Answer to PTP_Intermediate_Syllabus 2012_June2016_Set 1

Paper – 12: Company Accounts and Audit

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
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 Answer to PTP_Intermediate_Syllabus 2012_June2016_Set 1

The following table lists the learning objectives and the verbs that appear in the syllabus
learning aims and examination questions:

Learning objectives Verbs used Definition

KNOWLEDGE List Make a list of
State Express, fully or clearly, the
What you are expected to details/facts
know Define Give the exact meaning of
Describe Communicate the key features of
Distinguish Highlight the differences between
COMPREHENSION Explain Make clear or intelligible/ state the
meaning or purpose of
What you are expected to Identity Recognize, establish or select after
understand consideration
Illustrate Use an example to describe or explain
something
Apply Put to practical use
Calculate Ascertain or reckon mathematically
LEVEL B

APPLICATION Demonstrate Prove with certainty or exhibit by

practical means
How you are expected to Prepare Make or get ready for use
apply Reconcile Make or prove consistent/
your knowledge compatible
Solve Find an answer to
Tabulate Arrange in a table
Analyse Examine in detail the structure of
Categories Place into a defined class or division
ANALYSIS
Compare Show the similarities and/or
and contrast differences between
How you are expected to
Construct Build up or compile
analyses the detail of what you
Priorities Place in order of priority or sequence
have learned
for action
Produce Create or bring into existence

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
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 Answer to PTP_Intermediate_Syllabus 2012_June2016_Set 1

Paper – 12: Company Accounts and Audit

Full Marks: 100 Time Allowed: 3 Hours

This paper contains 4 questions. All questions are compulsory, subject to instruction provided
against each question. All workings must form part of your answer.
Assumptions, if any, must be clearly indicated.

1. Answer all questions: [2×10=20]

(i) ABC Ltd. developed a know-how by incurring expenditure of `20 lakhs. The know-how
was used by the company from 01.04.2008. The useful life of the asset is 10 years from the
year of commencement of its use. The company has not amortised the asset till 31.3.2015.
Pass Journal entry to give effect to the value of know-how as per Accounting Standard-26
for the year ended 31.3.2015.
Answer:
Journal Entry

Particulars Dr. (`) Cr. (`)

Profit and Loss A/c (Prior period item) Dr. 12,00,000
Depreciation A/c Dr. 2,00,000
To Know-how A/c 14,00,000
[Being depreciation of 7 years (out of which of 6 years charged
as prior period item)]

(ii) Discuss about Going Concern assumption.

Answer:
Under going concern assumption, the financial statements are normally prepared on the
assumption that an entity is a going concern and will continue in operation for the
foreseeable future. Therefore, it is assumed that the entity has neither the intention nor the
need to liquidate or curtail materially the scale of its operations; if such an intention or
need exists, the financial statements may have to be prepared on a different basis. In
case going concern basis could not be used, the entity shall disclose the basis used as
well.
(iii) Hari Ltd had issued 30,000, 15% Convertible Debentures of `100 each on 1st April 2011. The
Debentures are due for redemption on 1st March 2014. The terms of issue of Debentures
provided that they were redeemable at a premium of 5% and also conferred option to the
Debenture holders to convert 20% of their holding into Equity Shares (Nominal Value of `10)
at a Price of `15 per Share. Debenture holders holding 2,500 Debentures did not exercise
the option. Calculate the Number of Equity Shares to be allotted to the Debenture holders
exercising the option to the maximum.

Answer:
Particulars Nos,
Total Number of Debentures 30,000
Less: Number of Debentures not opting for conversion 2,500
Balance Debentures opting for conversion 27,500
Convertible Portion Debentures = 20% of 27,500 5,500
Redemption Value of 5,500 Debentures (5,500 × `105) ` 5,77,500
Number of Equity-Shares to be allotted = 5,77,500 ÷ 15 = 38,500 Shares of `10 each

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 Answer to PTP_Intermediate_Syllabus 2012_June2016_Set 1

(iv) Z Ltd. took over the assets of `6,00,000 and liabilities of `80,000 of C Ltd. for an agreed
purchase consideration of `5,40,000 to be satisfied by the issue of 10% Debentures of
`1,000 each.
Show the necessary journal entries in the books of Z Ltd, assuming that—
Case (a) Such Debentures are issued at par;

Answer:

In the Books of Z Ltd.

Journal
Particulars L. F. Dr.(`) Cr.(`)
Sundry Assets A/c Dr. 6,00,000
Goodwill A/c Dr. 20,000
To Sundry Liabilities A/c 80,000
To C Ltd. 5,40,000
(Being the purchase of assets and liabilities from C
Ltd. as per agreement dated...)
Case (a) If Debentures are issued at par
C Ltd. Dr. 5,40,000
To 10% Debentures A/c 5,40,000
(Being the issue of debentures at par to C Ltd. as
per Board's resolution dated....)

(v) List the factors that should be considered in identifying geographical segments.

Answer:

Geographical segments include:

(a) Similarity of economic and political conditions;
(b) Relationships between operations in different geographical areas;
(c) Proximity of operations;
(d) Special risks associated with operations in a particular area;
(e) Exchange control regulations; and
(f) The underlying currency risks

(vi) X Ltd. of India purchased machinery from U.S.A. at $ 1.5 million on 01/10/2011-2012. At that
date the exchange rate was `42 per dollar. This machinery is to be depreciated @ 10% on SLM
basis. The exchange rate on 31/03/2013 was ` 42.50 per dollar. How this transaction be
shown in the financial statements of X Ltd. for the year 2012 - 2013.

Answer:
Calculation of amount to be recognized in Machinery a/c, Depreciation
for the year and Closing balance of the Machinery Account.
Particulars Amount
A. Cost of Machinery $15,00,000
B. Exchange rate per dollar existing on date of transaction `42.00
C. Cost of Machinery to be recognized (A × B) `6,30,00,000
D. Depreciation for the year (C × 10% × 0.5) `31,50,000
E. Closing balance of the Machinery (C – D) `5,98,50,000

(vii) State the meaning of the term ‘substantive tests’.

Answer:

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
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Substantive procedures (or substantive tests) are those activities which are performed by
the auditor during the substantive testing stage of the audit that gather evidence as to
the completeness, validity and/ or accuracy of account balances and underlying classes
of transactions.
Management impliedly asserts that account balances and underlying classes of
transaction do not contain any material misstatements: in other words, that they are
materially complete, valid and accurate. Auditors gather evidence about these
assertions by undertaking activities referred to as substantive procedures.
(viii) List the objectives of Social Audit.

Answer:
Objectives of Social Audit
(i) Assessing the needs of the society and resources available for fulfilling them.
(ii) Spreading awareness among beneficiaries about the business' efforts towards
attaining social objectives.
(iii) Increasing efficacy and effectiveness of the organization's corporate social
responsibility (CSR) programmes.
(iv) Scrutiny of policy decisions, keeping in view the interests of stakeholders.

(ix) ‘The auditor is faced with sampling risk in substantive procedures’ - Discuss.

Answer:
Substantive Procedures:
(i) Risk of Incorrect Rejection: The risk that, although the sample result supports the
conclusion that a recorded account balance or class of transactions is materially
misstated, in fact it is not materially misstated.
(ii) Risk of Incorrect Acceptance: The risk that, although the sample result supports the
conclusion that a recorded account balance or class of transactions is not materially
misstated, in fact it is materially misstated.,
(x) ―To verify the secret reserve, the auditor should keep in mind the following points.’ – List
the points.

Answer:
To verify the secret reserve, if any, the auditor should keep in mind the following points:
(i) Carefully enquire into the necessity of creating such reserve.
(ii) Don't qualify audit report if it is found that the intention of the company is honest and
the amount is reasonable.
(iii) May pass a remark in audit report that the assets are understated,
(iv) Discuss the fact, if found, that the director's intention behind creating secret reserve
was not honest and only to facilitate improper dealing in shares.

2. (Answer any 2 questions)

(a) On 1st April, 2010. BHARAT Ltd. purchased a Fixed Asset worth `149.50 lakhs for which it got
Government grant of `24.50 lakhs. The Salvage Value at the end of useful life of 4 years
was estimated at `51.20 lakhs. X Ltd. decides to treat the Grant as Capital Receipt. During
2012-2013 the Grant has become refundable due to non-fulfillment of certain conditions.

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Calculate the amount of the Depreciation to be recognized every year in Profit and Loss
Account during the useful life of the machinery if the company followed (a) W.D.V Method.
[8]
Answer:

As per AS 12 on Accounting Government Grants, the amount refundable in respect of a

government grant related to a specific fixed asset is recorded by increasing the book value
of the asset. Depreciation on the revised book value is provided prospectively over the
residual useful life of the asset.

Statement showing the Book Value, WDV Depreciation Charged and

Recording of refund of Grant
Particulars ` (in lakhs)
Cost of Fixed Asset 149.50
Less: Grant received (24.50)
A Net Cost of Fixed Asset 125.00
B Less: Depreciation @ 20% (25.00)
C Book value of the machinery at the end of 1st year (A - B) 100.00
D Less: Depreciation @ 20% (20.00)
E Book value of the machinery at the end of 2nd year (C - D) 80.00
F Add: Grant refunded 24.50
G Revised Book Value 104.50
H Less: Depreciation @ 30% (31.35)
I Book Value of Machinery at the end of 3rd year (G - H) 73.15
J Less: Depreciation @ 30% (21.95)
K Book Value of Machinery at the end of 4th year (l-J) 51.20

Working Notes: Calculation of WDV rate of Depreciation

(i) WDV Depreciation rate (on 01.04.2010) = 1 - 4 Residual Value / Net cost
= 1 - 4 51.20 lakhs /125 lakhs
= 1 - 4 0.4096 =1-0.8 = 0.2 or 20%
(ii) WDV Depreciation rate (on 01.04.2012) =1- Residual Value / Revised Book Value
=1- 51.20 lakhs /104.50 lakhs
=1- 0.49 = 1 – 0.7 = 0.3 or 30%

(b) (i) X Ltd. sold JCB Machine having WDV of `50 Lakhs to Y Ltd. for `60 Lakhs and the same
JCB was leased back of Y Ltd to X Ltd. The lease is operating lease.

Comment according to relevant Accounting Standard if

(i) Sale price of `60 Lakhs is equal to fair value
(ii) Fair Value is ` 50 Lakhs and sale price is ` 45 Lakhs.
(iii) Fair value is ` 55 Lakhs and sale price is ` 62 Lakhs.
(iv) Fair value is ` 45 Lakhs and sale price is ` 48 Lakhs [4]

Answer:

According to AS 19, following will be the treatment in the given situations:

(i) X Ltd. should immediately recognize the profit of ` 10 lakhs (i.e. 60 - 50) in its books.
(ii) The loss of `5 lakhs (50 - 45) to be immediately recognized by X Ltd. in its books provided

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loss is not compensated by future lease payments.

(iii) Profit of `5 lakhs (55 - 50) to be immediately recognized by X Ltd. in its books and
balance profit of ` 7 lakhs (62-55) is to be amortised/deferred over lease period.
(iv) The loss of ` 5 lakhs (50 - 45) to be immediately recognized by X Ltd. in its books and
profit of ` 3 lakhs (48 - 45) should be amortised/deferred over lease period.

(b) (ii) Sterling Ltd. purchased a plant for US $20,000 on 31st December, 2013 payable after 4
months. The company entered into a forward contract for 4 months @ `48.85 per dollar. On
31st December, 2013, the exchange rate was ` 47.50 per dollar.
How will you recognize the profit or loss on forward contract in the books of Sterling Limited
for the year ended 31st March, 2014. [4]

Answer:

Calculation of Profit or Loss to be recognized in the books of Sterling Limited

Particulars `
Forward contract rate 48.85
Less: Spot rate 47.50
Loss 1.35
Forward Contract Amount $20,000
Total loss on entering into forward contract = ($20,000 × ` 1.35) ` 27,000'
Contract period 4 months
Loss for the period 1st January, 2014 to 31st March, 2014 i.e.
3 months falling in the year 2013-2014 will be (` 27,000 × 3/4) 20,250

Balance loss of `6,750 (i. e. `27,000 – `20,250) for the month of April, 2014 will be
recognized in the financial year 2014 – 2015.

(c) (i) An engineering goods company provides after sales warranty for 2 years to its
customers. Based on past experience, the company has the following policy for
making provision for warranties on the invoice amount, on the remaining balance
warranty period:
Less than 1 year: 2% provision
More than 1 year: 3% provision
The company has raised invoices as under:
Invoice date Amount `
19 January, 2011
th 40,000
29 January, 2012
th 25,000
15th October, 2012 90,000

Calculate the provision to be made for warranty under Accounting Standard 29 as at

31st March, 2012 and 31st March, 2013. Also compute amount to be debited to Profit
and Loss Account for the year ended 31st March, 2013. [4]
Answer:
A. Provision as at 31-3-2013 = `25,000 × 0.02 + ` 90,000 × 0.03 = `3,200
B. Less: Provision as at 31-3-2012 = ` 40,000 × 0.02 + `25,000 × 0.03 = `1,550
C. Amount debited to Profit and Loss Account (A - B) = ` 1,650
Note: No provision is to be made on 31-3-2013 in respect of sales amounting to `40,000
made on 19-01-2011 because the warranty period of 2 years has already expired.

(c) (ii) From the following information compute diluted earnings per share.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
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Net Profit for the year `12,00,000

Weighted average number of equity shares outstanding 5,00,000 shares
Average fair value of one equity share `20
Weighted average number of shares under option 1,00,000 shares
Exercise price per share under option `15
[4]
Answer:

Computation of Diluted Earnings per Share

Particulars Earnings Shares Earnings per share
(`) (`)
Net Profit for the year 12,00,000
Weighted average number of equity shares
outstanding 5,00,000
Basic earnings per share
(12,00,000/5,00,000) 2.40
Weighted average number of shares under
option 1,00,000
Number of shares that would have been issued
at fair value (1,00,000 ×15.00)/ 20.00 (75,000) -
Diluted earnings per share (12,00,000/5,25,000) 12,00,000 5,25,000 2.29

*The earnings have not been increased as the total number of shares has been increased
only by the number of shares (25,000) deemed for the purpose of computation to have
been issued for no consideration.

3. (Answer any 2 questions)

(a) (i) X Ltd. went into liquidation when its position was as given below:

1. Position of Share Capital:

Name of Number and Nature of Share held Nominal Called up Paid up
Share Value per amount amount
Holder Share per Share per Share
` ` `
‘A’ 6,000,10% Pref. Shares 100 50 50
‘B’ 500 Equity Shares 100 100 100
‘C’ 1,000 Equity Shares 75 50 50
‘D’ 600 Equity Shares 75 50 53
‘E’ 400 Equity Shares 75 50 47
‘F’ 1,000 Equity Shares 50 25 25

2. Unsecured Creditors `99,000

3. Liquidator's Remuneration `1,000

Prepare Liquidator's Final Statement of Account in the following case.

If the assets are realized for `4,00,600 [10]

Answer:

(a) LIQUIDATOR'S FINAL STATEMENT OF ACCOUNT

Receipts ` Payments `

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Assets realised 4,00,600 Liquidator's Remuneration 1,000

Call on Contributories: Unsecured Creditors 99,000
'C’ — @ ` 2.50 on 1,000 Shares 2,500 Pref. Share holders 3,00,000
'E'— @ ` 5.50 on 400 Shares 2,200 Equity Share holders:
'F’ — @ ` 10 on 1,000 Shares 10,000 'B'—@ `30 on 500 Shares 15,000
'D'—@ ` 0.50 on 600 Shares 300
4,15,300 4,15,300

Working Notes:

(i) Calculation of % of Deficiency

`
A. Total paid up Equity Share capital 1,75,600
B. Less: Cash Available 600
C. Deficiency to be borne (A – B) 1,75,000
D. Total Nominal Equity Share Capital 2,50,000
E. Deficiency as % of Normal capital 70%

(ii) Calculation of Net amount returnable/receivable Per Share from the Contribution

Name of Share holder B C D E F

` ` ` ` `
A. Paid up amount/Share 100 50 53 47 25
B. Less: Deficiency to be borne @ 70% of
Nominal Value 70 52.50 52.50 52.50 35
C. Net Amount returnable (receivable) 30 (2.50) 0.50 (5.50) (10)

(a) (ii) T (ESOP) Ltd provides you the following particulars in respect of stock options granted:
Grant Date April 1, 2010
Number of Employees covered 1050
Number of Options granted per Employee 50
Vesting Condition: Continuous employment for 3 years
Nominal Value per share (`) 100
Exercise Price per share (`) 125
Market Price per share on Grant Date (`) 149
Vesting Date March 31, 2013
Exercise Date March 31, 2014
Fair Value of Option per share on Grant Date (`) 30

Position on 31.03.11 31.03.12 31.03.13

Estimated Annual Rate of Departure 2% 3%
Number of employees left 30 20 16
Number of employees entitled to exercise 984
On 31st March, 2014, 960 Employees exercised the option and 24 Employees did not
exercise the option.
Compute Expenses to be recognised in each year by (i) Fair Value Method.
[6]
Answer:
(i) Fair value method
EXPENSE TO BE RECOGNISEDIN EACH YEAR

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
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Particulars 2010 -11 2011 -12 2012 - 13

A. No. of Employees entitled to option =1050*0.98*0.98 = 1020*0.97*0.97 984
B. No. of options per Employee 50 50 50
C. Fair Value of Option per Share 30 30 30
D. Total Fair Value of Option [A*B*C] 14,82,000 14,39,580 14,76,000
E. Expense to be recognized [Total Fair
Value* No of years expired/vesting = 14,82,000/3 = = 14,76,000
Period] – [Expenses already =4,94,000 [14,39,580*2/3] – 4,94,000 –
recognized during previous years] – [4,94,000] = 4,65,720 =
4,65,720 5,16,280
Value of options Forfeited = [(984 – 960) × 50 × `30] = `36,000

(b) (i) CAMID Limited planned to set up a unit for manufacture of bulk drugs. For the purpose of
financing the unit the Board of Directors have issued 15,00,000 equity shares of `10 each.
30% of the issue was reserved for promoters and the balance was offered to the public. A, B
and C have come forward to underwrite the public issue in the ratio of 3:1:1 and also
agreed for firm undertaking of 30,000; 20,000 and 10,000 shares, respectively. The
underwriting commission was fixed at 4%. The amount payable on application was ` 2.50 per
share. The details of subscriptions (excluding firm underwriting) are:
Shares
Marked forms of A 5,50,000
Marked forms of B 2,00,000
Marked forms of C 1,50,000
Unmarked forms 50,000

(a) You are required to show the allocation of liability among underwriters with workings.
(b) Pass journal entries in the books of CAMID Limited:
(i) For underwriters' net liability and the receipt or payment of cash to or from
underwriters.
(ii) Determining the liability towards the payment of commission to the underwriters.
[16]
Answer:

(a) STATEMENT SHOWING THE NET AND TOTAL LIABILITY OF UNDERWRITERS

Particulars A B C Total (No.
(No. of (No. of (No. of of Shares)
Shares) Shares) Shares)
A Gross Liability 6,30,000 2,10,000 2,10,000 10,50,000
B Less: Marked Applications (5,50,000) (2,00,000) (1,50,000) (9,00,000)
C Less: Unmarked Applications
(in the ratio of 3 : 1 : 1) (30,000) (10,000) (10,000) (50,000)
D Less: Firm underwriting (30,000) (20,000) (10,000) (60,000)
E Balance 20,000 (20,000) 40,000 40,000
F Surplus of B distributed between
A and C in the ratio of 3 : 1 (15,000) 20,000 (5,000) -
G Net liability 5,000 - 35,000 40,000
H Add Firm underwriting 30,000 20,000 10,000 60,000
I Total Liability
35,000 20,000 45,000 1,00,000

JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)

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A Dr. 12,500
C Dr. 87,500
To Equity Share Capital A/c 1,00,000
(Allotment of shares to underwriters: 5,000 shares
to A and 35,000 shares to C)
Underwriting Commission A/c Dr. 4,20,000
To A 2,52,000
To B 84,000
To C 84,000
(Underwriting commission payable @ 4% on the
amount of shares underwritten)
A Dr. 2,39,500
B Dr. 84,000
To Bank A/c 3,23,500
(Amount paid to A and B in final settlement)
Bank A/c Dr. 3,500
To C 3,500
(Amount received from C on shares allotted less
underwriting commission)

Working Notes:

(i) Calculation of amounts payable to/by underwriters:

A B C
Liability (No. of shares) 35,000 20,000 45,000
Less: Firm underwriting (No. of shares) 30,000 20,000 10,000
Net Liability (No. of Shares) 5,000 - 35,000

` ` `
Amount payable on application @ `2.50 12,500 - 87,500
per share
Less: Underwriting commission receivable
by underwriters @ 4% (2,52,000) (84,000) (84,000)
Amount payable from underwriters 2,39,500 84,000 -
Amount receivable from underwriters - - 3,500

(ii) No Journal entry is shown for firm underwritings by the underwriters on the assumption
that the amounts have been already paid by the underwriters at the opening days of
the issue. Alternatively, the students may pass entries for firm underwriting on the
ground that the allotment of shares will be made by the company at a time.

(c) (i) B Ltd. provides you the following information:

Issued Capital: 2,00,000 Equity Shares of `10 each
Reserves & Surplus: Capital Reserve `10,00,000
Securities Premium `18,00,000
Revenue Reserve `30,00,000
Profit & Loss A/c `40,00,000
Resolution passed to buy back: 25% of its Equity Shares @ `50 per share.
Pass journal entries to record the above transactions assuming that the company
achieved the target of buy-back. 6
Answer:

JOURNAL
Date Particulars L.F. Dr. (`) Cr. (`)
Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
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1. Equity Shares Buy Back A/c Dr. 25,00,000

To Bank A/c 25,00,000
[Being the payment made on buy-back of
50,000 shares @`50]
2. Equity Share Capital A/c Dr. 5,00,000
Securities Premium A/c Dr. 18,00,000
Revenue Reserve A/c Dr. 2,00,000
To Equity Share Buyback A/c 25,00,000
[Being the cancellation of equity shares bought
back]
3. Revenue Reserve A/c Dr. 5,00,000
To Capital Redemption Reserve A/c 5,00,000
Being the amount equal to nominal value of
equity shares bought back out of free reserves
transfer to CRR)

(c) (ii) The promoters of H Ltd. took over on behalf of the company a running business with
effect from 1st April, 2014. The company got incorporated on 1st August, 2014. The
annual accounts were made up to 31st March, 2015 which revealed that the sales for
the whole year totaled `1,600 lakhs out of which sales till 31st July, 2014 were for `400
lakhs. Gross profit ratio was 25%.
The expenses from 1st April 2014 till 31st March 2015 were as follows:
(` in lakhs)
Salaries 69
Rent, Rates and Insurance 24
Sundry Office Expenses 66
Travelers’ Commission 16
Discount Allowed 12
Bad Debts 4
Directors’ Fee 25
Audit Fee 9
Depreciation on Tangible Assets 12
Debenture Interest 11
Prepare a statement showing the calculation of Profits for the pre-incorporation and
post incorporation periods. [10]

Answer:

Statement showing the calculation of Profits for the pre-incorporation and post-
incorporation periods
Total Basis of Pre- Post-
Amount allocation incorporation incorporation
(` in lakhs) (` in lakhs) (` in lakhs)
Gross Profit (25% of `1600) 400 Sales 100 300
Less: Salaries 69 Time 23 46
Rent, rates and insurance 24 Time 8 16
Sundry office expenses 66 Time 22 44
Travellers’ commission 16 Sales 4 12
Discount Allowed 12 Sales 1 9
Bad Debts 4 Sales 1 3

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Directors’ fee 25 Post - 25

Audit Fees 9 Sales 2.25 6.75
Depreciation on tangible 12 Time 4 8
assets
Debenture Interest 11 Post - 11
Net Profit 152 32.75 119.25
Working Notes:
1. Sales Ratio
(` in lakhs)
Sales for the whole year 1,600
Sales upto 31st July 2014 400
Therefore, sales for the period from 1st August 2014 to 31st March 2015 1,200
Thus sale ratio = 400:1200 = 1:3
2. Time ratio
1st April, 2014 to 31st July, 2014 : 1st August ,2014 to 31st March, 2015
= 4 months: 8 months = 1:2
Thus, time ratio is 1:2.

4. (Answer any 2 questions)

(a) (i) Write a note on (A) Public Deposits (B) Deposit of Statutory Dues [3+5]

Answer:

Public Deposits: In case company has accepted deposits from the public whether the
directions issued by the Reserve Bank of India and the provisions of Sections 73 to 76 or
any other relevant provision of the Companies Act and the rules framed there under
where applicable, have been complied with, if not, the nature of contraventions should
be stated; if an order has been passed by Company Law Board or National Company
Law Tribunal or Reserve Bank of India or any court or any other tribunal whether the same
has been complied with or not.

Deposit of Statutory Dues: The company auditor has to report that –

(a) Is the company regular in depositing undisputed statutory dues including Provident
Fund Employees State Insurance, Income tax, Sales tax, Wealth Tax, Service tax,
Custom Duty, Excise Duty, Value Added Tax, cess and any other statutory dues with
the appropriate authorities and if not the extent of arrears of outstanding statutory
dues as at the last day of the financial year concerned for a period of more than six
months from the date they became payable, shall be indicated by the auditor.
(b) In case dues of Income tax, Sales tax, Wealth tax, Service tax, Custom Duty, Excise
Duty, Value Added Tax, Cess have not been deposited on account of any dispute,
then the amounts involved and the forum where dispute is pending may be
mentioned, but he should while reporting, remember that a mere representation to
the department should not constitute a dispute.
Whether the amount required to be transferred to investor education and protection
fund in accordance with the relevant provisions of the Companies Act, 1956(1of
1956) and rules made there under has been transferred to such fund with in time.

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 Answer to PTP_Intermediate_Syllabus 2012_June2016_Set 1

(a) (ii) Discuss the objectives of SAE 3402 Assurance Reports on Controls At a Service
Organization. [4]

Answer:

The objectives of the service auditor are:

(a) To obtain reasonable assurance about whether, in all material respects, based on
suitable criteria:
(i) The service organization's description of its system fairly presents the system as
designed and implemented throughout the specified period (or in the case of
a type 1 report, as at a specified date);
(ii) The controls related to the control objectives stated in the service
organization's description of its system were suitably designed throughout the
specified period (or in the case of a type 1 report, as at a specified date);
(iii) Where included in the scope of the engagement, the controls operated
effectively to provide reasonable assurance that the control objectives stated
in the service organization's description of its system were achieved throughout
the specified period.
(b) To report on the matters in (a) above in accordance with the service auditor's
findings.

(a) (iii) Write a note on Adverse or Negative Report. [4]

Answer:

 An Adverse or negative report is given when the Auditor concludes that based on his
examination, he does not agree with the affirmations made in the Financial
Statements/Financial Report.
 The Auditor states that the Financial Statements do not present a true and fair view of
the state of affairs and the working results of the organization.
 The Auditor should state the reasons for issuing such a report.

 An Adverse Opinion should be expressed when the effect of a disagreement is so

material and pervasive to the Financial Statements, that the Auditor Concludes that
a qualification of the report is not adequate to disclose the misleading or incomplete
nature of the Financial Statements.

(b) (i) Discuss the overall maximum managerial remuneration and managerial
remuneration in case of absence or inadequacy of profits as per section 197 of
Companies Act, 2013. [6]

Answer:

Ceiling of Total Managerial Remuneration:

The total managerial remuneration payable by a public company, to its directors,
including managing director and whole-time director, and its manager in respect of
any financial year shall not exceed eleven per cent. of the net profits of that company
for that financial year computed in the manner laid down in section 198 except that the
remuneration of the directors shall not be deducted from the gross profits.
Provided that the company in general meeting may, with the approval of the Central
Government, authorise the payment of remuneration exceeding eleven per cent. of the
net profits of the company, subject to the provisions of Schedule V.

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 Answer to PTP_Intermediate_Syllabus 2012_June2016_Set 1

Provided further that, except with the approval of the company in general meeting,—
(i) the remuneration payable to any one managing director; or whole-time director or
manager shall not exceed five per cent. of the net profits of the company and if
there is more than one such director remuneration shall not exceed ten per cent, of
the net profits to all such directors and manager taken together;
(ii) the remuneration payable to directors who are neither managing directors nor
whole-time directors shall not exceed,—
(A) one per cent. of the net profits of the company, if there is a managing or whole-
time director or manager;
(B) three per cent. of the net profits in any other case.
The percentages aforesaid shall be exclusive of any fees payable to directors under sub-
section (5).
If, in any financial year, a company has no profits or its profits are inadequate, the
company shall not pay to its directors, including any managing or whole-time director or
manager ,by way of remuneration any sum exclusive of any fees payable to directors
under sub-section (5) hereunder except in accordance with the provisions of Schedule V
and if it is not able to comply with such provisions, with the previous approval of the
Central Government.

(b) (ii) State the advantages of Internal Controls. [3]

Answer:

A good internal control system ensures that the resources are utilized only for their
intended purposes and helps to overcome the risk associated with the misuse of
organization’s funds and other resources.
It prevents errors and irregularities by detecting them in a timely manner, thereby
promoting reliable and accurate accounting records. Safeguard from irregularities or
misappropriations.
It protects the interest of employees by segregation of duties and delegation of
responsibilities.

(b) (iii) Describe the Audit of a Recreation club. [7]

Answer:

(i) Examine the constitution, powers of governing body and relevant rules relating to
preparation and finalisation of accounts. In case, it is constituted as a company limited
by guarantee, application of provisions of the Companies Act, 2013 should also be seen.
(ii) Vouch the receipt on account of entrance fees with member’s applications,
counterfoils issued to them, and minutes of the Managing Committee.
(iii) Vouch Members’ subscription with the counterfoils of receipts issued to them. Trace
receipts for a selected period to the Register of members; reconcile the amount of total
subscription due with the amount collected and the outstanding. Check totals of various
columns of the Register of Members and tally them across. See the Register of Members

to ascertain the Member’s dues which are in arrear and enquire whether necessary
steps have been taken for their recovery. The amount considered irrecoverable, if any
should be written off.
(iv) Ensure that arrears of subscriptions for the previous year have been correctly brought
over and arrears for the year under audit and subscription received in advance
have been correctly adjusted.
(v) Verify the internal check as regards members being charged with the price of
foodstuffs and drinks provided to them and their guests as well as with the fees
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chargeable for the special service rendered such as billiards, tennis, etc. Trace debits for
a selected period from subsidiary registers maintained in respect of supplies and
services to members to confirm that the account of every member has been debited
with amounts recoverable from him.
(vi) Vouch purchase of sports items, furniture, crockery, etc., and trace their entries into the
respective stock registers. Vouch purchases of food-stuffs, cigars, wines, etc. and test
their sale price so as to confirm that the normal rates of profit have been earned on their
sales.
The stock of unsold provisions and stores, at the end of the year should be verified
physically and its valuation checked.
(vii) Check the stock of furniture, sports material and other assets physically with the
respective stock registers or inventories prepared at the end of the year.
(viii) Inspect the share scrips and bonds in respect of investments, check their current values for
disclosure in final accounts, also ascertain that the arrangements for their safe
custody are satisfactory, check the accrual of income there from and provision of
income tax thereon.
(c) (i) List the points for verifying assets and liabilities. [4]
Answer:
He should keep in mind the following points while verifying the assets & liabilities –
a. Whether the assets and liabilities are properly traced from ledger to Balance Sheet
b. Whether the assets are acquired for the business and liabilities got created for the
purpose of business and are clearly stated in the Balance Sheet.
c. Whether the assets and liabilities are properly grouped under specified heads in
the Balance Sheet.
d. Whether the assets & liabilities are in actual existence on Balance Sheet date.
e. Whether along with ownership the possession of assets lies with the client.
f. Whether the assets are properly valued in the Balance Sheet
g. Whether the liabilities stated in the Balance Sheet tallies with the confirmation
certificate.

(c) (ii) ‘Vouching is the foundation over which the structure of auditing is erected’ – Discuss
[4]
Answer:

―Vouching is the foundation over which the structure of auditing is erected‖

i. Serves as evidence: Vouching being an important auditing procedure helps in
obtaining evidence with respect to transactions recorded, which ultimately ensures
the completeness, accuracy, genuineness and validity of the transactions.
ii. Assurance: With the help of vouching, the auditor is ensured about recording of
transaction, proper allocation to accounting period, occurrence of transaction, and
further classification and disclosure of transactions as per the standard accounting
principles and policies.

iii. Preliminary for Verification: Vouching serves as a basis of verification of assets

and liabilities. Examination of the source documents justifying the amount of assets
and liabilities stated in the Balance Sheet can be done by vouching.
iv. Establishes Authenticity: It facilitates authenticity of the transactions recorded in the
primary books of accounts.

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(c) (iii) State the auditor’s duty in regard to issue of debentures. [5]
Answer:

Auditor’s Duty:

 The auditor should verify that the prospectus had been duly filed with the registrar
before the date of allotment of debentures.
 He should check the amount collected in the cash book with the counterfoils of
receipts issued to the applicants and also cross check the amount into the
application and allotment book.
 He should examine the debenture trust deed and note the conditions contained
therein as to issue and repayment.
 If the debentures are covered by a mortgage of a charge, it should be verified that the
charge has been correctly recorded in the register of mortgage and charges and it
has also been registered with the registrar of the companies.
 Compliance with SEBI guidelines should also be ensured.
 Where debentures have been issued as fully paid up to vendors as a part of the
purchase consideration, the contract in this regard should be checked.

(c) (iv) List the matters that need to be reviewed on a timely basis. [3]
Answer:

 Overall audit plan and the audit programme

 Assessment of inherent and control risks as well as any modifications made to the
overall audit plan and programme
 Documentation of the audit evidence obtained from substantive procedures and
the conclusions drawn there from
 Any proposed adjustments to the financial statements arising out of auditor’s
examination and observations.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament)
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