 5

Answer:

Key benefit of assurance is the independent, professional verification being given to the users.

In addition, assurance may have subsidiary benefits. Those are:

i. Although an assurance report may only be addressed to one set of people, it may give

additional conlidence to other parties in a way that benefits the business.

For example, audit reports are addressed to shareholders, but the existence of an

unqualified audit report might give the bank more confidence to lend money to that

business, in other words, it enhances the credibillty of the information.

* The existence of an independent check might help prevent errors or frauds being made

and reduce the risk of management.

* Where problems exist within information, the existence of an assurance report drawsattention to the deficiencies in that information, so that users know what those

deficiencies are.

* Assurance is also important in more general terms. It helps to ensure that high quality,reliable information exists, leading to effective markets that investors have faith in and

trust.

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c. The content of the audit report is regulated by BSA 700 and also by relevantBangladeshi law. In this context, what are the basic elements should be included in anaudit report? Write sequentially 6

Answer:

According to BSA 700, the audit report should include the following basic elements, usually inthe following layout.

statements

A measure of uniformity in the form and content of the audit report is desirable because it helps

to promote the reader's understanding and to identify unusual circumstances when they occur.

d. ICAB and IFAC Code of ethics sets out the rules under which auditors should acceptnew appointment.

What procedures should the new auditors follow to comply with the above set of rules? 6

Answer:

ICAB Code of Ethics as well as IFAC Code of Ethics sets out the rules under which auditorsshould accept new appointments. Before a new audit client is accepted, the auditors must ensure

that there is no independence or other ethical issues likely to cause significant problems withthe ethical. Furthermore, new auditors should ensure that they have been appointed in a properand legal manner.

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The new auditors must carrv out the following procedures:

.f. Ensure professionallv qualified to act:

Consider whether disqualified on legal or ethical grounds, for example if there would be

a conflict of interest with another client.

* Ensure adequateness ofexisting resources:

The audit firm must have the resources to perform the work properly also have to ensure

availability of specialist knowledge or skills, if required. The impact on existingengagements must be estimated, in terms of staff time and the timing of the audit.

* Obtain references:

Make independent enquiries from third parties if directors not personally known.

..'. Communicate with present auditors:

Enquire whether there are reasons/circumstances behind the change which the new

auditors ought to know, also as a matter of courtesy.

Ouestion:2

Internal control is the collection of policies and procedures that are followed by the organizations

while performing the activities required to attain their goals. It facllitates the organizations tostay in the right path and to mitigate the risks they face day to day basis. A good internal controlsystem enhances the efficiency and effectiveness of organizations as well. It provides signals

about the deviations of operations and thus organizations can take appropriate measures to

overcome those situations.

a. What is the difference between policies and procedures? 4

b. Define the term control activities. Briefly discuss the types of control activities that are

introduced by the organizations in designing a good internal control system. 2+6

c. ABC Limited is a newly established private limited company where you work as afinancial advisor. The company is in the process of allocating duties and responsibilitiesamong their staff in such a manner that will help them to mitigate the risks of fraud and

error. As a financial advisor develop a list of activities that should be assigned to differentemployees for the sake of adequate separation of duties. 4

d. Suppose proper segregation of duties is not possible due to the limited number of staff. Inthis case, what should management do to enhance control? 3

e. Briefly explain three methods of documenting the understanding of internal control byexternal auditors. 6

Page l7

Answer to the question no-2(a):

Policies refer to the principles that guide the actions and decisions in an organization. In other

word we can say "Policy is the list rules or the framework for the task. Policies do not tell"how" to do something, but spell out what is acceptable and what is not. Indeed, policies are

rules established to reduce risk.

Procedures refer to the established or prescribed methods to be followed to do something. Theydescribe "how" something should be done. Indeed, procedures outline a series of steps taken toensure that an intemal control is followed. Example: the procedure is the list of exact instructionsfor every turn the driver needs to ta

Answer to the question no-2(b):

Control activities are the policies and procedures which help to ensure that necessary actions are

taken to reduce risks in the achievement of the entity's objectives. They are the most tangible

controls that help to prevent and detect frauds and errors. Control activities may be manual or

system based where processes are computerized.

There are many control activities that are introduced by the organizations in designing a good

internal control system. Without instituting adequate control activities, orgatizations are exposed

to huge risks. Indeed, Control activities mitigate or eliminate certain risks or threats. Whatever

the control activities organization follow they generally fall under the following types of specific

control activities:

Authorization: The essence of this controls is that all transactions and activities must be

properly authorized to make the system satisfactory. This is very much fundamental to

prevent unwanted and unauthorized transactions. Authorization may be either general or

specific based on the nature of transactions.

Segregation of duties: This implies that a number of people should be engaged to perform

the different parts of a process. Involvement of several people, makes fraudulent

transactions difficult. It also reduces effors as more people implies more checking.

Physical control over assets and liabilities: To ensure robust internal control, physical or

logical security needs to be established and maintained over assets and records. Physical

control is very much essential to protect assets and documents.

Performance review: Performance review includes reconciliation between two sets of data,

comparing internal data with external information, variance analysis, trend analysis etc.

Through performance review organization can create visibility of its activities and pay

attention to those areas where it requires.

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Independent check: It implies the careful and continuous review of the above four types ofcontrol activities. This helps to verify and review the execution of all other control

activities by raising flags.

Answer to the question no-2(c):

Segregation of duties is a very fundamental control activity for each and every organrzation that

is keen to establish and maintain a well balanced internal control system. In the environment ofseparation of duties, nobody is involved to execute majority part of a process alone and therefore

lots of unwanted situations can be prevented. As a financial advisor, I would suggest the

following activities that should be allocated over different staff of the organization:

Recoding: The process of creating and maintaining records of transactions

Authorization: Authonzation of transactions and activities should be assigned to separate

staff.

Asset custody: The access to or control over physical assets like cash, inventories, furniture

etc. should have in the hand of separate individual.

Reconciliations: Separate person should be assigned to carry out reconciliation between two

sets of information to ensure to verify that all transactions are valid, authorised and properly

recorded.

Answer to the queqtial lar2(dL

Small orgatizations may not be able to obtain the ideal system of separate employees each

performing one of the four different duties. In this case, mitigating controls can be used to

decrease risk. That is, additional control procedures can be placed in a system to help to reduce

the risks associated with lack of segregation of duties. Additional controls may include frequent

job rotation, frequent reporting of transactions, establish independent check etc.

Answer to the question no-2(e):

Auditors must record the internal control that they determine during audit of financial statements.

Internal control documentation can take various forms based on the circumstances. The

following three methods are commonly used for documenting the understanding of internal

control of an organization:

Narrative descriptions: Narrative is a written description of a client's internal controls

i.enarrative describes process flows in written form, without graphical representations. The

narratives must include the origin, processing and disposition of documents and records and

the relevant control points.However, narrative descriptions do not serve as an effective tool

for process description and they can be lengthy and difficult to review, and typically are not

considered user-friendly.

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Flow chart: An internal control flow chart is a symbolic, diagrammatic representation of the

client's documents and records in the sequence in which they are processed. A flowchart is aprocess map and a graphical representation of events performed by a set of people. Process

maps can help auditors understand business processes better, identify risks, controls,

deficiencies, and inefficiencies; and develop recommendations for improvements.

Internal Control Questionnaire: An Internal control questionnaire (ICQ) is a list of answers tothe series of questions related with controls of each area in order to identify and evaluate the

effectiveness of internal control. Effective ICQ comprises a carefully structured, logicallysequenced series of questions that helps to highlight control gaps, strengths, and weaknesses

within a system.

Ouestion: 3

L. BSA 530 o'Audit Sampling" states that 'when designing audit procedures, the auditorshould determine appropriate means for selecting items for testing so as to gathersuflicient appropriate audit evidence to meet the objectives of the audit procedures'.

In this context what do you understand by 66Audit Sampling"? Some testing proceduresdo not involve sampling. Explain 3+4

Answer:

Answer to the question no- 3(a)

Audit sampling involves the application of audit procedures to less than 100% of the itemswithin an account balance or class of transactions such that all sampling units have a chance ofselection. This will enable the auditor to obtain and evaluate audit evidence about somecharacteristic of the items selected in order to form or assist in forming a conclusion concerningthe population from which the sample is drawn.

Some testing procedures do not involve sampling. such as:

* Testing l00o/o of items in a population is obvious.

* Certain characteristic, as selection is not representative:

Assurance providers are unlikely to test 100% of items when carrying out tests of control,but 100% testing may be appropriate for certain substantive procedures. For example, ifthe population is made up of a small number of high value items and there is a high riskof material misstatement then 100% examination may be appropriate.

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T

b. What are the general matters that BSA 580 requires auditors to confirm in writing?What are the auditors' duties if management does not provide one or more of therequested written representations? 4+4

Answer:

Written representation - A written statement by management provided to the auditor to

confirm certain matters or to support other audit evidence. Written representations in this context

do not include financial statements, the assertions therein, or supporting books and records.

There are a numbef of elements that BSA 580 requires auditors to confirm in writing,namelv that management:

.i. Acknowledges its responsibility for the preparation and fair presentation of the f,rnancial

statements in accordance with the applicable financial reporting framework and has

approved the financial statements

.1. Acknowledges its responsibility for the design and implementation of internal control

* Believes that the effects of uncorrected misstatements aggregated by the auditors duringthe audit are immaterial. A summary of these items should be attached to the writtenrepresentations

The confirmation with regard to responsibility and approval of the financial statements is

normally done when the auditors receive a signed copy of the financial statements, whichincorporate a relevant statement of responsibilities. Alternatively, the auditors may obtain such

evidence from minutes of directors' meetings, or by including them in the written representation

letter.

If management does not pfAllide que qt morg of the requested written representations, theauditor shall:

i. Discuss the matter with management;

ii. Reevaluate the integrity of management and evaluate the effect that this may have on

the reliability of representations (oral or written) and audit evidence in general; and

iii. Take appropriate actions, including determining the possible effect on the opinion inthe auditor's report.

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c. Small Companies may have particular problem regarding "Human Element" inimplementing effective internal control system. Explain

Answer.'

Small companies may have particular problems in implementing effective intemal control

systems because of the human element. Small companies generally have fewer employees than

larger companies, meaning that there are fewer people to involve in the internal control system.

Involving a large number of people in internal control systems helps to limit the risk of the

human element in internal control systems because if a lot of people are involved, there is a

greater chance that people's errors or, worse, frauds, will be uncovered by the next person in the

control chain. The control of using a number of people in a single system is called segregation

of duties.

In a small company, if its staff capacity is not such to ensure that lots of people are involved inthe internal control system, then the control system will be weaker.

Ouestion:4

As part of the analyical procedures of XYZ Limited, you performed calculations of the

following ratios:

Ratios 2015 2014

Gross profit ratio 25% 29%

EBIT to sales ratio Il% 10.8%

Current ratio 1.55 1.85

Days to collect receivable 108 85

Days to sell Inventory 96 95

Interest coverage ratio 4.2 5.5

Earnings per share Taka 8.5 Taka 8.6

a. Based on the above ratios, which two aspects of the company, do you believe, should

receive special attention in the audit? 4

b. State five possible reasons behind decreasing gross profit ratio to 25%o in 2015 from29o/o

of20l4- 4

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Based on the ratios, as given in the question, I think following aspects should get special

attention:

. Profitability in terms gtoss profit to revenue.

. Liquidity condition of the company.

. Average Accounts Receivable collection period

In case of gross profit ratio, it came down to 25oh in 2015 from29%o of last year. This is a huge

fluctuation and therefore the reasons behind such movement should be investigated to gather

suffi cient and appropriate evidence.

On the other hand, in 2015 compared to 2014, the liquidity position of the company has

deteriorated in several considerations which include lower current ratio, higher days sales

outstanding and higher bank borrowing as reflected through lower interest coverage ratio over

the last year. All ratios relating to tightening liquidity condition need to be examined in detail to

understand associated root causes and related risks.

Considering Accounts Receivable Turnover ratio, it is found that Days to collect Receivable has

been increased compared to last year which has negative impact in cash flow from operating

activities. Moreover, funds remained block in receivable for more days compared to year 2014-

The reason for increased Day to collect Receivable has to be checked to ensure the actual reason

as well as the impact in working capital management.

Answer to the question no-4(b):

Gross profit ratio is derived by dividing gross profit by the amount of revenue where gtoss profit

is equal to revenue minus cost of goods sold. If we look into the functions of the gross profit

ratio, the following factors might have contributed to decrease the same:

. The selling price of the products may have been reduced as part of business strategy. If it isso, the amount of revenue has reduced in terms of value. This has played role to reduce gross

profit ratio compared to last year.

. The product mix may have been changed this year. That is, the company has sold more low

margin products in 2015 than last year.

. The company might have offered higher rate of trade discount compared to last year.

. Raw material price of the products may have increased which led to increase cost ofproduction.

. The overhead cost of the products may have increased due to several reasons like labour pay

rise, energy cost, maintenance cost etc.

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Ouestion:6

a. Why is independence so important to the external auditor? Why does lack of independence inappearancejeopardise auditor's independence in fact? 3+3

b. Explain the terms "Threats" and "safeguards" with reference to maintaining professionalObjectivity and Independence. What is acceptable threat? 4+2

c. Under each of the following circumstances what kind of threat auditor may encounter andwhat should be the safeguards to maintain professional objectivity and independence? 2x4

Mr. Zaman, an audit staff of Zara & Co, Chartered Accountants, is working in a client as

audit supervisor. On the occasion of Eidul- Fitr, the client sent him a gift box of theirproducts valuing Taka 10,000.

Farah & Co, Chartered Accountants, is the auditor of KYC Limited. The company hasdecided to go for IPO next year to raise money from public to finance their futureexpansions. Recently they asked Farah & Co to prepare their financial statementsalongside to continue to act in the capacity of external auditor.

Sara & Co, Chartered Accountants has received an offer from MM Limited to conducttheir audit on the fees which is l2Yo of profit before tax.


Independence is the freedom from conditions that threaten the ability of the auditor to carry outhis responsibilities in an unbiased manner. Independence is one of the worthiest characteristics ofexternal auditor and it is very much fundamental to the principles of integrity and objectivity. Itallows auditor to be freedom from any biasness. Extemal auditor is considered as independentparty and is engaged to provide assurance as to the reliability of the information incorporated inthe financial statements which are the medium of discharging the accountability of management.As stakeholders from different corners put their trust and confidence on auditor, the auditprocedures and the conclusion of the audit shall not be motivated by personal interest. A lack ofindependence may lead to a failure to fulfill professional requirements to obtain enough evidenceto form the basis of an audit opinion and therefore it can undermine the purpose of independentaudit. Eventually stakeholders will give no value to the assurance provided by the auditor.Therefore, auditor has no alternative but to be independent to ensure acceptability of his or herdelivery.

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ii. Lara & Co, Chartered Accountants, is the external auditor of PK Limited. Mrs. Kelly, a

senior audit staff of Lara & Co, is a daughter of Marketing Director of PK Limited. Theengagement partner of the audit firm is planning to depute Mrs. Kelly to PK Limited tolead the field work of the audit.

Auditor must be independent in fact as well as in appearance. That is, real independence and

perceived independence are equally important to the auditor. It is essential for auditor tomaintain independent attitude in fulfilling his responsibilities, side by side, it is also importantthat the users of financial statements have confidence in that independence. lndependent in fact

exists when auditor actually maintains an unbiased attitude throughout the audit; on the other

side, independent in appearance is the outcome of others' perception that there is no threat to the

auditor's objectivity. If auditor is really independent in his actions but users believe him as not to

be independent, most of the value of the audit function will be lost. So, it is obvious that a lack ofindependence in appearance takes away the credit of independence in fact.

Answer to the question no16(b}

While conducting the required procedures for audit and other assurance services, an assurance

provider may encounter certain circumstances that could prevent him from complying withFundamental Principles associated with professional ethics. Such circumstances are called

threats. The quality of service may be impaired if these threats prevail.

When an assurance provider faces any threat he needs to assess it and then must apply certain

procedures either to eliminate the threat or reduce it to an acceptable level. Such procedures are

called safeguards. If the threat is insignificant, the assurance provider can ignore it otherwise he

has to take actions for safeguard.

A threat is acceptable when a reasonable and informed third party would probably not conclude

that the assurance provider's compliance with the Fundamental Principles was compromised.

When any threat appears to the assurance provider, it is his responsibility to eliminate it or

reduce it to an acceptable level; otherwise he will be professionally liable for non-compliance ofprescribed ethics.

Answer to the question no-6(c):

Offering gift to Mr. Zaman a staff of the audit firm, falls under self-interest threat. Since

the amount of gift is significant it can influence Mr. Zaman not to be independent inperforming his professional duties. This may cause a less quality audit. In this case, the

best safeguard before Mr. Zaman is not to accept the gift. Maybe, he could accept the giftfor the sake of the courtesy if it was insignificant in terms of value.

ll. If Mrs. Kelly, daughter of Marketing Director of PK Limited and a senior audit staff ofLara & Co, is delegated the responsibility to lead the audit team that will be engaged to

perform the audit of PK Limited, the familiarity threat may arise. Mrs. Kelly may not be

able to apply professional skepticism in her actions to the fullest level. Therefore, the best

safeguard to reduce the threat of this instance would be not to engage her to carry out the

audit work of PK Limited.

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lll

IV

If auditor undertakes the service of preparation of financial statements in addition to his

current role to act in the capacity of external auditor, there is huge possibility to create

self-review threat. Self-review threat arises when assurance firm provides multiple

services to an assurance client. Here, auditor needs to take steps to eliminate or reduce

the risk to the acceptable level. Since the client is not listed till now, audit firm may

continue both services but following measures should be taken to reduce the threat:

. Using separate staff members for audit and financial statements preparation.

Implementing policies and procedures to prohibit the individual providing such

services from making any managerial decisions on behalf of the assurance client.

Originating of source data and providing accounting entries should be done by client.

The underlying assumptions and estimations required for preparation of financialstatements should be done and approved by client.

Engagement fee based on the amount of profit before tax falls under the category of self-

interest threat. This fee is contingent in nature. A firm should not enter into any fee

arrangement for audit under which the amount of fee is contingent on the result of the

assurance work or on items that are the subject matter of the assurance engagement.

Rather, Sara & Co should ask the client to fix up the fees based on the work volume ofthe audit or the fees at the prescribed rate of ICAB.

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I

I

ACCOUNTINGNov. - Dec. 2016

Question No. L.

a) Briefly explain the purposes of Financial Statements.

With reference to the BAS-1: Presentation of Financial Statements, outline all thecomponents of a set of Financial Statements. 4

b) Identify any four users of financial statements and explain their needs for accountinginformation. How does the user get accounting information? 4

c) The conceptual framework of accounting recognizes qualitative characteristics of financialinformation that is useful for decision making. Explain. 4

Answer of O. no. I (a)

1. (a) The purpose of financial statements is to provide information about the financial position,performance and changes in financial position of an entity that is useful to a wide range of users

in making economic decision. Financial Statements also show the results of the stewardship ofmanagement, or the accountability of management for the resources entrusted to it.

The components of a set of Financial Statements are:

(i) Statement of Financial Statement

(iD Statement of Comprehensive income

(iii) Statement of changes in equity

(iv) Statement of cash flows

(v) Notes to the financial statements

Answet pfQ-qo.l (b)

Users of financial statements and their needs for accounting information have been explainedbelow:

(D Investors are those who provide risk capital i.e. mainly shareholders. They are concernedwith the risk inherent in and the retum provided by the business. They need information tohelp them determine whether they should buy, hold or sell their holdings. They also need

information to assess the ability of the business to pay dividends.

(iD Employees of the business and their representative groups are interested in informationabout the stability and profitability of their employer. They need to assess the likelihood offuture employment and increase or decrease in remuneration packages. They will also be

interested in retirement benefits and employment opportunities/advancement.

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(iiD Lenders.

These consist of debenture holders, banks, lessors, other financial institutions, otherbusinesses etc. They are interested in information that enables them to determine whethertheir loans, and the interest attached to them, will be paid when due.

(iv) Suppliers and other trade payables.

These are people the business owes money to. They are interested in information thatenables them to determine whether amounts owing to them will be paid when due. Manysuppliers will also be interested in the long term survival of the business if the business istheir major customer.

v) Customers or trade receivables.

Customers have an interest in information about the continuance of the business especiallyif they have bought goods with guarantees etc. if the business is a major supplier of goodsto them they will wish to know that that supply will continue into the future.

0 Governments and their agencies.

Governments are interested in the allocation of resources within a country and of coursethe collection of revenues such as taxes from individual businesses. They will requireinformation on the activities of the business to regulate them, determine taxation policiesand assess the basis for national income and similar statistics.

g) The general public.

The most interested 'public' are generally those that live in close proximity to thebusiness. They will wish to know if the business makes a contribution to the localeconomy and what effect it has on the local environment, for example in terms ofpollution. They will wish to know the number of people the business employs from thelocality, their patronage of local suppliers and the possible effect on the locality if thebusiness ceases to operate.

1. (c) The IASB states that there are four principal characteristics - understandability,relevance, reliability/faithful representation and comparability.

(a) Understandability:

Information provided to users must not be so complex that a user with a reasonable knowledge ofbusiness and economic activities and accounting, and a willingness to study the information withreasonable diligence, would not be able to understand it. There is a fine balancing act neededhere by those preparing financial statements to ensure that all information relevant to users isgiven to them even though it may be complex.

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(b) Relevance:

To be useful, information must be relevant to the decision-making needs of users. Relevance is

closely related to its predictive role- that is the extent to which the information helps users topredict the organisation's future and so make decisions about it. For example, the attempt by apotential investor to predict future profitability and dividend levels will be at least partly based

on the financial statements. A sub characteristic to relevance is materiality- information ismaterial and therefore relevant if its omission or misstatement could influence the economicdecisions of users. Materiality depends of the size of the item or error judged in the particularcircumstances.

(c) Reliabitity/Taithful representation:

Information has the quality of reliability when it is free from material error and bias and can be

depended upon by users to represent faithfully that which it either purports to represent or couldreasonably be expected to represent. There is quite often a conflict between relevant and reliableinformation. Information may be relevant, but so unreliable in nature or representation that itsrecognition may be potentially misleading. For example, if the validity and amount of a claim fordamages under a legal action are disputed, it may be inappropriate for the business to recognise

the full amount of the claim in the statement of financial position as this would provideunreliable information. However, to ensure relevance, it would be appropriate to disclose the

amount and circumstances of the claim in a note to the accounts.

(d) Comparability:

Users need to be able to compare financial statements of a business through time in order toidentify trends in its financial position and performance. Users also need to be able to compare

one business with another and, therefore, the measurement and display of the financial effect oftransactions and other events must be carried out in a consistent way for different entities. Thus,

we have the need for accounting standards from this characteristic.

Question No.2.

(a) Identify the accounting concept involved in transactions recording and explain the correctaccounting treatment for each of the following: 6

(i) Only 10 months' salaries Tk.100, 000 are shown in the Trial Balance of RahmanEnterprise for the year ended 3l December 2015. An equal amount is paid for salaries

for each month of the year.

(iD Tk.4,600 had been charged to general expenses for the owner's private holiday.

(iii) A customer, owing Tk. 5,040 has been declared bankrupt. This amount is to be writtenoff.

(b) Write down two transactions which have the following effect in the accounting equation:

Assets : Liabilities * Owners' Equity. Increase assets, increase owner's equity and decrease

assets. 2

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(c) The following relate to the business of Kafi Enterprise for the year ended December 31,20t5.

Sales Tk. 688,560

Sales return Tk. 7,600

Opening Inventory at cost Tk.27,560

Closing Inventory at cost Tk. 36,280

Gross profit for the year is 33% of cost of goods sold.

You are required to calculate the:

(i) Turnover.

(ii) Cost of goods sold.

(iii) Amount of purchases. 8

Auqwer 2(a)

Item (i): Accruals/lVlatching concept: The matching of receipts and payments within anaccounting period. Adjustments have to be made regarding early and late transactions both at thestart and at the end of the accounting period .Tk. 20,000 of unpaid salaries has to be accrued inorder to get the correct value ofsalaries expenses for the financial year.

(ii): Business Entity concept. Only the transactions of the business should be recorded in theaccounts of the business. The owner's private holiday is not a business expense and must beshown as drawings which reduce the amount of capital the owner has invested in the business.

Item (iii): The Prudence concept requires a business not to overstate revenue and not tounderstate expense. Writing off an irrecoverable debt is an example of this, as this will increaseexpenses and thus reduce net profit. This action will also reduce the value receivables and hencecurrent assets in the statement of financial position.

2 (b) The following two transactions are considered to show impact on accounting equation,Assets: Liabilities f Owners' Equity:

1. Liza put into taka 2,500 in her start-up business and borrowed taka 500 from hisuncle.

Cash 3,000 : Loan 500 + Capital 2,500

Liza bought an equipment costing taka 300 and she settled taka 200 in cash and restof the amount is still due.

Cash 2,800 + Equipment 300:Creditors 100 & Loan 500 + Capital 2,500

ll

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(i)

2 (c)

(ii)

(iii)

Date

April I,t ,7

,, 13

,, 16

,r 2r7

Calculation of Turnover:Sales

Less Returns

Cost of Goods sold: : ('/ox 680,960) :510,720

Purchases

Cost of Goods soldOpening stockAdd purchases (balancing figure)

Goods availableLess closing stock

Cost of sales (% x 680,960)

TK.

688,5607,600

680,960

27,560519,440

547,60036,280

510,720

Question No.3.

(a) "An error is an irregularity in the accounting records that makes the f,rnancial Statements

invalid". With this view (i) List five accounting errors that do not affect the agreement of the trialbalance and (ii) List five accounting errors that affect the agreement of the trial balance. 6

(b) The following are extracts from the cash and bank statements of IPM Ltd for the month ofApril,2016.

Cash Book

DR

Taka

60,000

14,000

4,900

9,7803,800

Date CRTaka

Rahman 2,200Ehasan 5,120

Oishee Hossen 7,600Mohaimin 1,840

Balance c/d 75.720

92.480

Balance b/dMark Taylor

Yassir Hosain

Niaz AhmedShaila Khan

April 2,,

11,,

17

"25,r 30

Page l2l

Bank Statement Details

April I

tt aJ

,r7

,, l3

,, 13

Balance b/d

Rahman

Mark Taylor

Ehasan

Yassir Hossain

Debit

Taka

2,200

5,120

Credit

Taka

14,000

4,900

Balance

Taka

60,000

57,800

71,800

66,680

71,580

" 19 Credit transfer to Nil - 900 72,480

" 22 Niaz Ahmed - 9,720 82,260

" 30 Bank charges 160 - 82,100

" 30 Insurance 1,250 - 80,850

" 30 Provident Fund 2,570 - 78,280

Requirement:

(i) Prepare the adjusted cash book as at 30th April, 2016. 8

(ii) Draw up a bank reconciliation statement as at 30th April, 2016. 1

(C) Carol Eaton's accountant has prepared her trial balance which did not balance. The trialbalance contained a suspense account balance of Tk.1,110 (credit balance). Realizing that thisdid not balance, the following elrors were discovered by Mike, the internal auditor.

(i) A credit note for Tk.2,850 was entered on the customer account of P Scott but no entry wasmade in the returns account.

(ii) The sales account was overcast by Tk.4,800.

(iii) Tk.2,970 of goods withdrawn for Carol's personal use was entered into the drawings accountbut no other entries were made.

(iv) A discount allowed of Tk. 2,520 was credited in error to the discount received account.

(v) Cash sales of Tk.19,780 had not been entered into the sales account.

(vi) A bad debt of Tk. 6,300 had been entered in the customer's account but not the bad debtaccount.

(vii) The purchases account had been under cast by Tk. 2,650.

Page 122

Requirement: Prepare a suspense account to correct the errors discovered showing clearly theopening and closing balances. (Note: Joumal entries are not required.) l0

Answer 3(a)

3 (a) (i) Errors not affecting Trial Balance agreement are:

- Errors of Omission

- Errors of Commission

- Complete Reversal of Entries

- Compensating Errors

- Errors of Principle

- Error of Original Entry

- Error of Duplication

(ii) Enors that affect the agreement of the Trial Balance are:

- Incomplete Double Entry

- Casting Errors

- Transposition of Figures

- Omission of an Opening Balance in the Ledger Accounts

- Posting Errors

- Failure to extract one or more balances in the Trial Balance

- Placing items at the wrong side of the Trial Balance

- Single entry transactions

3 (b)IBM LTD.

Adjusted Cash Book

Taka

75,720 April30Bank charges

900 lnsuranceProvident fundBalance c/d 72,640

Balance b/dApril 19

Credit transfer - Nill

Taka

160

1,2502,50

_15,620

72,640

?6,610

Balance b/d

Page 123

IBM LTD

BANK RECONCILIATION STATEMENT AS AT 3OTH APRIL, 2016

Balance as per cash bookAdd Unpresentedcheques :

OaisheeHossenMohaimin

Less uncreditedcheque:Shaila Khan

Balance as per bankstatement

3 (c)

Purchases (3)Sales (5)

Taka2,970

19,780

Nil

ParticularsBalance b/dSales returns (1)Sales (2)Discount received (4)(2520 x 2)Bad debts (6)Purchases (7)

72,640

9,440

82,0803,800

Taka1,1 10

2,8504,800

5,0406,3002,650

______ 22J:9_

7,6001.840

,8250

Suspense account

Alternative approach of preparing suspense account

Particulars

Item No. Details Debit Credit BalanceTrial balance 1,1 10 (1,110)

I Sales returns 2,950 (3,960)Sales 4,800 (8,760)Purchases 2,970 (5,790)

lv Discount received 2,520 (8,310)lv Discount allowed 2,520 (10,830)v Sales 19,780 8,950vi Bad debts 6,300 2,650vl1 Purchases 2,650 Nil

Balance c/d

____221:0

Page 124

llil1

Question No.4.

(a) Explain Depreciation and Useful Life of Fixed Assets.

(b) List the factors or causes that contribute to depreciation of a Fixed Asset.

(c) KababGhar does not keep a set of accounting records for its business operations. For the yearended 31 December 2015, the following information was made available:

Opening inventory Tk.7,000, Cost of goods available for sale Tk.227,000, Net profit Tk.8,000,Net current assets Tk.9,000, Short-term loan Tk.1,600, Cost of sales Tk.180,000, Gross profitpercentage on sales is 10% , Net book value of non-current assets Tk.163,000, Accounts payableTk.1,400 and Long-term loans Tk.80,000. Current assets are 4 times higher than currentliabilities.

2

J

Requirement: Calculate the following for KababGhar on 3lst December 2015:

(i) Sales.

(ii) Purchases.

(iii) Closing inventory.

(iv) Total operating expenses.

(v) Total value of current assets.

(vi) Capital. t2

Answer 4(a)

Depreciation is the allocation of the Depreciable amount of an asset over its estimated useful life.This allocated amount is charged against the income statement/Profit and Loss Account.

The useful Life of an Asset is either the period over which a depreciable asset is expected to be

used. OR the number of production/similar unit expected to be obtained from the Asset by the

enterprise/company.

b) Four (4) factors are:

- Physical deterioration/Expected physical wear and tear.

- Obsolescence/Economic factors.

- Depletion (Natural resources such as mines)

- Legal limit/Time factor.

Page 125

(c)

(i)

(ii)

Sales: cost ofsales * gross profit: 180, 000 + 1/9 (180, 000;: 180, 000 + 20, 000:TK.200,000

Purchases : cost of goods available for sales - opening stock : 227,000 - 7,000 :TK.220,000

Closing stock : cost of goods available for sale - cost of goods sold : 227,000 -180,000: TK.47,000

Total revenue expenses: gross profit - net profit:20,000 - 8,000: TK.12,000

Total value of current assets Current ratio : 4: I

Net current asset: 9,000

Current asset: x Current liabilities 1,600 + 1,400: x 3,000:3,000 x 4: TK.12,000

OR Current asset:4 Current liabilities

I Net current asset: 9,000

Current asset - current liabilities : 9,000

4 - l:9,000If 3 :9, 000

4:9,000 x 4

3 : TK.12,000

(iiD

(iv)

(v)

(vi) Capital : Net book value of non-current assetsNet current assets

: 163,000: 9,000

172,000

Page 126

Question No.5.

Top Clean Services has the following unadjusted trial balance after a month of operation as on30 September 2016:

CashAccounts ReceivableSuppliesPrepaid InsuranceEquipmentNotes PayableAccounts PayableOwner's CapitalOwner's DrawingsService RevenueSalaries & Wages ExpensesUtilities ExpenseAdvertising Expense

Trial BalanceDebitTaka5,4002,8001,3002,400

60,000

CreditTaka

40,0002,400

30,0001,000

4,900

71.300 77300Other information are:

(i) Insurance expense is Tk.200 per month.

(ii) Tk.1,000 of supplies are in hand at September 30.

(iii) Monthly depreciation on the equipment is Tk.900.

(iv) Interest of Tk.500 on the notes payable has accrued during September.

Required to prepare:

(a) Adjusted Trial Balance. 5

(b) Income Statement for the month of September 2016 and Balance Sheet as on 30 September

2016. 15

(c) Closing Journal entries. 4

,200800400

J

Page 127

Answer 5

TrialBalanceSheet

Account Titles Dr. Cr.

Cash 5,400

Accounts Receivable 2,800

Supplies 1,300

Prepaid Insurance 2,400

Equipment 60,000

Notes Payable 40,000

Accounts Payable 2,400

Owner's Capital

Owner's Drawings 1,000

Service Revenue

Salaries and

Wages Expense 3,200

Utilities Expense 800

Advertising Expense 400

Totals 77.300 77 300_

Insurance Expense

Supplies Expense

Depreciation Expense

Accumulated Depreciation-

Equipment

Interest Expense

Interest Payable

Top Clean Services

Adjusted Trial Balancer lncome Statement and Balance Sheetfor the Month Ended September 30,2016

Adjusted TrialIncome Adjustments Balance

Dr. Cr Dr.

5,400

2,800

1,000

Cr. Dr. Cr

2,200

BalanceStatement

30,000

60,000

1,000

40,000

2,400

3,200

800

30,000

4,900

(b) 300

(a) 200

Dr. Cr

5,400

2,900

1,000

2,200

60,000

40,000

2,400

30,000

1,000

4,9004,900

(a) 200

(b) 300

(c) 900

(c) 900

(d) s00

(d) 500

a29q _1,99q ryqq zq,zgq

3,200

800

200

400

300

900

200

400

300

900

900

500 500

500 500

-q,199- 499- -12,400

?3,800

1,400 1,400

6.300 6.300 zuga E,ggg_

900

Totals

Net Loss

Totals

Page | 28

(b) JOURNAL ENTRTES

Sep 30 4,900Service Revenue

Income Statement

(To close revenue account)

4,900

Dec 30 lncome Statement

Salaries and Wages Expense

Depreciation Expense

Utilities Expense

Interest Expense

Advertising Expense

Supplies Expense

lnsurance Exparse

(To close expense accounts)

6,300

3,200

900

800

500

400

300

200

Sept 30 Owner's Capital

Income Statement

(To close net loss to capital)

1,400

1,400

Sept 30 Owner's Capital

Owner's Drawings

(To close drawings to capital)

1,000

1,000

Page 129

BUSINESS & FINANCENov.-Dec.2016

Question No. L

(a) What is the appropriate level of inventory from the viewpoints of a firm's frnance, marketing,manufacturing and purchasing managers? 2

(b) Ocean Company uses 800 units of a product per year on a continuous basis. The product hasa fixed cost of Tk.50 per order, and its carrying cost is Tk.2 per unit per year. It takes 5 days toreceive a shipment after an order is placed, and the firm wishes to hold 10 days' usage ininventory as a safety stock.

i. Calculate the EOQ.

ii. Determine the average level of inventory. (Note: Use a 365-day year to calculate daily usage.)

iii. Determine the reorder point.

iv. Indicate which of the following variables change if the firm does not hold the safety stock (1)order cost, (2) carrying cost, (3) total inventory cost, (4) reorder point and (5) economic orderquantity. Explain. 12

Answer to Question No. 1 (a)

Differing viewpoints about appropriate inventory level commonly exist among a firm's frnance,marketing, manufacturing and purchasing managers. Each of them views inventory levels in lightof his or her own objectives.

The finance manager 's general view toward inventory levels is to keep them low, to ensure thatthe firm's money is not being unwisely invested in excess inventory.

The marketing manager, on the other hand, would like to have large inventories of the frrm'sfinished products. This would ensure that all orders could be filled quickly, eliminating the needfor backorders due to stock-out.

As manufacturing manager is in charge of the production plan of a company, helshe would keepraw materials inventories high to avoid production delays. He or she also would favor largeproduction runs for the sake of lower unit production costs, which would result in high finishedgoods inventories.

The purchasing manager is concerned solely with the raw materials inventories. He or she likesto ensure the availability of raw materials at a favorable price whenever raw materials arerequired by production department. In an effort to get quantity discounts or in anticipation ofrising prices or a shortage of certain materials, the purchasing manager may purchase largerquantities of resources than are actually needed at the time.

Page | 30

Answer to Question No. I @)

ll Average level of inventory

lll Reorder point

lv Change

(2) Carrying costs

(3) Total inventory cost

(4) Reorder point

:200 units

800 units x l0 days+2 365

121.92 or 122 units

(800 units x 10 days) , (800 units x 5 days)

365 days

1. EOQ

365 days

32.88 or 33 units

Do Not Change

(1) Ordering costs

(5) Economic order quantity

Question No.2

Paramount Company turns over its inventory six times each year; it has an average collection

period of 45 days and an average payment period of 30 days. The firm's annual sales is Tk.3

million. Assume there is no difference in the investment per taka of sales in inventory,

receivables, and payables; and assume a 365-day year.

a. Calculate the firm's cash conversion cycle, its daily cash operating expenditure, and the

amount of resources needed to support its cash conversion cycle.

b. Find the firm's cash conversion cycle and resource investment requirement if it makes the

following changes simultaneously:

(1) Shortens the average age ofinventory by 5 days.

(2) Speeds the collection ofaccounts receivable by an average of 10 days.

(3) Extends the average payment period by 10 days.

Page | 31

k2r s, o) _ [z " soo, rf.so;1/ c -\

2

200 units

c. If the firm pays l3o/o for its resource investment, by how much, if anything, could it increaseits annual profit as a result of the changes in part b?

d. If the annual cost of achieving the profit in part c is Tk.35,000, what action would yourecommend to the firm? Why? 14

Answer to Question No. 2

a. Cash conversion cycle : Inventory turnover period * Receivables collection period -Payables payment period

Inventory tumover period : (365 + 6) : 61 days

Cash conversion cycle : (61+45-30) days

76 days

Daily Financing required Tk. 3,000,000 + 365

: Tk.8,219

Resources needed : Daily financing required x CCC

: Tk. 8,219 x 76

: Tk.624,644

b. Cash conversion cycle (CCC) 56 days + 35 days - 40 days

5l days

Tk. 8,219 x 5l

Tk.419,169

Resources needed

c Additional profit (Daily expenditure or financing x reduction inCCC) x financing rate

(Tk.8,219x25)x0.13

: Tk.26,712

d. As the cost of achieving the profit (Tk. 35,000) exceed the amount of increase in profit(Tk.26,7I2), my recommendation to the firm is not to implement the proposed changes.

Question No.3

(a) How does change in volume affect the break-even point? What important information isconveyed by the margin of safety calculation in Cost-Volume-Profit (CVP) analysis? 4

(b) Pragati Company produces and sells a single product. The company's income statement forthe most recent month is given below: g

Page 132

Sales (6,000 units at Tk. 40 per unit).............Less manufacfuring costs : Direct materials.....Direct labor (variable) ............Variable factory overheadFixed factory overhead...Gross marginLess selling and other expenses:

Variable selling and other expenses .......Fixed selling and other expenses...Net operating income.There are no beginning or ending inventories.

Tk.240,000Tk.49,000

60,00012,00030.000

24,00042.000

150"00090,000

66.000Tk.24.000

Required:

i. Compute the company's monthly break-even point in units of product.

ii. Determine the company's monthly net operating income if sales increased by 25% and there isno change in total fixed expenses?

iii. The company has decided to automate a portion of its operations. The change will reducedirect labor costs per unit by 40 percent, but it will double the costs for fixed factory overhead.Compute the new break-even point in units.

Answer to Question No.3 (a)

Within the relevant range, the break-even point does not change. This is due to the linearityassumptions that apply to total revenues, fixed costs, and variable costs.

The break-even point in CVP analysis is critical because it divides profitable levels of operationfrom unprofitable levels of operation. The margin of safety gives managers an idea of the extentto which sales can fall before operations will become unprofitable.

Answer to Question No. 3 (b)

(i) The company's income statement in contribution format would be:

Sales

Less: Variable expensesDirect materialsDirect labourVariable factory overheadVariable selling and other expenses

Contribution marginLess: Fixed expenses

Fixed factory overheadFixed selling and other expense

Net operating income

Tk.48,00060,00012,00024,000

Tk.30,00042,000

Tk.240,000

144,00096,000

72.000Tk.24.000

Tk.40

Tk.24Tk. 16

t00%

60%40%

Page | 33

Break even point in units : Tk. 72,000/Tk. 16

: 4,500 units

ii. If sales increased by 25o/o, sales volume will be 6,000 x l25o/o: 7,500 units

Net operating income with increased sales volume is as follows:

Sales (7,500 units at Tk. 40)............

Less: Variable expenses (7,500 units at Tk.24)......Contribution margin...

Less: Fixed expenses...

Net operating income.

Tk.300,000180.000

120,000

72.000

Tk. 48.000

iii. Direct labor cost per unit before automation is (Tk. 60,000/6,000)

: Tk. 10

After 40 o/o reduction, the direct labor cost will be Tk. (10 - 10x.40)

:Tk.6

Therefore, the company's new cost strucfure will be:

Selling price Tk.40

Less: Variable expenses (Tk.24 - Tk. 4) 20 50%

Contribution margin Tk.20 s0%

Break even point in units : Tk. (30,000x2 +42,000yTk. 20: 5,100 units

Question No.4

(a) Briefly discuss the purpose of accounting standards. 3

(b) Write the challenges faced by the professional accountants in Bangladesh in implementingaccounting standards. 5

(c) What are the various professional services that are rendered by a professional accountant inpublic practice in Bangladesh? 3

Answer to Question No.4

(a) The basic purpose of accounting standards is to identify proper accounting practice for thebenefit of preparers, auditors and users of financial statements. Accounting standards create a

cofirmon understanding between the users and preparers of financial statements on howparticulars items should be recognrzed, measured and disclosed. Financial statements are

expected to comply with applicable accounting standards other than some exceptional cases.

Page 134

rc0%

(b) The challenges faced by the professional accountants in Bangladesh in implementingaccounting standards are as follows:

Adoption of accounting standards means a complete set of different reporting standards hasto bring in. The awareness of these reporting standards is still low among the stakeholders i.e.management, shareholders and regulators etc. To bring a full awareness of these standardsamong these parties is a complex task.

Implementation of standards entails incremental costs to reporting entities in ensuringcompliance with accounting standards through the employment of appropriately eligiblepersonnel for the preparation of Financial Statements. Many companies are not willing tobear these costs.

Standards are often inflexible which also pose a challenge in implementation of accountingstandards.

(c) A professional accountant in public practice in Bangladesh renders the followingprofessional services :

- Accounting- Auditing and assurance

- Taxation- Management consulting- Investment business

- Corporate finance

- Forensic accounting

- Financial Management

- Company Secretarial services

- Information and Communication technology

Question No.5

Define delegation of power. Discuss the advantages of delegation and problems related to poordelegation of power and Explain Likart's four leadership styles with comments on the bestleadership style. 3+3+5


Delegation of power refers to giving a subordinate responsibility and authority to carry out agiven task while the manager retains the overall responsibility.

Advantages of delegation:

- Manager can be relieved of less important activities.

- It enables decisions to be taken nearer to the point of impact and without the delays caused byreference upwards.

- It gives business a chance to meet changing conditions more flexibly.

Page | 35

- It makes subordinate's job more interesting.

- It allows for career development and succession planning.

- It brings together skills and ideas.

- It allows performance appraisal.

- It fosters team building.

Problems of poor delegation:

- Too much supervision can waste time and be demotivating for the subordinates.

- Too little supervision can lead to subordinates feeling abandoned and may result in an inferioroutcome if they are not completely happy with what they are doing.

- Manages tries to delegate full responsibility that is s/he uses delegation to 'pass the buck'.

- Manager delegates only boring work.

- Manager tries to delegate impossible tasks because s/he can not do it themselves.

- Managers may not delegate enough because they fear their status is being undermined and theywant to stay in control.

- Subordinates may lack skills and training required.

The 4(four) leadership style identified by Likert are as follows:

(i) Exploitative - authoritative

- Decisions are imposed by managers on subordinates and Subordinates are motivatedby threats

- Authority is centralized with minimal delegation

- There is little communication between superior and subordinate and there is noteamwork

(ii) Benevolent - authoritative

- Leadership is by a condescending form of master - servant relationship andsubordinates are motivated by rewards

- There are some degree of delegation of responsibility

- Little communication between superior and subordinate and there is relatively littleteamwork

(iii) Consultative

- Superiors have substantial but not complete trust in their subordinates

- Motivation is by rewards and some involvement in objective setting

- There is an increasing degree of delegation

Page | 36

Some communication between superior and subordinate and there is moderateamount of team work

(iv) Participative

Superiors have complete confidence in subordinates

Motivation is by rewards and participation in objective setting

There is high degree of delegation

Much communication between superior and subordinate and substantial amount ofteam work.

Question No.6

What are the causes of market failure? Write the significance of price elasticity of demand andlist the factors influencing price elasticity of demand for a commodity. 2+5+5

Answer to Ouestion No. 6

Causes of market failure:

Market failure is a situation in which a free market mechanism fails to produce the most efficient(the 'optimum') allocation of resources. Market failure is caused by a number of factors:

. Market imperfection with one, or a few, suppliers exerting market power

'Externalities

. The existence of public goods and benefits that are gained by third parties

. Economies of scale. Large-scale production leads to reductions in costs per unit, which are notmatched by price reductions. This leads to above-normal profits and enables large companies todominate smaller companies.

Significance of price elasticity of demand:

The price elasticity of demand is relevant to total spending on a good or service, which in turn isa matter of interest to suppliers, to whom sales revenue accrues, and government, which mayreceive a proportion of total expenditure in the form of taxation.

o When demand is elastic, an increase in price will result in a fall in the quantity demanded,and total expenditure will fall.

o Demand inelasticity above zero means an increase in price will still result in a fall inquantity demanded, but total expenditure will rise.

o With unit elasticity, expenditure will stay constant given a change in price.

Page | 37

Information on price elasticity of demand therefore indicates how consumers can be expected to

respond to different prices, so the effect of different prices on total revenue and profits can be

predicted.

Factors influencing price elasticity of demand:

1. Availability of substitutes

The more substitutes there are for a good, especially close substitutes, the more elastic will be theprice elasticity of demand for the good. For example, in a supermarket, a rise in the price of onevegetable such as carrots or cucumbers is likely to result in a switch of customer demand to othervegetables, many vegetables being fairly close substitutes for each other. This factor is probablythe most important influence on price elasticity of demand.

2. The time horizon

Over time, consumers' demand patterns are likely to change, and so if the price of a good isincreased, the initial response might be very little change in demand (inelastic demand) but thenas consumers adjust their buying habits in response to the price increase, demand might fallsubstantially. The time horizon influences elasticity largely because the longer the period of timewhich we consider, the greater the knowledge of substitution possibilities by consumers and thegreater provision of substitutes by suppliers.

3. Competitors' pricing

If the response of competitors to a price increase by one business is to keep their pricesunchanged, the supplier raising its prices is likely to face elastic demand for its goods at higherprices. If the response of competitors to a reduction in price by one supplier is to match the pricereduction themselves, the supplier is likely to face inelastic demand at lower prices.

4. Luxuries and necessities

Necessities tend to have a more inelastic demand curve, whereas luxury goods and services tendto be more elastic.

5. Percentage of income spent on a good

The smaller the percentage of an individual's income spent on purchasing the good, the moreinelastic demand will be.

6. Habit-forming goods

Goods such as cigarettes and alcohol tend to be inelastic in demand. Preferences are such thathabitual consumers of certain products become desensitised to price changes.

Question No.7

(a) Write about an audit committee and its constitution. 4

(b) What is internal control? What constitutes a sound system of internal control? 6

Page | 38

Answer to No.7 (a)

Audit committee:

An Audit Committee is a sub-committee of the Board of Directors. The Audit Committee assistthe Board of Directors in ensuring that the financial statements reflect true and fair view of thestate of affairs of the company and in ensuring a good monitoring system within the business.The Audit Committee is generally responsible to the Board of Directors. The duties of the AuditCommittee are usually set forth in writing.

Constitution of Audit Committee:

(D The Audit Committee should be composed of at least 3 (three) members

(ii) The Board of Directors should appoint members of the Audit Committee who shouldbe directors of the company and should include at least one independent director.

(iii) When the term of service of the Committee members expires or there is anycircumstance causing any Committee member to be unable to hold office untilexpiration of the term of service, thus making the number of the Committee membersto be lower than the prescribed number of 3 (three) persons, the Board of Directorsshould appoint the new Committee member(s) to fill up the vacancy(ies) immediatelyor not later than 1 (one) month from the date of vacancy(ies) in the Committee toensure continuity of the performance of work of the Audit Committee.

Answer to Question No. 7 (b)

Internal control: A process designed to provide reasonable (not absolute) assurance regardingthe achievement of objectives via:

. Effective and efficient operations

. Reliable financial reporting

. Compliance with applicable laws and regulations

In constituting a sound system of internal control for the company, the board's deliberationsshould take a risk-based approach, including:

. The nature and extent of the risks facing the company

. The extent and categories of risk which it regards as acceptable

. The likelihood of the risks concerned materialising

. The company's ability to reduce the incidence and impact on the business of risks that domaterialise

The costs of operating particular controls relative to the benefit thereby obtained inmanaging the related risks

Page | 39

Internal control system should be constituted in such a way so that it reduces the possibilityof

- Poor judgement in decision making

- Human error

- Deliberate circumvention of control processes by employees and others

- Management overriding controls

- Occurrence of unforeseen circumstances

Finally, the system of internal control should be embedded in the operations of the company andshould form part of its culture.

Question No. 8

The financial statements of XYZ Company for the year ended December 31,2015 are as follow:

XYZ Company - Income StatementFor the Year Ended December 31,2015

Taka

Sales revenueLess: Cost of goods soldGross profitLess: Operating expensesSelling expenseGeneral and administrative expenses

Lease expenseDepreciation expenseTotal operating expenseOperating profitLess: Interest expenseNet profit before taxLess: TaxNet profit after tax

160,000106.00054.000

16,00010,000

1,00010.00037"00017,0006.100

10,9004.3606.540

Page | 40

XYZCompany - Balance Sheet December 31, 2015

Assets Tk.

Cash

Marketable securitiesAccounts receivableInventoriesTotal current assets

LandBuildings and equipmentLess: Accumulated depreciationNet fixed assets

Total assets

s001,000

25,00045,50072 00026,00090,000

(38,000)78,000

Eqpqq

Liabilities and Stockholders' Equity

Accounts payableNotes payableTotal current liabilitiesLong-term debtCommon stock u

Retained earningsTotal liabilities and stockholders' equity

22,00047,00069,00022,95031,50026,550

uq99q

The firm's 3,000 outstanding shares of common stock closed at a price of Tk.25 per share as at

3t-12-201,5

Required:a. Use the preceding financial statements to complete the following table. Assume the industry

averages given in the table are applicable for both 2014 and20l5- 10

RatioCurrent ratio

Quick ratioInventory turnoverAverage collection periodDebt ratioTimes interest earned ratioGross profit marginNet profit marginReturn on total assets

Return on common equityMarket/book ratio

Industry average1.80

0.702.50

37.5 days65%3.838%3.5%4.0%9.5%

1.1

Actual20L41.840.782.59

36.5 days67%4.040%3.6%4.0%8.0%t.2

Actual2015

Page | 41

b. Analyze XYZ Company's financial condition as it is related to (1) liquidity, (2) activity, (3)debt, (4) profitability, and (5) market. Summarize the company's overall financial condition. 5


a.

Current ratio

Quick ratio

Inventory fumover

Average collection period

Debt ratio

Times interest eamed

Gross profit margin

Net profit margin

Return on total assets

Return on common equity

Market/book ratio

Ratio AnalvsisXYZ Comp"any

IndustryAverage

1.80

.70

2.s0

37 days

6s%

3.8

38%

3.5%

4.0%

9.5%

1.1

Actual20t4

Actual20t5

1.84

.78

2.59

36 days

67%

4.0

40%

3.6%

4.0%

8.0%

r_2

t.04

.38

2.33

57 days

6t.3%

2.8

34%

4.1%

4.4%

tL.3%

1.3

b. (1) Liquidity: XYZ Company's liquidity position has deteriorated from 2014 to 2015 and isinferior to the industry average. The firm may not be able to satisfy short-termobligations as they come due.

(2) Activity: XYZ Company's ability to convert assets into cash has deteriorated from 2014to 2015. Examination for the cause of the 2l-day increase in the average collection periodis warranted. Inventory tumover has also decreased for the period under review and isfair compared to industry. The firm may be holding slightly excessive inventory.

(3) Debt: XYZ Company's long-term debt position has improved since 2014 and is belowaverage. XYZ Company's ability to service interest payments has deteriorated and isbelow industry.

(4) Profitability: Although XYZ Company's gross profit margin is below its industryaverage, indicating high cost of goods sold, the firm has a superior net profit margin incomparison to average. The firm has lower than average operating expenses. The firmhas a superior return on investment and return on equity in comparison to the industryand shows an upward trend.

(5) Market: XYZ Company's increase in their market price relative to their book value pershare indicates that the firm's performance has been interpreted as more positive in 2015than in 2014 and it is a little higher than the industry.

overall, the firm maintains superior profitability at the risk of illiquiditymanagement of accounts receivable and inventory is warranted.

Page | 42

Investigation into the

MANAGEMENT INFORMATIONNov-Dec 2016

Question No. 1

Tamim & Company gathered the following information for the year ended December 31,2015

Units produced 45,000

Units expected to be produced 45,000

Units sold 43,200

Direct labour Tk.137,200

Direct materials used Tk.126,400

Fixed selling and administrative expenses Tk. 51,000

Variable selling and administrative expenses Tk. 58,000

Fixed manufacturing overhead Tk. 83,250

Variable manufacturing overhead Tk. 73,900

Direct materials inventory, December 31,20T5 0

Direct materials inventory, December 3I,2014 0

Work-in-process inventory, December 31,2015 0

Work-in-process inventory, December 3I,2014 0

Finished goods inventory, December 31,2014 0

Required:

a) Under absorption costing, what is the cost of the finished goods inventory on December 31,20t5? 3

b) Under variable costing, what is the cost of the finished goods inventory on December 31,32015?

c) Why is absorption costing more widely used than variable costing? 4

Page | 43


a) (CtJ 126,400 + CU 137,200 + CU 73,900 + CU 83,250)145,000: CU 9.35

CU 9.35 x 1,800: CU 16,830

b) (cu t26,400 + cu 137,200 + cU 73,900)145,000: cu 7.50

CU 7.50 x 1,800: CU 13,500

c) Reasons:

l) Variable costing is not allowed for tax purposes, but absorption costing is allowed.

2) Yaiable costing is not allowed for external reports as it is not supported bylnternational Accounting Standards, but absorption costing is allowed.

Question No. 2

(a) A wholesaler had an opening inventory of 750 units of item X valued at Tk. 80 each on IMarch.

The following receipts and sales were recorded during March.4 March Received 180 units at a cost of Tk. 85 per unit

18 March Received 90 units at a cost of Tk. 90 per unit

24March Sold 852 units at a price of Tk. I l0 per unit

Using the weighted average cost method of valuation, what was the cost of item X soldon24 March? 5

(b) When opening inventories were 8,500 litres and closing inventories 6,750litres, a firmhad a profit of Tk. 62,100 using marginal costing.

Assuming that the fixed overhead absorption rate was Tk. 3 per litre, what would be theprofit, using absorption costing? 5

Answer to Ouestion No.2:

a) Weighted average cost per unit:

750 units X Tk. 80

180 units X Tk. 85

90 units X Tk. 90

60,000

15,300

8,100

1,020 units Tk.83,400

Weighted average cost per unit : Tk. 83,40011,020: Tk. 81.76: Tk. 81 .76X 852 units: Tk. 69,660

Cost of units sold on24 March

Page | 44

b) Difference in profit:: (8,500 - 6,750)X Tk. 3 : Tk. 5 250

Absorption costing profi t: Tk. 62,100 - Tk. 5 250: Tk. 56,850

Since inventory levels reduced, the absorption costing profit will be lower than the

marginal costing profit.

Question No.3

(a) "Unused capacity should be treated as a general cost to be shared across all product lines."

Do you agree? Explain. 4

(b) Dilon, Inc. manufactures Cell Phone Charger. Currently the company uses a plant-wide rate

for allocating manufacturing overhead costs. The plant manager believes it is time to refine the

method of cost allocation and has the accounting department to identify the primary production

activities and their cost drivers:

Activities cost driver Allocation RateMaterial handling Number of parts Tk. 4 per part

Assembly Labour hours Tk. 40 per hour

lnspection Minutes at inspection station Tk. 6 per minute

The current traditional cost method allocates overhead costs based on direct labour hours using a

rate ofTk. 400 per labour hour.

Required:

(1) What are the manufacturing overhead costs per Charger assuming the traditional cost method

is used and a batch of 500 Chargers are produced? The batch requires 1,000 parts, 10 directlabour hours, and 15 minutes of inspection time. 4

(2) What are the manufacturing overhead costs per Charger assuming an activity-based costing

method is used and a batch of 50 Chargers are produced? The batch requires 100 parts, 6 direct

manufacturing labour hours and 2.5 minutes of inspection time. 4

Answer to Ouestion No.3 (a)

Do not Agree.

Explanation: In general, unused capacity is not assigned to product lines. However, if the

capacity was acquired to meet anticipated demands from a particular customer or a particular

market segment, the costs of unused capacity due to lower-than-expected demands can be

assigned to the person or organizational unit responsible for that customer or segment. Such an

assignment is done on a lump-sum basis to the organizational unit; it should not be driven down

to the products actually produced during the period in the unit.

Page | 45

Question No.4

(a) A firm incurred atotal adverse labour variance of Tk.750. The standard pay rate was Tk.7.50per hour, while the actual pay rate was Tk. 8 per hour. The labour rate variance was Tk.2,250.Calculate the budgeted hours for labour? 7

(b) The budgeted sales revenue of QC Ltd for August was Tk. 210,000 with an estimated sellingprice of Tk. 84 and estimated variable cost per unit of Tk. 70. Actual sales in August were 2,650units, amounting to Tk. 219,950 revenue with a total resultant profit of Tk. 35,775. Calculate thesales volume variance? g

Answer to No.4:

(a) The flexed budgeted hours for labor are the standard hours allowed for the actual production.

(b) Labor rate variance : Actual hours worked X difference in labor rate2,250 : Actual hours worked X (Tk.S.00 - Tk. 7.50)

Actual hours worked : 4,500

Since total labor variance :So, Tk. 7s0 (A)Efficiency variance

I,500 (F) :

Efficiency variance * rate varianceEfficiency variance + Tk.2,250 (A)Tk. 1,500 (F)

Saving in labor hours compared with standard X standardrate per hourTk. 1,500/Tk.7.50

200 hours

2,500 units2,650 units

Saving in labor hours

Therefore, Standard hours for actual production:: 4,500 hours worked + 200 hours saved: 4,700 hours

(c) Budgeted sales volume (Tk. 210,000/Tk. 84)Actual sales

Sales volume variance in units 150 units (F)per unit (Tk. 84-i' Lk. 70) X Tk. 14

Sales volume variance

Standard

Page | 46

Tk. 2,100 (F)

Answer to Ouestion No.3 (b)

(1) CU 400 + 10LH: CU 8.00 per Charger

(2) [(100 parts XCU 4) + (6LH X CU 40) + (2.5 Inspection Hour XCU 6)] + 50Units : CU 13.10

per Charger

Question No. 5

(a) "Managers who use a historical-cost accounting system look backward at what somethingcost yesterday, instead of forward to what it will cost tomorrow." Do you agree? Why? 1

(b) The following information pertains to Zafar Corporation:

MonthJulyAugustSeptemberOctoberNovemberDecember

Sales (Tk.)40,00030,00020,00050,00060,00070,000

Purchases (Tk.)20,00015,00010,00025,00030,00035,000

20%

50%

28%

2%

Cash is collected from customers in the following manner

Month of sale

Month following the sale

Two months following sale

Amount uncollectible

' Thirty percent of purchases are paid for in cash in the month of purchase, and the balance ispaid the following month. A 2% discount is allowed on purchases paid for in the month ofpurchase.

' Labour costs equal 20% of sales; other operating costs of Tk.5,000 per month includingTk.2,000 of depreciation. Both are paid in the month incurred.

' The cash balance on October 1 is Tk.4,300. A minimum cash balance of Tk.4,000 is requiredat the end of the month. Money is borrowed in multiples of Tk.1,000.

' The company will issue Tk.6,000 of common stock and pay Tk.10,000 as dividends inOctober.

' There is no debt outstanding at October 1.

Required:

Prepare a projected cash flow statement in good form for the month ended October 31. 10

Page | 47

Answer to No.5 (a):

There is some truth to this statement. However, using a historical cost accounting system with

budgets is not backward looking. Budgets force managers to plan for the future, including

predicting future prices.

Answer to No.5 ft):

Cash Inflows:Cash collections from customers:

August (0.28 x CU 30,000)

September (0.50 x CU 20,000)

October (0.20 x CU 50,000)

Total

Cash Outflows:

Cash outflows for operating:

Suppliers

Labor

Operating costs

Total

cu 8,400

10,000

10.000

eu28t00

** cu 14,350

10,000

3.000

cu 21.350

Net cash flows this month

Opening cash

Cash dividends paid

Cash from stock issue

Cash Available

Opening Loan

Borrowing Made

Borrowing Repaid

Ending Loan

Ending cash

cu 1,050

4,300

(10,000)

6"000

1,350

0

3,000

0

3.000

cu 4.350

*xCU 7,350 + CU 7,000: Oct (0.30 x CU 25,000 , .98) + Sept (0.20 " CU 10,000).

Page | 48

Question No.6

(a) Distinguish between tax avoidance and tax evasion.

(b) Mehedi is considering the purchase of a machine. Data are as follows:

Cost Tk. 160,000

Useful life 10 years

Expected annual savings in cash operation costs Tk. 33,000

Mehedi's cost of capital is lLoh and its tax rate is 40%o.

Annual straight-line depreciation

Required to compute:

a. the annual net cash flows for the investment. 3

b. the NPV of the project. 3

c. the IRR of the project. 3

(c) Rahim Enterprise can produce any of three products with its current production line. The heat

treating equipment has 400 hours available during any given month. Per unit production, sales

and cost statistics are as follows:

ABCSellingprice Tk. 15 Tk.20 Tk. 10

Variable cost Tk. 9 Tk.l2 Tk. 7

Required time in heat treat 1.5 hrs 2.5 hrs. 1.0 hrs

Maximum demand per month 100 100 100

Required:

i. How many of each product should Rahim Enterprise produce and sell? 4

ii. Suppose the selling price of C increases to Tk.12. How many of each product should Rahim

Enterprise produce and sell? 4

3

Pagel49

Answer to Ouestion No. 6 (a):

Tax avoidance is the achieving of a reduction in income tax payments through legal means; tax-evasion achieves the same end through illegal means. Tax avoidance is considered moral; taxevasion, immoral. Tax avoidance uses the rules of the system (tax laws) in an optimum way; taxevasion disregards the rules.

Answer to Ouestion No. 6 (b):

a. Annual net cash flows: CU 26,200 [CU 33,000 pretax - 40% x (CU 33,000 - CU 16,000depreciation)l

b. NPV: Negative CU 11,970 l(CU 26,200 x 5.650) - CU 160,0001

c. IRR: between lUYo and l2Yo [factor of 6.107 (160,000126,200) is between 6.145 and 5.650]

Answer to Ouestion No. 6 (c):

a. 100 A, 100 B, 0 C

A: (CU 15 - 9y1.5 : CU 4.00/hr

B: (CU 20 - 12)12.5: CU 3.20lbr

C: (CU l0 - 7)11.0 : CU 3.00/hr

b. 100 A, 60 B, 100 c

C: (CU 12 - 7)11.0 : CU 5.00/hr

A: (CU 15 - 9y1.5 : CU 4.00lhr

B: (CU 20 - 12)12.5: CU 3.20lht

Question No. 7

100 x 1.5 hrs: 150.0 hrs

100 x 2.5 hrs:250.0

0 (no hours remaining)

100 x 1.0 hrs: 100.0 hrs

100 x 1.5 hrs: 150.0

(400 - 100 - 150y2.5 hrs:60 units

(a) What are some non-financial measures that a company might use in order to motivateachieving the objective of anticipating future customer needs? 4

(b) The following information relates to Department I of Zaman Company for the fourth quarter.The total overhead variance is divided into three variances: spending, variable efficienCy, andvolume. Actual total overhead (fixed plus variable) Tk. 178,500

Budget formula Tk. 110,000+ Tk.50 per hour

Total overhead application rate Tk. 1.50 per hour

Actual hours worked 121,000

Standard hours allowed for production 130,000

Required:Determine the variable efficiency variance in this department during the quarter? 6

Page | 50

(c) Huda Enterprise has the following budget and actual results for May:

Budeet Actual

Unit production 9,000 9,600

Direct labour hours 1I,250 I1,550

Materials used, feet 15,750 16,100

Standard labour rate is Tk.12 per hour; standard material price is Tk.4.50 per foot. Actual wageswere Tk.140,250; actual material purchases were 17,500 pounds forTk.l7,160.

Required:

For each of the following variances, determine the amount and the correct direction(F: favorable, U: unfavorable): 10

i. Material price variance.

ii. Material use variance.iii. Direct labour rate variance.iv. Direct labour efficiency variance.

Answer to Ouestion No. 7 (a):

Non-financial measures that a company might use in order to motivate achieving the objective ofanticipating future customer needs include (1) time spent with key customers at targetedaccounts learning about their future opportunities and needs, (2) the number of new projectslaunched based on customer input (3) Macro economic indicators and industry growth forecastand (4) Planned market share growth

Answer to Ouestion No. 7 (b):

Budget allowance for actual hours

[(121,000 x CU .50) + CU 110,000] cu 170,500

Budget allowance for standard hours:

Variable (130,000 x CU.50)Fixed

Variable efficiency variance

Answer to Ouestion No. 7 (c):

cu 65,000

110,000

cu (4,500)

CU 77,160 - (CU 4.50 x 17,500)

CU 4.50 x (16,100 - U.75 x 9,6001)

CU 140,250 - (CU 12x 11,550)

CU 12 x (1 1,550 - U.25 x 9,6001)

favorable

a. MPV:

b. MUV:c. DLRV:d. DLEV:

CU I,590 FCU 3,150 F

CU 1,650 UCU 5,400 F

Page | 51

175,000

TAXATION.INov- Dec 2016

Question No. I

(a) A professional accountant needs to possess integrity. Explain in brief the term "integrity". 5

(b) Discuss the professional behavior of an accountant. 5

Answer to Ouestion No. I

(a) Integrity: Requires all professional accountants to be straightforward and honest inprofessional and business relationships. A professional accountant should not be associated withany information where he believes that the information:

. Contains a materially false or misleading statement

. Contains statements or information furnished recklessly

. Omits or obscured information required to be included where such omission or obscuritywould be misleading

(b) Professional behavior

Professional behavior: Imposes an obligation on a professional accountant to complywith relevant laws and regulations and avoid any action that may bring discredit to the

profession.

This includes actions which a reasonable and informed third party, having knowledge ofall relevant information, would conclude negatively affects the good reputation of the

profession.

Professional accountants should be honest and truthful and should not:

Make exaggerated claims for the services they are able to offer, the qualifications theypossess, or experience they have gained

Make disparaging references or unsubstantiated comparisons to the work of others.

Quesfion No.2

What is NBR? Discuss the main functions of NBR.

Page | 52

l0


National Board of Revenue (NBR) is the highest executive authority. It is statutory body and its

members are appointed by the Government to manage, control and supervise the whole income

tax Department. The NBR is empowered to make necessary rules concerning income tax matters

and is authorized to give any interpretation of any provision in any section of the Ordinance. Itcannot act by issuing any instructions to be construed as interference to the authority of judicial

personnel like the Commissioner of Taxes (Appeals), Appellate Additional Commissioner ofTaxes, Appellate Joint Commissioner of Taxes and the Commissioner of Taxes when they

exercise their judicial powers.

Main functions of NBR

l. To declare any foreign unincorporated association as a company for the purposes of the

Ordinance.

2. To determine a period to be an income year of any person.

3. To delegate powers to the lnspecting Additional Commissioner of Taxes to exercise the

powers of a Commissioner and to the Appellate Additional Commissioner of Taxes to

exercise the powers of a Commissioner (Appeals).

4. To determine the functions of the Director General of Inspection, the Commissioner

(Appeals), the Appellate Joint Commissioner, the Commissioner (LTU), the Inspecting Joint

Commissioner and to determine the jurisdiction of Income Tax authorities.

5. To issue orders, directions or instructions to all officers and other persons engaged in the

performance of any functions under the Ordinance.

6. To determine place of assessment when jurisdiction of an assessee falls more than in one zone.

7. To direct to make payment of tax deducted at source within the time specified.

8. To recognize and authorize Chartered Accountant, Cost and Management accountant,

income tax practitioner and members of other accounting bodies for appearance in income

tax matters as authorized representative of the assessee.

9. To take disciplinary action against any authorized representative in case ofprofessional misconduct.

10. To allow tax holiday or tax exemption to approved undertakings.

11. To accord and withdraw recognition to Super Annuation Fund, Pension Fund and Gratuity

Fund.

l2.To reward employ of the tax department or any other person for fumishing information

leading to tax evasion.

Page | 53

Question No.3

(a) What is "Tax Day" as defined in Clause 62A of Section 2 of Income Tax Ordinance 1984inserted by the Finance Act20I6? 6

(b) What is the "Tax Day" of a "Company" for the year ended on 31 December 2015 and 30

June 2016? 4

Answer to Ouestion No.3

(a) "Tax Day" means:

(i) in the case of an assessee other than a company, the thirtieth day of Novemberfollowing the end of the income year;

(ii) in the case of a company, the fifteenth day of the seventh month following the end

of the income year;

(iii) the next working day following the Tax Day if the day mentioned in sub-clauses(i) and (ii) is a public holiday.

(b) For the year ended 31 December 2015, the tax day of a company is 15 July 2016 and forthe year ended 30 June 2016, the tax day of a company is 15 January 2017.

Question No.4

(a) Discuss the Taxation Implications of Resident and Non-resident? 5

(b) Mr. Lee, a Taiwanese National first came to Bangladesh on 12 April 2013 and stayed for 7months on a contract service. He left Bangladesh thereafter, but again came back on a consultingassignment on 19 January 2014 and after completing the work he left Bangladesh on 10 October2014.

Determine the "Residential Status" of Mr. Lee and the relevant "Assessment Years" forassessment of his incomes 5


(a) Taxation Implications of Resident and Non-resident

Determination of residential status of an assessee has a significance bearing on the taxliability as incidence of income tax varies according to the residential status of anassessee. In this regard we can consider the following issues:

(i) To determine the amount of total income:

Determination of total income is different for residents and non-residents. A residentconsiders global income as his total income but a non-resident does not consider incomefrom other countries in his total income.

Page | 54

(iD To determine minimum limit of taxable income:

A resident and non-resident Bangladeshi has to pay tax if his total taxable income ismore than Tk. 250,000 as per the Ordinance (in case of women, elderly citizens beingmore than 65 years old, the limit is Tk. 300,000 and disable persons the limit is Tk.375,000). But for a non-resident foreigner, such minimum limit is not applicable.

(iiD Tax rates:

For a resident and non-resident Bangladeshi, tax is calculated using the rates applicablefor various levels of income. Such as Uo/ofor the first Tk. 250,000, 10%for the next Tk.300,000. But a non-resident foreigner has to pay tax at maximum rate of 30Yo.

(lv) fncome tax rebate:

A resident and non-resident Bangladeshi assessee gets income tax rebate on investmentallowance and on tax exempted income from gross tax liability. But, for a non-residentforeigner, no tax rebate is applicable.

(v) Tax liability:

The average tax rate applicable for a resident and non-resident Bangladeshi is less thanthat of a non-resident foreigner since tax is calculated using different lower tax rates(such a l0%o, l5o ,20o/o,25% & 30%). But a non-resident foreigner has to pay tax atmaximum rate of 30%o.

Thus, determination of residential status of an assessee has a significant bearing on thetax liability as total income, taxable income and tax rate are found to vary according tothe residential status ofan assessee.

(b) The stay of Mr. Lee in Bangladesh during different periods may be analyzed as under :

Income

YearPeriod of staying in

Bangladesh

Assessment

yearNumber of

daysResidential Status

2012 -201312 April 2013 to

30 June 2013 2013-201480

Non-resident(Note - a)

20t3 -20t4

1 July 2013 to

l lNovember 2013

19 January 2014to30 June 2014

2014-2015

134

164

Resident

(Note - a)

298

20t4- 20151 July 2014to10 October 2014 20rs-20r6

t02Resident

(Note - b)

Page | 55

Notes:

(a) According to the provisions of Section 2(55) (a), an individual would be resident inBangladesh in respect of any income year, if he has been in the country:

for a period of, or periods amounting in all to, one hundred and eighty two days or more in that

year; or

for a period of, or periods amounting in all to, ninety days or more in that year having previously

been in Bangladesh for a period of, or periods amounting in all to, three hundred sixty five days

or more during four years preceding that year.

(b) Analyzing the staying period of Mr. Lee in Bangladesh during the various financial years, itis ascertained that during the income year relevant for the assessment year 2015 - 2016, Mr. Lee

stayed for 102 days which is more than the minimum requirement of 90 days. He was also in the

country for periods amounting in all to 378 days (80 + 298) during the four years preceding the

income year 2014 - 2015. Thus, Mr. Lee would be treated as a resident for the assessment year

20ts -2016.

Question No.5

\d/s. John Morris Inc. is a Multinational Company doing Business in Bangladesh Branch. TheCompany filed return of income for the assessment year 2016-2017 showing income of Tk.3,000,000. Examination of the audited statement of accounts filed with the return of incomerevealed the following:

(i) Salary includes Tk.330,000 paid to a Director working at the Head Office at California. Hehas never visited Bangladesh and no tax, as such, has been deducted at the time of making thepayment.

(ii) Head Office Expenses charged Tk.1,100,000.

(iiD A fine of Tk.11,000 paid for violation of customs law charged to P & L Account.

(iv) One Nissan Car Purchased for Tk.4,500,000 during the year. Depreciation @20% chargedon the full cost of the vehicle.

(v) The Company sold a Motor Vehicle for Tk.465,000. Original Cost of the Vehicle was Tk.525,000 and the Written Down Value was Tk.325,000. This has not been reflected in theaccounts.

(vi) Tk.15,000 donated to a non-recognized school.

(vii)Royalty paid Tk.300,000.

Required:

From the above information compute the total income of the Company for tax purpose. 10

Page | 56


I\[/S. John Morris Inc.Bangladesh Branch

Computation of total incomeAssessment Year: 2016-2017

Sl. No. Particulars Taka

Total income (as per return filed) 3,000,000

(a) Accounting Depreciation (iv) (20o/o of 4,500,000)Less : Tax Depreciation as per 3'd Schedule :

o Rate is 20%o (Para - 3)o Maximum allowable cost of a vehicle is Tk. 25lac

(Para-Il)o 20%oof25lac

900,000

(500,000)

400,000(b) Head Office Expense (II)

Less : Allowable upto 10% of net profit disclosed

ISection-30(g)]10% of Tk. 3,000,000

l,loo,ooo

€qqpqq)900,000

(c) Royalty Paid (VII)Less : Allowable upto 8% of net profit disclosed

ISection-30(h)]8% of Tk. 3,000,000 (assuming net profit)

300,000

(240,000)60,000

Salary Paid to a Director at Head Office (I)

[Not allowable as expense as no income tax was

deducted or paid as required u/s 30 (a)l

330 ,000

330,000Fine for Violation of customs law (IIf(No fine or penalty is allowable as business expense)

11,000

11,000Donation to a non-recognized school (Vf(Not allowable as expense as the school is notrecognized by the NBR for this purpose)

15,000

15,000

Profit on sale of a motor car (Not shown in A/C) :

Sales PriceLess : Wriffen down value

456,000(325,000)

Adjusted total income

140,000

Page | 57

(d)

(e)

(f)

(e)

4.756.000

Question No.6

Mr. Siddiquee is the Finance Manager of Sunflower Company Ltd. Following is the statement ofhis income and expenditure for the year ended on 30 June 2016:

(a) Salaries:

Basic Salary Tk.40,000 p.m. House Rent Allowance Tk.10,000 p. m. Entertainment Allowance

Tk. 3,000 p.m. and Medical Allowance Tk.500 p.m. As Festival Allowance, he gets an amount

equal to two months " basic salary. His Contribution to Recognised Provident Fund is 10% of hisBasic Salary. His employer also contributes the same amount.

(b) House Property

Mr. Siddiquee has House. Half of it is let out at Tk.20,000 p.m.He resides in the remaining half.The expenses of the House are Municipal Tax Tk.15,000, Repair Tk.18,000, Collection ChargeTk.2,000 and Insurance Tk.4,000.

(c) Agricultural Income

(i) Sale of agri-products Tk.40,000.

(ii) Cash rentals of agricultural land Tk.20,000.

(d) Business Income

Income from Sole Proprietorship Business of Tk.50,000 (Last year's Loss was Tk.10,000).

(e) Other Income

Interest on Saving Instruments Tk.40,000 (Gross), on which 5%o income tax was deducted atsource (TDS) u/s 52D of ITO 1984.

Interest on Bank Deposit Tk.23,400 [Net) of l0% TDS, Dividend Tk.75,000 from Mutual Fundand Winning from lottery a TV valued Tk.50,000 for which 20%o tax was collected at source u/s55.

Following are his expenditures and investments for the year:

Family expenses Tk.250,000, Premium for Life Policy Tk.15,000, Furchase of Shares Tk.35,000, Purchase of Books Tk.2,000, Deposit to the Deposit Pension Scheme Tk.2,000 andDonation to Zakat Fund Tk. 15,000.

Find out Total Income and Tax to be paid by Mr. Siddiquee mentioning the assessment year. l0

Page | 58


Mr. Siddiquee

Computation of total incomeAssessment year 2016 -2017

Income year 2015 -2016

A. Computation of total income

I Income from Salaries

Basis Salary (12 x 40,000) 480,000

36,000

80,000

48,000

House Rent Allowance (12 x 10,000)

Less: Exempted

(50% of the basic i.e. Tk. 240,000 or Tk. 25,000 permonth i.e. Tk. 300,000, whichever is less is exempted)

120,000

120,000

Entertainment Allowance (12 x 3,000)

Less: Exempted

(Assumed that this is not included with the Value ofFree Tea, Coffee, Beverage or the like thereof providedat the office premises during the course of work)

36,000

Medical Allowance

Less : Exempted

(10% of the basic i.e., Tk. 48,000 or Tk. 120,000

annually, whichever is less is exempted)

6,000

6,000

Festival Bonus (2 x 40,000)

Employers' Contribution to RPF (10% x 480,000)

Sub-Total 644,000

Heads Taka

b Income from House PropertyAnnual Value (% let out) (12 x 20,000) 240,000Less : Repairs etc. (%of 240,000) (60,000)

lrss : Municipal Tax (% of Tk. 15,000) (Only for let outpa.rt)

(7,500)

Less : Insurance (% of Tk. 4,000) (Only for let outpart)

(2,000)

170,500Deemed income u/s 19(30) - (Tk. 60,000- Tk. 20,000) 40,000Sub- total 210,500

Page | 59

c Income from AgricultureSale of Agri Products

Less : Cost of Production 60%

(Assumed that no Books of Accounts were maintained)

40,000

(24,000)

16,000

20,000Rentals of Agri Land

Sub-Total 36,000

d Income from Business

Income from Sole Proprietorship

Less : Carry Forward of Last Year's Loss

50,000

(10,000) 40,000

Sub-Total 40,000

E Other Income

Interest on Saving Instruments (Gross) 40,000

50,000

26,000

50,000

Dividend Income From Mutual Fund

Less: Exemption

75,000

(25,000)

Interest on Bank Deposit (23,40019*10)

(Grossed up for 10% TDS)

Winning of TV from Lottery

Sub-Total 166,000

Total Income (a+ b+ c + d+ e) 1,096,500

B Actual Investment and Donations Taka

C Eligible Amount of Investment and Donations

The eligible amount of Investment and Donations for tax rebate would be the lesser offollowing:

Premium for Life Policy (LIP) 15,000

Contribution to R. P. F (Self + Employer's) (2 x 48,000) 96,000

Purchase of Shares (Assuming listed with a Stock Exchange of Bangladesh 35,000

Deposit to Pension Scheme (within the limit of 60,000) 2,000

Donation to Zakat Fund 15,000

Total Amount of Actual Investment and Donations 163,000

Page | 60

50,000 and Interest from Saving instruments of Tk. 40,000).

(TDS on Income from Winning from Lottery u/s 55 and TDS on Interest on Saving

Instruments u/s 52D is the Minimum Tax u/s 82C, and therefore, as per the Section

aaQ)@)(11) as amended by the Finance Act 2016, the Income on which TDS isminimum tax u/s 82C is not allowable for computation of Eligible Investment)

1,096,500 - 50,000 - 40,000 : Tk. 1,006,500

25Yo Xl,006,500 : Tk. 25,41,625

Therefore, Eligible Amount is actual amount of investment and donations of Tk.163,000 being lower than Tk. 25,41,625 and Tk. 1.50 Crore.

D Tax Rebate

Tax Rebate as per Section 44 (2)(b) would be Tk. 24,450 being l5o/o of the eligible

amount of investment and donations of Tk. 163,000 as the said amount is within the

limit of first slab of eligible amount of Tk. 250,000.

E Computation of tax liabilities (As per the Finance Act 2016) on regular income

Regular income: (1,096,500 - 40,000) : Tk. 1,056,500

Particulars Tax RateAmount in

TakaOn first Tk. 250,000 0% Nil

40,000

60,975

On Next Tk. 400,000 10%

On the balance Tk. 406,500 t5%

Tax on regular income of Tk. 1,0561500 100,975

Tax on saving instrument income of Tk.40,000 5% 2.000

Total tax on total income of Tk. 1,0961500 r02.9tsLess : Tax Rebate on eligible investment &donations (24,450)

Tax After Rebate 78,525

Less : Tax Deducted as Source on Saving instruments 5% of Tk.40,000 (2,000)

(2,600)

(10,000)

Less : Tax Deducted as Source on Bank Interest 10% of Tk. 26,000

Less : Tax Deducted at Source on Winning fromLottery

20o/o of Tk 50,000

Net Tax Liability 63,925

Page | 61

Question No. 7

Write the withholding ratelrates of tax and withholding authority of following payment:

i. Payment on account of interest on securities.

ii. Payment to contractors and sub-contractors.

iii. Payment on indenting commission.

iv. Fees for Directors.

v. Fees for Professional and Technical services.

vi. Payrnent to clearing and forwarding agents.

vii. Payment against Transfer of property.

viii. Payment against Divideird.

ix. Payment to non-resident.

x. Payment against advertisement.


Withholding ratelrates of tax and withholding authority are as follows:

l0

sl. Head of withholding Withholdingauthority

Withholding ratelrates oftax

I Interest on securities Any person responsible

for issuing any security

t0%

2 Payment to contractors

& sub-contractors

Any person responsible

for making such

payment

Upto Tk.200,000/- .. NilFrom 200,000 to Tk. 500,000

---- t%

From 500,001 to

Tk.1,000,0001- ...2%

Froml,000,00ltoTk.2,500,000/- .. .3%

From 2,500,001 to

Tk.10,000,000 ...4%

From 10,000,001 to

Tk.50,000,000 ...5%

Page | 62

From 50,000,001 toTk.100,000,000 . ..6%

Where amount exceeds Tk.100,000,000...... .. 7%

3 Payment on indenting

commission


or shipping agency

commission.

Up to base amount of Tk. 25

lakh ------ 60/o

Where base amount exceeds

Tk.25lak*r . .......8%4 Fees for Directors The principal officer of

a company of the chiefexecutive of anyNGOor trust responsible formaking such payment


lakh ------ 10%


Tk.25lakh . ....... 12%

5 Fees for professional

oftechnical services


lakh ------ 10%


Tk. 25 laktr . ....... 12%

6 Clearing and

forwarding agents

Commissioner ofCustoms

r0%

7 Transfer of property Any person responsible

for registering any

document of a person

5% of deed value up to 31"August, 2009 and

2oh of deedvalue from l'tSeptember,2009 in case ofproperty situated in any citycorporation, paurashave or

cantonment board.

l% of deed value froml'tSeptember,2009 in case ofproperty situated in areas

other than any citycorporation, paurashave orcantonment board.

Page | 63

Do

8 Advertisement ofnewspaper ofmagazine or private

television channel

The Government or any

other authority,

corporation body or

any company or any

banking company or

any insurance company

or any cooperative

bank or any NGO or

any university ormedical college or

dental college or

engineering college

responsible for making

such payment.

4%

9 Dividends The principal officer ofa company

Resident/non-resident

Bangladesh company ....20%

Resident/non-resident

Bangladesh person other

than company .. .. l0%

Non-resident (other than

Bangladeshi non-resident)

....25%10 Income of non-

residents


for making such

payment.

Withholding tax rates are

varies from 5.25o/o to 30oh

depending on the nature ofservices.

Question No. 8

(a) How Advance Tax is computed U/S 65 and is payable U/S 66 of Income Tax Ordinance1984? s

(b) Bengal (Pvt.) Ltd. (Applicable Tax Rate is 35%) computed its Advance Tax Payable for theIncome Year 2015 - 2016 based on the latest assesseed income of Tk.500,000 for the IncomeYear 2013 - 2014. Assessment for the Income Year 20L4 - 2015 was completed on 15 April2016 at a Loss of Tk. 600,000. Calculate the amount of advance tax to be paid by Bengal (Pvt.)Ltd. in each quarter for the Assessment Year 2016 - 2017 . 5

Page | 64


(a) Computation of Advance Tax: Section 65

The amount of advance tax payable by an assessed in a financial year shall be the amount equalto the tax payable on his total income of the latest income year as assessed on regular basis orprovisionally, as the case may be, as reduced by the amount of tax required to be deducted orcollected at source.

The tax payable under Section 65(1) shall be calculated at the rates in force in respect of the

financial yearreferred therein.

Installments of Advance Tax: Section 66

Advance tax shall be payable in four equal installments on the fifteenth day of September,

December, March and June of the financial year for which the tax is payable. However, if before

the fifteenth day of May of the year, an assessment of the assessee is completed in respect of an

income ygar,later than that on the basis of which the tax was computed under Section 65, the

assessee shall pay in one installment on the specified date or in equal installments on the

specified dates, if more than one falling after the date of the said assessment, the tax computed

on the revised basis as reduced by the amount, if any, paid in accordance with the original

computation.

(b) The latest assessed income is Tk. 500,000 for the Income Year 2013 - 2014 (Assessment

Year 2014 - 2015).

Amount of Tax: Tk. 500,000X35%: Tk. 175,000

Payable in Each Installment : Tk. 175,000 14: Tk. 43,750

Payable in 4 quarterly installments for the Assessment Year 2016 - 2017

Date of installments Installment due (Tk.) Paid (Tk.)

15 September 2015 43,750 43,750

15 December 2015 43,750 43,750

15 March 2016 43,750 43,750

15 June 2016 43,750 NIL *

* According to Section 66 of ITO 1984, the last installment due on 15 June 2016 is not

required to be paid because the assessment for the income year 2014 - 2015 (Assessment Year

2015 -20T6)was completed on the 15th April 2016, that is, before the 15ft day of May 2016.

Page | 65

Question No.9

What is Input Tax for the purpose of VAT? Discuss the conditions to be met for claiming credit

for input tax? 10


Input tax is VAT paid by a tax payer on his inputs, that is, all raw materials, packing materials,

services, fuel, machinery, spare parts, and all purchased goods for sales. However, inputs do notinclude labour, land, building, office equipments, vehicles and their construction or maintenance

materials and insurance relating thereto.

The following conditions are to be met for claiming credit of input tax:(a) The Tax payer must have been registered for the purposes of "fuII" VAT, not turnover tax ornot VAT based on estimated value addition.(b) The Tax payer must have Bills of Entry for imports and VAT invoices (VAT - II) for localpurchases of goods and services, maintained for 6 years. No credit for input tax shall be allowedagainst tumover tax or VAT based on estimated value addition.(c) The Tax payer must declare the inputs in Price Declaration including output/input ratio.(d) The Tax payer must claim the input tax within the related year. However, claim for input taxmay be allowed after the related year for bonafide reason.(e) The Tax payer must possess the inputs for which input tax has been claimed.(f) The Tax payer can claim credit against VAT only, not import duty, supplementary dutyand/or income tax at source. However, an exporter can claim credit against import duty and/orsupplementary duty under "duty exemption and drawback" (generally known as DEDO)arangement under rule 19 (4).

Question No. 10

A firm produces 150 units of an item per day and sells all at the rate of Tk.30 per unit to thewholesaler. If the Wholesaler added Tk.600 as his profit and sells to retailer who adds Tk.1,100while selling, then calculate the total tax collected by the government, through VAT. 10


Cost of wholesaler

VATTotal

Value added (by wholesaler)

vAr (1s%)

TotalValue added by retailervAr (rs%)TotalSo, Total VAT (Tax)

: Tk.30 x 100: Tk.4,500:Tk.675: Tk.5,175: Tk.600: Tk.90: Tk.5,965: Tk.1,100: Tk.165: Tk.7,130:1675 +90+ 1651:Tk.930

Page | 66

BUSINESS & COMPANY LAWNov - Dec 2016

Question No. I

a) Define proposal and acceptance. What are the essentials of proposal and acceptance?Discuss. 4+4

b) Describe the circumstances when a proposal is revoked. 8

Answer to Ouestion No. I

(a) Definition of proposal and acceptance.

Proposal:

When one person signifies to another his willingness to do or to abstain from doing anything,with a view to obtaining the assent of that other to such act or abstinence, he is said to make aproposal.

Acceptance:

When the person to whom the proposal made signifies his assent thereto the proposal is saidito be accepted

Essentials of Proposal:

(i) There must be an intention to create legal relations.

(iD The terms of the proposal must be certain and not loose-or vague.

(iii) A proposal may be general or specific, i.e. it may be made to one person or specifiednumber or to the world at large.

(iv) A proposal must communicated.

(v) A proposal is different from an invitation to treat. An invitation to treat is an invitationto make a proposal.

Essentials of Acceptance:

(i) An offer can only be acceptable by the person to whom it is made.

(iD It must be absolute and unqualified.

(iii) Where a form of acceptance is prescribed the acceptance must be expressed in theprescribed form.

(iv) Where no form is prescribed, the acceptance must be in some usual or reasonable

manner.

Page | 67

(v) Where the acceptance of the offer is not in the form prescribed the proposer mustinform the acceptor, within reasonable, time, of this default. If he does not do so, he ispresumed to have accepted the acceptance.

(b) Aproposal is revoked-

(i) by the communication of notice of revocation by the proposer to the other party. Anotice of revocation must be communicated by the proposer or by his authority.

(ii) by the lapse of the time prescribed in such proposal for its acceptance, of if no time isso prescribed, by the lapse of a reasonable time, without communication of theacceptance.

(iii) by the failure of the acceptor to fulfill a condition precedent to acceptance.

(iv) by the death or insanity of the proposer; if the fact of his death or insanity comes to theknowledge of the acceptor before acceptance. But if the acceptor accepts without theknowledge, the contract comes into existence.

(vi) by an act of the proposer inconsistent with the proposal. An act inconsistent with theproposal of which the acceptor has knowledge is a revocation.

Question No.2

Distinguish between Contract and Agreement. In which cases the contracts are required to bemade in writing? 4+6


Difference between Contract and Agreement

(i) Agreement is a wider conception than contract; it is a genus of which contract is only a

specles.

(ii) A contract is an agreement enforceable at law. Thus all contracts are agreements butall agreements are not necessarily contracts. A gift or bailment involves the notion ofagreement though not necessarily contract.

(iii) The law requires a contract to be supported by consideration, if it is to be enforceable,unless it is covered by the exceptions mentioned in section of the Act.

(iv) There are many agreements which are not contracts because the parties did not intendthat these should be attended by legal consequences, e.g. agreements to take a walktogether or to offer and accept hospitality, and agreements binding in honour wherethe parties expressly exclude the jurisdiction of the Courts.

Page | 68

The following contracts must be made in writing:

1. An agreement may be made without consideration it is expressed in writing and registered and is

made on account of natural love and affection between parties standing in a near relation to each

other.

2. If an agreement is to pay a debt of which the creditor might have enforced payment but forthe law, for the limitation of suits, it must be made in writing and should be signed by the

person to be charged with.

3. The Memorandum of Association and the Articles of Association of a company incorporated

under the Companies Act 1994, must be made in writing.

4. Any contract made by a company must be in writing.

5. Sale, mortgage, a lease, and a gift of the immovable property must be made in writing.

6. A trust must be created in writing.

7 . An agreement in the form of an acknowledgement of save the law of limitation is required tobe made in writing.

Question No. 3

Write the legal status of the following cases giving appropriate argument in favor of youranswer. 4x4

a) Mr. A entered into an agreement with his wife, Mrs. Y, to register a house in her name withoutany purchase consideration. Subsequently, Mr. A refused to register the house in the name of hiswife. Mrs. Y filed a law suit to hold her husband accountable for not honouring the agreement

between them.

b) Mr. William let a flat to Mr. Martin at arctt of BDT 75,000 p.m. To reduce the municipal tax

Mr. William entered into two agreements with Mr. Martin. In one agreement the rent was shown

as BDT 25,000 and as per the other agreement Mr. Martin agreed to pay BDT 50,000 forservices in connection with the flat. After six months of occupancy Mr. Martin stopped payingBDT 50,000 per month. Mr. William sued Mr. Martin to recover the money.

c) Mr. Chowdhury was employed as Managing Director of XYZ Company Limited by its board

of directors under a written contract. Subsequently, the contract was found to be void because the

directors who constituted the board was found unqualified. Mr. Chowdhury worked as ManagingDirector for three months. The company refused to pay the remuneration to Mr. Chowdhury.

d) Mr. Das engaged Mr. Datta an auctioneer to sell a house property owned by him. The

minimum selling price was fixed at BDT 50,000,000. It was agreed that Mr. Datta will receive

BDT 500,000 as commission, if he succeeds. Actually, Mr. Datta sold the property at BDT51,000,000 and made secret profit of BDT 1,000,000. As per agreement, Mr. Das paid the

commission of BDT 500,000 to Mr. Datta. Subsequently, Mr. Das came to know that by sellingthe property Mr. Datta made a secret profit of BDT 1,000,000, Mr. Das sued to recover BDT1,500,000 from Mr. Datta.

Page | 69


a) An agreement made without consideration is valid if it is expressed in writing and registeredunder for the time being in force for the registration of documents and it is made on account ofnatural love and affection between the parties standing in near relation to each other. Hence,the agreement is void because under the mentioned circumstances there was no natural loveand affection between the parties.

b) As per the provisions of Law of Contract if the consideration and the object of an agreementare of such nature that it would directly or indirectly lead to a violation of law, the agreementis void. Since the agreements were made to defraud the municipal authority the agreementwas void. Hence Mr. William cannot recover the money from Mr. Martin.

c) According to the Doctrine of Quantum Meruitwhen a contract is discovered to beunenforceable for some technical reason any person who had done something under thecontract is entitled to reasonable compensation. Hence Mr. Chowdhury is entitled to getremuneration for the services rendered under the contract.

d) An agent who is guilty of misconduct in the business of the agency is not entitled to anyremuneration in respect of that part of the business in which he has misconducted. In this caseMr. Datta is not entitled to any remuneration for selling the house property. Hence, Mr. Das isentitled to recover BDT 1,500,000 (both the commission amount and the amount of secretprofit made by Mr. Datta).

Question No.4

What do you understand by the doctrine of Caveat Emptor? What are the exceptions to thisdoctrine? 3+6


Caveat Emptor is a Latin expression which means "Buyers Beware". This ordinarily means abuyer must buy goods after satisfying himself about quality and fitness of the goods. If he makesa bad choice he cannot blame the seller or recover damages from the seller.

As per section 16 of Sale of Goods Act there shall be no implied condition as to quality or fitnessfor particular purpose except under the circumstances mentioned below (considered as exceptionto doctrine of Caveat Emptor):

a) Where the buyer relies upon the skill and judgment of the seller.

b) Where, by custom, an implied condition of fitness is annexed to a contract of sale.

c) Where there is a sale of goods by description, there is an implied condition that the goodsare frt for sale.

d) Where the seller is guilty of fraud. A contract of sale of goods must satisfy all the essentialelements of a contract. If the consent of the buyer was obtained by fraud, the seller is notprotected by the doctrine of Caveat Emptor.

Page | 70

Question No. 5

a) Describe the rules regarding Personal Profits (secretaccordance with the provisions of Partnership Act,1932.

profits) earned by Partner(s) in

b) what are the consequences of non-registration of a Partnership Firm?

c) Can a firm be liable for the wrongful acts of a partner?


(a) Subject to contract between the partners, if a partner:

6

6

2

i) Derives any profit for himself from any tansaction of the firm or from use of the property orbusiness connection of the firm or the firm name, he shall account for that profit and pay it tothe firm;

ii) Carries on any business of the same nature as and competing with that of the firm, heshall account for and pay to the firm all profits made by him in that business.

(b) An unregistered firm and the partners thereof suffer from certain disabilities which are:

i) A partner of an unregistered firm cannot file a suit (against the firm or any partnerthereof) for the purpose of enforcing a right arising from contract or aright conferred bythe Partnership Act.

ii) No suit can be filed on behalf of an unregistered firm against any third party for thepurpose of enforcing a right arising from a contract.

iii) An unregistered firm cannot claim a set-off in a suit. Set-off means a claim by thedefendant which would reduce the amount of money payable by him to the plaintiff.

(c) A firm can be liable for the wrongful acts of a partner. Where, by the wrongful act oromission of a partner acting in the ordinary course of the business of a firm, or with theauthority of his partners, loss or injury is caused to any third party, or any penalty is incurred,the firm is liable therefore is liable to the same extent as the partner.

Question No. 6

Describe the rules that are applicable in the case of lost negotiable instruments. 10

Answer the Question No. 6

The rules that are applicable in the case of lost negotiable instruments are:

1. Holder's right to duplicate of lost bill: Where a bill of exchange has been lost before it isoverdue, the holder of it may apply to the drawer to give him another bill of the same tenor,giving security to the drawer, if required, to indemnify him against all person in case the bill,alleged to have been lost, shall be found again. If the drawer on request refuses to give a

duplicate, he may be compelled to do so.

Page | 71

2. Delivery of instrument on payment or indemnity in case of /oss.' Before payment of a

negotiable instrument, the person liable to pay is entitled to see the instrument and afterpayment he is entitled to have it delivered to him. If the document is lost or for any reason

cannot be produced he can refuse to pay. If he pays the holder against a lost instrument he

can demand to be indemnified against any further claim thereon against him.

3. Title of the finder: The finder of a lost instrument gets no title. The rightful holder is entitledto get it back from him.

4. Rights of Holder in Due Course: If a negotiable instrument, payable to bear or indorsed inblank, is lost and the finder negotiates it to a third party who takes it in good faith and forvalue, the third party becomes a holder in due course and is entitled to receive the amountdue on the instrument from the parties liable to pay.

5. Effict of Forgery.' If a negotiable instrument payable to order is endorsed by the finder witha forged signature, the indorsee gets no title even though he might have taken it in good faithand for consideration. Forgery can confer no title.

6. Effict of payment in due Course: If the party liable on a negotiable instrument pays theamount due on it, to the person having it in his possession, under circumstances which makesthe payment in due course, he is discharged from all liabilities under the instrument. But thetrue owner can recover the money from the person who obtained payment.

7. Information and notice: When a negotiable instrument is lost, the holder should inform allparties liable on it and should also give public notice.

Question No. 7

Under which circumstances a Banker must refuse to pay against a cheque. 10


Under the following circumstances a Banker must refuse to pay against a cheque:

i) If the accountholder countermands payment i.e. instruct the banker not to pay which mustbe properly communicated to the banker;

ii) If after issue of the cheque but before encashment of cheque the accountholder dies and thebank receives the notice of the death;

iii) If the bank receives notice of insolvency of the accountholder;

iv) In case of cheque drawn by a company, if the bank receives notice of winding up orderagainst the company;

v) If the bank is served with a garnishee order (an order by the court directing a person, havingin his/her custody money belonging to another, to pay the money to some other person) orif the money of the accountholder are attached in execution of a decree of a court;

vi) If the accountholder has assigned his/trer credit balance and the bank receives notice of thatfact;

vii) If the drawer informs the bank that the cheque is lost;

Page 172

viiD If the banker has reason to believe that the title of the person presenting the cheque isdefective;

i*) If there are insufficient funds of drawer and there is no overdraft anangement.

Question No.8

a) What are the provisions of The Arbitration Act, 2001 regarding power of the ArbitrationTribunal to make interim orders. 10

b) Describe the cases which are considered as "Acts of Bankruptcy" 5

Answer to Question No. 8 (a)

Provisions of The Arbitration Act, 2001 regarding power of the Arbitration Tribunal to makeinterim orders are as follows:

(l) Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party,

order a party to make any interim measure of protection as the arbitral tribunal mayconsider necessary in respect of the subject matter of the dispute, and no appeal shall lieagainst this order.

(2) The arbttral tribunal may require a party to provide appropriate security in connection witha measure order under sub-section (1).

(3) No order under this section shall be passed without giving a notice to the other parties.

Provided that the arbrtral tribunal may, where it appears that the object of taking interimmeasure under this section would be defeated by the delay, dispense with such notice.

(a) An order of an arbitral tribunal requiring the taking of interim measures may be enforced

by the court, on an application made therefore, by the party requesting the taking of such

interim measures.

The application field before the Court for enforcement of the interim measures under sub-section

(4) shall be deemed not to be incompatible with section 7 or with the arbitration agreement or a

waiver of the agreement.

Answer to Question No. 8(b)

Act of BankruptcyA debtor commits act of bankruptcy in each of the following cases:

(a) transfer all or substantially all his property for the benefit of creditors;(b) transfer of properly with intent to defeat or delay creditors;(c) transfer of property which would be void as fraudulent preference;(d) if with intent to defeat or delay creditors, (i) he departs or remains out of Bangladesh:

(ii) departs from the dwelling house or usual place of business ; (iii) secludes himself so as to

deprive his creditors of the means of communicating with him;(e) if any of the property has been sold in execution of a decree for money;

(f) if the petitions to be adjudged as bankrupt;(g) if he notifies his creditors that he has suspended or is about to suspend payment of debts;

(h) if he is imprisoned in execution of decree for money.

Page 173

IT KnowledgeNov-Dec 2016

1. (a) For information to be useful and effective, elaborate on the issues which need to be

considered regarding mode and format. 5

Answer

For information to be useful and effective, the following issues need to be considered regarding

mode and format:

. The modes of communicating information to humans are sensory (through sight, hear, taste,

touch and smell) but in business they are either visual, verbal or in written form.

' Format of information should be so designed that it assists in decision making, solvingproblems, initiating planning, controlling and searching.

' The reports should preferably be supplied on an exception basis to save the manager from an

overload of information.

' The data should only be classified into those categories, which have relevance to the problem athand. Sales analysis can be conducted by several categories. But the reports should be providedonly on those that appear to be significant to decision making.

. The reports may be required in entirely, for example, for the auditors.

' For such information as Return on Investment (ROI), the summary figures in the entire ROIhierarchy should also be given. This would assist the manager to trace the causes for a rise or fallin ROI.

' Format of information dissemination is a matter of imagination and perception. It should besimple and relevant, should highlight important points but should not be too cluttered up.

' Every space in the information format should have current relevance. Often unnecessary rvasteof space is noticed in the information not required. This should be avoided.

Information should be fast and extremely simple to use as it will be used by busyexecutives. The system will provide information in interesting and understandable formatsby using colors, graphics and diagrams.

(b) What is a database management system? Why backup and replication are needed in adatabase? what is meant by change and access logging in database? 5

Page 174

Answer

A Database Management System (DBMS) is a set of programs that enables sorting,modifying and extracting information from a database. It also provides users with tool toadd, delete, access, modify and analyze data stored in one location

There are various database management systems available in the market. Some of them are

Sybase, Microsoft SQL Server, Oracle RDBMS, PostgreSQl, MySQL, etc. In a database

management system, backup and replication are needed. Backup and replication copies ofattributes need to be made regularly in case primary disks or other equipment fails. A periodiccopy of attributes may also be created for a distant organization that cannot readily access the

original. DBMS usually provide utilities to facilitate the process of extracting and disseminating

attribute sets.

If a component becomes unavailable, a standby system takes over immediately andtransparently. The DBMS feature that enables redundancy is called Replication. When data

is replicated between database servers, so that the information remains consistent throughout the

database system and users cannot tell or even know which server in the DBMS they are using,

the system is said to exhibit replication transparency. Often one wants to know who accessed

what attributes, what was changed, and when it was changed. Logging services allow this bykeeping a record ofaccess occturences and changes.

2. Define a knowledge-based system. What are the different components of a knowledge-

based system? Discuss in detail the different types of knowledge-based systems. 10

Answer

A knowledge-based system (KBS) a system where all the expert human knowledge covering a

particular topic is brought together and made available to the user through a computer system

which uses the facts in its knowledge base by applying rules that may sensibly be applied to the

knowledge. Human knowledge encompasses such a massive area of data that it is not reasonable

to try to distill all human knowledge into one computer database. Because of this problem ofvolume, knowledge-based systems are restricted to a nalrow area of knowledge. It may be

geological patterns in the oil exploration industry, medical diagnosis in the doctor's waitingroom or personnel information in a company, all are well delineated areas of expertise where

there are no grey areas of whether the data should be included or not. The access to this

knowledge can be very haphazard unless the system follows certain rules. That is why all expert,

or knowledge-based, systems include rule bases which determine how the data within the system

relate to each other. There must be an algorithm, or set of algorithms, for determining how the

rules in the rule base should be applied to the knowledge in the knowledge base. These

algorithms are known as the inference engine which gives a method for searching and querying

the knowledge and rule base. Finally there must be a user interface which allows the user to

Page | 75

interrogate the knowledge base. The user interface will pass requests on to the inference engine

which, in tum, interrogates the knowledge base. The user interface will prompt the user, often byproducing a series of questions each of which will have a small number of possible answers, and

each of which will have the effect of accessing smaller and smaller areas of the knowledge base.

The user interface will also allow the user to ask for explanations of the reasoning behind theadvice that has been given and the results will give conclusions with the probabilities of those

conclusions being correct. There are three different types of knowledge-based system.

Diagnostic: The user interface gives a series of questions, each of which has a limited number ofpossible answers, each one of which leads to another question. Gradually, the amount of data inthe knowledge base is reduced until there is only a small amount of relevant data which mustprovide the answer to the query. A good example is a medical diagnostic machine. This containsan enoffnous amount of knowledge about medical conditions. To read all of it would be aHerculean task. If the user interface asks whether the patient has a high temperature there are twopossible answers which immediately divide the knowledge base into two parts. A series ofsimilar questions will result in only a small amount of the knowledge base being relevant. Theresult may well be more than one possible diagnosis. In this case, probabilities will be assigned

to each diagnosis and a doctor has to finally reach a conclusion.

Advice Giving: An advice giving system is one that follows some process being done and then

offers advice on how to proceed if something needs to be done or goes wrong. An examplewould be a stock control system which has knowledge of the stock levels of all the items and can

offer advice as to whether further stock should be ordered, when to order, who to order from.

Decision Making: A decision making knowledge-based system is precisely that, a system whichunderstands what is happening in a system and has been given enough rules to be able to make

and carry out decisions without further intervention. A good example is the stock exchange share

systems used by stock brokers. The computer system keeps a check on the values of shares

constantly. The system has been given certain rules about what to do when share prices change.For example, the system may have been told to sell the shares owned by a customer if they fallbelow a certain value. The reason for this is that, if the shares are falling sharply, the instructionto sell when a particular value is reached can save the investor a lot of money. This has becomenecessary because shares are now traded 24 hours a day in stock markets all over the world, notjust in the hours that, for instance, the London stock exchange is open. This means that if shares

fell suddenly in the early hours of the morning an investor may be bankrupted before the stockmarket opens again. This has led to the automated buying and selling of shares by knowledge-based systems. There are dangers in such an approach. In the 1990s there was a big plunge in thestock markets all over the world caused by just such an automated approach. Some stock felltriggering some systems to automatically sell. This put more stock on the market which, in turn,brought the price down again, which triggered more machines to sell. It was very nearly a

disaster caused by the fact that the knowledge bases were not big enough to see a wide enough

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picture. Because the detail was so narrow, the systems had no way of realizing that they were

causing the problem and had no rules for dealing with the situation even if they had. New rules

have been written into the knowledge base to make such an occuffence far less likely to happen

again in the future.

3. List the classes of software based on commercial perspective. Describe clearly the main

traits of each class with examples. 10

Answer

From the commercial perspective software can be classified into three major classes:

1. Commercial Software

2. Freeware /Open Source

3. Shareware

Commercial Software:

. Refers to any software that is designed for sale to serve a commercial need. Commercial

software is usually proprietary software, but in some instances it may be public domain software.

. Commercial software requires payment before it can be used and includes all the program's

features, with no restrictions or time limits.

. Commercial software programs typically come in a physical box, which is what you see

displayed in retail stores. They still contain the software CD or DVD and'usually a "getting

started" manual along with a registration key used for registering the product. Most commercial

software programs ask that the user register the program so the company can keep track of its

authorized users.

. While most commercial software programs are sold in the physical box, many software titles

are now available as downloads. These downloads are typically made available from the

company's website, The user pays for the program directly on the website and instead ofreceiving the software in the mail; the user downloads it to his computer.

Freeware/Open Source:

. Freeware is free to use and does not require any payment from the user. Open Source Software

(OSS) is computer software that is available in source code form for which the source code and

certain other rights normally reserved for copyright holders are provided under a software license

that permits users to study, change, and improve the software

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' However, freeware may not always provide much help in terms of support if the software goes

wrong, so there is always a certain amount of risk when using freeware. The source code offreeware is widely available, therefore modification, updates and future development can becontributed to by a community of programmers, rather than just the author.

' To be considered as open source software by the software development industry, certain criteriamust be rnet:

l. The program must be freely distributed.

2. Source code must be included.

3. Anyone must be allowed to modify the source code.

4. Modified versions can be redistributed.

5. The license must not require the exclusion of other software or interfere with the operation ofother software

' Besides Linux, Mozilla (Netscape browser core), Apache (Web server), PERL (Web scriptinglanguage) and PNG (graphics file format) are all examples of very popular software that is basedon open source

Shareware:

' Shareware is basically "try before you buy" software. Shareware is software that is distributedfree on a trial basis with the understanding that the user may need or want to pay for it later.Some software developers offer a shareware version of their program with a built-in expirationdate (after 30 days, the user can no longer get access to the program). Other shareware(sometimes called liteware) is offered with certain capabilities disabled as an enticement to buythe complete version of the program.

' During the 1980s, a person by the name of Bob Wallace invented a word processor programcalled PC-Write. In his attempt to describe the program, he coined the term "shareware". Somepeople believe that it was Jim Button, CEO of PC-File, or Andrew Fluegelman, the author of pC-Talk, who invented shareware. The reality is that all three of them contributed greatly to theconcept of shareware.

' With the existence of so many Internet Providers, such as those that provide cable internet andwireless internet services, access to shareware has become much easier. In fact, almost all bigcompanies such as Microsoft, WinZip, and AOL have their own trial versions to market theirsoftware. Offering shareware has become a good way to market software, because it givesconsumers a chance to try new software and find out whether it is worth buying. This is a way togive them guaranteed value for their money.

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' Because shareware is so easily available, it has become an easy target for piracy. Softwarepiracy is done by hacking into software and disabling the copyright protection. Since piratedsoftware is usually much cheaper than the original, many people will choose to buy them insteadof paying a high price for the real software. This results in loss of sales for the developers of thesoftware.

4. (a) Define firmware with few examples. Explain how firmware works.

Answer

Firmware is defined as:

"The computer program in a read-only memory (ROM) integrated circuit.""The Erasable Programmable Read-Only Memory (EPROM) chip, whose program may be

modified by special external hardware, but not by (a general purpose) application program.""The Electrically Erasable Programmable Read-Only Memory (EEPROM) chip, whose program

may be modified by special electrical extemal hardware (not the usual optical light), but not by(a general purpose) application program."

Examples of firmware include:. The BIOS found in IBM-compatible Personal Computers;. Open Firmware, used in computers from Sun Microsystems and Apple Computer;. ARCS, used in computers from Silicon Graphics;. RTAS (Run-Time Abstraction Services), used in computers from IBM;. EPROM chips used in the Eventide H-3000 series of digital music processors.

How it works?. Firmware boots up computeized or digital devices, as ROM chips are non-volatile, - meaning

they do not require a power source to hold their contents. Perhaps the most familiar firmware isthe basic input output system (B/OS) chip. The BIOS chip on a computer motherboard holds

instructions that, upon powering up, initialize the hardware, ensure components are working, and

finally roll out the operating system to take over.

. In the past, firmware chips could not be rewritten. When the BIOS became outdated, the onlyoption was to buy a new motherboard. New firrnware would understand the latest hardware so

that the user would not be limited to older drives and other legacy technologies when facing

inevitable upgrades.

. It became clear that a new type of firmware chip that could be updated would be extremely

beneficial. This became possible with flash memory chips. With the BIOS written to this type ofchip, a user could connect to the manufacturer's website, download a firmware upgrade to

diskette and flash the BIOS chip during bootup to install a new set of instructions. All quality

motherboards today feature a flash BIOS, or upgradeable firmware.

5

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. Upgradeable firmware has extended the life of countless electronic devices, adding new

functionality. However, flashing firmware is also risky, as the device will not boot if the flashing

process is intemrpted or becomes comrpted. When upgrading firmware, be sure to followinstructions carefully and back up any important data beforehand.

(b) What is a linear array? Discuss the properties of a linear array. How does a record

differ from a linear array? 5

Answer

A linear array is a list of finite number n of similar data elements referenced by a set of n

homogeneous data elements.

The properties of a linear affay are,

(a) The elements of the affay are referenced by an index set consisting of n consecutive numbers.

(b) The elements of the array are stored in successive memory locations.

(c) Al1 of the elements of a linear array must be of the same type or of a derived type. Hence,

affays are referred to as homogeneous data structures.

(d) Array elements can be directly accessed. With arrays if you know you want to access the ithelement, you can simply use one line of code: arrayNamefi].

A record differs from a linear array in the following ways,

(u) A record may be collection of non-homogeneous data, i.e. the data items in a record mayhave different data types.

(b) The data items in a record are indexed by attribute name, so there may not be a naturalordering of its elements

(c) A record forms a hierarchical structure but a linear array does not have hierarchicalstructure.

5. (a) What are the issues that need to be considered when evaluating an IT asset

management solution? What are the misconceptions regarding IT asset managementsolutions? Explain clearly. 6

Answer

The following are the issues that need to be considered when evaluating an IT asset managementsolution:

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' Efficient and accurate discovery of all IT assets, including routers, printers, servers, laptops,PDAs, and workstations.

' A structured approach to software discovery across the company, with application, suite, and

version recognition for both workstations and servers.

' A centralized asset repository that houses the physical, contractual, and financial informationfor each asset, along with information about software throughout the organization, includingversion, user, and number of copies.

Misconceptions abound regarding ITAM (and other) solutions; the following are some of the

most popular:

"Methodology is first and foremost about technology"- Methodology must be based on whatworks for the organization and meets its business needs. Technology is the tool to reach the goal,

not the goal itself.

"The IT platform with the lowest-cost TCO is the best choice"- The IT manager must ensure

that a platform can run the company's existing applications and work with its existinginfrastructure; otherwise, a best-of-breed platform may be worthless.

"Soft costs don't count"- Indirect costs can account for up to 600/o of an organization's total

outlay on IT; rarely do the largest costs show up on a vendor invoice.

(b) "A router is connected to at least two networks", explain which role a router plays

connected in this manner. Also, elaborate the technical details on how this role is

accomplished. 4

Answer

A router is connected to two or more data lines from different networks. When a data packet

comes in on one of the lines, the router reads the address information in the packet to determine

the ultimate destination. Then, using information in its routing table or routing policy, it directs

the packet to the next network on its journey. This creates an overlay internetwork.

PC2192.168.1.10

PC1192.168.2.10

192.168.1.1NIC 1

192.168.2.1NIC 2

Router192.168.1.x Network

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192.168.2.x Network

A router keeps data flowing between networks. Routers are located at gateways, the places where

two or more networks connect. Thus a router carries out path determination and packet

switching. When data is sent between locations on one network or from one network to another

network the data is always seen and directed to the correct location by the router. The router

accomplishes this by using headers and forwarding table to determine the best path forforwarding the data packets and they also use protocols such as ICMP to communicate with each

other and configure the best route between any two hosts.

6 (a)Why Software Change Management Matters? I)escribe the troubles of Ad-HocSoftware Change. 5

Answer

Software change management is one of the most important critical success factors. It is an

essential discipline for enterprise IT organizations. Software change is inevitable

. New requirements emerge when the software is used

. The business environment changes

. Errors must be repaired

. New equipment must be accommodated

. The performance or reliability may have to be improved

In modem enterprises, software automates a wide variety of business processes. Changes madeto software are, in effect, changes made to the business processes themselves. This includesmanagement of changes to software in development, changes to software in production, andchanges to associated artifacts like requirements, models, and test cases.

From a survey report: It was asked respondents that do not have defined change managementprocesses in place for all of their software what types of troubles they encounter as a result. Therespondents cited poor software quality (15%), dissatisfied business customers (72%),unnecessary rework (71%), missed deadlines (68%), higher costs (61%), failed changes (51%),and downtime in production (50%) as resultant pains. Only T4%o of respondents from companiesthat do not apply defined change management processes to all software rated the cumulativeimpact of these pains as minor.

sometimes the costs of software change usually exceed the costs of software development.

(b) List and explain the Controls over Program Changes. 5

Answer

The Controls over System and Program Changes are explained here:-

(i) Change Management Controls: To properly control information system changes,companies need formal change management control policies and procedure. These controlsinclude many things. Such as periodically review all systems for needed changes; requireall requests to be submitted in a standard format, etc.

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(ii) Authorization Controls: Authorization Controls ensure all information and data entered orused in processing which is authorized by management, and representative of events that

actually occurred.

(iii) Documentation Controls: Documentation contains descriptions of the hardware, software,

policies, standards, procedures, and approvals related to the system and formalize the

system's security controls.

(iv) Testing and Quality Controls: testing commences during the design phase, during which

designs and specifications should be subject to quality reviews, and continues during the

system development and acceptance testing phases of the system development life cycle

(SDLC).

7. Describe in detail the three basic methods which are used to deliver information over a

network. 10

Answer

lnformation is delivered over a network by three basic methods:

Unicast: Unicast is a type of transmission in which information is sent from only one sender to

only one receiver. [n another words, Unicast transmission is between one-to-one nodes

(involving two nodes only).

Examples of Unicast transmission are HTTP, SMTP, Telnet, SSH, POP3 where the request for

information is directed from one sender to only one receiver at the other end.

Broadcast: Broadcast is a tlpe of transmission in which information is sent from just one

computer but is received by all the computers connected to the network. This would mean that

every time a computer or a node would transmit a packet of type "broadcast", all the other

computers will receive that information packet.

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C

CCC

Unicast

Examples of broadcast are many but one that would be best to understand here is a computerbooting up and requesting for an IP address. In this case, the computer which is booting up andrequesting for an IP address does not know which computer will be able to provide it with an IPaddress. It will then broadcast a request packet on the network which will be received by all theother computers but will be acknowledged by only the computer acting as a DHCP server. Oneother example would be that of the ARP (Address Resolution Protocol) which will broadcast theaddress resolution request to all other computers on the network.

Multicast: To transmit a single message to a selected group of recipients. It is a type oftransmission or corlmunication in which there is only one sender and the information sent ismeant for a set of receivers. On a multicast network, you can send a single packet of informationfrom one computer for distribution to several other computers, instead of having to send thatpacket once for every destination. Because 5, 10, or 100 machines can receive the same packet,bandwidth is conserved.

One good example of Multicast based network is video transmission network in which onecomputer needs to transmit video channel to a specific group of computers. This way when theother computers are also a part of this Multicast IP network, they will be able to receive same setof data at the same time. Multicast offers savings on bandwidth and is the preferred way of datacommunication when data is too transmitted to a set of computers.

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Broadcast

C

O

Figure 4.5 : Multicast

8. What does the principle internal control rely on? What are the six components that focuson control activity? 10

Answer

The principle that intemal controls rely is the principle of checks and balances in the workplace.

The following components focus on the control activity:

Personnel: Personnel need to be competent and trustworthy, with clearly established lines ofauthority and responsibility documented in written job descriptions and procedure manuals.

Organizational charts provide a visual presentation of lines of authority and periodic updates-ofjob descriptions ensures that employees are aware of the duties they are expected to perform.

Authorization Procedures: Authorization procedures need to include a thorough review of .

supporting information to verify the propriety and validly of transactions. Approval authority is

to be commensurate with the nature and significance of the transactions and in compliance withorganization policy.

Segregation of Duties: Segregation of duties reduces the likelihood of errors and inegularities.An individual is not to have responsibility for more than one of the three transaction

components: authorization, custody, and record keeping. When the work of one employee ischecked by another, and when the responsibility for custody for assets is separate from the

responsibility for maintaining the records relating to those assets, there is appropriate segregationof duties. This helps detect errors in a timely manner and deter improper activities; and at the

same time, it should be devised to prompt operational efficiency and allow for effectivecommunications.

Physical Restrictions: Physical restrictions are the most important type of protective measures

for safeguarding organization assets, processes and data.

Documentation and Record Retention: Documentation and record retention is to provide

reasonable assurance that all information and transactions of value are accurately recorded and

retained. Records are to be maintained and controlled in accordance with the established

retention period and properly disposed of in accordance with established procedures.

Monitoring Operations: Monitoring Operations is essential to verify that controls are operating

properly. Reconciliations, confirmations, and exception reports can provide this type ofinformation.

9. What is the nature of IT related financial or accounting controls auditors look for when

they examine these controls? How do they put them into categories? What are the controlgroups as categorized by the auditors? Describe in detail. 12

Page | 85

Answer

When the auditors examine financial or accounting controls we examine them to see if they

reduce the likelihood of the financial statements containing material errors.

They put the controls into categories depending on when they act. The auditors categorize the

controls into following four groups:

(i). Preventive Controls: Preventive controls are those inputs, which are designed to prevent an

error, omission or malicious act occurring. An example of a preventive control is the use ofpasswords to gain access to a financial system.

The broad characteristics of preventive controls are:

. A clear-cut understanding about the vulnerabilities of the asset.

. Understanding probable threats.

. Provision of necessary controls for probable threats from materializing.

As has been discussed earlier in this section, any control can be implemented in both a manual

and computeized environment for the same purpose. Only, the implementation methodologymay differ from one environment to the other. Now let us discuss the examples of preventivecontrols and how the same control is implemented in different environments.

Examples of preventive controls are:

. Employ qualified personnel.

. Segregation of duties.

. Access control.

. Vaccination against diseases.

. Documentation.

. Prescribing appropriate books for a course.

. Training and retraining of staff.

. Authorization of transaction.

. Validation, edit checks in the application.

. Firewalls.

'Anti-virus software (sometimes this acts like a corrective control also), etc.

. Passwords.

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(ii). Detective Control: These controls are designed to detect errors, omissions or malicious acts

that occur and report the occurrence. An example of a detective control would be a use ofautomatic expenditure profiling where management gets regular reports of spend to date against

profiled spend.

The main characteristics of such controls are as follows:

. Clear understanding of lawful activities so that anything which deviates from these is reported

as unlawful, malicious, etc.

' An established mechanism to refer the reported unlawful activities to the appropriate person orgroup.

. Interaction with the preventive control to prevent such acts from occurring.

. Surprise checks by supervisor.

Examples of detective controls include,

. Hash totals.

. Check points in production jobs.

. Echo control in telecommunications.

. Error message over tape labels.

. Duplicate checking of calculations.

. Periodic performance reporting with variances.

. Past-due accounts report.

. The internal audit functions.

. Intrusion detection system.

. Cash counts and bank reconciliation.

. Monitoring expenditures against budgeted amount.

(iii) Conective Controls: Corrective controls are designed to reduce the impact or correct an

effor once it has been detected. Corrective controls may include the use of default dates on

invoices where an operator has tried to enter the incorrect date. A business continuity plan is

considered to be a significant corrective control.

The main characteristics of the corrective controls are:

. Minimize the impact of the threat.

. Identify the cause of the problem.

. Remedy problems discovered by detective controls.

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. Get feedback from preventive and detective controls.

. Correct error arising from a problem.

. Modify the processing systems to minimize future occurrences of the problem.

Examples of Corrective Controls,

. Contingency planning.

. Backup procedure.

. Rerun procedures.

. Treatment procedures for a disease.

. Change input value to an application system.

. Investigate budget variance and report violations.

(iv)-Compensatory Controls: Controls are basically designed to reduce the probability ofthreats, which can exploit the vulnerabilities of an asset and cause a loss to that asset. Whiledesigning the appropriate control one thing should be kept in mind-the cost of the lock should

not be more than the cost of the assets it protects.

Sometimes while designing and implementing controls, organizations because of different

constraints like financial, administrative or operational, may not be able to implementappropriate controls. In such a scenario, there should be adequate compensatory measures whichmay although not be as efficient as the appropriate control, can indubitably reduce the

probability of threats to the assets. Such measures are called compensatory controls.

10. Compare and contrast among risk, threat and vulnerability. How are these caused? I

Answer

Risk: A risk is the likelihood that an organization would face a vulnerability being exploited or athreat becoming harmful. Information systems can generate many direct and indirect risks. These

risks lead to a gap between the need to protect systems and the degree of protection applied.

The gap is caused by:

l. Widespread use of technology.

2. Interconnectivity of systems.

3. Elimination of distance, time and space as constraints.

4. Unevenness of technological changes.

5. Devolution of management and control.

6. Attractiveness of conducting unconventional electronic attacks against organizations.

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7. External factors such as legislative, legal and regulatory requirements or technologicaldevelopments.

This means there are new risk areas that could have a significant impact on critical business

operations, such as:

1. External dangers from hackers, leading to denial of service and virus attacks, extortion and

leakage of corporate information.

2. Growing potential for misuse and abuse of information system affecting privacy and ethical

values.

3. Increasing requirements for availability and robustness. Because new technology provides the

potential for dramatically performance, improved and demonstrated enhanced business

information risk reduction and security measures can add real value to the organization bycontributing to interactions with trading partners, closer customer relations, improved

competitive advantage and protected reputation.

Threat: A threat is an action, event or condition where there is a compromise in the system, its

quality and ability to inflict harm to the organization. Threat is any circumstance or event withthe potential to cause harm to an information system in the form of destruction, disclosure,

adverse modification of data and denial of services.

Examples of threat are flood, fire, natural disasters, heat, fteezing, virus, wortns, Trojans and

spyware.

Vulnerability: Vulnerability is the weakness in the system safeguards that exposes the system to

threats. It may be weakness in an information system, cryptographic system (security systems),

or other components (e.g. system security procedures, hardware design, internal controls) that

could be exploited by a threat. Vulnerabilities potentially "allow" a threat to harm or exploit the

system. For example, vulnerability could be a poor access control method allowing dishonest

employees (the threat) to exploit the system to adjust their own records.

Here are two more vulnerability examples:

. Leaving your front door unlocked makes your house vulnerable to unwanted visitors.

. Short- passwords (less than 6 characters) make your automated information system vulnerable

to password cracking or guessing routines.

Missing safeguards often determine the level of vulnerability. Determining vulnerabilities

involves a security evaluation of the system including inspection of safeguards, testing, and

penetration analysis.

---- End

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