THE HISAB SCHOOL OF ACCOUNTANCY, LAHORE

CERTIFICATE OF ACCOUNTING AND FINANCE

MOCK EXAM OF FINANCIAL ACCOUNTING AND REPORTING – I
(CAF-1)
Marks: 100 23 August 2022
Time: 3 hours
Additional reading time –15 minutes

Instructions to examinees:
(i) Answer all questions.
(ii) Answer in black pen only.
(iii) Mention your name and CRN number in answer script
SECTION - A
QUESTION NO 1: (08)

On January 1, 2021, Umrao Jan Limited started the construction of its new factory. The
construction period is approximately 15 months and the cost is estimated at Rs. 80 million. The
work has been divided into 5 phases and payment to contractor shall be made on completion of
each phase.

In the year the company had the following sources of finance available.
1. Rights issue of shares amounting to Rs. 15 million on January 1, 2021. The company
usually pays a dividend of 10% each year.
2. Bank loan of Rs. 32 million carrying a mark-up of 13% was raised on March 1, 2021. (This
loan was outstanding for 306 days in the year).
3. On August 1, 2021, Rs. 10 million were borrowed from the bank. Interest thereon, is
payable at the rate of 11%. (This loan was outstanding for 153 days in the year).

Investment income on temporary investment of the borrowings amounted to Rs. 0.5 million. The
details of bills submitted by the contractor, during the year are as follows:

Particulars Date of payment Rupees

On completion of 1st phase March 1, 2021 20,000,000
On completion of 2nd phase April 1,2021 18,000,000
On completion of 3rd phase October 1, 2021 16,000,000
On completion of 4th phase Payment not yet 17,000,000
made

On June 1, 2021, the Karachi Development Authority issued instructions for stoppage of work on
account of certain discrepancies in the completion plan. The company filed a petition in the Sindh
High Court and the matter was decided in the company’s favor on July 31, 2021. Work
recommenced after a delay of 61 days.
The following periods may be relevant:
Period Days
March 1 to December 31 306
April 1 to December 31 275
August 1 to December 31 153
October 1 to December 31 92
(a) Assuming that the loans were taken specifically for the project, calculate the amount of
borrowing costs that should be capitalised in the period ending December 31, 2021 in
accordance with the requirements of IAS 23 Borrowing Costs.
 (b) Assuming that the loans constituted general finance, calculate the amount of borrowing
costs that s h o u l d be capitalised in the period ending December 31, 2021 in accordance
with the requirements of IAS 23 Borrowing Costs.

(Borrowing cost calculations should be based on number of days)

Requirement
(a) Amount of borrowing Cost capitalized during the period
(b) Capitalization rate used in case of general borrowings is to determine the amount
of borrowing cost eligible for capitalization.

QUESTION NO 2: (08)

The following information has been extracted from its financial statements of IRIS Limited (IL)
for the year ended 30 June 2021.

Debit Credit
Particulars
Rs. in million
Sales 172
Cost of sales 80
Operating and selling expenses 40
Bad debt expense 6
Loss on settlement of insurance claim 2
Finance charges paid 8
Taxation expense 15
Closing stock in trade 10
Trade receivables 28
Provision for doubtful debts 6
Trade payables 20
Provision for taxation 5
Property, plant and equipment - WDV 105

Additional information:
At the beginning of the period, the assets and liabilities were valued as under:
Rs. in
million
Property, plant and equipment 52
Stock in trade 4
Trade receivables 8
Trade payables 12
1. During the year, IL incurred a capital expenditure of Rs. 70 million.
2. Loss on settlement of insurance claim relates to a car which was destroyed in an accident.
Its cost and written down value at the time of accident was Rs. 5 million and Rs. 4 million
respectively. There were no other disposals during the year.

Requirement
Prepare operating activities section of the statement of cash flows for the year ended 30 June
2021 using the indirect method in accordance with the International Financial Reporting
Standards.
QUESTION NO 3: (10)
Alia Trust runs a charitable hospital and a pharmacy. Following balances were extracted from
their books:
Particulars Debit (Rs.) Credit (Rs.)
Fund 1,800,000
Donation received 1,200,000
Fees received from Patients 600,000
Recovery of room rent etc. 550,000
Recovery for food supplies 280,000
Surgical equipment 910,000
Building, theatres etc. 640,000
Consumption of Medicine – Hospital 240,000
Consumption of Foodstuff – Hospital 180,000
Consumption of Chemicals – Hospital 60,000
Closing stock of Medicines 40,000
Closing stock of Foodstuff 8,000
Closing stock of Chemicals 2,000
Sale of medicines from pharmacy 620,000
Opening stock of medicines (pharmacy) 110,000
Purchase of medicines (pharmacy) 600,000
Salaries – Administrative staff 60,000
Salaries – Doctors, nurses etc. 300,000
Salaries – Pharmacists in pharmacy 30,000
Electricity and power charges – Hospital 210,000
Electricity and power charges – Pharmacy 4,000
Furniture, fittings and equipment 160,000
Ambulance 60,000
Postage & Telephone (net of recovery)-Trust 52,000
Medical Journals 42,000
Ambulance maintenance (net of recovery) 1,600
Consumption of linen, bed sheets etc. 180,000
3-year 11% Fixed deposit (kept on 01-04-2017) 1,000,000
Cash in hand 12,100
Cash at bank 70,500
Debtors (pharmacy) 121,000
Creditors (pharmacy) 82,000
Remuneration to trustees, trust expenses 42,000
Total 5,133,600 5,133,600
Other information:
(i) Pharmacy supplies medicines to hospital on requisition and delivery notes; for
which no adjustment has yet been made in the books. Cost of such supplies was
Rs. 120,000.
(ii) Stock of medicines at closing date in pharmacy was Rs. 80,000.
(iii) Donations received relate to the trust.
(iv) Stock of medicines on 31st March 2018 included Rs. 8,000 of medicines
belonging to patients that have not been considered while calculating the
consumption.
 (v) One of the well-wisher donated surgical equipment having market value of Rs.
80,000 as on 31-3-2018.
(vi) The hospital is to receive a grant of 25% of the amount spent on poor people.
Such expenditure in the year was 100,000.
(vii) Out of fees recovered from patients, 10% is given to specialists.
(viii) Depreciation on Surgical equipment is 20%, buildings 5%, Furniture 10% and
Ambulance 30%.

Required:
Prepare Income & Expenditure accounts for the trust under Deferral Method for the year
ended 31-3-2018.

QUESTION NO 4:

IAS 16 ‘Property, Plant and Equipment’ and IAS 40 ‘Investment Property’ deal with tangible non-
current assets of an entity. Discuss any four differences between IAS 16 and IAS 40. (4)

QUESTION NO 5: (2+2+3+3)

Wonder Limited (WL) is engaged in the manufacturing and sale of textile machinery. Following
are the draft extracts of the statement of financial position and the income statement for the
year ended 30 June 2022:

Statement of Financial Position

2022 2021
Rs. in millions
Property, plant and equipment 189 130

Retained earnings 166 108

Deferred tax liability 45 27

Income Statement
2022 2021
Rs.in million
Profit before taxation 90 120
Taxation 32 42
Profit after taxation 58 78

Following additional information has not been taken into account in the preparation of
the above financial statements:

(i) Cost of repairs amounting to Rs. 20 million was erroneously debited to the
machinery account on 1 October 2020. The estimated useful life of the machine is
10 years.
(ii) On 1 July 2021, WL reviewed the estimated useful life of its plant and revised it from
5 years to 8 years. The plant was purchased on 1 July 2020 at a cost of Rs. 70 million.

Depreciation is provided under the straight-line method. Applicable tax rate is 30%.

Required:
Prepare relevant extracts (including comparative figures) for the year ended 30 June 2022
related to the following:
 (a) Statement of financial position
(b) Income statement
(c) Statement of changes in equity
(d) Correction of error note

QUESTION NO 6:
MULTIPLE CHOICE QUESTIONS

Select the most appropriate answer(s) from the options available for each of the following

(i) A plant has a carrying amount of Rs. 3.3 million as at 31 December 2021. Its fair value is Rs. 2.4
million and costs of disposal are estimated at Rs. 0.1 million. Cash flows from the plant for the
next 4 years are estimated at Rs. 0.7 million per annum. It will be disposed of at the end of the 4th
year for Rs. 0.6 million. Applicable discount rate is 10% per annum.
What is the approximate impairment loss on the plant to be recognized in the financial statements
for the year ended 31 December 2021?
(a) Rs. 1 million
(b) Rs. 2.6 million
(c) Rs. 0.7 million
(d) Rs. 1.1 million (02)

(ii) The forgivable loan from government is accounted for as _______________ if there is no reasonable
assurance that the entity will meet the terms for forgiveness of loan.
(a) a liability
(b) an income
(c) a government assistance
(d) a government grant (01)

(iii) Which of the following statements is/are correct?

(I) Cash flows information cannot be manipulated easily, as compared to profit or loss
because it is not affected by different accounting policies.
(II) Cash flows information can be manipulated easily, as compared to profit or loss
because it is affected by different accounting estimates.
(a) Only (I) is correct
(b) Only (II) is correct
(c) Both are correct
(d) None is correct (01)

(iv) On 1 January 2019, a company purchased an asset for Rs. 5 million against which it received
the government grant of Rs. 0.5 million. The company deducted the grant from the cost of asset.
It is the policy of the company to depreciate such assets using straight line method over ten years.
On 1 January 2021, the government grant became repayable due to non-fulfilment of conditions.
Repayment of grant will result in increasing:
(a) carrying value by Rs. 0.5 million
(b) carrying value by Rs. 0.4 million
(c) expense by Rs. 0.4 million
(d) expense by Rs. 0.5 million (02)

(v) As per IAS 20 ‘Accounting for Government Grants and Disclosure of Government Assistance’,
presenting the whole grant as other income in the statement of comprehensive income or
deducting it from a related expense, is the correct treatment of:
(a) grant related to income
(b) forgivable loan expected to be received in next year
(c) government assistance in the form of free technical advice
(d) grant related to assets (01)

(vi) Which of the following statements is/are correct?

(I) The Conceptual Framework is not an IFRS and nothing in the Conceptual Framework
overrides any specific IFRS.
(II) (II) One of the purposes of Conceptual Framework is to assist IASB to develop IFRSs
that are based on consistent concepts.
(a) Only (I) is correct
(b) Only (II) is correct
(c) Both are correct
(d) None is correct (01)

(vii) Which of the following may be presented in both statement of comprehensive income and
statement of cash flows?
(a) Purchase of non-current assets
(b) Issuance of shares
(c) Repayment of loan
(d) Depreciation (01)

(viii) Which TWO of the following are internal sources of assessing whether there is an
indication of impairment?
(a) An expected decline in the asset’s market value
(b) An increase in interest rates
(c) Evidence that the asset is damaged
(d) Evidence that the entity’s performance is worse than expected (01)

SECTION B
QUESTION NO 7:

SK Limited (SKL) deals in a single product. Following are the summarized financial statements of
SKL for the year ended 31 December 2017:
Statement of financial position Statement of profit or loss
2017 2016 2017 2016
Rs. in million Units sold in million 39 30
Fixed assets 410 240
Current assets 90 200 Rs. in million
500 440 Sales 371 300
Cost of goods sold (273) (210)
Capital 280 260 Gross profit 98 90
Long-term loan 170 100 Selling and administrative (55) (60)
Current liabilities 50 80 Finance cost (13) (8)
500 440 Net profit 30 22

Additional information:
i. With effect from 1 January 2017, selling price was decreased by 5% to boost sales
volume.
ii. During the year 2017, suppliers demanded price increase of 4%. SKL resisted the
price increase. However, both parties agreed to reduce the credit period.
iii. SKL had been running its business in a rented building whose annual rent was Rs.
15 million. During the year, SKL purchased this building for Rs. 200 million. Funds
 were arranged partially through a long-term loan. Useful life of the building is
estimated at 40 years.
iv. 75% of the selling and administration cost incurred in 2016 was fixed cost.
Required:
(a) Compute the following ratios for 2016 and 2017: (08)
 Gross profit  Net profit margin
margin
 Return on capital
 Return on assets employed

 Debt equity ratio  Current ratio

(b) Keeping in view the above information, comment on profitability and liquidity
position of SKL for 2017. (04)

QUESTION NO 8: (09)

DCCL, a company listed on Karachi and Lahore stock exchange is in process of finalization of its
accounts for the year ended 31-12-2021. The following information is available
i. Shareholders equity as at 31-12-2021 and 2020 consist of

Rs in million

2021 2020

Share capital (Rs 10 each) 10,340 7,833

Unappropriated Profits 6,945 4,508

ii. Profit after tax for the years ended 31-12-2020, 2021 and 2022 (unaudited)
was Rs 4,240 million, Rs 4,944 million and Rs 5,090 million respectively.

Cash dividends and bonus declared/paid during the last three years were as follows:
Cash Dividend Bonus Shares

*Interim Final *Interim Final

For the year ended 31-12-2020 10% - - 20%

For the year ended 31-12-2021 - 15% 10% 10%

For the year ended 31-12-2022 - 10% 5% 5%

*Interim dividend/bonus was declared at time of announcement of half-yearly financial results.

iii. Right shares were issued on 30-11-2022 in the ratio of 4 right shares for every 5
shares held by the shareholders of the company. The right issue was made at Rs
18/share.
iv. Applicable tax rate is 35%.
Required: Prepare statement of changes in equity for the year ended 31-12-2022.
QUESTION NO 9: (9)
Hobbit Ltd. bookkeeper drew up following statement of changes in equity for year ended
31.12.2021:

2021 2020
Rs. Rs.
Opening balance 81,000,000 25,000,000
Profit after tax 110,000,000 65,000,000
Less: Preference dividends (2,000,000) (4,000,000)
Less: Ordinary dividends (10,000,000) (5,000,000)
Closing balance 179,000,000 81,000,000

 The preference dividends in 2020 include Rs. 2,000,000 dividends owing in

respect of 2019. A dividend was not declared in 2019 as a loss was incurred in that
year.
 On 1 January 2021 there are 2,000,000 authorised ordinary shares (with a par
value of Rs. 10), of which 40% are in issue.

Additional information:
 During the year 2021 Rs. 2,000,000 repairs were wrongly capitalized on 1 April
2021. Depreciation rate is 10%.
 On 30 April 2021, Hubbard Limited issued 125,000 shares at their market value of
Rs. 5 per share. Another issue of 30,000 shares took place on 30 November 2021 at
their market value of Rs. 7 per share. A further issue of 30,000 shares took place on
20 January 2022 at their market value of Rs. 7 per share.
 Hobbit Limited had a rights issue on 31 May 2021, the terms of which were that
one share was offered at an exercise price of Rs. 3, for every 4 shares held on 31
May 2021, the market price immediately before the issue was Rs. 5 per share. All
shares offered were taken up.
 20% bonus shares were issued on 31 July 2021.

Required:
(a) Calculate the EPS of 2021 along with comparatives.
(b) Show the equity portion in the statement of financial position as on 31-12-2021
(including comparatives).

QUESTION NO 10: (20)

The following information pertains to Mango Limited (ML).

1) ML purchased delivery Truck, costing Rs. 170 million on 1 July 2014. It is to be
depreciated using the straight-line method, with Rs. 10 residual value. On 31
December 2017 it has accumulated depreciation of Rs. 35.
During 2019, ML decided to change the depreciation method from straight line to
reducing balance method. There is no change in life, however the estimate of
residual value is Rs. 15
2) In 2017 construction of buildings was started for rental purposes and spent Rs. 40
million. In 2018 expenditure of Rs. 50 million incurred. An expenditure of Rs. 30
million was spent on 31 May 2019. Now the company financed this expenditure
by obtaining a loan of Rs. 100 million from the bank on 01 May 2019 at the rate
of 12% per annum. Surplus funds have been invested at 7.35%. At end of year 2019
 one building of Rs. 60 million completed. The remaining building’s had not been
completed at the end of the year 2019.
3) ML purchased a plant for Rs. 375 million on January 01, 2018 and installed at the
cost of Rs. 59 million.
The plant has an estimated useful life of 7 years with no residual value.
ML uses revaluation model for subsequent measurement of its plant and
machinery and accounts for revaluations on net replacement value method. The
details of revaluations performed by an independent firm “Muhammad Ahmad
Malik & Co” are as follows:

Revaluation date Fair value

31 December 2018 Rs. 360 million
31 December 2019 Rs. 290 million
The auditor doubted the revalued amount presented in financial statements
amount at 31.12.2019 and asked to perform impairment testing for the plant. The
relevant data is as follows.
 Estimated cost to sell is Rs. 10 million. The Fair value is same as revalued amount.
 Estimated Cash flows of plant acquird on January 01, 2018 would be as follows
Years 2020 2021 2022 2023 2024
Cash flows (Rs. in 88.00 82.28 73.21 65.81 56.37
million)
 Applicable discount rate is 10%.

Required:
(a) Prepare the disclosure under relevant IAS in relation to Property, Plant and
Equipment in the notes to the published accounts for the year ended 31 December,
2019. (Comparatives are required, total column is not required)
(b) Perform the impairment test and incorporate the impairment loss (if any) in above
disclosure of PPE.
Note: Round off your workings to the nearest millions.

(THE END)
SOLUTION TO FAR1 MOCK

SOLUTION NO 1:
a) Assuming borrowings as Specific Borrowing:
Interest Incurred:
32,000,000 x 13% x (306-61)/365 = 2,792,32
9
10,000,000 x 11% x 153/365 = 461,096
Less: Investment Income: (Given) = (500,000)
Borrowing Cost to be capitalized = 2,753,425

b) Assuming borrowings as General Borrowings:

5,000,000 x 12.73% x (306-61)/365 = 427,240
18,000,000 x 12.73% x (275-61)/365 = 1,343,45
1
16,000,000 x 12.73% x 92/365 = 513,385
Borrowing cost to be Capitalized 2,284,076

W-1) Calculation of Capitalization Rate:

= 3,948,658 X 100 = 12.73%
31,019,178

 Interest incurred on loans:

32,000,000 x 13% x 306/365 = 3,487,562
10,000,000 x 11% x 153/365 = 461,096
3,948,658

 Weighted Avg outstanding balance:

32,000,000 x 306/365 = 26,827,39
7
10,000,000 x 153/365 = 4,191,781
31,019,178

W-2) Details of Payments:

Funds used From
Date Particulars Amount Right Loans
Shares
1-3-2021 First Payments 20,000,00 15,000,000 5,000,000
0
1-4-2021 Second 18,000,00 - 18,000,000
Payments 0
1-10-2021 Third Payments 16,000,00 - 16,000,000
0
SOLUTION NO 2:

Iris Limited
Extracts from Statement of Cash Flows (direct method)
for the year ended 30 June 2021
Rs. in million
Cash flows from operating activities
Cash receipts from customers 152
Cash paid to suppliers (65)
Cash paid for expenses (40)
Cash generated from operations 47
Interest paid (8)
Taxation paid (10)
Net cash inflow from operating activities 29

Stock
Debtor b/d 4 Cost of sales 67
(80-13)
b/d 8 Cash 152
Purchases 73 c/d 10
Sales 172 c/d 28

Creditor PPE-WDV
Cash 65 b/d 12 b/d 52 Disposal 4
c/d 20 Purchase 73 Cash 70 Depreciation 13
c/d 105

Tax
Payable
Cash 10 b/d -
c/d 5 Expense 15
2.

Sky Limited
Extracts from Statement of Cash Flows (indirect method)
for the year ended 30 June 2021
Rs. in million
Cash flows from operating activities
Profit before tax (172-80-40-6-2-8) 36
Adjustments for:
Depreciation 13
Bad debts 6
Loss on disposal 2
Financial charges 8
Profit before working capital changes 65
Changes in working capital
Stock (10 - 4) (6)
Trade receivables (28 - 8) (20)
Trade payables (20 - 12) 8
Cash generated from operations 47
Interest paid (8)
Taxation paid (14)
Net cash inflow from operating activities 29
SOLUTION NO 3:

Fatima Trust Marks

Income and expenditure 0.50
For the year ended 31.3.18 Rs.
INCOME
Donation 1,200,000 0.25
Fees from patients 600,000 0.25
Room rents etc 550,000 0.25
Food recoveries less food expenses (280,000 - 180,000) 100,000 0.50
Interest due on F. D (1,000,000 x 11%) 110,000 0.50
Ambulance receipts 1,600 0.25
Grants (Point-6: 100,000 x 0.25) 25,000 0.50
Fair Value-Surgical Equipment 80,000 0.25
Profit from pharmacy (W-1) 76,000 0.25
2,742,600
EXPENDITURE
Postage, telephone etc. (52,000) 0.25
Medicines consumed (240,000 + 8,000 belong to patient) (248,000) 0.50
Medicines received from Dispansary (120,000) 0.25
Chemicals consumed (60,000) 0.25
Trustee remuneration etc (42,000) 0.25
Salaries - Doctors (300,000) 0.25
Salaries - Administrative staff (60,000) 0.25
Electricity & Power (210,000) 0.25
Medical journals (42,000) 0.25
Linens, bed sheets (180,000) 0.25
Depreciation on:
Surgical equipment (990,000 x 20%) (198,000) 0.50
Building (640,000 x 5%) (32,000) 0.50
Furniture (160,000 x 10%) (16,000) 0.50
Ambulance (60,000 x 30%) (18,000) 0.50
Due to specialists (600,000 x 10%) (60,000) 0.50
(1,638,000)
Surplus 1,104,600

Hadia Trust
Balance Sheet 0.50
As at 31-3-2018 Rs.
Funds & Liabilities
Opening fund 1,800,000 0.25
Add: Surplus/(Deficit) of Trust 1,104,600 0.25
2,904,600
Liabilities
Creditor-Dispensary 82,000 0.25
Due to Specialist (600,000 x 10%) 60,000 0.25
142,000
3,046,600
Asset

Non - current assets

Building (640,000 - 32,000) 608,000 0.50
Furniture (160,000 - 16,000) 144,000 0.50
Ambulance (60,000 - 18,000) 42,000 0.50
Surgical Equipment (910,000 + 80,000 - 198,000) 792,000 0.75
Fixed Deposit 1,000,000 0.25
2,586,000
Current Assets
Stocks
Pharmacy 80,000 0.25
Medicines (40,000 - 8,000 medicine of patient) 32,000 0.50
Food stuff 8,000 0.25
Chemicals 2,000 0.25
Grants due (point-6) 25,000 0.25
Debtors-Dispensary 121,000 0.25
Interest accrued on F. D 110,000 0.25
Cash at Bank 70,500 0.25
Cash in hand 12,100 0.25
460,600
3,046,600

(W-1) Dispensary - Income & Expenditure Account for the year ended 31.3.2018 INCOME
Sales 620,000 0.25

Less: Cost of Dispensary medicine

Opening stock 110,000 0.25
Purchases 600,000 0.25
Less: Issues to hospitals (120,000) 0.25
Less:Closing Stock (80,000) 0.25
(510,000)
Gross profit 110,000
Less: expenses
Salaries 30,000 0.25
Electricity charges 4,000 0.25
Surplus (Transferred to Trust I&E) 76,000
SOLUTION NO 4:
SOLUTIO NO 5:
SOLUTIO NO 6:
(i) (c) Rs. 0.7 million
(ii) (a) a liability
(iii) (a) Only (I) is correct
(iv) (b) the carrying value by Rs. 0.4 million
(v) (a) Grant related to income
(vi) (c) Both are correct
(vii) (d) Depreciation
(viii) (c) Evidence that the asset is (d) Evidence that the entity’s performance is
damaged worse than expected
SOLUTION NO 7:
SK limited

Computation of ratios

2017 2016
(i) Gross profit margin 26.42% 30.00%
(98 ÷ 371) x 100 (90 ÷ 300) x 100
(ii) Net profit margin 8.09% 7.33%
(30 ÷ 371) x 100 (22 ÷ 300) x 100
(iii) Return on assets 8.60% 6.82%
(30 + 13) ÷ 500 x 100 (22 + 8) ÷ 440 x 100
(iv) Return on capital employed 9.56% 8.33%
(30 + 13)/280 + 170) x 100 (22 + 8) ÷ (260 + 100) x 100
(v) Debt equity ratio 0.38% 0.28%
170 ÷ (280 + 170) x 100% 100 ÷ (260 + 100) x 100%
(vi) Current ratio 1.80 2.50
90 ÷ 50 200 ÷ 80

(b)

(i) Profitability:
In 2017, gross profit margin of SKL has reduce from 30% to 26.42%. however, gross and
net profits amounts have been increased by Rs. 8 million mainly due to:
• Increase in sales volume as a result of 5% decrease in selling price. This resulted in increase in gross
profit by 8.89%[(98-90)÷90×100]. ( Horizontal analysis)
• Acquisition of building has resulted in savings in expenses as rent saved (Rs. 15 million) is higher than
the depreciation (Rs. 5 million) and increased in finance cost (Rs. 5 million).
• Since 75% of selling and administrative cost was fixed, expenses did not increase due to increase in
sales volume (economies of scale).

(ii) Liquidity:
• The decrease in current ratio from 2.5 to 1.8 is net effect of the following:
• Cash payment for purchase of building which significantly decreased current assets.
• Prompt payment to suppliers which decreased the current liabilities.
QUESTION NO 8:

DCCL
Statement of Changes in Equity
For the Year ended 31-12-22
Rs in
millions
Share Share Unappropriate Total
Capital Premiu d
m Profit
Balance as on 1-1-2021 7,833 - 4,508 12,341

Final Bonus Shares-2020 (20%) 1,567 - (1,567) -

(7,833x20%)
Interim Bonus Shares-2021(10%) 940 - (940) -
(7,833+1,567)x10%
Profit for the year - - 4,944 4,944
Balance as on 31-12-2021 10,340 - 6,945 17,285

Final Bonus Shares-2021 (10%) 1034 (1034) -

(10,340x10%)
Final Cash Dividend-2021 (15%) (1,551) (1,551
(10,340x15%) )
Interim bonus Shares-2022(5%) 569 (569) -
(10,340+1034) x 5%
*Issue of Right Shares 9,554 7,643 - 17,197
Profit for the year (W) 5,090 5,090
Balance as on 31-12-2022 21,497 7,643 8,881 38,021

*Right share=(10,340+1034+569)=11,943÷10 x 4/5 = 955.4 m shares

Share capital = 955.4 x 10 = 9,554
Share Premium = 955.4 x 8 =7,643
SOLUTION NO 9:
Basic earnings per share for the year ended 31 December 2021.

2021: 108,150,000 (W.1) – 2,000,000 /1,260,244 (W.2) = 84.2 per shares

2020 [restated]: 65,000,000-2,000,000 /1,043,478 (W.2) = 60.38 per shares
Original of 2020 would be; 65,000,000 -2,000,000 /800,000 = 78.75 per shares
Rupees in millions
2021 2020
Equity and liabilities
Equity
Share capital 14,175,000 8,000,000
(1,417,500 x 10) / (800,000 x 10)
Retained earning (W.3) 177,150,00 81,000,00
0 0
191,325,00 89,000,00
0 0

Corrected profit for the year

Given 110,000,00
0
Repairs wrongly capitalized (2,000,000)
Depreciation reversal (2,000 x 10% x 9/12) 150,000
Corrected 108,150,00
0

Workings:
Actual Current Prior
year year
(weighted) (adjuste
d)
Opening balance 1.1 800,000 800,000 800,000
Issue for value 30.4 125,000 83,333 0
(125,000 x 8/12)
925,000 883,333 800,000

Issue for value 31.05 [Right shares(W)] 138,750 80,938 0

(138,750 x 7/12)
1,063,750 964,271 800,000
Issue for no value 31.05(W) 92,500 83,850 69,565
(92,500/1,063,750 (92,500/1,063,
X964,271) 750X800,000)

1,156,250 1,048,121 869,565

Issue for no value 31.07 (bonus share) 231,250 209,624 173,913
[1,156,250 x 20%]
 (231,250/1,156, (231,250/1,156,
250X1,048,121) 250X869,565)
1,387,500 1,257,745 1,043,478
Issue for value 30.11 30,000 2,500 0
(30,000 x 1/12)

Closing balance 31.12 1,471,500 1,260,245 1,043,478

Working :

Issued for value = 925,000 x 1/4 = 231,250 x 3 = 693,750/5 = 138,750 shares

Issued for no value = 231,250 – 138,750
= 92,500 shares

Retained earnings as 31.12.2021

2021
Rs.
Opening balance 81,000,000
Profit after tax 108,150,000
Less: Preference dividends (2,000,000)
Less: Ordinary dividends (10,000,000)
Closing balance 177,150,000
SOLUTION NO 10:
Mango Limited

NOTES TO THE FINANCIAL STATEMENT

2019 2018 Marks

10. Property Plant & Equipment --------- ---------------------Rs. in milli ons------------------------------
Plan Vehicle Plant Vehicle 2019 2018
Gross Carrying Amount plant ve icle plant vehicle
Balance 01.Jan 360.00 170.00 - 170.00 0.25 0.25 0.25
+Addition 434.00 0.25
-Transfer (60.00) (62.00) 0.25 0.25
+Revaluation Surplus/(Rev. Loss) (10.00) (12.00) 0.75 0.75

Balance 31.Dec 290.00 170.00 360.00 170.00 0.125 0.125 0.125 0.125
Accumulated Depreciation & Impairment Loss
Balance 01.Jan - 45.00 - 35.00 0.25 0.25
+Depreciation for the year* 60.00 21.00 62.00 10.00 0.5 0.5 0.5 0.5
-Transfer (60.00) (62.00) 0.25 0.25
+Impairment Loss 7.00 0.75
Balance 31.Dec 7.00 66.00 - 45.00

WDV 31.Dec 283.00 104.00 360.00 125.00 0.125 0.125 0.125 0.125

10.1 Measurement Basis Revaluation Cost Revaluation Cost 0.125 0.125 0.125 0.125
Reducing
Straight
Method 0.125 0.125 0.125 0.125
Useful Life/Depriation Rate 7 years 16.84% 7 years 16 years 0.125 0.125 0.125 0.125
W-3 W-2
Depreciation for the year*

*1 Plant Dep 2018=434/7=62

*2 Plant Dep 2019=360/6=60

*3 Vehicle Dep 2018=(170-10)/16=10

*4 Vehicle Dep 2019=125x16.8373%=21.05=21

Mangora Limited
NOTES TO THE FINANCIAL STATEMENT

For the year ended December 31, 2019

0.75
10.2 Last revaluation of plant was perfomed by an independent valuer "Muhammad Ahmed Malik & Co" on 31.12.2019
10.3 Had there been no revaluation the carrying amount of plant would have been
2019 2018
Cost 434 434
Accumulated Depreciation (434/7=62×2, 62×1) (124) (62)
Carrying Amount 310 372

10.4 At the end of year, the value of Plant has reduced and an impairment testing conduted resulting an impariment loss of Rs. 7 million
charged as expense.

2019 2018
10.5 Movement in Capital Work in progress Rs. In million Rs. In million
Opening Balance 90 40 0.25 0.25
Expenditure incurred 30 50 0.25 0.25
Borrowing Cost Capitalised 4 {(100×12%×7/12=7 less 3 (70×7.35%×7/12)} 1
Transferred to Investment Property (60) - 0.5
Closing Balance 64 90 0.25 0.25

10.6 During the year 2019 company has changed the depreciation method of Vehicles from straight line to 2
reducing balance method. Had the method not changed, profit for the year would have been higher by
Rs. 11 million. ( Dep 21- Dep 10)

(b) TEST OF IMPAIRMENT Rs. In million

Carrying amount of Machine 290 0.25

Recoverable Amount
Higher of
FV-Cost to Sell (290-10) 280 0.5
Value in Use 283 283
Impairment Loss 7 0.5

Value in Use
Net Cash Flow PV Factor '@10% PV

A B A×B
 Cer
ti
fi
cat
einAccount
ing&Fi
nanceSt
ageExami
nat
ion

TheHISAB 20thAUG,2022
SchoolofAc
count
anc
y 100Marks
Lahore 3hours
Addi
ti
onalr
eadi
ngt
ime–15mi nutes

Pr
i
nci
pl
eofTa
xat
i
on

Instruct
ionstoexaminees:
(i) Answeral lquest ions.
(ii) Answeri nbl ackpenonl y.
(ii)Ment
i ionyouCRNnumberi nanswerscr
ipt

Q.
1 (
a)HibaAssoci
ates(
HA)ani ndust
ri
alundert
aki
ngisengagedinthebusi
nessofmanufact
uri
ng
andsaleofcement.Fol
l
owi ngi
sanex t
ractf
rom HA‟sprof
itandl
ossaccountf
ortheyear
ended31December2021:

Descri
pti
on Amounti
nmill
ion
Sal
estor egi
ster
edpersons 400
Sal
estounr egi
ster
eddist
ri
but
ors 100
Total
sales 500
Total
expenditur
e 450

Required:
I
nt helightoft
hepr
ovi
sionsofI
ncomeTaxOrdi
nance,
2001comput
etaxabl
eincomeandt
ax
l
iabil
i
tyofHAundertheappropr
iat
eheadsofi
ncomefort
hetaxy
ear2022.
(06)
(
b)NetoAssoci ates(NA)isengagedint hebusi
nessofmanuf act
uri
ngandsaleofvar
ious
products.Whil
eanalyzi
ngbooksofaccount
sofNetoAssoci
ates(NA)youhav
eobser
vedthe
fol
lowingforthetaxyear2022:
(
i) Rs.500,000pai donaccountofTechni calli
teraturedistr
ibutedtocust omer sregar
ding
safeuseofpest i
cidesmanuf acturedbyNA.
(
ii
) Rs.1,
000, 000onaccountofRunni ngexpensesoncar sfortheexecutives,forbusi
ness
aswellast heirpersonal use, asperthetermsoft heirempl oymentagr eement
(
ii
i)Sal
aryex penseofRs.1, 000,000pay ableasf i
nal settl
ementt ooneoft her eti
red
employeei nnextmont h.NAhasnotdeduct edanyt axont his.
(
iv)NASol dcosmet i
csamount ingt oRs.5,000,
000andpai dcommi ssi
onofRs.100, 000to
Hamz awhoi snonact i
veini ncomet ax.Cosmet icsar eThirdSchedulei t
em underthe
Sal
esTaxAct ,1990.
(
v) NA‟sPhar maceut icalsdivi
sioni ncurr
edadv erti
sementandsal espr omot i
onexpensesof
Rs.2,
300, 000andex ceededi tstargetofannual turnoverofRs.20, 000,000by7%.
Requi r
ed:
Beingt axconsul
tantoft
heNAy ouar
er equi
redt
oex
plai
ntheadmissi
bil
i
ty/
inadmissi
bil
i
tyoft
he
abov eforTaxYear2022alongwit
hreasonkeepi
ngi
nv i
ewthepr
ovisi
onsoftheIncomeTax
Ordinance,2001.
 (
05)
(
c)Usamaownsapi eceofagri
culturall
andinSehwan.On1Januar y2021,Usamar entedouttheland
forpoul
tryfar
mingoncommer cialbasi
stooneofi tsassoci
ates,HenEnt
erpri
ses,atamont hlyrent
ofRs.200,000.However,theannuall ett
ingv al
ueofsi mil
arlandintheareaisest i
matedatRs.
2,880,
000.Usamaalsoreceiv
edanon- adj
ustabledeposi
tofRs.800,000f
rom HenEnt erpr
ises.
Fol
lowi
ngexpenseswer
eincur
redbyUsamai
nrespectoft
hel
anddur
ingt
hey
earended31
December2021:
(
i)Gr oundl evel
li
ngex pensesRs.50,000.
(
ii
)Pr opertytaxRs.150, 000.
(
ii
i)Rentcol l
ecti
onchar gesRs.12,000.
(
iv)I
nterestaccruedonmor t
gageoflandRs.75,000.
(
v)Insurancepr emium agai nstt
heriskofwaterloggi
ngRs.30,
000.
Required:
Undert heprovi
sionsoft heIncomeTaxOr di
nance,2001cal
culat
eUsama'
stax
abl
eincomef
ort
ax
year2022.
(06)
Q.
2 Respondtothefol
lowi
ngi
ndependentscenar
ios,
undert
hepr
ovi
sionsoft
heI
ncomeTax
Ordi
nance,2001:
(
a)ShifaSecuri
ti
es(Pvt
)Limit
ed(SSPL),anon-act
ivesmallcompany,pur chasedat r
adi
ngri
ghts
enti
tl
ementcerti
fi
cat
eforRs.2,
700,000on11December2020,i nordert obeabletotr
adeasa
brokeronthePakist
anStockExchange.TSPLsol
dt hecert
if
icat
eon25December2021f orRs.
3,
100,000.Thecompanydi
dnotconductanybusi
nessduri
ngthetimeitheldthecer
ti
fi
cat
e.
Requir
ed:
Computetaxli
abil
it
ybyShi
faSecur
it
ies(
Pvt
.)Li
mited(
SSPL)fort
hetaxyear2022i
nrespectof
thesal
eofthetradi
ngri
ght
senti
tl
ementcer
ti
fi
cateon25December2021.
(
02)
(
b)Naseeris63yearsol
dandisresi
dentinPaki
stan.Hefil
eshi
staxr
etur
nsr
egul
arl
y.Dur
ingt
hetax
year2022Naseer‟sson,whoisat axpay
eri
nPaki st
an,gav
eNaseeracashgi
ftofRs.400,
000
t
hroughaprescri
bedbanki
ngchannel.
Requi
red:
Expl
ainthet
axi
mpl
i
cat
ionsoft
heabov
etr
ansact
ion.

(
02)
(
c)On1June2022Hi baSol d4,000sharesinBrightLi
ghtLtd,anunl
i
stedcompany
,forRs.800,
000.
Hi
baacquiredt
hesesharesasf ol
l
ows:
 15Apri
l2020Purchased2,000sharesforRs.90,000
 20August2020Purchased2,000sharesforRs.150,000
 18December20211f
or4r
ight
sissuewast
akenupf
ull
y,cost
ingRs.40pershar
e
Requi
red:
Computetaxabl
eincomeofHi
baf
ort
het
axy
ear2022i
nrespectofabov
etr
ansact
ion.
(
03)
(
d)AzharPakist
anLi
mited(APL)at ex
til
emanuf act
urerisanon-li
stedpubliccompanyincorporated
undertheCompaniesAct ,2017.APLhasbeengr antedpermi ssi
onbyCommi ssi
onerI nland
Revenuetousea12mont hsper i
odendi ngon31Augustasi tstaxy earsi
nceitsi
ncorpor
ationon
01September2017.Allt
heshar eholder
sofAPLar eindi
vi
dual
s.Thecont rolandmanagementof
theaff
air
sofAPLduringt
hey earwasout sidePaki
stan.
Requi
red:
(
i) Br
ief
lystat
ewi t
hreasonswhetherf
ortaxpur
poses:
(
a) APLisorisnotapubliccompany.
(
b) I
sar esi
dentcompanyoranon- r
esi
dentcompany
 (
ii
) Stat
ethecalendaryearwhichwil
ldenot
etheAPL‟staxyearf
ortheaccounti
ngy earended31
August2020andt helastduedat
eforfi
li
ngAPL‟sincometaxret
urnforr
elevanttaxyear.
(04)

Q.
3
(
a)Sanai soperati
ngabusinessasaWeddi ngEventPlannersi
ncepast12y ear
s.Shehadf i
ledher
compl et
ereturnforthetaxyear2013on20August2013.On1Sept ember2019,Commi ssi
oner
Inl
andRev enue(CIR)servedaShowCauseNot i
ce,r
equiri
nghertoexpl
aincert
ainrecei
ptswhich
werecr edi
tedtoheraccountdur i
ngt hetaxyear2013.Sanaisuncertai
nast owhet herCIRis
empower edt oi
ssuesuchanot i
ceafteralapseofsomanyy ear
s.
Required:
AdviseSanaaboutt hevali
dit
yoftheshowcausenot icei
ssuedbyCIRundertheIncomeTax
Ordinance,2001.
(03)
(
b)Commi ssi
onerI
nlandRevenue(CI
R)i
ntendstoamendtheassessmentofABCLt
donthebasi
s
ofdefi
nit
einfor
mati
onandt her
efor
ehasi
ssuedashowcausenoti
ceu/
s122(9).
Requi
red:
Expl
ainv
ari
ousopt
ionsav
ail
abl
etoABCLt
dinr
esponset
osai
dnot
ice.
(
07)
(
c)St
atet
her
ulesr
elat
ingt
oset
-of
fandcar
ry-
for
war
dofl
ossesofAOPandi
tsmember
s.
(
03)

Q.
4 Grapef
rui
tiswor
kingasMangerPr
oduct
ionwit
hJuiceLi
mited(
JL)fort
hepastcoupl
eofyear
s.
Thedetai
l
sofhismonthl
yemolument
sduringt
heyearended30June2022areasunder
:
 Her eceivest heBasi csalaryRs.350, 000.Permont h.Salar
yist ransferredalongwi t
hmedi cal
all
owanceofRs.38, 000andhouser entallowanceof150, 000at5th wor kingdayofeach
mont h.
 Companymai ntainedcarf orbot hof fici
alandpr i
vateuse.Thecarwasl easedon1August
2021f rom nat ionalbankofPaki st anundergov ernmentofPaki stansubsi dizedl oanscheme.
Thet enur eoft hel easei s5y ear shav ingi nterestr ateof7per cent.Annualr ent
alsofRs
350,000wer epaidJL.Fai rmar ketv alueoft hecarondat eofl easewasRs.1, 500,000and
tot
al r
ent alsofRs1, 750,000wi l
lbepai dbyJL.
 On1Januar y2022,JLsol dani tem ofLG4kLEDt oGrapeFruitf orRs.120, 000.Thewr i
tt
en
downv alueoft hei t
em ofLEDatt heendof31December2021wasRs.130, 000.
 Anopt i
onwasgr antedt ograpefruitinAugust2020t oacquire2,500shar esinJLnewi ssuein
for
eigncur rency.Thef acevalueofeachshar ei sRs1$.Howev er,theopt i
onwasexer cisable
aft
ercompl eti
onofoney earofser vi
cewi t
hJL,Gr apefr
uitpaidanamountequi val
entt oRs.
200,000t oacqui r
et heopt i
onwhent hef airmar ketv alueoftheopt i
onwasRs.250, 000.
 On1Sept ember2021, hepaidanamountequi valentt oRs.300,000t oacqui ret hesharesi nJL.
Theshar eswer ei ssuedt ohi m on15Sept ember2021,whent hemar ketv alueofeachshar e
wasequi v alenttoRs.375i nlocal currency.
 On15June, 2020, GrapeFruitsold2,000shar esi nJLandr eceivednetpr oceedsequi v al
entto
Rs.875, 000i nhisbankaccounti nPaki stan.Thi samountwasr eceivedaf terdeduct i
onof
bankchar gesofRs.5, 000andbr okeragecommi ssionequi val
entt oRs.10, 000.
 Rs.90,
000forsi
gni
ngabondwi
thJL.Accor
dingt
othebondGr
apef
rui
twoul
dnotj
oinanyof
thecompet
it
orsofJLf
ornex
t3year
s.
Ot
heri
nfor
mat
ionr
elev
antt
otaxy
ear2022i
sasunder
:
 On1Jul y2021,Grapefrui
trecei
vedfol
lowi
ngpaymentsfr
om hisprev
iousempl
oyerLassi
Hospi
talLimit
ed:
 Rs.1,
085,000inr
espectofter
minati
onbenef
it
sunderanagr
eement.
  Rs.1,
925,
000agai
nstgr
atui
tyunderanapprovedscheme.
 On1December2021,hepai
dapr emium ofRs.300,
000onal
i
fei
nsur
ancepol
i
cy.
 On1Januar y2022,Gr apefrui
tpurchased35,000li
stedsharesinMusamiLi mited(
ML)ata
pr
iceofRs.25pershar e.On20Mar ch2022,heful
lysubscri
bed15%r ightshar
esoff
eredby
MLt oit
sex i
sti
ngshareholdersatapr i
ceofRs.20pershare.
 Withhol
dingtaxdeductedfrom Grapefrui
t‟
ssalar
yduringt
axy ear2022amountedtoRs.
1,
105,000
 Histot
alassessedt
axablei
ncomeandtotaltaxespai
dthereonduri
ngt
het
hreepr
ecedi
ngt
ax
year
samount edtoRs.13,
750,
000andRs.1,410,000r
especti
vel
y.
Asgrapefr
uitsignedanagreementfornotjoini
nganyofthecompet
it
orofJL.Tosafeguar
dhi
s
fut
ureint
erestsinAugust2021,
grapefrui
tsignedacontr
actwit
hMangoEnterpr
ises(ME).
Themai
ncontentsofthecontractar
easfol
lows.
(i
) MEwil
l pr
ovide500met ri
ctonsofmangoesatRs.2,
580permet
ri
cton
(i
i
) Del i
veryisexpectedtobemadei nOctober2021
(i
i
i) MEagr eedtorepurchasetheent
irel
otatthepri
cepr
evai
l
ingont
hedateofsal
e.i
v.I
n
Oct
ober2021
Grapefr
uitsol
dtheent i
relott
oMEwi t
houttaki
ngdeli
ver
yinOctober2021atpr i
ceof3,
840per
metri
ct on.Healsoi ncur
redcostofRs25,000inrespectofsuchtransact
ion.Heent
eredin
si
mi l
arkindoft
ransacti
oninJanuar
y2021andsust
ainedalossofRs300,000.
Requi
red:
Underthepr
ovi
sionsoft
heI
ncomeTaxOrdi
nance,2001andRul
esmadether
eunder,comput
er
thet
axablei
ncomeandnett
axpayabl
ebyorref
undablet
oGrapef
rui
tfort
axyear2022.
(19)
Q.5
(a) St
atet
hemeani
ngoft
het
erms“
Taxev
asi
on”and“
Taxav
oidance”gi
vi
ngt
woexampl
eoft
heeach.
(
04)

(b) I nthelightofICAP‟ sCodeofEt hics,di

scusseachoft hef ol
lowi
ngi ndependentsituati
onswith
regar
dt othebr eachofthef undament al pr
inci
plesofethics:
(i
) AliAhmad, ataxpractit
ioner,f
ailedtoincluderentalincomeonat axr et
urnhef i
ledforhiscli
ent,
ZaheerAssoci ates(ZA).Theomi ttedincomewasf r
om ar ecentlyacquir
edpr opert
y.Thepr opert
ywasdul y
discl
osedinZA‟ swealthstatement .
(i
i) Mat eeni sasolepractici
ngchar teredaccountant.Dur i
ngt heyear,oneofhisclients,Tai
zEnterpr
ises
(TE),
openedanewdi vi
sioninMi ddleEast .Mateenhasnoexper i
enceininternati
onaltaxandwoul dnotbe
abletogiv
eTEt hekindoft axadv i
ceneededf orthenewdi v
ision.TEisal ong-t
imeclientandMat eendoes
notwanttol osei t
.Mateendeci dedtor emai nsi
lentabouthi slackofknowl edgeinthear eaandwoul ddeal
thesit
uati
ononneedbasi s.
(
06)
Q.
6 (
a)Usaidaregisteredpersonundert
heSalesTaxisengagedinthebusinessofmanuf act
ureand
supplyofv ari
ous taxabl
e and exemptgoods and isregister
ed with Feder
alsales t
ax
author
it
ies.Duringthemont hofMay2022itcar
ri
edoutthefollowi
ngtransacti
ons:
(
i) Usai dpur chasedr awmat eri
alworthRs.200, 000f ormanuf acturi
ngoftaxabl egoods.He
uti
li
zedr awmat eri
al worthRs.125, 000f orproduct i
onwher easmat er
ialwor thRs.25,000
wasl yi
ngi nthei nventory .Balancer aw mat erialofRs.50, 000wasdest royedbyf i
re.
Usaidreceivedani nsurancecl aim ofRs.40, 000i nrespectofgoodsdest roy edbyfire.
(
ii
) Usai dundermi sappr ehensi oncollectedaddi tionalsalestaxofRs.100, 000f r
om oneof
i
tscust omer s.65% oft hegoodsonwhi chaddi ti
onalsalest axwascol lectedarest il
l
l
y i
ngwitht hecust omerasunsol dst ock.
(
ii
i) Usaidsol dgoodswor t
hRs.1, 000,000t oMr .UsmanonApr i
l2019andr elatedsalestax
waspai dt otheex chequeri nt hesamemont h.I nJanuary2022Usmanbecamebankr upt.
I
nMay2022af termaki ngsev er
alunsuccessf ulatt
empt st orecovert hedebt ,Usaid
recogni
z edt hesaidamountofRs.1, 000,000asbaddebti nit
sbooksofaccount s.
 (
iv) Usaidl
aunchedincenti
veschemef orit
scustomers.Underthesai
dscheme,goodswor t
h
Rs.100areprov
idedf r
eeofcostont hecumulati
vepurchaseofgoodswort
hRs.2,000.
(
v) Usai dsol
dv ehi
clesandf urni
tur
e&f i
tt
ingstonon-regi
ster
edpersonforRs.1,000,
000
andRs.500,
000r especti
vel
y.Fur
nitur
eandf i
tt
ingswereheldbyUsaidasst
ockintrade.
Requi
red:
I
nthelightoft
heprovi
sionsoftheSal
esTaxAct
,1990readwit
hSalesTaxRul
es,2005advi
ce
Usai
dast othechar
geabil
it
y/adj
ust
mentofsal
estaxi
nrespectofeachoft
heabovetr
ansact
ions.

(
10)

(
b)SluggishLimi t
ed(SL)purchased80t onsofcement ,coveredunderThirdSchedule,fr
om I r
on
Limited(IL)foroneofitsprojectsatawhol esalepri
ceofRs.10, 000perton.Theretai
lpr i
ceof
thecementi nthemar ketisRs.11, 000pert on.Alltheabov epricesareexcl
usiveoff ederal
excisedut yofRs.1,500pert onandsal estaxatt herateof17%.Duet ofi
nancialconstrai
nts,
SLhasr equestedtosettl
et hepr i
cebyt r
ansf err
ingaf orkli
fterhavi
ngamar ketv al
ueofRs.
800,000andt opayRs.90,000i nfi
nalsett
lemental ongwi t
ht heappli
cabl
esalestaxbywayof
achequedr awninfavourofIL.
Requir
ed:
I
nv i
ewoftheprov
isi
onsoft
heSalesTaxAct
,1990det
erminet
hev
alueofsuppl
yandtheamount
ofsal
estaxpay
ablebySLundert
heaboveci
rcumst
ances.
(
04)
(
c)I
ntheli
ghtoft
heprovi
sionsofSalesTaxRul
es,2006expl
aint
heconceptofcancel
l
ati
onof
mul
ti
plesal
est
axr
egist
rationnumbers.
(
03)
Q.
7 CanadaAssociates(CA)i sr egi steredundert heSal
esTaxAct ,1990,asmanuf acturer-
cum-
di
stri
butor-
cum-retai
ler.Fol l
owi nginf or
mat ionhasbeenextractedfr
om itsrecordsf orthemont
h
ofAugust20XX:
Rupees
Suppli
es
Taxablegoodstoregister edper sons 15,000,00
Taxablegoodstounr egister edper sons 02,800,00
Export
s 0
1,500,00
Exemptsuppli
es 0,
1 700,00
Purchases 0
Taxablegoodsfrom regist eredsuppl iers 20,000,00
Taxablegoodsfrom unregi st eredsuppl i
ers 01,800,00
Exemptgoodsf r
om r egister edsuppl i
ers 0400,000
Fi
xedassets(machi nery)f rom ar egisteredsuppli
er 1,000,00
0
Thefoll
owingadditi
onal i
nf ormat ioni savailabl
eforAugust20XX:
(
i) Supplyoftaxabl egoodst oregi
steredpersonsincludet hef oll
owing:
 Goodsi nv oiced atRs.325, 000 (
netofspeci aldi scountofRs.125, 000)soldt oa
governmentof fi
cial.On1August20XX,CAl aunched„ Hall
oweenToothBr ush‟whichis
coveredunder3r dschedul e.Ther etai
lpriceoft het oothbrushesisRs.100each.
Howev er,beingt hef i
rstmont hoflaunchi
ng,i twassol datadi scount
edpr i
ceofRs.75
each.4,000t oothbr usheswer esol
di nAugust20XX.
 Ex portsincludesuppl yoftax abl
egoodsofRs.500, 000t oaretai
leri
nExportProcessi
ng
Zone
 Ex emptsuppl i
esi ncludedistri
buti
onoff reesampl esofexemptgoodsamongt he
vendors.Val ueofsuchgoodsamount edtoRs. 80,000.
(
ii
) Pur
chasesf r
om regi
ster
edsuppli
ersi
ncl
ude:
 Mat er
ialworthRs.350,
000thepaymentofwhi
chwasmadebydeposi
ti
ngcashdi
rect
ly
inthebusinessbankaccountoft
hesuppl
ier
.
  Mater
ial
worthRs.800,
000agai
nstwhichadiscr
epancyhasbeenindi
catedbythe
CREST.
 AnamountofRs.2,000,
000pai
dforpurchaseofrawmateri
al.However
,only30%oft
he
goodsweresuppl
iedduri
ngAugustforwhichsalest
axinvoi
cehasbeeni ssuedbyt
he
suppl
i
er.
(
ii
i)On1August20XX,CAex ecut
edanagreementwithMajeedSons(
MS)forsal
eoflocal
l
y
purchasedgoodswort
hRs.225,000.TheagreementempowersMStoobtai
ndel
iv
eryof
thesegoodsanyt
imei
tli
kes.
(
iv)Suppli
esr
etur
nedbydif
fer
entregi
ster
edpersonsamount
edt
oRs.756,
000.Pr
operdebi
tand
cr
editnot
eswerer
aisedwit
hinthespeci
fi
edtime.
(
v) Theaudi
tor
shavepr
oposedaprovi
sionagai
nstobsol
eteandexpi
redst
ockofRs.285,
000
whichi
slyi
ngi
nCA‟swarehousesi
nceJanuary20X9.
(
vi)Machi
ner
ypur
chaseddur
ingt
hemont
hwascommi
ssi
onedi
ntooper
ati
onson31August
20XX.
(
vii
)Excessofi
nputt
axov
erout
putt
axi
nJul
y20XXamount
edt
oRs.75,
000.
Exceptwher
eot
her
wisespeci
fi
ed,
all
figur
esar
eexcl
usi
veofsal
est
ax.Rat
eofsal
est
axi
s17%.

Requi
red:
Computethesal
est
axl
i
abi
l
ityofCAf
ort
hemont
hofAugust20XX. (
13)
 EXTRACTSFROM THEI
NCOMETAX
ORDINANCE,
2001
Rat
esofTaxf ornon-salar
iedIndiv
idualsand
Associat
ionofPer sons
S.No Taxabl
eIncome Rat
eofTax
1. Wheretaxabl
eincomedoesnotexceedRs. 0%
2. Wheretaxabl
eincomeexceedsRs.400, 000 5%oft heamountexceedi
ng
butdoesnotexceedRs.600,
000 Rs.400,000
3. Wheretaxabl
eincomeexceedsRs.600,
000 Rs.10,
000plus10%ofthe
butdoesnotexceedRs.1,
200,
000 amountexceedi
ngRs.600,
000
4. Wheret
axabl
eIncomeexceedsRs. Rs.70,
000plus15%ofthe
1,
200,
000butdoesnotexceedRs.2,
400,
000 amountexceedi
ngRs.1,
200,
000
5 Wheret
axabl
eIncomeexceedsRs. Rs.250,
000plus20%ofthe
2,
400,
000butdoesnotexceedRs.3,
000,
000 amountexceedi
ngRs.2,
400,
000
6 Wheret
axabl
eIncomeexceedsRs. Rs.370,
000plus25%ofthe
3,
000,
000butdoesnotexceedRs.4,
000,
000 amountexceedi
ngRs.3,
000,
000
7. Wheret
axabl
eIncomeexceedsRs. Rs.620,
000plus30%ofthe
4,
000,
000butdoesnotexceedRs.6,
000,
000 amountexceedi
ngRs.4,
000,
000
Wheret
axabl
eIncomeexceedsRs.6,
000,
000 Rs.1,
220,
000plus35%ofthe
8.
amountexceedi
ngRs.6,
000,
000

(
2) Wheretheincomeofani ndi
vi
dualchargeabl
eundert
hehead―‗sal
ary
‖ exceedssevent
y-f
ive
percentofhistaxabl
eincome,
theratesoftaxt
obeappli
edshallbeassetoutinthe
fol
l
owingTabl e,namel
y:—

S.No TaxableIncome Rat

eofTax
(1) (2) (3)
Wheretaxabl
eincomedoesnot 0%
1.
exceedRs.600,
000
2. 5%oft heamount
Wheretaxabl
eincome
exceedingRs.600,
000
exceedsRs.600,
000but
doesnotexceedRs.
3. 1,
20
Wh e0
r
e,
00
t
a0
xabl
eincome Rs.30,000plus10%ofthe
exceedsRs.1,
200,000but amountex ceedi
ngRs.
doesnotexceedRs.1,800,
000 1,
200,000
 4. Wheret axableincome Rs.90,000plus15%ofthe
exceedsRs.1, 800,000but amountex ceedi
ngRs.
doesnotex ceedRs.2,500,
000 1,
800,000
5. Wheret axableincome Rs.195,000plus17.
5%oft he
exceedsRs.2, 500,000but amountex ceedi
ngRs.
doesnotex ceedRs.3,500,
000 2,
500,000
6. Wheret axableincome Rs.370,000plus20%ofthe
exceedsRs.3, 500,000but amountex ceedi
ngRs.
doesnotex ceedRs.5,000,
000 3,
500,000
7. Wheret axableincome Rs.670,000plus22.
5%oft he
exceedsRs.5, 000,000but amountex ceedi
ngRs.
doesnotex ceedRs.8,000,
000 5,
000,000
8. Wheret axableincome Rs.1,
345,000plus25%oft he
exceedsRs.8, 000,000but amountexceedingRs.
doesnotex ceedRs. 8,
000,000
9. 12,
Wh 0
e0
r
e0,
0
ta0
x0
ableincomeex ceeds Rs.2,
345,000plus27.5%ofthe
Rs.12,000,000butdoesnot Amountex ceedi
ngRs.12,000,
000
exceedRs. 30,000,
000
10. Wheret axableincomeex ceeds Rs.7,
295,
000plus30%ofthe
Rs.30,000,000butdoesnot amountexceedi
ngRs.
exceedRs. 50,000,
000 30,
000,
000
11. Wheret axableincomeex ceeds Rs.13,
295,
000plus32.
5%ofthe
Rs.50,000,000butdoesnot amountexceedi
ngRs.50,
000,
000
exceedRs. 75,000,
000
12. Wheret axableincome Rs.21,
420,
000plus35%oft
he
exceedsRs. 75,000,000 amountexceedi
ngRs.
75,
000,
000

Ratesoft
axfordi
sposalofimmoveableproper t
y
(
3A) Gai
nari
si
ngondi sposalofanimmovabl
epropert
yshallbecomput edinaccor
dancewi
tht
he
f
ormul
a:
S.
No. HoldingPeriod Gai
n
1. Whereholdi
ngperi
odofani
mmovablepr
opert
ydoesnotexceedone A
2. yea
Wher
reholdi
ngperi
odofani
mmovablepr
opert
yexceedsoneyear Ax¾
butdoesnotexceedtwoy ear
s
3. Whereholdi
ngperiodofanimmovabl
epr
oper
tyexceedst
woy ear Ax½
butdoesnotexceedthreeyear
s
4. Whereholdi
ngperiodofanimmovabl
epr
oper
tyexceedst
hreeyear Ax¼
butdoesnotexceedfouryears
5. Whereholdi
ngperiodofanimmovabl
epr
oper
tyexceedsf
ouryears 0

Wher
eAi
stheamountofgai
nondi
sposal
ofani
mmov
abl
e

pr
oper
ty.Thet
axwi
l
lbecal
cul
atedoni
mmov
abl
epr
oper
tyatt
he

S.No. Amountofgain Rat

eoft ax
1. Wher
ethegai
ndoesnotexceedRs.5mil
li
on 3.5%
2. Wher
ethegai
nexceedsRs.5mil
li
onbutdoesnotexceedRs.10 7.5%
3. mi
l
Whl
i
eo
r
ent
hegai
nexceedsRs.10mil
li
onbutdoesnotexceedRs.15 10%
4. mi
l
Whl
i
eo
r
ent
hegai
nexceedsRs.15mil
li
on 15%
f
oll
owi
ngr
ates:
 Rat
esoft
axf
orsecur
it
ies
TY2022
S.No. Per
iod Securit
ies Securi
ti
es
acquir
edbefor
e acquir
edaft
er
01.07.
2016 01.07.
2016
1. Wher eholdi
ngperiodofasecuri
tyi
slessthan12 15%
moe
Wh nr
ths
eholdi
ngperiodofasecuri
tyi
s12mont hsor
2. 12.
5%
mor ebutlessthan24months 12.
5%
3. Wher eholdi
ngperiodofasecuri
tyi
s24mont hsor 7.
5%
mor ebutthesecurit
ywasacquir
edonoraf t
er
4. 1.
7.
Wh 2
er0
e1
t3
hesecuri
tywasacquir
edbefore1stJul
y, 0% 0%
2013
Rat
esoft
axdepr
eci
ati
on
Asset
s Rateof
depreci
ati
o
Bui
l
dings(
All
types) n 10%
Furni
tureandfit
ti
ngs,Plantandmachi
nery–gener
al,Motorv
ehiclesandships, 15%
Technicalandprof
essionalbooks
Comput ersandall
i
editemsi ncl
udi
ngpr
inter
,moni
torandITrel
atedplantand 30%
ma
Airc
crhi
n
after
y
sandaeroengines 30%

I
nit
ial
all
owancer
ate 25%
 Cer
ti
fi
cat
einAccount
ing&Fi
nanceSt
ageExami
nat
ion

TheHISAB
SchoolofAc
count
anc
y
Lahore

Moc
kSol
ut
ion

Instruct
ionstoexaminees:
(i) Answeral lquest ions.
(ii) Answeri nbl ackpenonl y.
(ii)Ment
i ionyouCRNnumberi nanswerscr
ipt

Answer#1
(a)
HibaAssoci
ates
Computati
onoftaxabl
eincome
TaxYear:2022

Mar
ks
I
ncomef rom Busi
ness: Rs.I
nmill
i
on
Sal
es 500
All
owabl
eex pendi
tur
e-W-1 405 1
Taxabl
eincome 95 0.
5

Cal
cul
ati
onoft
axl
i
abi
l
it
y:
Rupees
Taxl
iabi
l
ityupt
o6, 000,
000 1,
220,
000
Bal
ance (Rs.
95,000,
000-
6,000,
000)
x35% 31,
150,
000
32,
370,
000 1
Worki
ngs
W-1:
Sal
estoregi
ster
edpersons 400
Sal
estounregi
ster
edpersons-
li
abl
etober
egi
ster
ed 100

Tot
alexpendi
tur
etobedi
sal
l
owed(100/500x 450) 90 A 2
Di
sal
loweduptomaxi
mum of10%oftot
alexpendit
ure 45 B 1

LowerofAorB 45 0.
5
Total
expendi
tur
e 450
All
owabl
eamount 405 6

(
b)1mar
kforeachcor
rectanswer

(
i)Expendi
tur
eofRs.500,
000i
ncur
redont
echni
call
i
ter
atur
edi
str
ibut
edt
ocust
omer
sregar
dingsaf
e
 useofpest i
cidesi sadmi ssibl
ebeingf orthepur posesofbusinessandsuff
eringfr
om nolegal
di
sabil
it
y .
(
ii
)Thecar sgi ventot heex ecuti
vesareinaccordancewi t
htheter
msoft hei
rempl
oyment.Thei
rusefor
per
sonalpur poseswi l
lbet r
eatedasaper quisi
tefortaxat
ionoftheemploy
eesbutforNA,i
tisful
ly
admissi
bleex penditure.
(
ii
i)Wit
hholdingi srequiredonl yattheti
meofmaki ngt hepayment.Si
ncepaymentistobemadenext
month,thereforetheex penseisadmissibl
e.
(
iv)Anyamountofcommi ssionpaidorpayablei
sdisall
owedinrespectofsupplyofproductsli
stedi
nthe
Thir
dSchedul eoftheSalesTaxAct,1990,wheretheamountofcommi ssi
onpaidorpay abl
eexceeds
0.2percentofgrossamountofsuppl i
esther
eofunlessthepersontowhom commi ssionis
pai
di sappeari
ngintheactiv
et axpayerl
i
st.AsHamzai snon-act
iveandcommi ssionpayableexceeds0.
2%
ofgrosssupplies,
theref
oreexcessamountofRs. 90,
000will
bedisallowed.
(
i)A pharmaceuticalmanuf actureris enti
tl
ed to maximum deduct
ion of10% oft
he tur
noveras
deducti
bleexpendit
ure.Therefore,i
nthiscaseitwouldbeal
l
owedt odeductmaxi
mum amountofRs.
2,
140,000incomput i
ngincomef rom busi
ness.(20,
000,
000×107%x10%) .

(
c) Mar
ks
Usama
Comput
ati
onoftaxabl
eincome
TaxYear:2022
Incomef rom pr opert
y:
Grossrent(Hi gherofactualorMV ) 2,
880,
000 1
Nonadj ustabledeposit-Not reatmentincaseofland -
Lessdeduct ions:
Repairall
owanc e-
(Gr
oundl evell
ingupto1/5th)
-Notreat
menti
ncaseof l
and - 1
Propert
yt ax 150,
000 1
Rentcollecti
onchar gesall
owedupt o4%ofgr oss r
ent 12,
000 1
Inter
estaccruedonmor t
agageofl and-Al
lowedonpaidbasis 1
I
nsurancepr emi um-Noex penseal l
owedi ncaseofland 1
162,
000
Taxableincome 2,
718,
000 6

Answer#2
Mar
ks
(
a) Rs.63,
000[
Rs.(
3,100,
000–2,
700,
000)x75%x21%][
s.37] 2

(
b) Ifagi ftisr ecei
v edfrom aper sonhav i
ngt heirnat
ional
taxnumber 2
throughabanki ngchannel ,suchagi ftisnott obetr
eatedasi
ncome.
BecauseNaseer ’ssoni sataxpayerinPaki stanandtheamounthas
beenr ecei vedt hroughabanki ng
channel ,itisnott reatedashisincome.[ s.39(3)]
(
c) Consider ationonsal eof4,000shares 000 0.
800, 5
Costof4000shar es-W-1 000 2
224,
Capitalgai n 576,
000
75%t obet axableashol di
ngisgr eaterthan1year 432,
00 0.5
W- 1: 0 3
2,000shar espur chasedon15Apr il2020 90,
000
2,000shar espur chasedon20August2020 150,
000
1,000r ight sissueshar esatRs.40pershar e 40,
000
 Totalcostof5,
000shar
es280,
000 280,
000
Costof4,000shar
essold(
280,
000/5,
000x4,
000) 224,
000

(
d)
(
a)

(i
). Shar esofAPLar enotownedbyanygov ernmentandi t
ssharesar enotli
stedonanyst ock
exchangeinPakistan.So,i
tisnotapubliccompanyf orthepurposeofincomet axdespit
et hef actt
hatiti
s
apubliccompanyundert heCompani esAct,2017.(
1Mar k)
(i
i). I facompanyi sincorporat
edorformedbyorunderanyl awinforceinPakist
an,i
tist r
eat edasa
resi
dentcompany .Suchacompanycannotbet reat
edasnon- resi
dentmer el
yont hebasi
st hatt hecont
rol
andmanagementoft heaffair
softhecompanywer esituatedabroad.Therefor
e,APLisar esident
company .(
1Mar k)

(
b) Foraccount i
ngyearended31August2020,thet
axyeari
sdenot
edbythecalendaryear2021.The
l
astdat
eforf
il
ingaret
urnofincomef
orthetaxyear2021i
s30September2021.(
2Mar ks)

Answer#3(
a)
Ther eturnsubmi t
tedbySanaon20August2013woul dbeconsi der edasdeemedassessment .Undert he
Ordi nance, noor dershoul dbeamendedbyCI Raftertheex piryoff i
v eyearsfrom theendoff inanci al y
earin
whi chCI Rhav eissuedort reatedt ohaveissuedt heassessmentor dertothetaxpr ayer.Si
nceassessment
wasdeemedt obef i
nali
zedon20August2013, CIRwasempower edt oamendt heor derupt o30June
2019.I nthel i
ghtoft heabov e, thenot i
ceissuedbyCI Ri snotv ali
d.( 03mar ks)
(b)
ABCLt dwi l
lhav ethef oll
owi ngt woopt i
ons:
(a) Fi leapr operr epl
yi nr esponset oshowcausenot ice.I ncaseCI Rdoesnotagr eewitht ax pay er’
s
responseandamendst heassessment ,t
hecompanywi l
lstil
l havet heopt i
ont ofil
eanappeal befor ehigher
appel lateaut horit
iesagai nstt heor derofCI R.(02mar ks)
(b) Agr eedassessmentu/ s122D( 5mar ks)
Sect ion122Dcont ainsacompl etecodeofagr eedassessment ,thesal i
entfeatureswher eofar easunder :
• At axpay erafterissuanceofanot i
cef oramendmentofassessmentmayf i
leanof ferofset tlement
i
nt hepr escribedf orm bef oret heAssessmentOv ersightCommi ttee( AOC)inaddi ti
ont ofi
lingar eplyt othe
Commi ssioner.
• AOCaf terex aminingt heof fermadebyt hetax payerasaf oresaid,maycal lfortherecor doft hecase
andaf teraf f
ordingoppor tunityofbei nghear dt othetaxpay er ,maydeci detoacceptormodi f
ysuchof fer
throughconsensusandcommuni cateitsdecisiontot het axpay er;
• Wher et het axpayeri ssat isfi
edwi t
ht hedecisionoft heAOC,
(a) heshal ldeposi ttheamountoft axpay ableincludinganyamountofpenal tyanddef aultsur char ge
asperdeci si
onoft heAOC;
(b) t heCI Rshal lamendassessmenti naccor dancewi ththedeci si
onoft heAOCaf terhav ingsat i
sfied
thatt het axasdet erminedbyt heAOChasbeenpai dbyt het axpay er;

(
a) thet axpayershallwai
vetheri
ghttopreferappealagai
nstsuchamendedassessment;
and
(
b) nof urtherproceedi
ngsshal
lbeunder
takenundert heOr
dinancei
nrespectoft
heissues
decidedbyt heAOCunl esst
hetaxasperclause(i)abov
ehasnotbeendepositedbythe
taxpay er.
(
c)
Rul
esrel
ati
ngt
osetoffandcarr
iedf
orwardofl
ossesofAOP:( 3marks)
TheAOPisent
it
ledt
osetoffandcar
ryfor
wardi
tslossesagai
nsti
tsi
ncomeonl
y.Howev
er,
shar
eofl
oss
f
rom AOPi
snei
theradj
ust
abl
eagai
nstt
hei
ncomeofi
tsmember
snori
tisconsi
der
edf
orr
atepur
pose.
Answer#5
(
a)

Taxev
asi
on(
02mar
ks)
I
trefer
st oallatt
emptst
omi
nimi
zeat
axpay
er’
sli
abi
l
ityt
hroughi
l
legalmeans.I
tisapuni
shabl
e
of
fenceintheeyesofl
aw.

Itar
iseswhenataxpay
erint
enti
onal
lyconceal
sthet
ruenat
ureofhi
s/hertaxaff
air
s,f
ori
nst
ancefail
i
ng
todeclar
eincomeonhis/
hertaxret
urn.Forexampl
ewhencashsal
esar econceal
edtor
educeincome
andassets.
Taxav
oidance(
02mar
ks)
I
tref
erstoanyt r
ansacti
onwhereoneofthemainpur
posesofaper
soni
nent
eri
ngi
ntot
het
ransact
ion
i
stheavoidanceorreducti
onofanyper
son’
sli
abil
i
tyt
otax.

I
tpert
ainstoasit
uati
onwhenataxpayerl
egi
ti
matel
yt akesadv
antageofthededucti
ons,concessi
ons
andbenefi
tspr
ov i
dedbythetaxlawsinordert
or educeordef erhi
s/hertaxli
abi
li
ty.Forexample
oper
ati
ngasasmal lcompanytoincurl
owertaxr ateoravail
i
ngt axcreditonnewlyestabli
shed
i
ndustr
ial
under
taki
ng.
(
b)
I
CAP’
sCodeofEt
hics:
(
i) Duedi ligence:Undert hegivenci rcumstances,AliAhmaddi dnotex erci
seduedi li
gencei n
prepari
ngt het axret
urn.Healsof ail
edtoexerciseprofessi
onalcompetenceandduepr ofessi
onal
care.Sincet hepropertywasdi sclosedinthewealthst at
ement,itwashisresponsi
bil
i
tyt ocross
mat chthei nformati
onpr ov
idedi nthereturnwiththatofZA’sweal t
hstatementforensuringthe
accuracyofi nformati
on.(03mar ks)
(
ii
) Nonr egulatoryethicalissues:Thesi tuat
ionrel
atest onon- r
egulatoryethicalissues.Undersuch
ci
rcumst ancesi ti
st hepr ofessionaldutyofthetaxpr acti
tionertoi nformt heclientaboutthelack
ofhisknowl edgei nt hepar ti
cularfieldanddisassoci atehi mselff rom theengagement .Since
Mateenhasnotdi sclosedhi slackofknowl edgeint hear eaofi nternati
onaltax ati
ont ohiscli
ent
,
hewoul dber esponsi bl
ef orthebr eachofi nt
egrit
yandpr ofessi
onalcompet encypr inci
ples.He
mayal sodiscreditthepr ofessionbyhi di
ngthisfact(professional behaviour)
.(03mar ks)

Answer#6(
a)(
02mar
ksf
oreachcor
rectanswer
)
(
i) Inputt axonraw mat er
ialconsumedofRs.125, 000andcl osi
ngstockofRs.25,000wi llbe
clai
medi nt
hemont hofpur chasei.e.May2022.Aregi
steredpersoni
snotenti
tl
edt oreclaim
i
nputt axpaidongoodswhi chwer esubsequent
lydest
royed.Goodsdestroy
edbyf i
rewillnot
bet reatedassupplyasi tisneitherasalenordoneint henormalcourseoffur
theranceof
business.Ther
efore,i
nsuranceclaim bei
ngcompensati
onforlossandnotpaymentfordeli
v er
y
ofgoodsi snotsubjectt
osal estax.
(
ii
) Intheabovescenari
o,si
nce65% oft hestock,onwhichexcesstaxof( 100,000x65%)Rs.
65,
000wascol l
ect
ed,i
ssti
llunsold,Usaidshoul
dret
urnthi
samountt oitscustomer.Howev
er,
the bal
ance amountofRs.35, 000,t he i
nci
dence ofwhich has been passed on t
othe
consumersshoul
dbedepositedwi t
htheFederalGover
nment.
(
ii
i) Adj
ustmentofbaddebtisall
owedonlyincasepr
operdebi
t/
cr edi
tnoteisissuedwi
thi
n180
daysoft
hedateoftherel
evantsuppl
y.Si
nce180dayshavelapsed,t
heref
ore,noadj
ustment
wil
lbeal
lowed.
(
iv) Theopenmar ketpr
icewoul
dconsti
tut
etheval
ueofsuppl
yandsalest
axshouldbechar
ged
accor
dingl
y.However,i
tmaybet r
eatedaspackagedi
scountandift
heinv
oiceshowsthe
 discount
edpri
ceanddiscountisinconformit
ywit
hthenormalbusi
nesspract
icet
hent
he
salestaxwoul
dbechar
gedont hedi
scountedpri
cei
nst
eadofopenmar
ketpr
ice.
(
v) AsperSi xthScheduleoft heSal esTaxAct ,1990supplyoff i
xedasset shel dotherwi
sethan
stockint radeagainstwhichi nputtaxadjust
mentisnotav ai
labl
ear eex emptf r
om tax.Asper
section8i nputt
axi snotallowedonv ehicl
esandfurnit
ureheldot herwiseasst ockintr
ade.
Ther ef
ore,salestaxwi l
lnotbechar gedonsal eofvehicl
e.Furnit
ureandf i
tt
ingsheldasstock
i
nt radewi llbechargedtosalest ax@ 20%assal ei
smadet onon- r
egisteredperson.However
,
threepercentf ur
thertaxwill
notbechar gedincasesaleismadet oanendconsumer .

(
b)(
04mar
ks)
Si
ncecementiscoveredunderthir
dschedule,
itsval
ueshal
lbetheretai
lpri
ceincl
udi
ngFEDbut
excl
udingretai
ltax.I
rr
especti
veoftheamountpaidoranyconsider
ationgi
veni
nkind.Hence
val
ueofsuppl ywouldbeasf ol
lows:
Rupees
Val
ueofsuppl y: Rupees/Ton
Ret
ailpri
ceexcludi
ngFEDandsal estax 11,000
Add:exci
sedut y 1,
500
Ret
ailpri
ce 12,500

Val
ueofsuppl
yofcementf
orsal
est
axpur
poses[
80×12,
500] 1,
000,
000
Sal
est
ax@ 17% 170,
000

Cancel
lat
ionofmul
ti
pler
egi
str
ati
ons(
Rul
e10)(
03mar
ks)
 Incaseapersonholdsmul t
ipl
esal estaxr egi
strat
ions,heshallretai
nonl yoneregist
rat
ionand
surr
enderal
lotherregistr
ati
onsunderi nti
mat i
ont oconcernedCI RatRTO.
 Provi
dedthattheBoar dmay ,subjecttosuchcondi t
ionsasitmaydeem appr opri
ate,al
lowor
all
ocat
eaper sonsepar at
eregistrati
onf ormanuf acturi
ngunitsl
ocat edindiff
erentLTUorRTO.
 Thetaxli
abil
i
tiesagainsttheregistrat
ioncancel l
edasabov eshallbetransfer
redagainstthe
regi
str
ati
onretai
nedandi ncaseofsuchr egist
rationsbeingindiffer
entLTUorRTO, theCIR

Answer#4
NameofTax payer:Mr.Grapef
rui
tIncome
yearended: 30thJune,2022TaxYear:
2022
PersonalStatus:I
ndivi
dual
Residenti
al St
atus:Resi
dent
I
NCOMEFROM SALARY
Not
e Amount Exempt Tax
able
BasicSalar
y( 350,000x12) 4,
200,
000 - 4,
200,
000
Medicalall
owance( 38,
000x12)
Exemptupt o10%ofBasi cSalar
y 456,
000 420,
000 36,
000
Houserentallowance( 150,
000x12) 1,
800,
000 - 1,
800,
000
Conveyance( 1,500,000x5%x11/ 12) 68,
750 - 68,
750
SaleofLED( 120,000–120, 000) 10,
000 - 10,
000

Fairmar ketv
alueofsharesattheti
meofissueofshar
es(
2,500x 937,
500
3e
L7s
5s)
:Amountal readypaidasconsi
der
ati
on(200,
000+300,
000) (
500,
000) 437,
500
Gratuit
yunderanappr ovedscheme 1,
925,
000 1,
925,
000 -
Terminat i
onbenefitf
rom pr
evi
ousemployer 1,
085,
000 - 1,
085,
000
Bondamount 90,
000 90,
000
Salary 7,
727,
250

CAPITALGAIN( Secti
on37)
FMVofsharesatt heti
meofsal e 875,
000
Less:Amountpaidagainstopt
ionandshar
es(
200,
000+300,
000)
x
2,
000/2,500 (
400,
000)
Amounttaxabl
eundert
heheadofSal
ary(
437,
500/2500x2000) (
350,
000)
Capi
talGain 125,
000

I
NCOMEFROM SPECULATI
ONBUSI
NESS

Grosssales[3840x500] 1,920,
000
COS[ 2580x500] (
1,290,
000)
Grossprofi
t 630,
000
Expendit
ureinrespectoff
utur
econt
ract (25,
000)
605,
000
Br
oughtf
orwar
dlosses (300,
000)
305,
000

TOTALI
NCOME 8,
157,
250

Less
Terminal
benef
it
s 1,
085,
000
Taxablei
ncome 7,
072,
250

Comput
ati
onofnett
axl
i
abi
l
ity
:

TaxonRs.5,000,000 670,
000
Tax@ 22.5%ont heamountexceedi
ngRs.5,
000,
000(
i.
e.on
2,
072,
250) 466,
256
Taxpayableontaxabl
eincome 1,
136,
256

Taxont erminalbenef
itamount:
(taxoflast3years/TaxableI
ncomeoflast3yearsx100)xAmountof
terminalbenefi
tsRs.(
1,410,
000/13,
750,000x1,085,
000) 111,
262
Taxpay ableunderNTR 1,
247,
518

Taxl
i
abi
l
ity

Less:
taxcr
edi
toni
nvest
menti
nshar
esandl
i
fei
nsur
ance

Taxcreditshallbeallowedoneitherofl
i
f ei
nsuranceori
nvest
mentin
sharesinthef ol
lowingmanner:
Lifei
nsurance( Rs.
1,266,
456/7,
072,250xlowerofRs.300,
000or20% of
taxabl
eincome) 53,
722
Rightshares(Rs.1,266,
456/
7,072,250xlowerofRs.105,
000or20% of
taxabl
eincome) 18,
803
Taxcredit-
beinghigherofAorB 53,
722 53,
722

TaxLi
abi
l
ity 1,
193,
796

Less:
taxal
readypai
dordeduct
edatsour
ce (
1,105,
000)
Taxdeduct
edonsalari
es

Bal
ancet
axpay
abl
e 88,
796
 THE HISAB SCHOOL OF ACCOUNTANCY
Certificate in Accounting and Finance Stage Examination

MOCK EXAMINATION – AUTUMN 2022

August 18, 2022
3 hours – 100 marks
Additional Reading Time – 15 minutes

Cost and Management Accounting (CAF-3)

Instructions to examinees:
(i) Answer all seven questions.
(ii) Answer in black pen only.

Section A

Q1. Saib Limited (SL) offers three types of soaps, viz., BX, BY, and BZ. The profitability of
SL is declining and it has incurred a loss during the year ended June 30th 2022. The product wise
results are as under:

BX BY BZ
No. of Units Sold 400,000 600,000 300,000
--------- Rupees in Million ---------
Sales 140 180 126
Cost of Sales (105) (135) (120)
Operating Cost (30) (49) (13)
Net Profit / Loss 5 (4) (7)

Other relevant information is as under:

i. Cost of sales includes fixed costs of Rs. 135 million. Fixed costs have been allocated to
the products on the basis of labour hours. BX, BY and BZ require 1.50, 1.75, and 2.00
labour hours per unit respectively.
ii. Variable operating costs of BX, BY, and BZ are Rs. 45, Rs. 49, and Rs. 26 per unit
respectively.
iii. In order to increase sales and improve operating results, SL is considering a proposal to
introduce a ‘Jumbo economy pack’. The details of the proposal are as under:
 The Jumbo pack would consist of one packet of each of the three types of soaps. It
would be sold at a price equivalent to 90% of the total price of the three packs. It
has been projected that on introduction of the Jumbo pack, the sale of the individual
packets would reduce by 20%.
 The existing packing machine would need to be replaced. The new machine would
reduce the variable costs of production by 2%. However, annual fixed costs would
increase by Rs. 3 million.
 To market the Jumbo pack, SL plans to launch a sale campaign at a cost of Rs. 4
million.

Required:
(a) Calculate the number of Jumbo packs that should be sold during the year to achieve a net
profit of Rs. 5 million. (14)
(b) State any two limitations of CVP analysis. (02)

The HISAB School of Accountancy Muhammad Samie ACA, MBA, APFA

 Page 2 of 6

Q2. Amrood Limited (AL) manufactures three products. Presently, overheads are allocated to
each product on the basis of direct labour hours. In order to determine the cost of products more
accurately, AL has decided to implement Activity Based Costing for allocation of overheads.

The following data has been extracted from AL’s budget for the next year:

Products Aye Bee Cee

Cost per Unit: --------- Rupees ---------
Direct material @ Rs. 200 per kg 400 300 500
Direct labour @ Rs. 50 per hour 300 350 250
Other Data:
Production Units 50,000 40,000 25,000
Batch Size Units 500 250 250
Inspection time per Batch Hours 20 15 18
Economic Order Quantity Kg 10,000 12,000 6,250

Details of factory overheads budgeted for the next year are as under:

Rs. in ‘000
Procurement department costs 2,500
Batch set up costs 3,600
Quality control department costs 4,510
Utilities 4,230
Salaries of supervisors and foremen 3,525
Salaries of cleaners and maintenance staff 1,410
Miscellaneous costs 705

Required:
Compute product-wise cost per unit using Activity Based Costing. (12)

Q3. Injeer Limited (IL) is the manufacturer of a special component used in automobiles
globally. Each component uses two electronic chips (e-chips) and IL follows a policy of
maintaining the safety stock of 2,000 e-chips. Orders are being placed on EOQ basis.

Following data relates to the recent year ended June 2022.

 Total costs associated with purchasing department amounted to Rs. 1,900,000 of which
Rs. 700,000 pertained to fixed costs.
 80 orders were placed during the year.
 Total annual market demand of components was 3 million. IL’s market share was 30%.
 It was expected that 10% of the e-chips purchased would be defective.
 Electronic chips constitute the only purchase made by IL.

Projections for the year ended June 2023 are as follows:

 Total annual market demand of components will increase by 10%
 IL’s market share will move to 40%.
 Carrying cost per unit is expected to increase by 10%.

The HISAB School of Accountancy Muhammad Samie ACA, MBA, APFA

 Page 3 of 6

 Fixed costs of the purchasing department would increase by 20%

 Variable costs linked with processing an order would increase by 15%.
 Due to a special inspection activity planned, on sample basis, at the purchase stage during
next year, it is expected that only 4% of the purchased e-chips would be defective.
 Policy for maintenance of safety stock remains the same.

Required:
Assuming that inventory levels were constant during the year, compute the following for the year
ended June 2023:
(a) Economic Order Quantity (09)
(b) Total Ordering and carrying costs (03)

Q4. Khubani Limited (KL) produces a variety of electronic items including flat screen
television sets. All the components are imported and are assembled by a team of highly skilled
technicians. There are 10 employees working in this team, who work 5 days per week and 8
hours per day. Overtime is paid at double the normal rate.

A new model is produced each year. The production is carried out in batches. The efficiency of
the technicians improves with each batch but a study has not been carried out yet to determine
the extent of learning curve effect. Each batch consists of 40 units. So far, 4 batches have been
completed. The first batch required 800 direct labour hours including overtime of 200 hours. A
total of 2,312 hours have been recorded so far.

The company uses standard absorption costing. The following costs were recorded for the initial
batch:

Rupees
Direct materials 400,000
Direct labor including overtime 800,000
Variable Overheads (per labour hour) 500

The company has been asked to bid for an order of 480 units. Following details are related to the
new order:

 The order is required to be completed in 10 weeks.

 Due to strong competition prevailing in the market, the marketing director believes that
the quotation is unlikely to be accepted if it exceeds Rs. 25,000 per unit.
 Moreover, if the order is not accepted, only 8 of the employees will be employed
elsewhere whereas 2 employees will remain idle for the next 6 weeks.

Required:
Recommend whether KL should accept this order at Rs. 25,000 per unit. (16)

The HISAB School of Accountancy Muhammad Samie ACA, MBA, APFA

 Page 4 of 6

Section B

Q5. Angoor Limited (AL) deals in a single product which is processed through three
production departments. The standard cost card of the first department is as under:

 Raw material: 1.25 kg @ Rs. 30 per kg

 Labour: 8 minutes per unit @ Rs. 210 per hour
 Variable factory overheads: Rs. 21 per unit
 Fixed factory overheads have been budgeted at Rs. 15 million for this department for the
production of 1.2 million units.

The company uses FIFO method for inventory valuation. Normal loss is estimated at 5% of the
output quantity. Actual production related information of the first department, for the period
ended June 30th 2022 is as follows:

i. There was no beginning inventory of raw material.

ii. Raw material introduced during the period was 1,500,000 kg.
iii. 1,650,000 kg of raw material was purchased during the period at a total cost of Rs.
50,737,500.
iv. 160,000 labour hours were worked during the period at a cost of Rs. 32,750,000.
v. Actual factory overhead costs were Rs. 40 million of which 60% were variable.
vi. Number of units in process at the start and at the end of the period were 112,000 and
270,000 respectively.
vii. The stage of completion of the units in process was as follows:

Opening Closing
Raw Material 80% 60%
Labour 60% 45%
Factory Overheads 40% 30%

viii. 950,000 units were completed and transferred out to the next department.
ix. 44,500 units were lost when the plant had to be shut down due to a short circuit. These
units were 90% complete as to material and 70% complete as to labour and factory
overheads.

Required:
(a) Compute two variances each of all possible variances (12)
(b) Prepare all possible entries to record factory overheads (03)

Q6. Anaar Limited (AL) manufactures heavy tools for auto industry. Due to slack business
conditions, approximately 30,000 labour hours remain idle each month. Due to highly technical
nature of this job additional labour is not available. Moreover, since the company does not want
to lose the existing workers, idles hours are paid at 50% of the normal wage rate of Rs. 100 per
hour. Overheads are estimated at Rs. 150 per labour hour which includes variable as well as
fixed overheads. Idle hours result in unabsorbed fixed overheads of Rs. 0.9 million.

AL is considering an offer for supply of 10,000 units of tool Zee. In this respect, the following
information is available:
The HISAB School of Accountancy Muhammad Samie ACA, MBA, APFA
 Page 5 of 6

Each unit of Zee would require 2 kg of material Alpha which is available in the market at Rs.
1,100 per kg. Alternatively, AL could use 2.5 kg of a substitute material Beta which can be
produced internally. Production of each kg of Beta would require raw materials costing Rs. 520
and 1.25 labour hours. Processing of Beta would also require a special equipment which is
available at a rent of Rs. 188,000 per month.

To improve productivity, AL plans to pay wages of Rs. 210 per unit of Zee or Rs. 100 per hour,
whichever is higher. It is estimated that production of Zee at various efficiency levels would be
as follows:

 50% units in 2.2 hours per unit,

 30% units in 2.0 hours per unit, and
 Remaining units in 1.8 hours per unit.

Required:
(a) Compute selling price which AL may offer for supply of Zee, if AL requires a margin of
30% above the relevant costs. (13)
(b) Define committed cost and give one example in support of it (02)

Q7. Malta Limited (ML) is a manufacturing company with two factories. The company’s
Lahore factory currently produces a number of products. Four of these products use differing
quantities of the same resources. Details of these four products and their resource requirements
are as follows:

Alif Bay Pay Tay

------------- Rupees per unit -------------
Selling Price 56 40 78 96
Direct labour (Rs.8 per hour) 20 16 24 20
Direct material A (Rs.3 per litre) 6 3 0 9
Direct material B (Rs.5 per kg) 10 0 15 20
Variable overhead
- Labour Related 1.25 1 1.50 1.25
- Machine Related 1.25 2 0.75 1.00
Other Data:
Machine hours per unit 5 8 3 4
Maximum demand per week 1,000 3,500 2,800 4,500

Following further information is available.

i. An analysis of the variable overhead shows that some of it is caused by the number of
labour hours and the remainder is caused by the number of machine hours.
ii. Currently ML purchases a component Say from an external supplier for Rs.35 per
component. A single unit of this component is used in producing Noon the company’s
only other product. Product Noon is produced in ML’s other factory and does not use any
of the resources identified above. Product Noon currently yields a positive contribution.
ML could manufacture the component in its Lahore factory, but to do so would require:

The HISAB School of Accountancy Muhammad Samie ACA, MBA, APFA

 Page 6 of 6

 1 hour of direct labour

 0.5 machine hours, and
 2 kgs of direct material B.

iii. ML purchases 500 components per week. ML could not produce the component in its
other factory.
iv. The purchasing director has recently advised you that the availability of direct materials
A and B is to be restricted to 21,000 litres and 24,000 kgs per week respectively. This
restriction is unlikely to change for at least 10 weeks. No restrictions are expected on any
other resources.
v. ML does not hold inventory of either finished goods or raw materials.
vi. ML has already signed a contract, which must be fulfilled, to deliver the following units
of its products each week for the next 10 weeks (These quantities are in addition to the
maximum demand identified above.)

Product Contract Units

Alif 100
Bay 200
Pay 150
Tay 250

Required:
(a) Prepare a statement to show the optimum weekly utilization of Lahore factory’s available
resources. Also identify whether ML should continue to purchase the component Say or
whether it should manufacture it internally during the next 10 weeks (12)
(b) Mention any two non-financial factors that must be taken into account before deciding
whether or not to manufacture the component internally (02)

---- THE END ----

The HISAB School of Accountancy Muhammad Samie ACA, MBA, APFA

 THE HISAB SCHOOL OF ACCOUNTANCY
Certificate in Accounting and Finance Stage Examination

MOCK EXAMINATION – AUTUMN 2022

(MUHAMMAD SAMIE ACA, MBA, APFA)

Cost and Management Accounting (Solution Set)

Q1. (a)

(b)

 The selling price is constant. So total revenue will change direction and proportionately
with the output, and the Total Revenue curve will be linear.
 The variable cost per unit is also constant. Therefore, total variable costs are directly
proportioned to volume.
 Fixed costs are normally assumed to remain unchanged at all levels of output at least in
the short term
 All costs can be accurately divided into fixed and variable categories
 There will not be any significant change in the inventory level at the beginning and the
end of the year.
 CAF03 – Cost and Management Accounting | Page 2

Q2.
 CAF03 – Cost and Management Accounting | Page 3

Q3.
(a)
 CAF03 – Cost and Management Accounting | Page 4

(b)
 CAF03 – Cost and Management Accounting | Page 5

Q4.
 CAF03 – Cost and Management Accounting | Page 6

Q5. (a)
 CAF03 – Cost and Management Accounting | Page 7

(b)

Note: Alternative way of calculating total under/over absorbed factory overheads is to add up both Fixed and
variable total cost variances
 CAF03 – Cost and Management Accounting | Page 8

Q6. (a)

(b) Committed cost is the cost that would occur as a result of previous commitment made
with a certain party and would occur irrespective of whether we take a decision under
consideration or not. This cost, itself, is an example of unavoidable cost. For example, a storage
unit hired on committed rent for certain time duration if used for a contract would have zero
relevant cost to this new contract because rent expense is committed in nature and not
incremental to this new contract.
 CAF03 – Cost and Management Accounting | Page 9

Q7. (a)
 CAF03 – Cost and Management Accounting | Page 10

(b) Following are some of the factors that must be duly considered:

 The control of the production if it were to be manufactured internally

 The quality of the component produced
 The skill set of the employees
 The exposure of ML to pressure from the external supplier to withhold supplies / assist a
competitor
 Certificate in Accounting & Finance Stage Examination

The HISAB 16th AUG, 2022

School of Accountancy 100 Marks
Lahore 3 hours
B law Mock Additional reading time –15 minutes

BUSINESS LAW
Instructions to examinees:
( i ) A n s w er al l qu e s t i on s .
( i i ) An s we r i n bl a c k p e n on l y.
( i i i ) Mention you CRN number in answer script

Q.1 Choose your option in following Multiple Choice Questions

i) Which one of the following is an example of criminal law?
a) Claims of defamation in a talk show
b) Claims of customers against shop keepers
c) Claims on dishonor of a cheque
d) Claims on alleged breach of a contract
ii) According to Contract Act 1872, which of the following is CORRECT?
a) The person who makes the offer is called promisor and the person to whom the offer is made is called
promisee
b) The person who makes the offer is called promisor and the person who receives the offer is called
promisee
c) The person who makes the offer is called promisor and the person who accepts the offer is called
promisee
d) The person who makes the offer is called promisee and the person to whom the offer is made is called
promisor.
iii) Salman makes the offer to Bashir to sell his car in Rs. 1,000,000/-. Which of the following statement is
correct regarding acceptance of Salman‟s offer by Bashir?
a) Bashir told Salman that he will send his son to make the payment of Rs. 1,000,000/- and take delivery of
the car.
b) Bashir told Salman the he will accept Salman‟s offer only after confirming the price from market.
c) Bashir told Salman that he will only accept the offer of Salman if Salman make it in writing
d) Bashir told Salman that Salman is charging very high price for the car therefore Bahir accept Salman‟s
offer to sell in Rs. 900,000/-
iv) Which of the following is NOT a relation resembling those created by contract?
a) Necessities supplied to a person, who is not capable of understanding the terms of a contract
b) Promise to compensate the loss suffered by a party
c) Provision of non-gratuitous services to a person without request
d) Things delivered by mistake to a person, who never requested for it
v) Mr. X contracts with Miss Y and Mr. X is said to have performed the contract
a) If parties to the contract fulfil their respective obligations
b) If Mr. X offers to perform but Miss Y refuse to take the performance
c) If Mr. X perform according to the instruction of Miss Y but still other Miss Y couldn‟t get the benefits
of it.
d) In any of the above situations Mr. X is said to have performed the contract
vi) Murad owes several debts to Buzdar and for payment of debts Murad sends an amount without stating
that which debt Murad wanted to settle.
a) Buzdar can use the amount to settle any debt of his choice
 b) Buzdar can use the amount to settle time-barred debt
c) Buzdar can use the amount for both option (a) and (b)
d) Buzdar can use the amount for either option (a) or (b)
vii) Saeem owed Rs. 500,000/- to a Bank and requested the Bank for concession in recovery of the outstanding
amount. Bank allowed Saeem to pay only 50% of the outstanding amount. Saeem agreed to pay 50 % of
the debt. Later government passed a law named „Covid 19 Debt Relief Act 2021‟ and waived all bank
defaulters who owed banks amount less than Rs. 300,000/-
a) Saeem owed Rs. 500,000/- to the Bank therefore Saeem will not be entitled for the relief given by
the government
b) Saeem was already given relief by the Bank therefore Saeem will not be entitled for the relief given by
the government
c) Saeem is entitled for the relief because now Saeem‟s debt is less then 300,000/-
d) None of the above options are correct.
viii) Aslam made online reservation of a room in Hotel for two nights on 15th & 16th of December in Murree @
Rs. 15,000/- per night. Aslam deposited advance 25% rent online and Hotel management told Aslam and if
Aslam didn‟t show up Aslam‟s reservation will be cancelled and Advance rent will be forfeited. Aslam on
his way to Murree got stuck in snow storm/roads block and he had to sleep in car for the 15th of December.
Aslam reached Hotel on 16th to find out that his reservation was cancelled, deposit forfeited and no room was
available now in Hotel.
a) Aslam can claim compensation from Hotel management for cancelling the reservation and breach of
contract.
b) Aslam is only entitled for refund of advance rent as the contract had become void.
c) In breach of contract by Aslam, hotel management can only deduct actual loss suffered by hotel
from advance rent.
d) Aslam can get compensation from Hotel management only for 16th December however contract is
discharged for impossibility of performance for 15th December.
ix) Which one of the following acts is both abusive dominant position and prohibited agreement under Competition
Act 2010?
a) limiting production, sales and unreasonable increases in price or other unfair trading conditions
b) fixing the purchase or selling price or imposing any other restrictive trading conditions with regard to
the sale or distribution of any goods or the provision of any service
c) price discrimination by charging different prices for the same goods or services from different
customers in the absence of objective justifications that may justify different prices
d) making conclusion of contracts subject to acceptance by the other parties of supplementary obligations
which by their nature or according to commercial usage, have no connection with the subject of the
contracts.
x) Asad was appointed Umpire in an arbitration proceeding. In which of the following situation Asad (the umpire)
will be called to act.
a) If the arbitrators have allowed their time to expire without making an award.
b) If the arbitrators delivered to any party to the arbitration agreement a notice in writing stating that they
cannot agree
c) If the arbitrators make a case where both option (a) and (b) co-exist.
d) If the arbitrators see any one of the options (a) or (b).
xi) In which of the following manners Electronic Funds Transfer are NOT made?
a) Automated Teller Machine
b) Cheques with “Payee A/C only” crossing
c) E-wallets
d) Magnetic medium
xii) Which one of the following is NOT the property of the firm?
a) Property acquired with the money belonging to the firm for the purpose of the firm.
b) Property of the firm embezzled by a partner of the firm
c) Property acquired by a partner in his own name with the money of the firm
d) Property contributed in the capital of the firm for the use of the firm only.
xiii) Which one of the following is NOT an advantage for a minor, who on becoming adult choose to be a partner
in the firm?
a) He / She can inspect the books of the firm and can keep a record of those books
b) He / She can take part in the management of the firm
c) He / She can be held liable for all the debt taken by firm when he was minor
 d) He / She can represent the firm like an agent of the firm
xiv) Which of the following statements regarding negotiable instrument is CORRECT?
a) A bill, promissory note and cheque can only be made payable to bearer.
b) An indorsement in blank on an order instrument converts it into bearer instrument
c) There can be a time cheque or a time promissory note but there cannot be a time bill
d) On a cheque with special crossing any person other than payee cannot claim title of holder in due
course.
xv) Acceptance in Negotiable Instruments means:
a) A drawees endorsement that on due date or date of maturity he will pay.
b) Voluntary transfer of negotiable instrument to the payee by a maker
c) Compulsory payment to the holder in due course.
d) None of the above

Q.2 It is the primary duty of the parliament to legislate. Does parliament legislate to make rules for course outline
and examination of ICAP students? What are the advantages and disadvantages of the system under which
such rules are made? (04)
Q.3
(a)
(i) Asim offered to sell his car to Arif for 95,000. Arif accept to purchase it for Rs. 94,500.
Asim refused to sell the car for Rs. 94,500. Subsequently Arif agrees to purchase the car for
Rs 95,000 but Arif refused to sell the car. Arif sues Asim for the specific performance of
the contract. Will he succeed?
(03)
(ii) Amjid, an infant, borrows Rs.2,000 from Aswad and executes a promissory note for the
amount in favour of Aswad. On his attaining majority, the minor executes another
promissory note in lieu of the first which is then cancelled. In the second promissory note
valid? (03)

b) In a contract, stranger is the person who is not a party to the contract. What is the affect of stranger‟s
coercion, undue influence, fraud and misrepresentation on a contract? Differentiate by giving examples
for each situation. (08)
Q.4
a) Arslan promised to deliver industrial Chiller in Basit‟s Factory and Basit promised to pay on delivery.
What is the type of these reciprocal promises and what is the rule of their performance? (03)
b) Irfan was promised to have a car delivered on rent at 6 o clock in the morning by Saqib Rent-a-car
service. But Saqib informed Irfan that the performance of contract will be delayed for half an hour to
which Irfan agreed. What is the rule for claiming compensation for delay in this situation? (02)
c) How the contract will be performed when place for performance is not specified in the contract?
(02)
d) Hassan under a contract was bound to pick Nasir‟s Children from school every day. Hassan is now
going to Dubai and wants to substitute himself with Qasim. In the light of Contract Act 1872 what are
the rules prescribed for it. (02)

e) With the help of an example explain appropriation of payment. What are the options and limitation of
Creditor when debtor does not give instructions about appropriation? (02)
Q.5
a) Shahnawaz a car dealer contracted with Danish to sell and deliver brand new Mercedes Benz for Rs
3,000,000. Danish paid Rs 3,000,000 to Shahnawaz on Monday. The car was to be delivered to Danish
on Wednesday. However, on Tuesday there was a sudden riot in the locality and the car was set on fire
by an angry mob resulting in its complete destruction. According to the provisions of Contract Act
1872, advise Shahnawaz and Danish about the impact of this event on their contract. (04)
b) Ahmed contracted to supply ceramic tiles to Saeed and Saeed had contracted to supply those ceramic
tiles to Zubair Constructions (Pvt.) Ltd. Ahmed failed to supply the ceramic tile to Saeed and as a result
Saeed could not supply the tiles to Zubair Constructions (Pvt.) Lt on time. In order to avoid disruption of
its work, Zubair Constructions (Pvt.) Ltd. bought the required ceramic tiles from another supplier at a
 higher price. According to Contract Act 1872 advice:
(i) Habib Construction (Pvt.) Ltd. on the claim it can file against Ahmed and Saeed and the chances
of success in that claim.
(ii) Saeed on his claim against Ahmed and the chances of success in it. (04)

Q.6 List down the obligations resembling those created by contract. Support each obligation with a suitable
example. (10)

Q.7
a) Zubair, Akhtar & Zahid are carrying on business in partnership. Zubair sold his interest in the firm to
Rehan. Akhtar refused to accept Rehan as a partner in the firm. Rehan claimed that by acquiring the interest
of Zubair in the firm he has replaced him as partner & therefore has become a partner in firm. Under the
provisions of Partnership act discuss.

i) Whether Rehan has become a partner of firm.

ii) What are the rights of Rehan (04)
b) On 1 July 2016 Abid, Rizwan and Salman started a partnership business and contributed Rs. 200,000 each
towards the firm‟s capital. They also agreed to share profits in equal proportion. Abid, in addition to his
capital contribution, paid Rs. 100,000 to one of the suppliers of the firm as a security deposit for supply of
raw material. All the partners are entitled to interest at the rate of 8% on their capital. However, during the
year, the firm incurred a loss of Rs. 80,000. Under the provisions of Partnership Act 1932 state the
following:

i) Entitlement of partner‟s interest

ii) The status of Rs. 100,000 paid by Abid. (04)
c) Asif, Ahsan & Khubaib are partners in a firm. Khubaib with the consent of other partners admit his 16
years old son Usama to the benefits of partnership. Usama attained age of majority on 10th January 2017.
He came to know that he had been admitted to the benefits of partnership on 20th March 2017. Khubaib
died in October 2017 & remaining partners agreed to continue with Usama in the firm. On 2nd December
2017 the partners informed Usama that an outstanding liability of the firm require all partners to contribute
Rs. 500,000 to settle. Under the provisions of Partnership Act, analyse the status of Usama in this situation
and his liability to contribute Rs. 500,000. (04)

Q.8
a) Ahmed made a promissory note payable to Saqib or to his order. Saqib want to further negotiate it to
Arsalan. What are the essentials, which Saqib must observe to negotiate promissory note to Arsalan?
(04)
b) What is the rule of protection available to a collecting banker on a cheque with restrictive crossing? What
is the exception to this rule? (04)

Q.9
i) Saqib was a corrupt patwari and had wealth beyond his means. He died leaving behind his wife and four
minor children. Saqib‟s widow was an illiterate housewife and after the death of her husband became co-
owner of a huge wealth in inheritance of her husband. Can Saqib‟s widow and minor children be held
liable for money laundering? (02)
ii) Ali Baba was a famous robber and he had a secret pit where he used to hide the proceed of his crime.
Qasim used to work for Ali Baba in selling goods of Ali Baba in market. One day Qasim accidently
discovered the secret pit and Ali Baba‟s true identity. But Qasim kept on working for Ali Baba and never
told anybody about the pit and Ali Baba‟s true identity. Qasim didn‟t even gave Ali Baba the impression
that he knows everything about him. Is Qasim liable for money laundering? (02)
iii) State the circumstances in which State Bank of Pakistan can revoke the status of a Designated Payment
System only after giving an opportunity of being heard. (05)
Q.10
(a) Respond to the following independent situations, under the provisions of the Negotiable Instruments Act,
1881:
(i) Samad drew a cheque which was payable to ‘Munaf or order’. Saleem after forging Munaf’s
endorsement on the cheque received payment from the banker. Discuss whether the banker would be
liable on the cheque to Samad. (03)
 (ii) specify Umair’s liability where Vazir filled in Rs. 600,000 on the promissory note. (1.5)
(iii) specify Umair’s liability where Vazir filled in Rs. 600,000 on the promissory note and transferred it
to Waris for value. (1.5)
Q.11
Saima, Ahsan and Bari started a cloth business in chandni chowk on 1 january 1995, for a period of five years.
The business resulted in a loss of Rs.10,000 in the first year, Rs. 15000 in a second year, Rs.18,000 in a third
year. Ahsan and bari wish to dissolve the firm while Saima wants to continue the business. Advise Ahsan and
Bari. (03)
 Certificate in Accounting & Finance Stage Examination

The HISAB
School of Accountancy
Lahore
B law mock solution

BUSINESS LAW
Instructions to examinees:
(i) Answer all questions.
(ii) Answer in black pen onl y.
( i i i ) Mention you CRN number in answer script

Ans.1
Choose your option in following Multiple Choice Questions
i) Which one of the following is an example of criminal law?
a) Claims of defamation in a talk show
b) Claims of customers against shop keepers
c) Claims on dishonor of a cheque
d) Claims on alleged breach of a contract

ii) According to Contract Act 1872, which of the following is CORRECT?

a) The person who makes the offer is called promisor and the person to whom the offer is made is
called promisee
b) The person who makes the offer is called promisor and the person who receives the offer is called
promisee
c) The person who makes the offer is called promisor and the person who accepts the offer is called
promisee
d) The person who makes the offer is called promisee and the person to whom the offer is made is
called promisor.

iii) Salman makes the offer to Bashir to sell his car in Rs. 1,000,000/-. Which of the following statement is
correct regarding acceptance of Salman’s offer by Bashir?
a) Bashir told Salman that he will send his son to make the payment of Rs. 1,000,000/- and take
delivery of the car.
b) Bashir told Salman the he will accept Salman’s offer only after confirming the price from market.
c) Bashir told Salman that he will only accept the offer of Salman if Salman make it in writing
d) Bashir told Salman that Salman is charging very high price for the car therefore Bahir accept
Salman’s offer to sell in Rs. 900,000/-

iv) Which of the following is NOT a relation resembling those created by contract?
a) Necessities supplied to a person, who is not capable of understanding the terms of a contract
b) Promise to compensate the loss suffered by a party
c) Provision of non-gratuitous services to a person without request
d) Things delivered by mistake to a person, who never requested for it
 v) Mr. X contracts with Miss Y and Mr. X is said to have performed the contract
a) If parties to the contract fulfil their respective obligations
b) If Mr. X offers to perform but Miss Y refuse to take the performance
c) If Mr. X perform according to the instruction of Miss Y but still other Miss Y couldn’t get the
benefits of it.
d) In any of the above situations Mr. X is said to have performed the contract

vi) Murad owes several debts to Buzdar and for payment of debts Murad sends an amount without
stating that which debt Murad wanted to settle.
a) Buzdar can use the amount to settle any debt of his choice
b) Buzdar can use the amount to settle time-barred debt
c) Buzdar can use the amount for both option (a) and (b)
d) Buzdar can use the amount for either option (a) or (b)
vii) Saeem owed Rs. 500,000/- to a Bank and requested the Bank for concession in recovery of the outstanding
amount. Bank allowed Saeem to pay only 50% of the outstanding amount. Saeem agreed to pay 50 % of
the debt. Later government passed a law named ‘Covid 19 Debt Relief Act 2021’ and waived all bank
defaulters who owed banks amount less than Rs. 300,000/-
a) Saeem owed Rs. 500,000/- to the Bank therefore Saeem will not be entitled for the relief given by the
government
b) Saeem was already given relief by the Bank therefore Saeem will not be entitled for the relief given
by the government
c) Saeem is entitled for the relief because now Saeem’s debt is less then 300,000/ -
d) None of the above options are correct.
viii) Aslam made online reservation of a room in Hotel for two nights on 15th & 16th of December in Murree @
Rs. 15,000/- per night. Aslam deposited advance 25% rent online and Hotel management told Aslam and if
Aslam didn’t show up Aslam’s reservation will be cancelled and Advance rent will be forfeited. Aslam on his
way to Murree got stuck in snow storm/roads block and he had to sleep in car for the 15th of December.
Aslam reached Hotel on 16th to find out that his reservation was cancelled, deposit forfeited and no room
was available now in Hotel.
a) Aslam can claim compensation from Hotel management for cancelling the reservation and breach of
contract.
b) Aslam is only entitled for refund of advance rent as the contract had become void.
c) In breach of contract by Aslam, hotel management can only deduct actual loss suffered by hotel from
advance rent.
d) Aslam can get compensation from Hotel management only for 16th December however contract is
discharged for impossibility of performance for 15th December.

ix) Which one of the following acts is both abusive dominant position and prohibited agreement under
Competition Act 2010?

a) limiting production, sales and unreasonable increases in price or other unfair trading conditions
b) fixing the purchase or selling price or imposing any other restrictive trading conditions with regard to
the sale or distribution of any goods or the provision of any service
c) price discrimination by charging different prices for the same goods or services from different
customers in the absence of objective justifications that may justify different prices
d) making conclusion of contracts subject to acceptance by the other parties of supplementary obligations
which by their nature or according to commercial usage, have no connection with the subject of the
contracts.

x) Asad was appointed Umpire in an arbitration proceeding. In which of the following situation Asad (the
umpire) will be called to act.
a) If the arbitrators have allowed their time to expire without making an award.
 b) If the arbitrators delivered to any party to the arbitration agreement a notice in writing stating that
they cannot agree
c) If the arbitrators make a case where both option (a) and (b) co-exist.
d) If the arbitrators see any one of the options (a) or (b).

xi) In which of the following manners Electronic Funds Transfer are NOT made?
a) Automated Teller Machine
b) Cheques with “Payee A/C only” crossing
c) E-wallets
d) Magnetic medium
xii) Which one of the following is NOT the property of the firm?
a) Property acquired with the money belonging to the firm for the purpose of the firm.
b) Property of the firm embezzled by a partner of the firm
c) Property acquired by a partner in his own name with the money of the firm
d) Property contributed in the capital of the firm for the use of the firm only.

xiii) Which one of the following is NOT an advantage for a minor, who on becoming adult choose to be a
partner in the firm?
a) He / She can inspect the books of the firm and can keep a record of those books
b) He / She can take part in the management of the firm
c) He / She can be held liable for all the debt taken by firm when he was minor
d) He / She can represent the firm like an agent of the firm

xiv) Which of the following statements regarding negotiable instrument is CORRECT?

a) A bill, promissory note and cheque can only be made payable to bearer.
b) An indorsement in blank on an order instrument converts it into bearer instrument
c) There can be a time cheque or a time promissory note but there cannot be a time bill
d) On a cheque with special crossing any person other than payee cannot claim title of holder in due
course.

xv) Acceptance in Negotiable Instruments means:

a) A drawees endorsement that on due date or date of maturity he will pay.
b) Voluntary transfer of negotiable instrument to the payee by a maker
c) Compulsory payment to the holder in due course.
d) None of the above
Ans.2
a) Parliament does not make rules for course outline and exams of ICAP students. This action is
taken ICAP through a system of delegated Legislation
Advantages of delegated legislation:
• Time Parliament does not have time to examine matters in detail
• Expert opinion Much of the content of delegated legislation is technical and is better
worked out in consultation with professional, commercial or industrial groups outside
Parliament.
• Flexible Delegated legislation is more flexible than an Act of Parliament. It is far
simpler to amend a piece of delegated legislation than to amend an Act of Parliament.

Disadvantages of delegated legislation:

• The main criticism of delegated legislation is that it takes law making away from the
democratically elected members. Power to make law is given to unelected civil servants and
experts working under the supervision of a government minister.
 • Because delegated legislation can be produced in large amounts the volume of
such law making becomes unmanageable and it is impossible to keep up-to-date.
Ans.3
a) Communication of offer, acceptance and revocation:
(i) According to the contract act 1872, an offer is also terminated by counter offer. A counter offer is an offer
by offeree in response to the original offer.
No, Asim’s offer comes to an end by the counter offer of Arif and there was no offer available for acceptance
subsequently.

(ii) The second promissory note is invalid for minor’s agreement being void-ab-initio cannot be made
valid by subsequent ratification.

b) Stranger to a contract does not have any right in the enforcement of contract but stranger can affect free
consent of a person in the contract. Following are the examples to distinguish between Coercion, Undue
Influence and fraud
i) Coercion: X threatened her son Y that if Y didn’t marry his maternal cousin Z, X will commit suicide.
Y marries Z. here the source of coercion was stranger to contract but the contract is still voidable at
the option of Y.
ii) Undue Influence: X the employer of Y called upon Y to tell him that If he didn’t sell his house to Z a
friend of X, then X will fire Y from the job. Y sold his house to Z. Here X was although stranger to
contract but still due to his undue influence the contract is voidable at the option of Y
iii) Fraud: X without the knowledge and consent of Z, told Y that Z wants to sell his mobile, which is never
repaired. Y under the impression created by X purchased the mobile from Z and discovered that
mobile was repaired. X intentionally lied to Y to cause him loss. Here because Z neither lied to Y nor
had the knowledge of X’s representation therefore the contract is not voidable due to fraud at the
option of Y.
iv) Misrepresentation: X without the knowledge and consent of Z, told Y that Z wants to sell his mobile,
which is never repaired. Y under the impression created by X purchased the mobile from Z and
discovered that mobile was repaired. X without intention misstated with Y. Here because Z neither
lied to Y nor had the knowledge of X’s misstatement therefore the contract is not voidable due to
misrepresentation at the option of Y.
Ans.4
a) This type of reciprocal promise is called mutual and concurrent reciprocal promises and the rule of such
reciprocal promises is that if Promiser of such reciprocal promises is willing to perform but reciprocal
promisee is not willing to perform the Promisor is not required to perform his/her part of the
performance.
b) The aggrieved party must inform other party at the time of accepting delayed performance that
compensation will be taken for the delay. Therefore Irfan must inform Saqib at the time of agreeing for
delayed performance his intention of getting compensation for the delay otherwise he will not be
entitled for it.
c) The promisor must apply to the promisee to appoint a reasonable place for the performance
d) A duty can be assigned with the consent of person, who has the right to claim performance and the
consent of the person to whom duty is intended to be assigned. Therefore Hassan can only make
arrangement with the consent of Saqib and Qasim.
e) Ali owed Qasim Rs. 100,000/- and Rs. 30,000/- in different transactions and Ali sent Qasim 10,000/- as
partial payment of the debts. This adjustment of Rs. 10,000 in debts is called appropriation of payment.
If debtor does not instruct how to appropriate the amount then creditor can adjust at his own choice an
can even adjust a time-barred but creditor cannot adjust a disbuted debt.
Ans.5
a) The illustration relates to the Exception of Discharge by Supervening Impossibility. In the situation
Shahnawaz is a car dealer and has agreed to sell a Mercedes Benz to Danish. Because the contract
was not for any particular Mercedes Benz car therefore any destruction of the Shahnawaz’s cars will not
qualify the case as discharged by supervening impossibility. For the contract to be dissolved there must
have been a failure of something which was at the basis of the contract in the intentions of both parties
and that was not the case here. Shahnawaz has to bear the loss and provide Danish a brand new
Mercedes Benz, whereas Danish rights under the contract are protected as the contract is not
discharged by supervening impossibility.

b) (i) Section 73 Contract Act 1872 (‘Act’) provides that ‘when a contract has been broken, the party who
suffers by such breach is entitled for receive, from the party who has broken the contract,
compensation for any loss or damage caused to him thereby, which naturally arose in the usual
course of things from such breach, or which the parties knew, when they made the contract, to be
likely to result from the breach of it.’ On the given facts, Saeed has breached his contractual
obligations towards Habib Constructions (Pvt.) Ltd. Consequently, Habib Constructions (Pvt.) Ltd.
may bring a claim for damages against Saeed. The market price paid by Habib Constructions (Pvt.)
Ltd. for the ceramic tiles is higher than the contractual price agreed with Saeed. Therefore,
Habib Constructions (Pvt.) Ltd. stands a good chance of being able to recover from Saeed the
difference between the market price paid by it and the contractual price agreed with Saeed. As
regards any claim against Ahmed, the doctrine of privity of contract would prevent such a claim,
which means that Habib Constructions (Pvt.) Ltd. being stranger to the agreement between Saeed
and Ahmed cannot claim anything from Ahmed.
(ii) On the given facts, Saeed may bring a claim for breach of contract against Ahmed. He may only be
able to recover the loss which could naturally have arisen in the usual course of things from the
breach of contract by Ahmed But Saeed cannot recover the loss paid to Habib Constructions (Pvt.)
Ltd. from Ahmed because Ahmed was not aware of the agreement between Saeed and Habib
Constructions (Pvt.) Ltd.

Ans.6
Solution of this question is quite obvious and can be related to the contents of chapter 8
Ans.7
a) Under the provisions of Partnership Act 1932

i) Selling of an interest in the firm is not possible to any third person without the consent of all the
partners of the firm. In the situation under discussion Zubair sale of his interest in the firm to
Rehan is not valid. Therefore, Rehan cannot be considered as partner in the firm.
ii) At the best the action of Zubair of selling his interest in the firm to Rehan can make Rehan a
transferee or sub-partner in the firm. As a transferee of a partner’s interest in the firm following
are his rights
• He is entitled to receive the share of the profits of the transferring partner.
• On the dissolution of the firm or on retirement of the transferring partner he is entitled to
receive:
a) the share of the assets of the firm to which the transferring partner is entitled.
b) an account from the date of the dissolution for the purpose of ascertaining the
share.

b) Under the provisions of Partnership Act

i) The rule regarding interest on capital is that partners can agree to take interest on their capital
invest in the firm, but such interest can only be given from the profits of the firm. Keeping this legal
provision in mind Abid, Rizwan and Salman are not entitled for an interest on capital as the firm didn’t
earn any profit.
ii) A partner can advance money to his firm, which is other than capital of the firm and on such
 loan/advance a partner is entitled for a 6 % interest. Abid payment of security deposit of Rs. 100,000
comes into this category and Abid is entitled to recover the same from the firm no matter any
loss, which the firm might suffer.

c) Usama in the story was initially inducted as minor enjoying the benefits of partnership who after attaining
age of majority had to decide that if he does not want to continue with the firm as a partner. A six months
time is provided in the situation under discussion to Usama. This six-month time period started running
from the date when Usama came to know about the status he was enjoying in the firm, i.e., 20th March
2017. Six months time period expired on 20th September 2017 and till then Usama didn’t announce his
breakup with the firm therefore under the law he will be considered a partner in the firm.

Death of Khubaib will change the partnership for a new one, which included Usama as a partner in the firm.
Under the circumstances Usama is liable to contribute Rs. 500,000/- for the liabilities of the firm.
Ans.8

a) Saqib if wants to negotiate promissory note to Arsalan then he must comply with following essentials
of endorsement on the promissory note:
i) It must be on instrument itself, if no space is left on the back of the endorsement, further
endorsements are signed on a slip of paper attached to the instrument called ‘allonge’.
ii) It must be signed by the endorser for the purpose of negotiation. Signature of the endorser on
the instrument without any additional words is sufficient.
iii) No particular form of words is necessary for an endorsement
iv) It must be completed by the delivery of the instrument. The delivery of the instrument
with the intention of passing the property in it.
Negotiation by endorsement must be of the entire instrument. Endorsement for part of the amount
or to two or more endorsee severally is invalid

b)
The rule is that a collecting bank has protected against collection of money on behalf a customer with
a defective title. However, this protection is not available where the banker allows the proceeds of an
“Account payee crossed cheque” to be credited to any account other than the payee

Exception to the rule

If the collecting banker has collected a cheque that had a crossing “account payee” which has been
obliterated or altered, the banker, in good faith and without negligence collecting payment of the cheque
and crediting proceeds thereof to a customer, shall not incur any liability by reason of the cheque having
been so crossed.

Ans.9
i) Qasim’s widow cannot be held liable for money laundering, if she didn’t know that the assets, which she now
own were proceeds of her husband’s crime. Knowing and having reasons to believe are the important
element to convict a person for money laundering
ii) According to the definition of money laundering, whoever conceals, assists, uses a property knowing and
having reasons to believe that such property is proceed of crime then such person is guilty of money
laundering, which in this scenario Qasim is as he had the information about Ali Baba, which he concealed.
iii) The State Bank may revoke the designation of a DPS if it is satisfied that:
a) the DPS has ceased to operate effectively as a PS;
b) the operator of the designated system has knowingly furnished information or documents to the State Bank
in connection with the designation of the PS which is or are false or misleading in any material particular;
c) the operator or settlement institution of the DPS is in the course of being wound up or otherwise
dissolved, whether in Pakistan or elsewhere;
d) any of the terms and conditions of the designation or requirements of the Act has been contravened; or
 e) the State Bank considers that it is in the public interest to revoke the designation.
Ans.10
(a)
i. Payment in due course of crossed cheque:
The banker in this case would not be liable to Samad and can debit Samad’s account with the amount of
the cheque provided the payment was made in due course without negligence and in accordance with
the apparent tenor of the cheque. The banker is not expected to verify the signatures of the payees and
the endorsees in an order cheque. The banker would only be liable to Samad if he can prove that payment
was not made in due course.
ii. Vazir being holder can only recover the amount intended to be paid by Umair i.e. Rs. 500,000.
iii. Waris being holder in due course can recover the amount of Rs. 600,000 from Umair.
Ans.11
Ahsan and Bari are advised to make a petition to the court for the dissolution of the firm on the ground that
firm cannot be carried on except at a loss. Since the firm was constituted for a fixed term of five years it
cannot be dissolved without the consent of all partners and as such Ahsan and Bari cannot compel Saima to
dissolve the firm.
 THE HISAB SCHOOL OF ACCOUNTANCY, LAHORE
CERTIFICATE OF ACCOUNTING AND FINANCE
MOCK EXAM OF FINANCIAL ACCOUNTING AND REPORTING – II
(CAF-5)
Marks: 100 15 August 2022
Time: 3 hours
Additional reading time –15 minutes

Instructions to examinees:
(i) Answer all questions.
(ii) Answer in black pen only.
(iii) Mention your name and CRN number in answer script
SECTION - A
QUESTION NO 1: (10)
On 1 January 20Y1, Jani Limited (JL) installed a plant at a total cost of Rs. 1,000,000 with useful life
of 5 years and nil residual value. There is legal requirement to dismantle the plant at the end of
useful life. It was estimated that dismantling would require cash outflows of Rs. 161,050 at the end
of useful life. Relevant pre-tax discount rate was estimated as 10%.
On 31 December 20Y1, plant was revalued to Rs. 875,000 and the estimate of dismantling cash
outflows and relevant pre-tax discount rate was revised to Rs. 197,350 and 11%, respectively.
On 31 December 20Y2, plant was revalued to Rs. 670,000 and the estimate of dismantling cash
outflows and relevant pre-tax discount rate was revised to Rs. 139,710 and 14%, respectively.
On 31 December 20Y3, the plant was revalued to Rs. 400,000 and the estimate of dismantling cash
outflows and relevant pre-tax discount rate was revised to Rs. 53,820 and 16%, respectively.
JL has financial year end of December 31.
Required: Prepare movement of plant’s carrying amount, provision for dismantling and
revaluation surplus, identifying the amounts that will be charged to profit or loss from 1 January
20Y1 to 31 December 20Y3 for JL.

QUESTION NO 2:

On 1 November 2021, Demanding Joy Limited (DJL) entered into a contract with Providing Joy
Limited (PJL) to manufacture and sell 200 units of a specialized machine at a total consideration
of Rs.300 million. The machines will be delivered in lots of 40 units at the end of each quarter. PJL
has paid 20% non-refundable consideration in advance while the remaining consideration will be
paid in five equal instalments, only after delivery of each lot and not before.

The sales team of DJL worked hard and spent 1600 hours costing Rs. 4 million for preparing
proposal for the contract. The team was also rewarded with a bonus of Rs. 6 million upon
obtaining the contract. Up to year ended 31 December 2021, DJL had manufactured 30 units of
the machine to be delivered on 31 January 2022.

DJL’s FC, a chartered accountant, has suggested that revenue for 30 units should be recognized in
2021 as the machines are of specialized nature and have no alternate use for DJL. Further, the
sales team cost of Rs. 10 million should be taken to statement of profit or loss in 2021 as this has
been fully recovered through 10% advance received from PJL.

Required:
Analyse the treatments suggested by the FC in respect of the above contract. (07)
QUESTION NO 3:
Draft financial statements of DDLJ Limited (DDLJ) for the year ended 31 December 2021 show
the following amounts:
Rs. in '000
Total assets 43,500
Total liabilities 12,300
Net profit for the year 4,573
While reviewing the draft financial statements, following issues were identified:

(i) DDLJ has classified investment in KWK Limited (KWK) as an investment in associate and
accounted for using equity method despite having no significant influence over KWL.
On 1 February 2021, DDLJ purchased 40,000 shares of KWL representing 15% shareholdings at
Rs. 80 per share. On 30 September 2021, KWL announced interim cash dividend of Rs. 5 per share.
KWL reported net profit of Rs. 2.4 million for the year ended 31 December 2021. The fair value of
each share of KWL was Rs. 70 as on 31 December 2021.

(ii) Transaction cost incurred on bonds issued by DDLJ was recorded as an asset and being
amortized over five years. Further, half of interest to be paid on 30 June 2022 has been accrued.
On 1 July 2021, DDLJ issued 6,000 bonds of Rs. 1,000 each at a discount of Rs. 50 each with
maturity in five years. The transaction cost associated with the issuance of these bonds was Rs.
20 per bond. The coupon interest rate is 11% per annum payable annually on 30 June. The
approximate effective interest rate was 13% per annum. Bonds are subsequently measured at
amortized cost.

Required:
Determine the revised amounts of total assets, total liabilities and net profit, after incorporating
the required corrections. (07)

QUESTION NO 4:
French Vaccines Limited (FVL), a listed company, has provided you with the following
information related to the year ended 30 June 2022:
(i) FVL has developed and patented two new vaccines A & B at a cost of Rs. 320 million and Rs.
240 million respectively. Based on market analysis, it is estimated that Vaccine A would generate
revenue of Rs. 600 million per annum for next five years whereas Vaccine B would generate
annual revenue of Rs. 160 million for an indefinite period.
(ii) Rs. 12 million was paid for an advertising campaign that will cover a period of 6 months from
1 May 2022 to 31 October 2022. The directors believe that the campaign would help to achieve
the sales growth target of 8% for the next two years.
(iii) Rs. 10 million were spent on training of technical staff. The training courses were conducted
by leading experts of medical training and are expected to improve the production quality
significantly and reduce costs.
Required:
In the light of International Financial Reporting Standard, explain how the above expenditure may
be accounted for in FVL’s financial statements for the year ended 30 June 2022. (9)

QUESTION NO 5:
Palm Limited (PL) is a listed company and engaged in manufacturing of textile products.
Following disclosures have been extracted from PL’s draft financial statements for the year ended
31 December 2021:
 16 - Long term loans and advances – secured
2021 2020
----- Rs. in '000 -----
Loans and advances – considered good:
Directors 89,600 95,100
Executives and other employees 81,900 87,600
171,500 182,700
Reconciliation
Balance at 1 January 88,500 92,300
Disbursements 18,700 22,400
Repayments (25,300) (27,100)
Balance at 31 December 81,900 87,600

29 - Remuneration of Chief Executive, Directors and Executives

The aggregate amounts charged in these financial statements are given below:
Chief Directors &
Executive Executives
----- Rs. in '000 -----
Managerial remuneration including bonuses 28,320 70,150
House rent and other allowances 17,700 38,975
Contribution to retirement benefit plans 1,888 3,680
47,908 112,805

Executives are also entitled for other benefits.

Required:
Prepare list of errors and omissions in the above disclosures in the light of Regulatory Framework
as applicable in Pakistan. (07) (Redrafting of disclosures is not required)

QUESTION NO 6:
Select the most appropriate answer(s) from the options available for each of the following
Multiple-Choice Questions.
(i) Government grants related to ‘Bearer plants’ are accounted for under:
(a) IAS 41 (b) IAS 20
(c) IAS 16 (d) IAS 41 and IAS 20 (01)
(ii) With regards to accounting regulation in Pakistan, the Institute of
Chartered Accountants of Pakistan is responsible for:
a) establishing accounting rules that must be followed by the companies in
Pakistan.
b) recommending accounting standards to the Securities and Exchange
Commission of Pakistan for notification.
c) issuing notification in the official gazette in respect of accounting standards to
be applicable in Pakistan.
d) approving accounting standards applicable in Pakistan. (01)
(iii) Which of the following statements is/are correct?
(I) Ocean fishing is an agricultural activity.
(II) Biological assets are never depreciated.
 (a) Only (I) is correct (b) Only (II) is correct
(c) Both are correct (d) None is correct (01)

(iv) As per IAS 21, non-monetary items carried at fair value are retranslated at the
exchange rate prevailing:
(a) at year-end
(b) during the year i.e. average rate
(c) at the date when fair value was determined
(d) at acquisition date (01)

(v) Which TWO of the following are non-adjusting events?

(a) Directors approved the plan to close down the major segment before year-end
but announcement to public was made after year-end.
(b) A company made an out of court settlement with a customer after year-end, for
defective products supplied before year-end.
(c) The discovery of fraud after year-end which shows that financial statements
are incorrect.
(d) A change in income tax rate announced after year-end. (02)

(vi) Which of the following statements is/are correct?

(I) An investment in equity instruments of another entity cannot be classified as

subsequently measured at amortized cost.
(II) An investment in debt instruments of another entity cannot be classified as
subsequently measured at fair value through other comprehensive income.
(a) Only (I) is correct (b) Only (II) is correct
(c) Both are correct (d) None is correct (01)

(vii) Which of the following statements is/are correct under IAS 21?
(I) Exchange differences on retranslation of all items are taken to profit or loss.
(II) Dividend received on foreign investments are recognized at average exchange
rate for the year.
(a) Only (I) is correct (b) Only (II) is correct
(c) Both are correct (d) None is correct (01)

(viii) On 1 January 2022, a company entered into a non-cancellable contract with its client
to implement a software by 30 June 2022. As per contract, client was required to pay
10% advance on 31 January 2022. The client paid the advance on 15 February 2022.
How will company record transaction on 31 January 2022?
Debit Credit
(a) Accounts receivable Contract liability
(b) Contract asset Revenue
(c) Accounts receivable Revenue
(d) No entry (01)

(ix) An operating segment has just started operations but has not earned any revenues yet.
Which of the following statements is correct?
(a) It may be a reportable segment if quantitative threshold is met.
(b) It is a reportable segment even if quantitative threshold is not met.
(c) It is not a reportable segment even if quantitative threshold is met.
(d) It will be a reportable segment only after earning revenues. (01)
 SECTION B
QUESTION NO 7:
Jasmine Limited (JL) is finalizing its financial statements for the year ended 31 December 2021.
In this respect, the following information has been gathered:

(i) Applicable tax rate is 30% except stated otherwise.

(ii) During the year JL incurred advertising cost of Rs. 15 million. This cost is to be allowed as tax
deduction over 5 years from 2021 to 2025.
(iii) Trade and other payables amounted to Rs. 40 million as on 31 December 2021 which include
unearned commission of Rs. 10 million. Commission is taxable when it is earned by the company.
Tax base of remaining trade and other payables is Rs. 25 million.
(iv) Other receivables amounted to Rs. 17 million as on 31 December 2021 which include dividend
receivable of Rs. 8 million. Dividend income was taxable on receipt basis at 20% in 2021.
However, with effect from 1 January 2022, dividend received is exempt from tax. Tax base of
remaining other receivables is Rs. 6 million.
(v) On 1 April 2021, JL invested Rs. 40 million in a fixed deposit account for one year at 10% per
annum. Interest will be received on maturity. Interest was taxable on receipt basis at 10% in
2021. However, with effect from 1 January 2022, interest received is taxable at 15%.
(vi) On 1 January 2020, a machine was acquired on lease for a period of 4 years at annual lease
rental of Rs. 28 million, payable in advance. Interest rate implicit in the lease is 10%. Under the
tax laws, all lease related payments are allowed in the year of payment.
(vii) Details of fixed assets are as follows:
 On 1 January 2021 JL acquired a plant at a cost of Rs. 250 million. It has been depreciated on
straight line basis over a useful life of six years. JL is also obliged to incur decommissioning cost
of Rs. 50 million at the end of useful life of the plant. Applicable discount rate is 8%.
 On 1 July 2021 JL sold one of its four buildings for Rs. 60 million. These buildings were
acquired on 1 January 2017 at a cost of Rs. 100 million each having useful life of 30 years.
The dismantling costs will be allowed for tax purposes when paid. Tax depreciation rate for all
owned fixed assets is 10% on reducing balance method. Further, full year’s tax depreciation is
allowed in year of purchase while no depreciation is allowed in year of disposal.
Required:
Compute the deferred tax liability/asset to be recognized in JL’s statement of financial position as
on 31 December 2021. (10)

QUESTION NO 8:
The following summarized trial balance pertains to Aam Limited (AL) and its subsidiary Bam
Limited (BL) for the year ended 31 December 2018:
AL Rs. (m) BL Rs. (m)
Debit Credit Debit Credit
Sales 5,177 3,996
Cost of sales 3,255 2,448
Operating expenses 713 636
Other income 350 18
Tax expense 403 288
Share capital (Rs. 10 each) 3,720 1,600
Share premium 1,430 322
Retained earnings as at 1 January 2018 2,293 516
Current liabilities 713 651
Property, plant and equipment 5,418 1,934
Investments 1,600
Loan to BL’s Director 10
Current assets 2,284 1,797
13,683 13,683 7,103 7,103
Additional information:
(i) AL acquired 96 million shares of BL on 1 May 2018 at following consideration:
 Cash payment of Rs. 450 million.
 Issuance of 40 million share of AL at Rs. 25 each.
(ii) On acquisition date, carrying values of BL’s net assets were equal to fair value except the
following:
 A building whose fair values and value in use were Rs. 390 million and Rs. 520 million
respectively as against carrying value of Rs. 480 million. The group follows cost model for
subsequent measurement of property, plant and equipment. The remaining life of building on
acquisition date was 20 years. Fair value of the building has increased to Rs. 440 million at 31
December 2018.
 A brand which has not been recognized by BL. The fair value of the brand was assessed at
Rs. 162 million. It is estimated that benefit would be obtained from the brand for the next 6 years.
(iii) Al measures the non-controlling interest at fair value. On the date of acquisition, the
market price of BL’s shares was Rs. 14 per share.
(iv) On 1 July 2018 AL sold an equipment to BL for Rs. 250 million at a gain of Rs. 20 million.
BL has charged depreciation of Rs. 12.5 million on this equipment.
(v) In each month of 2018, BL sold goods costing Rs. 40 million to AL at cost plus 20%. At year
end 75% of the goods purchased in December were included in stock of AL.
(vi) BL’s credit balance of Rs. 38 million in AL’s books does not agree with BL’s books due to
Rs. 7 million charged by AL for management services on 26 December 2018. Total management
fee charged by AL to BL since acquisition amounted to Rs. 16 million.
(vii) BL declared interim dividend of Rs. 0.50 per share in December 2018. AL has correctly
recorded the dividend in its books. However, Bl has not yet accounted for the dividend.
(viii) The income and expenses of BL may be assumed to have accrued evenly during the year.
Required:
Prepare the following:
a) Consolidated statement of profit or loss for the year ended 31 December 2018. (10)
b) Consolidated statement of financial position as at 31 December 2018. (08)
QUESTION NO 9:
Auto Limited (AL) is engaged in the business of manufacturing of trucks. Since a number of the
prospective customers do not have adequate funds to purchase the vehicles against full payment,
AL provides lease financing facility to its customers. It expects to receive a return at the rate of
15% per annum on the amount of lease finance.
On 1 July 2021, AL sold seven trucks to Transport Company (TC) on lease. The terms of the lease
and related information are as follows:
a) The lease period is 4 years, extendable up to the expected useful life of the trucks i.e. 5 years.
b) TC has guaranteed a residual value of Rs. 360,000 for each truck, till the end of the fourth
year. However, the guarantee would lapse if the lease term is extended to the fifth year. TC
will return the truck at the end of the lease term.
c) Lease rentals amount to Rs. 2,715,224 per annum and are payable in arrears i.e. on 30 June.
d) The cost of each truck is Rs. 900,000. Price in case of outright sale is Rs. 1,350,000 per truck.
e) The expected residual value of each truck at the end of the 4th and 5th year is Rs. 150,000 and
Rs. 100,000 respectively.
Required:
Assuming that AL and TC intend to extend the lease for a period of five years, prepare:
(a) Journal entries to record the transactions for the year ended 30 June 2022.
(b) A note for inclusion in the financial statements, for the year ended 30 June 2022, in
accordance with the requirements of IFRS-16 ‘Leases’. (12)
QUESTION NO 10:
Gujranwala Foods Limited has the following information in its records for the year ended 31
January 2022.
Chickpea Apricot Dates Onion
….. Rupees in ‘000’ ……
Sales 200 300 770 270
Purchases 75 150 320 100
Subsidies (Grant) 40 80 60 60
Own consumption (drawings) 45 40 75 20
Opening Inventory 40 40 70 -
Closing Inventory 60 110 300 60
The farm expenses for the period 1 February 2021 to 30 April 2022 are as follows:
Rupees
Casual labor 20,000
Regular workers 30,000
Land preparation and clearing costs 80,000
Hire of tractors 60,000
The farm’s non-current assets for the year ended 31 January
2022 were as follow
Rupees
Farm’s irrigation at cost 800,000
Farm’s implement and equipment 400,000

Additional information:
a) Farm’s irrigation costs are to be written off over 10 years
b) Farm’s implement and equipment were purchased on 30 April 2021 and these are to be
depreciated at 20% per annum.
Required:
Prepare Gujranwala Foods Limited’s gross output (means gross profit) and statement of profit or
loss for the year ended 31 January 2022. (10)

(THE END)
SOLUTION TO FAR2 MOCK

SOLUTION NO 1:

Jani Limited– Movement in PPE, Provision and Revaluation surplus

Revaluation Other Working

PPE Provision
Particulars OCI (RS) PL PL
Rupees
[1,000,000 +
1 Jan 20Y1 1,100,000 100,000
161,050 x 1.10-5]
[1,100,000 / 5
Depreciation (220,000) 220,000
years]
Interest 10,000 10,000 [100,000 x 10%]
31 Dec 20Y1 880,000 110,000
Revaluation (5,000) (5,000)
875,000 110,000 (5,000)
Increase in
20,000 (20,000) (balancing)
provision
31 Dec 20Y1 875,000 130,000 0 (25,000) [197,350 x 1.11-4]
[875,000 / 4
Depreciation (218,750) 218,750
years]
Depreciation decrease
6,250 [25,000 / 4 years]

Interest 14,300 14,300 [130,000 x 11%]

31 Dec 20Y2 656,250 144,300 (18,750)
Revaluation 13,750 13,750
670,000 144,300 (5,000)
Decrease in
(50,000) 4,5000 5,000 (balancing)
provision
31 Dec 20Y2 670,000 94,300 4,5000 0 [139,710 x 1.14-3]
[670,000 / 3
Depreciation (223,330) 223,330
years]
Incremental
(1,5000) [45,000 / 3 years]
depreciation
Interest 13,200 13,200 [94,300 x 14%]
31 Dec 20Y3 446,670 107,500 3,0000 0
Revaluation (46,670) (3,0000) (16,670)
400,000 107,500 0 (16,670)
Decrease in
(67,500) 5,0830 16,670 (balancing)
provision
31 Dec 20Y3 400,000 40,000 5,0830 0 [53,820 x 1.16-2]
SOLUTION NO 2:

(a) Revenue recognition

As per IFRS 15, in cases where entity’s performance does not create an asset with alternative use, the entity can
recognize revenue over time if the entity also has an enforceable right to payment for performance completed to date.
As per agreement, EL is entitled for remaining consideration only after delivery of each lot so revenue should not be
recognized over time as suggested by CFO. Proportionate revenue should be recognized upon transferring control i.e.
delivery of each lot consisting of 20 machines to PL. Goods manufactured till year-end should be included in EL’s closing
inventory and the advance received from PL should be shown as contract liability.

Contract cost

The cost of Rs. 4 million for 1600 hours spent is correctly expensed out as such cost would have been incurred whether
contract was obtained or not. However, Rs. 6 million paid for bonus should be capitalized as contract cost being an
incremental cost of obtaining a contract and should be amortized over contract period on a systematic basis. This
contract costs should not be amortized in year 2021 as no related revenue has been recognized in 2021

(b) In given situation, CFO is in breach of principle of professional competence and due care as CFO has a duty to
maintain his professional knowledge and skill at such a level that employer receives a competent service in accordance
with applicable technical and professional standards. CFO should involve in continuing professional development
activities which will develop and maintain his capabilities enabling him to perform competently within the professional
environment.
SOLUTION NO 3:
SOLUTION NO 4:

(i) Costs of developing the new vaccines should be capitalized as: "intangible assets" because:
• It is probable that future economic benefits i.e. sale of Rs. 600 million per annum for
next five years and sales of Rs. 160 million per annum for indefinite period, are
attributable to the vaccines and will flow to the EPL.
• The cost of the asset can be measured reliably i.e. Rs. 320 million and Rs. 240 million for A
& B respectively.

Vaccine A should be amortized over its commercial life i.e. five years.
Since there is an indefinite usefu1life of Vaccine B, it should not be amortized. Instead, EPL
should test the intangible asset for impairment by comparing its recoverable amount with its
carrying amount.
(ii) Advertising and promotional costs should be recognized as an expense when incurred.
However, the advertising expense amounting to Rs. 8 million (12 x 4 / 6) should be recognized
as prepayment.
(iii) Although well trained staff adds value to a business, lAS 38 prohibits the capitalization of
training costs.
SOLUTION NO 5:

List of errors and omissions

Long term loans and advances – secured
1. With regards to loans and advances to directors, the purposes for which loans or advances were
made shall be disclosed.
2. Reconciliation of the carrying amount at the beginning and end of the period, showing
disbursements and repayments shall be disclosed for directors only and not for Executives
and other employees;
3. The maximum aggregate amount outstanding at month end shall be disclosed for
Executives.
4. The particulars of collateral security held shall be disclosed when loans and advances are
secured.
5. The opening balance for year 2021 shall tie with closing balance for year 2020 i.e. Rs.
87,600.

Remuneration of chief executive, directors and executives

1. Comparative information for the year 2020 shall be provided.
2. Directors and Executives information shall be separately disclosed.
3. Number of persons shall be separately disclosed for chief executive, directors and executives.

4. Other benefits e.g. vehicle, cellular phone, etc. in cash or in kind shall be disclosed stating
their nature and, where practicable, their approximate money values.
SOLUTION NO 6:

(i) (b) IAS 20

(ii) (b) recommending accounting standards to the Securities and Exchange Commission
of Pakistan for notification.
(iii) (d) None is correct
(iv) (c) at the date when fair value was determined
(v) (a) Directors approved the plan to close down the major segment before year-end but
announcement to public was made after year-end.
(d) A change in income tax rate announced after year-end.
(vi) (a) Only (I) is correct
(vii) (d) None is correct
(viii) (a) Accounts receivable Contract liability
(ix) (a) It may be a reportable segment if quantitative threshold is met
SOLUTION NO 7:
SOLUTION NO 8:

Aam Limited

Consolidated statement of financial position

As at December 31, 2018

Rs. (m) Rs. (m)

Assets
Property, plant and equipment (5,418+1,934-90+3-20+1) 7,246
Brand (162-18) 144
Investments (1,600-1,450) 150
Loan to BL’s director 10 7,550

Current assets (2,284+1,797-6-93) 3,982

11,532
Equity and liabilities
Equity – ordinary share capital 3,720
Share premium 1,430
Consolidated retained earnings 4,000 9,150
Non-controlling interest 1,056
10,206
Current liabilities (713+651-48+7-45+80-32) 1,326
11,532
Aam Limited

Consolidated statement of comprehensive income

For the year ended December 31, 2018

AL BL Adjustments Consolidated
Rs. (m) Rs. (m) Rs. (m) Rs. (m)
Sales 5,177 2,664 (384) 7,457
Cost of sales (3,255) (1,632) 378 4,509
Gross profit 1,922 1,032 (6) 2,948
Operating expenses (713) (424) (6) (1,143)
Other income 350 12 295 657
Profit before tax 1,559 620 (283) 2,462
Tax expense (403) (192) -- (595)
Profit after tax 1,156 428 1,867
Profit attributable to
NCI (428+3-18-7-6)x40% 160
Owners of parent 1,707
1,867
Workings

W – 1 Group structure %
Group 60
NCI 40
 100
W – 2 Cost of control account Debit Credit
Rs. (m) Rs. (m)
Share capital (1,600x60%) 960.00
Share premium (322x60%) 193.20
Investment (450+1,000) 1,450
SRE-pre 481.20
Bargain purchase gain 184.40
1,634.40 1,634.40
W – 3 Non-controlling interest (NCI)
Share capital (1,600x40%) 640.000
Share premium (322x40%) 128.80
Goodwill (160x40%x14)= 896-620-128.80-320.80 193.60
SRE-pre 320.80
Profit for the year 160
C/d 1,056.00
1,249.60 1,249.60
W – 4 Consolidated retained earnings (CRE)
Balance b/f 2,293
Profit for the year 1,707
C/d 4,000
4,000 4,000

W – 5 Subsidiary retained earnings (SRE) Pre Post

Balance b/f 516 --
For the year profit (1,332-816-212+6-96) 214 --
Fair value loss on building (390-480) (90) --
Fair value gain of brand 162 --
802 --
Group 481.20 --
NCI 320.80 --

W – 6 Adjusting entries
Property, plant and equipment 3
Operating expenses (90/20x8/12) 3
Operating expenses 18
Brand (162/6x8/12) 18
Other income 20
Property, plant and equipment 20
Property, plant and equipment 1
Other income (20/10x6/12) 1
Sales (40x8x1.20) 384
Cost of sales 384
Cost of sales 6
Closing stock (40x1.20x75%)x20/120 6
Operating expense 7
Payables 7
Payable 38
Receivable 38
Other income 16
Operating expenses 16
Other income 48
NCI 32
Dividend (0.5x160) 80
Dividend 80
Dividend payable 80
Dividend payable 80
Dividend receivables 48
NCI 32
Cost of control 184.40
NCI 193.60
Other income 378.00
SOLUTION NO 9:

a) Journal entries in the books of Quartz Limited For the year ended 30-6-2022
Gross Investment = 2,715,224 x 5 + 100,000 x 7 = 14,276,120
Net Investment = 2,715,224 [1-(1 + 0.15)-5] + 700,000 (1 + 0.15)-5
0.15
=9,101,852 + 348,024
=9,449,876

1-7-2021
Lease Receivable(N.I) 9,449,876
Cost of Sales** 5,951,974
Sales 9,101,852*
Stock (900,000 x 7) 6,300,000

*Lower of
FV (sale price) = (1,350,000 x 7) = 9,450,000
& PV of LP = 9,101,852
**6,300,000 – 348,024 = 5,951,974

30-6-2022
Bank 2,715,224
Lease Receivable 1,297,743
Interest Income 1,417,481

b) Disclosure
For the year ended 30-6-2022

Maturity Analysis – contractual undiscounted lease payments

Less than one year 2,715,224
One to two years 2,715,224
Two to three years 2,715,224
Three to four years (2,715,224 + 700,000) 3,415,224
Total undiscounted lease receivable 11,560,896
Reconciliation:
Total lease receivable (2,715,224 x 4) 10,860,896
Add: unguaranteed residual value 700,000
Gross investment in lease 11,560,896
Less: unearned finance income (1,222,820 + 998,959 + 741,520 + (3,408,763)
445,464 )
Net investment in lease 8,152,133

The company has entered into a finance lease agreement with Emeralds Goods Transport Company. The
lease bears interest @ 15% per annum. Rentals are payable annually in arrears.
W-1 Lease Amortization Schedule
Date Rental Principal Interest Balance
1-7-2021 9,449,876
30-6-2022 2,715,224 1,297,743 1,417,481 8,152,133
30-6-2023 2,715,224 1,492,404 1,222,820 6,659,729
30-6-2024 2,715,224 1,716,265 998,959 4,943,464
30-6-2025 2,715,224 1,973,704 741,520 2,969,760
30-6-2026 3,415,224 2,969,760 445,464 -
(2,715,224+700,000)
SOLUTION NO 10:
 THE HISAB SCHOOL OF ACCOUNTANCY
Certificate in Accounting and Finance Stage Examination

MOCK EXAMINATION – AUTUMN 2022

August 17, 2022

3 hour – 100 marks
Additional Reading Time – 15 minutes

Managerial & Financial Analysis

Instructions to examinees:
(i) Answer all questions.
(ii) Answer in black pen only.

Section A

Q.1 Select the most appropriate answer from the options available for each of the following Multiple Choice
Questions. (10)

1. Bargaining power of customer increases in all of the following situations EXCEPT:

a. When switching cost is low
b. When there is high competition
c. When competitors’ products are undifferentiated
d. When volume of purchase is high

2. Social factors in PESTEL model focus on which of the following:

a. Understanding needs and buying behaviors of the customers
b. Determining growth pattern of industry
c. Establishing degree of competition in the market
d. None of the above

3. All of the following are examples of generic controls in IT systems EXCEPT:

a. Encryption c. Firewalls
b. Passwords d. Validation checks
4. An accountant must not allow his professional or business judgement to be affected by:
a. personal c. undue influence from others
prejudice) d. All the above
b. conflicts of
interest

5. Information technology deals with ……………, whereas information system deals with ………………..
a. Innovation; production c. Innovation; decision making
b. Production; decision making d. Decision making; innovation

6. For a business to be successful, it is important to focus on external environment to determine any

opportunity or threats that might be prevalent in the environment. The framework(s) that help analyzing is
the environment is(are):
a. PESTEL c. Five forces
b. Diamond d. All of the above
 Managerial & Financial Analysis (CAF-06)

7. In ……………… activity of primary value chain, materials are converted into final products.
a. Operations
b. Inbound logistics
c. Sales and
marketing
d. Services

8. Home delivery of products relates to …………………… activity of primary value chain.

a. Operations
b. Inbound logistics
c. Sales and marketing
d. Outbound logistics

9. Tulip Co is seeking additional finance and is considering using Islamic finance and, in
particular, would require a form which would be similar to equity financing regarding
Tulip Co’s interest in Islamic finance, which of the following statements is/are correct?
1) Murabaha could be used to meet Tulip Co’s financing needs
2) Mudaraba involves an investing partner and a managing or working partner
a. 1 only
b. 2 only
c. Both 1 and 2
d. Neither 1 nor 2

10. Which of the following statements about equity finance is correct?

a. Equity finance reserves represent cash which is available to a company to invest
b. Additional equity finance can be raised by rights issues and bonus issues
c. Retained earnings are a source of equity finance
d. Equity finance includes both ordinary shares and preference shares
 Managerial & Financial Analysis (CAF-06)

Section B

Q.2 Etihad Limited manufactures and sells three products. The following information is available in
this regard:

Year Product-1 Product -2 Product -3

(See note-1) (See note-2) (See note-3)
Sales Market Sales Market Sales Market
Size Size Size
Actual …..Rs. in millions…..
2017 74 132 3 70 10 100
2018 72 134 2 71 14 120
2019 74 133 2 69 16 140
Forecasted
2020 73 135 2 68 18 160
2021 74 134 1 62 22 190
Note 1: Product 1 is a long-standing product that has been consistently selling in the same market.
Note 2: Product 2 has been consistently selling in the same market for quite some time.
Note 3: Product 3 was introduced in 2017 and is still considered new in the market.
In the current year, 2019, the market share of the biggest competitor for Product 1 is 20%,
Product 2 is 44% and Product 3 is 37%.
Required:
Using BCG matrix, analyze the information provided above and devise strategies for each of three
products.
(12)
Q.3 ST (Support Tools) is a charity organization that provides living aids to help elderly and disabled
people live independently in their own home. These aids include walkers, wheelchairs, walking
frames, crutches, mobility scooters, bath lifts and bathroom and bedroom accessories.
Larger and more complex items (such as mobility scooters and bath lifts) are bought in bulk
from suppliers and stored in the hangars. Delivery of these items to ST is organized by their
manufacturers. These products are stored until they are ordered. When an order is received for
such products, the product is unpacked and tested. An ST transfer logo is then applied and the
product is re-packaged in the original packing material with an ST label attached. It is then
dispatched to the customer.
ST markets its products by placing single-sided promotional leaflets in hospitals, doctors’
surgeries and local social welfare departments. This leaflet provides information about ST and
gives a direct phone number and a web address. Customers may purchase products by ringing ST
directly or by ordering over their website. The website provides product information and photos
of the products which are supplied by ST.
Commercial competitors ST is finding it increasingly difficult to compete with commercial
firms offering independent living aids. Last year, the charity made a deficit of $160,000, and it
had to sell some of its airfield land to cover this. Many of the commercial firms it is competing
with have sophisticated sales and marketing operations and then arrange delivery to customers
directly from manufacturers based in low labor cost countries.
 Managerial & Financial Analysis (CAF-06)
Required:
ST fears for its future and has decided to review its value chain to see how it can achieve
competitive advantage. Analyze the primary activities of the value chain for the product range at
ST. (10)
Q.4 Gertonia is the largest economy in the European region and enjoys a stable and business friendly
government. Its automotive industry is well known for producing top quality speed car brands and
is considered an industry leader in the world. It has an excellent road network with no speed
limit that makes it perfect to meet the Gertonian’s appetite and demand for quality and speed.
Gertonia’s automotive industry is the largest industry sector and employer in the country which
includes from the large car manufacturers to extensive support network of many subsystems,
component and parts manufacturers. The industry is well supported by iron and steel industries,
efficient financial and IT systems, well reputed technical education institutes, heavy public and
private expenditure in education and highly skilled workforce. There is an intense competition and
a constant pressure on manufacturer to innovate.
Fredrick Dunden, Head of Auto Industry Union, believes Gertonia has developed a national
comparative advantage over many other countries, however, he is hesitant about the future
leadership position for speed cars mainly due to the tougher regulations on emission requirements
prompted by Gertonia’s deteriorating environmental conditions, petrol depended engines and
systems of speed cars, government plans to introduce speed limits on all areas to reduce the
increasing rate of car accidents in some areas, changing needs of the tech-savvy consumers and
the rising trend of people interested in driving rented speed cars rather than owning one.
Required:
Discuss the threat(s) and weakness(es) of the automotive industry for speed cars presented in
the case, and provide suggestions to Fredrick Dunden to tackle these issues. (08)

Q.5 There are several global oil companies, such as Exxon Mobil and BP plc. Use the PESTEL model
to identify environmental factors that will affect the strategic planning of such companies. (10)

Q.6
(a) Recent financial information at 30 November 2020 relating to MP Ltd (MPL), a company
listed on the Pakistan Stock Exchange, is as follows:

Rs. in Rs.in
Equity and Liabilities Assets
million millio
Ordinary shares (Rs. 50 each) 150 Non-current assets 475
Retained earnings 100 Current assets 65
Total equity 250
9% bank loan 50
7% term finance certificates (TFCs) 150
6% Convertible Loan 60
Current liabilities 30
Total equity and liabilities 540 Total assets 540

Other relevant financial information:

Risk-free rate of return 4.25%
Average return on the stock market 9.5%
Tax rate applicable to MPL 28%
The current share price of MPL is Rs. 122 per share and MPL has an equity beta of 1.3.
TFCs are trading on an ex-interest basis at 96% of their nominal value. Each TFC has a nominal
 Managerial & Financial Analysis (CAF-06)
value of Rs. 100 and is redeemable at nominal value in seven years' time at 30 November 2027.
Par value of each convertible loan is Rs 1000. Loan holders have right to convert their Convertible
loan into 6 ordinary shares or redeemable at par at 30 November 2026. It is expected that Share
price can grow by 6% every year. Market value of each convertible bond is 1070. CO is shortly
paying interest to debt holders.
Required:
Calculate the WACC of MPL. (08)

(b) Bongo Limited (BL) intends to acquire a machinery plant for its Multan factory. BL expects to borrow Rs. 450
million for this purchase on 1 November 2022 for a period of nine months. The directors are of the opinion
that the present short-term interest rates may rise and are therefore considering the use of interest rate futures
to hedge against BL’s short term interest rate risk exposure.
On June 1st, 2022, 9-month KIBOR is 12.40% per annum and November 2022 six-month interest rate futures is
traded at 87. The standard contract size is PKR 10 million.
Required:
Determine how beneficial would it be for BL to use interest rate futures to hedge interest rate risk if at the end
of five months, interest rates:
(i) rise by 1.50% and futures price move to 85.25
(ii) fall by 0.25% and futures price move to 87.2

(06)

Q.7 Akram Co, a house-building company, plans to build 100 houses on a development site over
the next four years. The purchase cost of the development site is Rs 40,000,000, payable at the
start of the first year of construction. Two types of house will be built, with annual sales of each
house expected to be as follows:
Year 1 2 3 4
Number of small houses sold: 15 20 15 5
Number of large houses sold: 7 8 15 15
Houses are built in the year of sale. Each customer finances the purchase of a home by taking out a
long-term personal loan from their bank. Financial information relating to each type of house is as
follows:

Small house Large house

Selling price: Rs 2,000,000 Rs 3,050,000
Variable cost of construction: Rs 1,000,000 Rs 2,000,000

Selling prices and variable cost of construction are in current price terms, before allowing for
selling price inflation of 3% per year and variable cost of construction inflation of 4•5% per year.
 Managerial & Financial Analysis (CAF-06)
Fixed infrastructure costs of Rs 10,500,000 per year in current price terms would be incurred.
These would not relate to any specific house, but would be for the provision of new roads,
gardens, drainage and utilities. Infrastructure cost inflation is expected to be 2% per year.
AKRAM Co pays profit tax one year in arrears at an annual rate of 30%. The company can
claim Tax allowable depreciation on the purchase cost of the development site on a straight-line
basis over the four years of construction.
AKRAM Co has a real after-tax cost of capital of 9% per year and a nominal after-tax cost of
capital of 12% per year.
Required:
(a) Calculate the net present value of the proposed investment and comment on its financial
acceptability. Work to the nearest Rs 1,000. (10)
(b) Discuss the effect of a substantial rise in interest rates on the financing cost of Akram Co and
its customers, and on the capital investment appraisal decision-making process of Akram Co. (05)

Q.8 A company manufactures and sells a single product. Next year’s budgeted profit on the projected
sales of 810,000 units is Rs. 1,611,000. The company is preparing its cash budget for next year.
The company divides the year into four periods, each of thirteen weeks. Sales and production
will occur at even rates within each period. Details are as follows:
(a) The selling price is Rs 30 per unit. All sales will be on credit and payment will be received
five weeks after the date of sale. It is expected that 2% of all sales will become bad debts.
The budgeted sales units are:
Period 1 2 3 4
Sales (units) 150,000 200,000 180,000 280,000
(b) The product incurs variable selling costs of Rs 1.60 per unit. These are paid in the period in
which they are incurred.
Period 1 2 3 4
Production (units) 210,000 210,000 220,000 220,000
(c) Production cost per unit:
Rs. Notes
Raw materials 9.50 Purchased on credit. Paid four weeks after purchase.
Production wages 8.20 Paid one week in arrears. These are variable costs.
Production overheads 7.00 See below.
Total 24.7
The company wishes to increase raw material inventory to six weeks of forward production by
the end of Period 1 and then to seven weeks by the end of Period 2. Purchases will occur evenly
throughout the periods. The production expenses of Rs. 7.00 per unit are detailed below:

Rs. Notes
Variable expenses 1.10 Paid in the period incurred.
Depreciation 2.70 This is an annual fixed cost that is absorbed on a per unit basis by the
budgeted production of 860,000 units.
Fixed expenses 3.20 3.20 Absorbed on a per unit basis based on the annual production of 860,000
units. Paid in two equal installments at the beginning of periods 1 and 3.

The company has a long term loan. The balance on this loan at the start of the year will be Rs10m.
Interest on this loan is charged at 9% per annum on the amount outstanding at the start of the year
and is to be paid in two equal instalments at the end of period 2 and at the end of period 4.
 Managerial & Financial Analysis (CAF-06)

Opening balances Rs.

Raw materials inventory 710,000 (all purchased at the current price)
Trade receivables (net of bad debts) 2,430,000
Bank and cash 76,000
Trade payables 612,000
Unpaid wages 130,000
Loan 10,000,000
Required:
Prepare, showing all cash flows, a cash budget for period 1 and a cash budget for period 2.

(15)
Q.9
Sigma Chemical (SC) is a financial institution that offers credit facility to its customers among other services.
SC is looking to waive off annual fee for the credit facility if a customer has a balance above a certain limit.
Umair, Head of Credit Department, determined that waiving off annual fee could be justified only if
customers maintain an average monthly balance of more than Rs. 70,000 in a given year. A random sample
of 900 customers’ balances is obtained. The monthly mean of the sample data is Rs. 71,000. It is also known
that the data is normally distributed with a standard deviation of Rs. 30,000. Umair is looking to apply
statistical analysis to determine whether to waive off annual fee or not.
Required:

(a) What conclusion can Umair draw from the given data, using a
10% significance level (critical value=1.28)? (06)

(THE END)
 Managerial & Financial Analysis (CAF-06)

Present Value Interest Factor (PVIFi,n) Table

Discount Rate (i)

Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% Periods
(n) (n)
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 1
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694 2
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579 3
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482 4
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402 5
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335 6
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279 7
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233 8
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194 9
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162 10
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135 11
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112 12
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093 13
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078 14
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065 15
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054 16
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045 17
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038 18
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031 19
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026 20

Present Value of 1, i.e., (1 + i)-n

Where
i = discount rate
n = number of periods until payment
 Managerial & Financial Analysis (CAF-06)

Present Value Interest Factor Annuity (PVIFAi,n) Table

Discount Rate (i)

Periods 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% Periods
(n) (n)

1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833 1
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528 2
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106 3
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589 4
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991 5
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326 6
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605 7
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837 8
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031 9
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192 10
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327 11
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439 12
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533 13
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611 14
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675 15
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730 16
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775 17
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812 18
19 17.226 15.678 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843 19
20 18.046 16.351 14.877 13.590 12.462 11.470 10.594 9.818 9.129 8.514 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870 20

Present value of an annuity, i.e., 1- (1+i)-n

i
Where
i = discount rate
n = number of periods
 Solution Q-1
(1 mark each)
1 B
2 A
3 D
4 D
5 C
6 A
7 A
8 D
9 B
10 C
 Solution Q-6 a
WACC

Cost of equity 10.75% 1 marks

Rf rate 4.25%
Beta 1.3
Market Risk Premium 9.25%

Cost of TFC
Years Cashflows 5% PV 8% PV
0 -96 1 -96 1 -96
0 to 7 5.04 5.786373397 29.16332192 5.206370059 26.2401051
7 100 0.71068133 71.06813301 0.583490395 58.34903953
4.231454936 -11.41085538
KD 5.81% 2 marks

Cost of Convertible Bond

Years Cashflows 5% PV 3% PV
0 -1010 1 -1010 1 -1010
0 to 7 43.2 5.075692067 219.2698973 5.417191444 234.0226704
6 1038.35599 0.746215397 774.8372271 0.837484257 869.6067946
-15.89287564 93.62946498
KD 4.71% 2 marks

Redemption value 1000

Conversion Value 1038.35599 1 marks
Share 6
Mv/Share 122
Growth 6%

Market values Rs m Cost

Equity 366 10.75% 39.345
TFC 144 5.81% 8.368617996
Cobertible loan 60.6 4.71% 2.854125697
570.6 50.56774369
WACC 8.86% 2 marks
Solution Q-6 b
Solution Q-7
Part a
NPV
"Rs 000" "Rs 000" "Rs 000" "Rs 000" "Rs 000" "Rs 000"
Years 0 1 2 3 4
Total Revenue 0 52890.5 68321.96 82774.07025 62747.11616
Total Variable cost 0 30305 39312.9 51352.47563 41738.15102
Infrastructure cost 10710 10924.2 11142.684 11365.53768 1 mark
Depreciation 10000 10000 10000 10000 1 mark
Profit 1875.5 8084.86 10278.91063 -356.5725444
Tax @ 30 % -562.65 -2425.458 -3083.673188 106.9717633 1 mark
Depreciation 0 10000 10000 10000 10000
Investment -40000
Net cash flows -40000 11312.85 15659.402 17195.23744 9750.399219
12% ( 1 marks) 1 0.892857143 0.797193878 0.711780248 0.635518078
PV -40000 10100.75893 12483.5794 12239.23036 6196.554975
NPV 1020.123669 1 mark

working
"Rs 000" "Rs 000" "Rs 000" "Rs 000" "Rs 000" "Rs 000"
Years 0 1 2 3 4
small house units 15 20 15 5
Price (000) 2000 2000 2000 2000
Revenue 30900 42436 32781.81 11255.0881 1.5 mark

Large house unit 7 8 15 15

Price(000) 3050 3050 3050 3050
Revenue 21990.5 25885.96 49992.26025 51492.02806 1.5 mark
Total Revenue 52890.5 68321.96 82774.07025 62747.11616

variable cost
per small house 1000 1000 1000 1000
15675 21840.5 17117.49188 5962.593003

Per large house 2000 2000 2000 2000

14630 17472.4 34234.98375 35775.55802
Total Variable cost 30305 39312.9 51352.47563 41738.15102 2 mark
Solution Q-2
(6 marks for categorizing each product in the right cell (2 marks for each product line) – working
must be shown. 6 marks for the strategies (2 marks for strategy of each product line)

Product 1: Analysis of Information

• It is a product in a market with low growth.
• Its market share is consistently very high and is forecasted to remain high.
• Its market share in the current year, 2019, is 56% (55.6%), which makes it the market leader.
• It is a long-standing product in the existing market.
• It displays the characteristics of a mature product with dominant position.
• This is a Cash Cow product.

Future Strategies:
• It should be dealt with consistently to keep reaping profits.
• The cash generated by product 1 can be used to invest in other products.
• Market penetration, although difficult to implement in a low growth market, should be used when
expansion is required as it is the least risky approach. For example, this can be obtained through cost
leadership and acquisition of competitors, etc.

Product 2: Analysis of Information

• It is a product in a market with declining growth.
• Its market share is consistently very low and is forecasted to dip lower.
• Its market share in the current year is about 3% (2.9%) which is much less than the 44% market share of
the market leader.
• It is an existing product in the existing market.
• It has weak position and seems to be in the decline phase.
• This is a Dog product.
Future Strategies:
• If the product is generating required ROIs or positive NPV, EM can choose to keep the product till it is
feasible.
• Divest the product as it is projected to decline and may incur losses.
• If EM decides to keep this product for any reason (e.g. profit, brand value, product synergy, etc), market
penetration strategy may be used for expansion, however, EM should avoid risky investments on this
product.

Product 3: Analysis of Information

• It is a product in a market that is showing high growth.
• It has low market share.
• Its market share in the current year is about 11% (11.4%) which is less than the 37% market share of the
market leader.
• It is considered a new product in the new market.
• It resembles an entrepreneurial venture in a high growth market.
• This is a Question Mark product.
Future Strategies:
• The market is growing quickly, there is an opportunity to increase market share, but initially it will require
a substantial investment of cash to increase or even maintain market share. EM should keep
investing in the growth of this product.
• EM can invest cash generated from product 1 into Product 3.
• Differentiation or focus strategy may be used to gain a larger market share.

Solution Q-3
(2 marks for identifying correct activities under each head of primary value chain. At least two
activities must be identified under each head)

ST supplies bought-in products (mobility scooters, bath lifts). The value chain for these products is different
and this is reflected in the following analysis.
The primary activities of the value chain are:
Inbound Logistics.
These are activities associated with receiving, storing and disseminating inputs to the product. Typical
examples at ST are materials handling, warehousing and inventory (stock) control. For bought-in products
from suppliers, Products are stored in the warehouse.
Operations
This is concerned with transforming inputs into the final product. This includes machining, assembly, testing
and packaging. For bought-in products from supplier, operations is concerned with the careful opening of
packaging, the addition of an ST transfer logo, the testing of the equipment and the re-packaging of the
product into its original packaging.
Outbound logistics
These are activities associated with storing and then physically distributing the product to buyers. Finished
goods warehousing, order processing and delivery is considered here. At ST, bought-in products from
suppliers need to be stored prior to delivery. Orders are placed by telephone or through the website.
Marketing and Sales
These are activities by which customers can learn of the existence of and then purchase the products. It
includes advertising, promotion, sales and pricing. At ST this covers leaflets in hospitals and surgeries, a
website catalogue and order taking and the giving of advice.

Solution Q-4
(4 marks for each of the opportunities and threats. At least two points must be provided in each
heading. 4 marks for appropriate suggestions)
Threat:
Tougher regulations on emission requirements / Deteriorating environmental conditions
This means companies would need to meet the new regulations, which in many cases would mean changing
the speed cars. This runs a risk of loss in business due to high costs, risk of comprise in quality, difficulty in
meeting regulations, etc.
Suggestions:
• Make environmentally friendly cars to satisfy regulatory requirements.
• Conduct CSR activities to reduce deterioration of environment causing by cars.
Threat:
Government plans to introduce speed limits on all areas
One of the reasons Gertonia can produce high speed cars is because of the local demand to meet Gertonian
appetite. Plan to introduce speed limits would mean Gertonians cannot drive fast at will which will
consequently affect local demand for fast cars. Hence, this can compromise the leadership position.
Suggestions:
• Gertonia has a business friendly government, as such government can be asked to keep no speed limits for
areas that do not run the risk of accidents due to high speed e.g. highways, etc.
• The accidents may be due to reasons other than high speed cars (e.g. bad roads, etc), as such a closer look
at the issue should be suggested to the government.
Threat:
Changing needs of the IT-savvy consumers
This would require the companies to upgrade to meet the high-tech demands of the consumers. If not
responded quick enough, this would result in loss of business.
Suggestions:
This is a manageable threat as Gertonia has efficient IT and financial systems, healthy spending in education
and a push to be innovative. The industry should quickly react to meet the customer needs.
Threat:
Rising trend of people interested in driving rented cars rather than owning one
This may result in lower demand resulting in lower profitability and an industry wide change from targeting
consumers to own the car to targeting organizations that rent out the car.
Suggestions:
• Strategies should be planned to target businesses who would give people cars to drive.
• Expand market and reach areas where people would like to own cars.
Weakness:
Not responding quick enough to the changes in environment Gertonian automotive industry has not been
moving quick enough to respond to the changes in the environment, for example, they are not responding to
IT-savvy consumers, heavy reliance on petrol and changing trends of driving a rented car rather than owning
one.
Suggestion:
• R&D should be encouraged in the industry.
• Private and public investments should be diverted for R&D.
• R&D efforts should be directed towards reducing reliance on petrol dependent engines and systems to
produce environmentally friendly cars.

Solution Q-5
(2 marks each to identify correct factors under each head. At least two factors must be identified in
each head)

Political environment. Oil companies are affected by the politics of many of the oil-producing
nations, and the use of oil supply and oil prices by the governments of some of these countries to exert
pressure in world politics. There are also political disputes about the ownership by nations of rights to drill
offshore in some parts of the world.
Economic environment. Oil companies, like all other commercial economies, are affected by the current and
expected state of the world economy and national economies. However, the importance of oil is such that
the decisions and activities of oil companies can have a significant effect on the world economy.
Social and cultural environment. Oil companies need to consider the attitudes of societies towards the
consumption of oil. The ‘green’ movement is strong in some countries, and there is an increasing
willingness among people to consider using alternative (non-oil) sources of energy.
Technological environment. Oil companies are affected by developments in technology, particularly
developments in the technology for using alternative energy sources, and R&D into more fuel-efficient
technology that uses oil.

Environmental/sociological influences. Oil is at the centre of concerns about greenhouse gases. Oil
companies are also affected by concerns for the protection of the environment and the ecology (for example,
concerns about pollution from oil spillages). There are also concerns about how long supplies of oil will last.

Legal environment. Oil companies will be affected by continuing legislation to protect the
environment and to punish companies found guilty of environmental pollution.
Solution of Q-8:

(a) Cash budget Rs000

Period 1 Period 2
2-Marks 2-Marks
Sales receipts (W1) 5,144 5,314
Payments: Raw materials (W2) 2,139 2,201
Production wages (W3) 1,720 1,722
Variable production expenses 231 231
Variable selling expenses 240 320
Fixed production expenses (W4) 1,376
Interest (W5) 450

Cash flow -562

Opening balance 76 -486

Closing balance -486 -

Workings

W1: Sales receipts Period 1 Period

2 2-Marks 2-Marks
Rs. ‘000’ Rs. ‘000’
Sales(@Rs30 per unit) 4,500 6,000
Reduced for bad debts 4,410 5,880
Opening trade receivables 2,430 1,696
Closing trade receivables *-1,696 -2,262
Receipts 5,144 5,314
* 1,696 = 4,410 x 5/13
 W2: Raw materials 3-M

Production (@Rs9·50 per unit) 1,995 1,995 2,090

Closing inventory *921 1,125
Opening inventory -710 -921
Purchases 2,206 2,199
Opening payables 612 679
Closing payables **-679 -677
Paid 2,139 2,201
* 1,995 x 6/13 **2,206 x 4/13

W3: Production wages 2-M

Production (@Rs8·20 per unit) 1,722 1,722

Opening unpaid 130 132
Closing unpaid -132 -132
Paid 1,720 1,722

W4 Fixed production expenses 1-M

Total cost = 860,000 units * Rs3·20 = Rs. 2,752,000. This is paid in two instalments.

W5 Interest payments 1-M

Rs10m @ 9% = Rs. 900,000. This is paid in two instalments

Solution Q-9(a)
 Cer
ti
fi
cat
einAccount
ing&Fi
nanceSt
ageExami
nat
ion

TheHISAB 19thAUG,2022
SchoolofAc
count
anc
y 100Marks
Lahore 3hours
Addi
ti
onalr
eadi
ngt
ime–15mi nutes

COMPANYL
AW

Instruct
ionstoexaminees:
(i) Answeral lquest ions.
(ii) Answeri nbl ackpenonl y.
(ii)Ment
i ionyouCRNnumberi nanswerscr
ipt

Q.
1 Sel
ectthemostappropr
iat
eanswerfrom t
heopt
ionsavai
l
abl
eforeachoft
hef
oll
owi
ng
Mult
ipl
eChoiceQuesti
ons(MCQs).EachMCQcar r
iesONEmark.

(i
)TheCommi ssionshallbeent i
tl
edtopresentapeti
ti
onf ort
hewi ndingupofacompanywi t
houtan
i
nv estigat
ionint
ot heaffair
soft hecompany:
(a)Ifthecompanyi scarryi
ngonabusi nessnotauthor
isedbyitsmemor andum.
(b)Ifsolebusinessoft hecompanyi stheli
censedacti
vit
yandt hatlicencei
srevoked.
(c)Ifthebusinessofcompanyi sbeingconductedi
namanneroppr essivet
oanyofitsmember sorper
sons
concer nedinthef or
mat i
onoft hecompany
(d)Themanagementoft hecompanymi ghtbeguil
tyoffraud,misfeasanceorothermisconductt
owardsthe
companyort owar dsanyofi t
smember s

(
ii
)Theregist
rarshallr
egi
sterthememor andum ofassociati
onofacompanyi ffoll
owi
ngcondi
ti
onsar
e
ful
fi
ll
ed:
(
i) Companyi sbeingfor
medf orlawful
pur poses
(
ii
) Noneoft heobjectst
atedisinappropri
at e,i
nsuff
ici
entl
yexpressi
veordecepti
ve
(
ii
i)Alll
egalrequi
rementsregardingregi
strationaredulycompli
edwi t
h
(
iv)Thecompanyhasobt ai
nedconf ir
mat i
onf rom t
heCommi ssionforregi
str
ati
onofmemorandum

(
a) i
,i
iandii
i
(
b)ivonly
(
c) i
i
,ii
iandi
v
(
d)Noneoft heabov
e

(
ii
i)Beforebeingpermitt
edtot rade,apubli
ccompanymusthave:
(
a) Obt ai
nedacer t
ifi
cateofincorporat
iononl
y
(
b)Beenl i
stedont hesecuri
tiesexchange
(
c) Issuedapr ospectus
(
d)Obt ai
nedacommencementofbusi nesscert
if
icat
eandcer
tif
icat
eofi
ncor
por
ati
on

(
iv)Apref
erencesharenormall
ycarr
iesaspr i
orri
ght(aheadofor
dinar
yshar
es)t
o
(
a) Recei
veasal ar
ywhichisnormall
yafixedamounteachy ear
(
b) Recei
vear epaymentofcapit
ali
ntheev entofwindingup
(
c) Voteinthegeneral
meeting
(
d) Noneoft heabove

(
v)Prospectusshal
lbeissued:
(
a) Atleastsevendaysandatmostt wentydaysbeforet
hedateofopeningofsubscri
pti
onlist.
(
b) Atleastsevendaysandatmostt hi
rt
yday saf
terthedateofopeni
ngofsubscri
pti
onlist.
(
c) Atleastsevendayandatmostt hi
rt
yday sbef
orethedateofopeningofsubscr
ipti
onlist
.
(
d) Notmor ethansevenday sornotl
essthanthi
rtydaysbefor
etheopeningofsubscri
pti
onl i
st.

(
vi)Whoshallpr
esidet hegeneralmeet
ing?
(
a) Anypersonelectedbyshar ehol
der
satstar
toft
hemeet
ing
(
b) Dir
ectorsofCompany
(
c) Majori
tyshareholder
(
d) Chair
manofBoar dofDirector
s
 (
vii
)Suar
ezLimit
edl astheldanAGM on31October2007f
ort
hey
earended30Sept
ember2007.Whenmust
t
hecompanyholditsnex tannual
gener
almeet
ing(AGM)?
(
a) by30September2008.
(
b) by31October2008
(
c) by31December2008
(
d) by28January2009
(
vii
i
)Al
lthefi
rstdi
rectorsshal
lret
ire:
(
a) Onthedateoft hefi
rstannualgener
almeet
ing.
(
b) Aft
ercompl et
ingaterm of3y ear
s
(
c) Aft
ercompl et
ingaterm of5y ear
s
(
d) Noneofthese

(
ix)Al
itheChiefExecut
iveofXy zFastFoodsLtd.hasv astexper
ienceofFastFoodIndust
ry.
(
a) hecannotcarr
youtt hebusinessofFastfoodofhi sown
(
b) hecansetupabusi nessoffastfoodforhisspouse
(
c) hecansetupabusi nessoffastfoodasfatherandt r
usteeforhi
smi norchi
l
dren
(
d) noneoftheabov e

(
x)Thequar
ter
lyfi
nanci
alst
atement
sofal
i
stedcompanyshal
lbet
ransmi
tt
edel
ect
roni
cal
l
yto
(
a) TheCommi ssi
on
(
b) TheSecuri
ti
esexchange
(
c) TheRegist
rar
(
d) All
oftheabove

(
xi)Apr ovi
sionalmanagerwasappoi ntedon24t hOct ober2021andwi ndinguporderwasi
ssuedbytheCour
ton
3Januar y2022,fr
om whom hecannotr equi
rethestatement( ofaffai
rs)inprescr
ibedf
orm?
(
a)Gener alManager(oper ati
ons)whosel astdayofempl oymentwi t
hthecompanywas26December2020.
(
b)ChiefOper at
ingOfficerwhosel astdayofempl oy
mentwi tht hecompanywas12Januar y2021.
(
c)SeniorManager( l
ogi st
ics)whosel astdayofempl oymentwi tht
hecompanywas18Febr uar
y2021.
(
d)ChiefFinancialOf
ficerwhosel astdayofempl oymentwi tht hecompanywas30Sept ember2020.

(
xii
)Whoisresponsi
blei
ncaseofdef
aul
tregar
dingpay
mentofdi
vi
dendt
omember
?
(
a) CFOoft hecompany
(
b) BODoft hecompany
(
c) CEOoft hecompany
(
d) Chair
manoft hecompany

(
xii
i
)Casual
vacancyint
heoff
iceofdi
rect
orsofalist
edcompanyshal
lbef
il
ledby
(
a) Bymember swi
thi
n30daysofoccurrence
(
b) Bydir
ect
orswit
hin30daysofoccur
rence
(
c) Bydir
ect
orswit
hin60daysofoccur
rence
(
d) Bydir
ect
orswit
hin90daysofoccur
rence

(
xiv
)Acompanymayhav edi
rect
ornomi
nat
edbyi
ts:
(
a) Debtors
(
b) Credi
tors
(
c) Employees
(
d) Noneoft hese
(xv
)Incaseofanymat er
iali
rr
egul
ari
tyi
ntheel
ect
ionoft
hedi
rect
ors,
member
shav
ing10%ormor
evot
ingpowermay
applyt
othecourtwi
thin
(a) 14daysofelect
ion
(b) 21daysofelect
ion
(c) 30daysofelect
ion
(d) Noneoftheabov ei
scorr
ect
(
15)

Q.
2 (a)RajaandRehant woseni orcri
cketer
swantt oestabli
shaCr icketAcademytoexplor
eandt r
ain
newt al
ent.Oneoftheirf
riendsadvisedthem t
or egi
steracompanyf ort
hispur
pose.Advi
seRaja&
Rehanaboutr est
ri
cti
ons,priv
il
egesandobl i
gat
ionsiftheyregi
steracompanyasanassoci at
ionnot
forpr
ofit
.

(
04)

(b)Plut
o(Pri
vat
e)Limi
ted(PPL)
,havi
ngpaid-upcapit
alofRs.7.5mil
li
on,haslaiditsannualfi
nanci
al
stat
ementsforappr
ovalatPPL’
sannualgeneralmeeti
ng.Undertheprovi
sionsoftheCompani es
Act,2017advi
sethecompanysecret
aryabouttherequi
rementsforf
il
ingthefinancial
statements
 wi
thr
epor
tsandot
herdocument
s,i
fany
.

(
02)

Q.
3
 (
a)Descr
ibet
het
erm“
associ
atedcompany
”inaccor
dancewi
tht
heCompani
esAct
,2017.
(
03)

(b)RBCLimit
edandKBCLi mitedar
eassoci
atedcompani eshavi
ngsharecapi
talofRs60.0mi ll
i
on
andRs15. 0mill
i
onr espect
ively
.Thecompanies’reser
vesequal10% ofthei
rshar ecapit
al.RBC
Limit
edproducesandsuppl iesacomponent‘ X’toKBC Limited.KBC Li
mit
edhasbeenf aci
ng
l
iqui
ditypr
obl
emsasar esultofwhichi
tsproducti
onandsal eshadbeensuff
ering.Consequentl
y,
ther
ehasbeenasi gni
fi
cantdecli
nei
nthesal
eofcomponent‘ X’byRBCLimit
ed.

Thedir
ector
sofRBCLimit
edwishtosupportKBCLimitedbywayoft
hef ol
l
owi
ng:
 Adv anci
ngl
oanofRs5.0mil
li
onatanannualint
erestof8%.
 Increasi
ngt
heli
mitoftr
adecredi
tfr
om Rs1.0mill
iontoRs3.0mi
ll
ion.

Bri
efl
ystatet
hecondi
ti
onsr
equi
redt
obef
ulf
il
ledbyt
het
wocompani
eswhi
l
ecar
ryi
ngoutt
heabove
tr
ansact
ions. (
03)
Q.
4 (a)M/ s.MoonLi ghtLimited (
ML)i sapubl i
climi
ted companyl
ist
ed onKarachi
,Lahoreand
Isl
amabadSt ockExchanges.Theelect
ionoft
hedir
ect
orsofMLwashel donJune30,2014.Agroup
ofshar ehol
dersholdi
ng25% oft hev ot
ingpowerdecidedonAugust28,2014tochal l
engethe
elect
iononthegroundthatvoti
ngwasnotcarri
edoutproperl
y.
Required:
Cantheabov esharehol
derschal
lengetheel
ecti
on? (
02)

(b)LuckyTr ansportLimitedhol dsaBoar dofDi rectors’meetingonl astdayofeverymont h.The

companyhel df ourmeetingsdur ingtheperi
odf r
om Jul y2015t oOctober2015.Mr.Afzal,aDi rector
ofthecompanyat tendedmeet ingheldinthemont hofAugust2015onl y
.InthemonthofNov ember
2015Mr .Afzalint
endstoat tendt heBoardofDi r
ect or
s’meet i
ng,butChiefExecut
iveOf f
icer( CEO)
ofthecompanyhasobj ectiont hatMr .Af
zalwasr emainedabsentf rom threemeetingsi .
e.,Jul y
,
SeptemberandOct oberwi t
houtl eaveofabsence,soheshal li
psofactoceaset oholdofficeoft he
dir
ectorofthecompany .
Required:
Evaluatetheabov esit
uati
onanddescr i
bewhet hertheobj ect
ionofCEOi svali
dornot. (02)

Q.
5 TheAnnual Gener alMeet ingofTr adeLi mitedwashel dat9: 15a.m on31Oct ober2012.
Certai
nshar eholder soft hecompanyhav el odgedf oll
owingcompl ai
ntswi t
hthecompany ’s
secretary.
() No
i ticeoft heannualgener almeet i
ngwasnotr eceivedbyt hem althought heyare
residenti nPaki stanandt heirr egisteredaddr esseshav eal sobeenpr ov i
dedt othe
company .
(i
i) Sincet hemeet i
ngcoul dnotcommenceatt heschedul edtimei .
e.9:00a. m; i
tbecame
invalidandshoul dbecal l
edagai n.
(i
i)Ar
i esol utionpassedi nthemeet ingwasappr ovedbyashowofhands.Howev er,apoll
shoul dhav ebeencar ri
edout .
(i
v)Mr .A who v oted f ora r esol uti
on wasr epresented through a prox ywhi ch was
deposi tedat5: 01p. m.i .
e.af terof ficehour son29Oct ober2012.Fur t
her ,since30
Oct ober2012wasapubl i
chol i
day ,thecondi ti
onofdeposi ti
ngt hepr oxyatl east48
hour sbef orethecommencementoft hemeet i
ng,wasnotmet .
(v) Mr .Gwhohol ds50, 000shar eswasr epr esentedbyt wopr oxiesi.
e.Mr .C( 30,000shares)
&Mr .D( 20,000shar es).Onlypr ox ywi th30, 000shar eswascount edforthepur pose
ofv ot i
ng.
(v)J
i KM Li mi tedhol ding20, 000shar esoft hecompanywasr epresent
edbyMrWaheed,
whoi snei theradi r
ect ornoranempl oy eeofJKM Li mited.
Commentont hev al i
dityofeachoft heabov ecompl aintsinthel i
ghtofCompani esAct ,2017.
(10)
 Q.6 Al ii
sashar ehol
derofAll
iedCementLi mi t
ed( ‘
ACL’)
,apubl
iclist
edcompany .ACL
hasmadeasi gnifi
cantprof
iti
nthelastfinanci
alyear.Theshar
ehol
ders,i
ncludi
ngAl i
,wer e
expecti
ngadeclarati
onofasubstant
ialdivi
dendofnotl esst
hanRs.10pershare.Howev er
,
theboardofdirectorsofACLproposedadi vi
dendofonl yRs.5pershar e.Al
irall
iedt he
sharehol
der
sandi nACL’sannualgeneralmeeting(heldtwomonthsago),theshareholders
approvedadiv
idendofRs.10pershare.

Af ew mont hsago,Alihadwr i
tt
enal et
tertothecompanysecr et
aryofACLaskingACLto
sendhi sduedividendstohisson, Qadir
,inI
slamabad.Thecompanysecr et
aryi
softhevi
ew
that,
sinceQadirisnotashar eholder
,nodivi
dendscanbepaidtohim.
Duet ot hesei
ssues,thedividendamount shavenotbeenpaidandhav ebeenlyi
nginACL’
s
bankaccountf orthelasttwomont hs.
Required:
UndertheCompani esAct,2017adv i
seAlionthelegal
consequencesoftheseact
ions. (
05)

Q.
7 (a)TheCompaniesAct,2017pr
escr
ibesgr
oundsforv
acat
ionofof
fi
cebydi
rect
or.Canacompany
provi
deaddi
ti
onalgroundsforv
acat
ionofoff
iceandi
fso,
how? (02)

(b)SedanLi mited( SL),acompanyl imi

tedbyguarant
eehav i
ngasharecapi
tal
,hasbeenincur
ri
ng
l
ossesf orthel astthreeyears.I
nit
iall
y,SLhadfourdirect
ors(member
s)A,B,CandD.On1Jul y
2012,Chadt ransferredallhi
sshar estoD.On1Mar ch2013A,BandDdeci dedt
owi nd-
upthe
companyv oluntaril
y.
Expl
aintheliabil
ityofA, B,
CandD. (
03)

(c)St
atetheper centageofshar eholders’v ot
esr equir
edtoapprovethef ol
l
owingresolut
ions.I
n
caseanybusinessdoesnotper taintoshar eholder
s,statewhoi
sempower edtoapprovethesame.
(i
) I
ncorporatingincreaseinaut horizedcapit
alinthememorandum andar
ticl
esof
associati
on.
(i
i
) Appoi ntmentofaudi tors.
(i
i
i) Acqui sit
ionoff i
xedassetscost ingRs.2Mi l
li
on.
(i
v) I nteri
m Di v
idend.
(v
) Fi nalDi v
idend.
(v
i) I nvestmenti nacompany (
03)

Q.
8 (a)Expl
aint
hesituati
onwher
ebyasharehol
der
smaycal
lforf
reshel
ect
ionofdi
rect
orspr
iort
othe
end ofthet
erm ofthepr
esentboar
d.
(02)

(
b)Az adLi mit
ed(AL)i salistedcompanyengagedinthebusi
nessofmanufacturi
ngandsupplyof
electr
icalappl
iances.Mr .Majnou,adir
ect
orofAL,hasappli
edforanint
erestfr
eeloanfr
om the
companyt oberepay abl
einf i
veyear
s.
Inviewoft heprovisi
onsoft heCompaniesAct,
2017descri
bethecir
cumstancesunderwhi
chAL
maygr antl
oantoMr .Maj nou. (02)

(
c)TheshareholdersofRamadanLi
mit
edholdi
ng20%ofthevot
ingpowersubmit
tedar equi
sit
iont
o
holdanex traordi
narygener
almeet
ing(EOGM)toremov etheaudit
oroft hecompany .The
companynei thercall
edtheEOGM norall
owedthem toholdthemeet i
ngatt hecompany ’
s
regi
ster
edoff i
ce.Thesai
dmeeti
ngwasthenhel
datsomeotherpl
aceandresolut
ionforremoval
oftheaudit
orwaspassed.

Di
scusst
hev
ali
dit
yoft
hesai
dmeet
ingandr
esol
uti
onpassedt
her
ein. (
02)
 Q.9 (a)TheChiefExecuti
veofaPublicLi
mit
edCompanyi
soutofcountr
yforsomeoffi
cial
assi
gnment.Theannualaccount
softhecompanyhav
etobeappr
ovedandsi
gned.Whatmustbe
donetocomplywi
ththelegalr
equir
ement
s?
(
02)

(b)UHYLi mitedintendst orai

sefundsthroughissuanceofshar est
ot hepublic.Proceedsoft he
i
ssuewoul dbeut i
li
zedforinst
all
ati
onofanewpl ant.Thedirect
orspl
ant oissuetheprospectuson
10Sept ember2019.Thesubscr i
pti
onl
istwillbeopenedinthesecondort hethi
rdweekofOct ober
2019.Anex pertopinionwouldalsoberequir
edtobeincludedinthepr
ospectus.
Youar erequiredtoadv isethecompany ,basedont heprovisi
onsoftheCompani esAct,2017i n
respectofthef ol
l
owi ng:

(
i) Dat
eofpubl
i
cat
ionoft
hepr
ospect
usandt
heopeni
ngofsubscr
ipt
ionl
i
st.
(
02)
(
ii
)Thepl
aceswher
eUHYwoul
dber
equi
redt
omakeav
ail
abl
ecopi
esofi
tspr
ospect
us.
(
03)

Q.
10 (a)TheDirect
orsofSigmaLimi
tedwishtorecommendafi
naldiv
idend.Undert
heprovi
sionsofthe
Companies Act,2017 adv
ise t
he dir
ect
ors aboutt
he r
estr
ict
ions,ifany,wit
hr egardtot he
declar
ati
onofdivi
dend.
(03)

(b)Youar et heChiefFinancialOffi
cerofacompanyli
stedont heKar achiStockEx changehav inga
sharecapi t
alofRs.50mi ll
i
on.Mr .Wahid,whohol
dsRs.5mi l
l
ionshar esoft hecompany ,hassent
awr i
tt
enr equestt orevi
ew t hecashbookoft hecompany .Explainwhet heryoucanr efuset his
request?
(02)
(c)Theannualgener almeet ingofacompanywashel donOct ober31,2009butonaccountof
certai
ndi sagreements,themember sdidnotadopttheaudi t
edf inancialstat
ement sfort hey ear
endedJune30, 2009.Intheabov esit
uati
onhowwouldt hecompanycompl ywiththeprov i
sionsof
theCompani esAct ,2017r elat
edt othefil
i
ngofcopiesofannualaccount swi thther egistr
arof
compani es?
(03)

Q.
11 (
a)Whocandemandapol
li
ntheGener
alMeet
ing?
(
01)
(
b)Whoi
sent
it
ledt
orecei
vet
henot
iceoft
hemeet
ingsofacompany
?
(
02)

(c)TheBoar
dofdir
ectorsofRSLi
mit
edwantst
oappoi
ntMr
.Sal
ahuddi
n,anempl
oyeeoft
he
company,asChi
efExecuti
veoft
hecompany
.
(
03)
Youarer
equir
edtoex pl
ainthef
ollowing:
(
i) Themi ni
mum numberofshar esr
equir
edtobeacqui
redbyMr.Sal
ahuddi
n.
(
ii
) Thet enureofoff
iceforwhichMr.Sal
ahuddi
nmaybeappoint
ed.
(
ii
i) Wi l
litbenecessaryt
oobt ainmember
s’appr
ovaloft
heter
msandconditi
onsbei
ng
off
eredtohim?
Q.
12 (a)RALi mitedisapubl i
climit
edcompany .Ithastwoclassesofshar esnamely‘A’and‘B’
.The
dir
ectorsoft hecompanyhav edeci
dedt orestri
ctt
hevoti
ngr i
ghtsofClass‘A’shar
ehol
ders.I
nlieu
thereof
,theyshallbeal
lowedtogetpreferenceinpaymentofdivi
dend.
Statet
hepr ocedurest
hroughwhichthedecisionofdi
rect
orscanbeputi ntoeff
ect.
(03)

(b)Mr.Ahmedplacedthei ni
ti
alcapit
alf orthef or
mati
onofMr .Kamal’scompanyandalso
assi
stedi
ncir
cul
ati
ngthecompany ’sprospectus.Companywi
shestoincl
udeastat
ementbyMr.
Ahmedasanex per
tregar
dingat echni
calissue.CanMr.Ahmedissuesuchastat
ement
?Please
 repl
yinthelightofprovi
sionsoftheCompani esAct
, 2017.
(03)
(
c)Thegener almeetingofVXLi mi
ted,alistedcompany ,wasconvenedon30May2012.Howev er
,
onlyfoursharehol
dersturneduptoattendt hemeet
ing.
Explai
nhowVXLi mitedshoulddealwiththeabovesituat
ioni
nthelightofCompani
esAct
,2017.
(
03)

Q.
13 (
a)Def
ine“
Unl
awf
ulAct
ivi
ty”asperCompani
esAct
,2017.
(
03)

(
b)Bri
efl
ydescr
ibet
hecondi
ti
onsunderwhi
chCommi
ssi
onmayappl
ytoCour
tforwi
ndi
ngupof
acompany.
(
03)

(
c)Wheni
sOf
fi
cial
Liqui
dat
orr
equi
redt
orepor
ttoCour
t.Al
sost
ateanysi
x(06)par
ti
cul
arsofsuch
r
epor
t.
(04)
 Cer
ti
fi
cat
einAccount
ing&Fi
nanceSt
ageExami
nat
ion

r
d
TheHISAB 23 FEB,2022
SchoolofAc
count
anc
y 100Mar ks
Lahore 3hours
Addi
ti
onalr
eadi
ngt
ime–15mi nutes

COMPANYL
AW

Instruct
ionstoexaminees:
(i) Answeral lquest ions.
(ii) Answeri nbl ackpenonl y.
(ii)Ment
i ionyouCRNnumberi nanswerscr
ipt

Answer#1

Sr# CorrectOption
(
i) (
a) Ifsolebusi nessoft hecompanyi sthelicensedact i
v i
tyandthatl
icensei
s
revoked.
(
ii
) (
a) i
, i
iandi ii
(
ii
i) (
d) Obtainedacommencementofbusi nesscer t
if
icateandcer t
if
icat
eof
i
ncor por at
ion
(
iv) (
b) Receivear epay mentofcapi tali
ntheev entofwi ndingup
(
v) (
c) Atleastsev endayandatmostt hirt
yday sbeforethedat eofopeningof
subscr i
pt i
onl ist.
(vi
) (
d) ChairmanofBoar dofDi r
ectors
(vi
i
) (
c) by31December2008
(
vii
i) (
a) Ont hedat eoft hefirstannualgeneralmeeting.
(i
x) (
a) hecannotcar r
youtt hebusinessofFastf oodofhi sown
(x) (
d) Alloftheabov e
(xi
) (
d) ChiefFi nanci alOffi
cerwhosel astdayofempl oy mentwi t
hthecompany
was30Sept ember2020.
(
xii
) (
c) CEOoft hecompany
(
xii
i) (
d) Bydi r
ect orswi t
hin90day sofoccurrence
(
xiv) (
b) Creditors
(xv
) (
c) 30day sofel ect i
on
Answer#2

(
a) Raj
aandRehanshoul dappl
ytoCommissi
ont
ogetr
egi
ster
edandwor
kasal
i
mit
edl
i
abi
l
ity
companywi
thoutusi
ngthewordl
i
mit
ed.

Rest
ri
ctions
 Su chAssoci
ati
onshal
lapplyit
sprofi
ts,i
fany,
orotheri
ncomeinpromot
ingi
tsobj
ect
s,
and
 Su chAssoci
ati
onshal
lprohibi
tthepaymentofanydivi
dendt
oitsmembers.
 Pri
vil
egesandbenefit
s
Theassociat
ionshal
lonr egi
str
ati
onenj
oyallthepri
vi
legesofal
i
mitedcompanyandbesubj
ect
toallit
sobli
gati
ons,exceptthoseofusi
ngt hewordorwor ds“
Limit
ed”,“
(Pr
ivat
e)Li
mit
ed”or
“Guarant
ee)Limi
ted”
,asthecasemaybe, aspartofit
sname.

(
b) Plut
o( Pv
t)Li
mited( PPL)isrequi
redtosendatl easttwocopiesofitsaccount
saswel las
audi
torsanddir
ectorsreporttotheregi
str
arwithi
n30day softhe dat
e of annualgeneral
meetingi
nwhichtheseaccountswereappr
oved.Theseaccount
sshall
bedulysi
gned.
Answer#3

(
a) Anyt woormor ecompani esorunder t
akingsareassociatedi ft
heyar
eint
erconnectedwi t
heach
ot
heri nfol
lowingmanner :
1)I fapersonwhoi st heowner ,part
ner,dir
ect
ororhol derof20% ormorev oti
ng-poweri na
company /undert
akingi sal
sot heowner ,par
tner,dir
ect ororhol
derof20% ormor ev ot
ing-
powerinanot hercompany /undert
aking.(
01mar k)
2)I fcompaniesorunder taki
ngsar eundercommonmanagementorcont rol
,oroneist he
subsidi
aryofanother .(01mar k)
3)I ftheundertaki
ngisamodar abamanagedbyt hecompany( 0.
5mark)

Provi
dedthatshar
esshal
lbedeemedtobeowned,hel
dorcontrol
l
edbyaper
soniftheyar
eowned,
heldorcont
rol
ledbyt
hatpersonorbyt
hespouseorminorchi
l
drenoft
heper
son.(
01mar k)

Excepti
ons:
Fol
l
owi ngshallnotbeconsi
deredtodeterminestatusofAssoci at
e:
 adi rect
ornominatedbyfederalorprov
incialgovernmentorbyfi
nanci
ali
nst
it
uti
onownedor
control
l
edbysuchgov ernments.(0.
5mar k)
 adi rect
orappoint
edas“ I
ndependentDirector”(
0.5mar k)
 shar esownedbyNat i
onalInv
est mentTrust.(0.
5mar k)
 shar esregi
ster
edinthenameofacent r
al deposit
ory.(
0.5mark)
(
subj
ectt
omaxi
mum of03mar
ks)

(
b) Adv
anci ngloanofRs5. 0mi l
li
on:
Thisisaninvestmentinassoci
atedcompany .Acompanyshal lnoti
nvestinanyofits
associat
edcompany /
undert
aking,unless
1. as pecial
resolut
ionispassedwhi chshal
l indi
cat
enat ur
e,peri
odandamountof
i
nvestment,andtermsandcondi ti
onsattachedtheret
o,and
2. r et
urnoninvestmentintheform ofloanshal l
notbelessthantheborrowingcostof
i
nvesti
ngcompany .

I
ncreasingthel
imitoft
radecredit
:
Thi
sisinthenatur
eofnormal tr
adecr edi
t.Thel
imitoft
radecr
edi
tcanbeenhancedby
managementofRBCLt d.basedont heirownassessmentandwit
houtanyf
urt
herappr
ovalor
l
egalrequir
ement.

Answer#4

(
a) Cour
tmaydecl
areelecti
onofdi
rect
orsasinval
i
difmemberappl
ytoCour
twit
hin30day
sfrom
thedat
eofelecti
on.As30day shav epassedsincet
hedateofmeeti
ng,memberscannot
chal
l
enget
heelect
ion.

(
b) Adi
rect
orshal
lipsof
act
oceaset
ohol
dof
fi
cei
fheabsent
shi
msel
ffr
om t
hreeconsecut
ive
 meet
ings.

Afzali
snotdi
squal
i
fiedasher
emai
nedabsentfrom t
woconsecut
ivesmeet
ingsonl
y
(Sept
emberandOctober
).Hei
sent
it
ledt
oattendboardmeet
ingofNovember.
Answer#5

(i
)Anot i
ceofgener
almeeti
ngi
sdeemedt obedulysentifi
tissentat
least21day sbefor
ethe
dateofgener
almeeti
ngtomembersatt
heirregi
ster
edorcommuni cat
ionaddressin Paki
stan.
I
fnot i
cehasbeendul
yserv
ed,t
hennon-
recei
ptofnoticebyanymembershallnotinval
idat
ethe
proceedi
ngsofmeeti
ng.

(
i)Ge
i ner
alMeet
ingbecomesi
nval
i
difquor
um i
snotpr
esentwi
thi
n30mi
nut
es.Asmeet
ing
st
art
edwi
thi
n30mi
nut
es,
ther
efor
eiti
sval
i
d.

(
ii
i)Atf
ir
sti
nst
ance,r
esol
uti
onsar
epassed byshow ofhands.Pol
lisconduct
ed onlyif
chai
rmanopt
sormembersholdi
ngatleast10%voti
ngpowerdemandsPollbef
oreconcl
usi
on
ofgener
almeet
ing.Ther
efor
e,resol
utionisval
id,ifpol
lwasnotdemandedbyspeci fied
members.

(
iv)Asproxyfor
m wasnotsubmi
ttedatl
east48hour
sbeforeti
meofmeet
ing,t
her
efor
e pr
oxy
i
si nv
ali
d.Mr.Awasnotent
it
ledt
oattendandvot
eatgeneralmeet
ing.

(
v)I
famemberappoi
ntsmor
ethanonepr
oxi
es,al
lpr
oxyf
ormsbecomei
nval
i
d.Nei
theroft
he
pr
oxi
eswasent
it
ledt
oat
tendandv
oteatgener
almeet
ing.

(
vi)A company may author
ize( t
hrough Board Resol
uti
on)any i
ndi
vi
dualto actas hi
s
r
epresent
ati
veingeneralmeetingsRepresentat
ivehasnott obeadi r
ect
ors,employ
eeor
memberofthecompany.

Answer#6

Approvalofdiv
idend:
As per Compani es Act, 2017, final divi
dend is recommended by Di rect
ors but
appr
ov ed/
declar
edbyMember singener
almeet i
ng.However,memberscannotappr
ovedivi
dend
i
nex cessofamountr ecommendedbyDi rect
ors.Ther
efor
e,approv
alofdi
videndbyshar
ehol
ders
i
nex cessofproposeddivi
dendisnotinaccordancewit
hlaw.

PaymentofDivi
dend:
AsperCompaniesAct,2017,di v
idendispai
dtoregist
eredshar ehol
der
,ortohisorder,ortohis
bankers,ort
o af i
nancialinsti
tut
ionnominat
edbyhi m fort hepurpose.Ther
efore,v i
ew of
companysecret
aryi
sincorrect.Divi
dendcanbepaidtoaper sonwhoisnotshareholder,onthe
orderofthemember.Ascompanyhasnotpai ddivi
dendwi thin30daysofi t
sdeclar
ation,chi
ef
execut
ivemaybeheldresponsibleandmaybepunishableundert hel
aw.

Answer#7

(
a) Acompanycanprovi
deaddi
tional
groundsforv
acat
ionofof
fi
ceofdi
rect
or.Companywi
l
lhav
eto
i
nser
tthesegr
oundsinar
ti
clesofassoci
ati
on.

(
b) I
ncaseofacompanyl
i
mitedbyguarant
ee,amemberi
sli
abl
eifcompanyi
swoundupwhi
l
ehei
s
amemberorwi
thi
noneyearaf
terheceasedt
obeamember.

I
nthegivencase,
ascompanyisbei
ngwoundupwi t
hinoneyearaf
terCceasedtobeamember
,ther
efor
e
Cisl
iabl
eforthedebt
sandl
iabi
li
ti
esofcompanycontr
actedbef
oreheceasedtobeamember
.
A,
BandDar
eli
abl
eforal
lthedebt
sandl
i
abi
l
iti
esofcompany
.
(
c) (
i) SpecialResol
uti
on(i.
e.3/4thor75%maj ori
ty)
(
ii
) Ordi
naryResoluti
on(i.
e.simplemajori
tyormor ethan50%maj
ori
ty)
(
ii
i) Shareholder
s’appr
ovalnotrequi
red.Dir
ector
sar eempower
edtoapprov
eit
.
(
iv) Shareholder
s’appr
ovalnotrequi
red.Dir
ector
sar eempower
edtoapprov
eit
.
(
v) Ordi
naryResoluti
on(i.
e.simplemajori
tyormor ethan50%maj
ori
ty)
(
vi) Shareholder
s’appr
ovalnotrequi
red.Dir
ector
sar eempower
edtoapprov
eit
.

Answer#8

(
a) I
fapersongetsrequi
redsharehol
dingt
obecomeadi
rect
or(
01mar
k),
hemayappl
ycompanyt
o
hol
dfr
eshelecti
onofdirect
ors(01mark).

(
b) Loancanbegrant
edif
:
 loanhasbeenapprovedbyresol
uti
onofmembers(01mark)
 approval
ofCommi ssioni
sobtai
nedbefor
esanct
ioni
ngofloan(
01mar
k)

(
c) Thi smeet ingisvali
d,andresolut
ionpassedinthemeet ingisbi
ndingoncompany.
Compani
esAct,2017empower smemberhol dingalteast10% v ot
ingpowertorequi
sit
ionEx
traor
dinary
Gener
alMeet
ing.Ifdirect
orsfai
ltocallEOGM wi t
hin21day s,suchsharehol
der
smayt hemsel
vescallthe
meeti
ngandalldecisi
onstakeninsuchameet ingshallbebindingonthecompany.

Answer#9

(
a) Ifchi
efexecut
ivei
snotf ortheti
mebei
ngi nPakistan,account
sshal
lbesignedbyatl
easttwo
dir
ector
salongwit
hastat ementwit
haccount
s( signedbysuchdirect
ors)expl
aini
ngt
hatchief
executi
vei
nnotinPaki
stan.

(
b)
(i
)
1.Apr ospectusisrequiredtobedat edandt hatdat eshallbeconsi deredthedateofi t
spubl icat
ion.
Therefore,the pr ospect
us ofUHY Li mited should be dat ed September10,2012 as t he
managementpl anst opubli
shont hatdate.( 01mar k)
2.Theadv erti
sementofapr ospectusi srequiredtobepubl i
shedi nanewspapernotl esst hansev en
daysandnotmor ethanthir
t ydaysbef orethesubscr i
pti
onlist,
isduet oopen.(01mar k)
3.AsUHYLi mitedpl anstopubl isht hepr ospect uson10Sept ember2012,i tshoul dopent he
subscripti
onlistwithi
n30day s,t
hati sby10Oct ober2012andnotbymi dofOct ober.(01mar k)
4.Howev er,i
ncaseUHYLi mitedwi shestoopent hesubscripti
onl i
stinthesecondort het hirdweek
ofOct ober2012, i
twoul dneedt oappl ytot heCommi ssionandt heCommi ssi
onmayf orspeci al
reasons,al l
ow the companyt o publ i
sh t he prospectus mor et han thi
rty days bef oret he
subscripti
onlisti
sduet oopen.( 01mar k)
(subjectt
omaxi mum of02mar ks)
(i
i)
From dat
eofpubl i
cationinnewspapertil
ldateofcl
osingofsubscri
ption,
prospect
usofacompany
shall
bemadeav ai
lable(fr
eeofcost )
,atfol
lowi
ngplaces:
1.Atr egisteredoffi
ceofcompany .
2.Atal lstockexchangesoft hePakist
an.
3.Wi thallbankerst otheissue.
4.Wi thconcer nedshar eregi
strar
.
5.Wi thconcer nedbal l
ott
er.
6.Wi thconcer nedcreditrati
ngagency( i
fany)
.
7.Onwebsi t
eofthei ssuer.
(
0.5mar kf
oreachplace,subjecttomaximum of02marks)
Answer#10

(
a) Rest
ri
cti
ononDeclarati
onofDi
vidend
Adiv
idendshal
lbepaidonl
youtofprof
it
soft
hecompany
.

Nodi
vi
dendshall bedecl aredorpai dbyacompany :
1.outofthepr of i
tsf r
om thesal eordi
sposalofanyimmov ablepropert
yorassetsofa
capi
tal
nat ureunl ess:
(i
) i tisor dinarybusinessofcompanyt opurchaseandsel lsuchproper
tyorasset
s,
and
(
ii
) companyhasset -offsuchpr
ofi
tsagainstl
ossesarisingfrom sal
eofsuch
propertyorasset s.
2.outofunr eali
z edgai noni nvest
mentpropert
ycredi
tedtopr ofi
tandlossaccount
.

(
b) Booksofaccount
scanbei nspect
edonlybydir
ector
s.
Memberscannotinspectbooksofaccount
s(unl
essauthor
izedbyact
,resol
uti
on)
.Ther
efor
e,we
canref
usethi
srequest.

(
c) Acompanyisrequi
redtof
il
eaccount
s(alongwi
thaudi
tor
’sreportanddir
ect
ors’r
epor
t)wi
th
r
egi
sterev
enifgeneral
meeti
ngdidnotadoptt
heaudit
edfinanci
alstat
ements.

However
,insuchasituat
ionast at
ementoft
hef
actthatt
hef
inanci
alst
atementshavenotbeen
adopt
edgivi
ngreasonsthereofshall
hav
etobeat
tachedwhi
l
ef i
li
ngthefi
nanci
alst
atements.

Answer#11

(
a) Member
shav
ingat
least10%(
per
sonal
l
yort
hroughpr
oxy
)ofv
oti
ngpowercandemandapol
l
.

(
b) 1. Everymemberoft hecompany.
2. Legal r
epresent at
iveofadeceasedmember(i
fcompanyhasbeen
3. no
Ofti
fi
e
fci d
al)
receiverofaninsol
ventmember(
ifcompanyhasbeennot
ifi
ed)
4. Everydirectorofthecompany
5. Auditorofthecompany

(
0.
5mar
kforeachpoi
ntsubj
ectt
omaxi
mum of02mar
ks)

(
c) (
i) Mr.Sal
ahuddi
nisnotr
equir
edtoacqui
reanymi
nimum numberofshar
esf
or
appoi
ntmentasChi
efExecuti
ve.

(
ii
) Mr.Sal
ahuddinshall
hol
doffi
cefort
hreey
earsfr
om thedat
eofappoi
ntment
,orf
or
shor
terper
iodiff
ixedbydi
rect
orsatt
imeofappoi
ntment.

(
ii
i) Thetermsandcondit
ionsofappoi
ntmentofachi
efexecuti
veshallbedet
erminedbyt
he
di
rect
orsorthecompanyi ngeneralmeeti
nginaccordancewiththeprovi
sionsint
he
company'
sart
icl
es.

Answer#12

(
a) Right
sofshareholder
scanbev ari
edbyal t
erat
ionofart
iclesofassoci
ati
onbypassingspeci
al
resol
uti
on.However,i
fsuchalterati
onaf f
ectsthesubst
ant i
veri
ghtsorli
abil
it
iesofacl
assof
member s,i
tshallbecarri
edoutonl yifamaj ori
tyofatl eastthr
ee-
fourt
hsoft hecl
assof
member saf
fect
edbysuchalter
at i
onv ot
eforsuchalt
erat
ion.

(
b) Aprospect
usshall
notincl
udeastatementbyanexper
t,unl
esstheexper
tisnotandhasnotbeen,
engagedorint
erestedintheformati
on,promoti
on,ormanagementoft hecompany .AsMr .
Ahmedhasbeenconnect edinformati
onofcompanyandi ncir
cul
ati
ngpr ospect
us,hecannot
 i
ssueexper
tst
atementi
npr
ospect
us.

(
c) Quor
um ofal i
stedcompanyi
s10members(pr
esentpersonall
yorvi
avideo-
li
nk)repr
esenti
ng
25% vot
ingpower( i
ncl
udi
ng pr
oxy
).Asonl
yfourshareholder
satt
endedmeet i
ng,ther
efore,
quor
um isnotpr
esent
.

I
fquor
um i
snotpr esentwithin30mi nutes,meetingshallbe:
 di
ssolved,ifrequi
sit
ionedbymember s.
 Adjournedt othesamedayi nthenex tweek,att hesametimeandplaceifcal
l
edby
di
rectors.Ifquorum isagai nnotpr esentatadjournedmeeting,02memberspresent
personall
yshallbequor um unlessar
ticl
esprovideother
wise.

Answer#13

(
a) Whatisdeemedt obe“UnlawfulAct i
vi
ty”:
1.Ifcompany r ecei
ved deposi t
s/contr
ibuti
ons fr
om publ i
c( inform ofcash ort hr
ough
coupons/t
icketsetc.
),andpr omisesr et
urnatfuturedatewhichisdet er
minedbychanceor
l
otter
yetc.
2.Ifcompanyr ai
sesUnaut hori
zeddeposi t
sf r
om generalpubli
cthroughv ari
ousschemese.g.
Refer
ralMarking,Mult
i-
Lev el
Mar keti
ng(MLM) ,
Py ramidandPonz iSchemes.
3.Anyot herbusinessnoti
fi
edbyCommi ssi
onasagai nstpubl
i
cpolicyormor al
lyhazar
d

(
b)
1.I
fCommi ssionhasi nvesti
gat
ed, anditisrev ealedthat
:
 Businessofcompanyi sUnlawful orFr audulent
,or
 Businessofcompanyi snotaut hori
zedbyMemor andum, or
 Businessi soppr essiv
etoanyofi t
smember sor
 Managementi sguilt
yoffraudormi sfeasanceormi sconducttowardscompanyori t
s
member s.
I
nvest
igat i
oni snotnecessaryifsole-businessofcompanyi sLicensedacti
v i
ty,andli
censehas
beenr
ev oked.
2.Commi ssionhasgi vent ocompanyoppor tunityofrepresentati
onandbei nghear d.
(b) Whent osubmi tRepor t
:
Assoonaspossibleaf terr
eceiptofStatementofAf f
air
s, wi
thi
n60day sfrom Winding-UpOrder.

(
c) Whatpart
icularsRepor tshal lcontain:
1.Det ail
sofasset sofcompany , i
ncludingt heirlocationandcur rentv al
ue(assi
gnedby
regist
eredv aluer).
2.Cashi nhand, Cashatbank, andNegot iableInstrument s.
3.AmountofAut horizedandPai d- upCapi tal.
4.Exi sti
ngandCont i
ngentl i
abi l
i
t i
es, i
ncludi ngpar t
icularsofcr editorsshowingseparat
ely
:
a.Secur eddebt( withpar ticularsofsecur i
tygiv en)
b.Unsecur eddebt
5.Recei vablesandamountl ikelyt ober eali
zedal ongwi thnames, addressesandoccupati
on
ofdebt ors.
6.Amountr eceivablef r
om cont ributories.
7.Det ail
sofongoi ngcont ractsandj oint-ventures( i
fany )
.
8.Det ail
soft rademar ksandi ntellectual properti
esofcompany( ifany )
.
9.Det ail
sofl egal casesf i
ledbyoragai nstt hecompany( ifany).
10.Detail
sofhol dingandsubsi diarycompani es(ifany).
11.Anyot herinformat ionwhi chCour tmaydi r
ect,orOf fici
alLiquidatormayconsider
necessar y.
(any06)

(
THEEND)
 Certificate in Accounting & Finance Stage Examination

The HISAB 22rd AUG, 2022

School of Accountancy 100 Marks
Lahore 3 hours
Additional reading time –15 minutes

Audit and Assurance

Instructions to examinees:
(i) Answer all questions.
(ii) Answer in black pen onl y.
( i i i ) Mention you CRN number in answer script

Q.1 Your firm has been appointed as the auditor of Amur Limited (AL), a public unlisted company, for the
year ending 31 December 2021. AL is in the business of manufacturing of various products. The
previous year’s audit was performed by another firm of chartered accountants who expressed an
unmodified opinion.
AL exports surgical instruments which are used in robotics surgery mostly to north America. A
manufacturing plant acquired for producing surgical instruments in October 2018 at a cost of
Rs. 100 million and had an expected useful life of 20 years. As of 30 September 2021, this plant
is appearing in HL’s book at Rs. 85 million. On inquiry with the management regarding the decline
of export sales, they informed that in the third quarter of 2020, north America placed strict
lockdown due to second wave of Covid-19. This resulted in cancellation of all future orders
from north America. They further informed that the plant remained idle several times in the current
year due to lack of export orders as there is a minimal demand of such products in Pakistan and
some other Asian countries. They further informed that there is uncertainty about the order in the
subsequent period also.
The profit before tax as per draft financial statements is Rs. 200 million.
Required:
Critically evaluate the issue discussed above, advise the course of action and discuss possible
reporting implications. (11)
Beluga Limited (BL):
You firm is finalising its audit of BL, a company listed on the Pakistan Stock Exchange, for the
year ended June 30, 2021. BL deals in the manufacturing of home decor products by using pink
salt. During the year BL acquired its first subsidiary, which has 60% shareholding in a company
located in Oman. The year ended June 30, 2021, is also the first time BL is required to reflect
foreign currency transactions in its financial statements. The acquisition of the subsidiary and the
foreign currency transactions are highly material and were identified as areas of significant risk
by the audit engagement partner. A substantial amount of audit resource was allocated to
these risk areas. The firm has concluded that both the acquisition of the subsidiary and the foreign
currency transactions are appropriately reflected in BL’s financial statements.
Required:
State, with reasons, the implications for your firm’s audit report. (06)
 Q.2 Your firm has been appointed as the auditor of Air Industries Limited (AIL) for the year ending 30 June
2021. AIL is a listed company and deals in manufacturing of chemicals.
The following information has been gathered by the audit team:
i. Junaid is the CEO and holds, directly and indirectly, majority of the shareholdings in AIL. There
are seven other directors on the board who meet four times a year to approve the quarterly financial
statements and endorse the decisions taken by Junaid during the quarter.
ii. AIL has been dumping its chemical waste in an open area outside the city, without proper treatment
as per the required standards. It was further informed that AIL has managed to receive the required
certificate from the relevant regulatory authority.
iii. AIL experienced significant turnover in its management team.
iv. There is a material amount (15% of total sales) due from a client. During discussion, management
has agreed to provide written representation with respect to the said amount, however, they want to
preclude you from sending a confirmation to the relevant agency.
v. The compound annual growth in company’s earnings over the last three years has exceeded 30%
per annum and the projected earnings growth for the year ending June 30, 2021, is in excess of 45%.
The growth is mainly on account of profitable contracts which the company has secured with two local
manufacturers.
vi. Scanning of the suppliers’ ledger accounts revealed various payments for which no satisfactory reply
was given by the management. However, said amounts were recovered before the year end.
vii. In addition to competitive market based salaries, it also offers performance based bonuses at all
levels, including the senior management.
viii. Due to significant growth, there is excessive pressure on management to raise additional finances to
meet the working capital requirements.
Required:
Briefly discuss the fraud risk factors in the above information. (10)
Q.3 (a) Comment on each of the following situations with reference to the appointment of external auditors in
accordance with the requirements of the Companies Act 2017.
i. Hawker & Company Chartered Accountants (HC) has been acting as the external auditor of the
Hurricane Ltd. (HL) from past two years. HC is also reappointed as auditor of HL during AGM held on
30th October-21. Salaar, who is minor son of Mr. Hawker (partner in HC), purchased 5,000 shares
in Fortress Pvt. Ltd (FL) on 20th December-21. HL and FL are associated companies due to common
management and control. After becoming aware of his son’s investment, Mr. Hawker disclosed this fact
and promised to disinvest with ninety days.
(03)
ii. Lockheed & Company Chartered Accountants (LC) received an offer for the appointment as external
auditors of Mig Solutions (MS). Mr. Lockheed (partner in LC) has been convicted for the offence
of moral turpitude by Lahore High Court seven years ago. Before this offer, Mr. Lockheed was an
employee of one of the directors of MS (Mr. Boeing) in his consultancy business. Later, that employment
changed to partnership between Mr. Lockheed and Mr. Boeing due to successful running of consultancy
business. Four years ago, the partnership was dissolved, and Mr. Lockheed was employed in MS.
He left his employment two years ago and started his practice through LC.
(03)
(b) Donbas Limited (DL) manufactures cycle parts. It has one operating site and a customer base spread
across Pakistan. Below is a description of the purchasing system.
i. The production department sends a purchase requisition form to purchase department when the material
is required.
ii. Purchase officer issues purchase order and contact different suppliers to check expected date of
delivery.
iii. After selection of supplier, the purchase officer sends out the purchase order. The purchase order is
not sequentially numbered and only orders above Rs. 50,000 require authorisation.
iv. Purchase invoices are input daily by the purchase ledger officer, who has been in the role for many
 years and, as an experienced team member, he does not apply any application controls over the input
process.
v. Every week the purchase daybook automatically updates the purchase ledger, the purchase ledger is
then posted manually to the general ledger by the purchase ledger clerk.
Required:
Identify and explain five application controls that should be adopted by HL to ensure the
completeness and accuracy of the input of purchase invoices. (10)
.4
i. Briefly describe the additional matters considered by the engagement quality control reviewer for
audits of financial statements of listed entities, on performing an engagement quality control review.
(03)
ii. During the audit of Kyiv Limited (KL) you have noted a transaction whereby a loan payable to
the holding company which was overdue for six months was settled by transfer of assets owned by
KL. Evaluate the scenario and specify the audit procedures which need to be performed.
(06)
iii. Your firm has recently been appointed as the external auditor of Stem Limited. The engagement
partner has planned a meeting with the audit team to discuss the overall audit strategy and finalize the
audit plan. List the planning activities which you would need to discuss with the engagement partner
regarding the issues related to first year of audit engagement.
(04)

Q.5 You are working as audit senior of Ali & Company, Chartered Accountants and joined the ongoing audit
of Meta Limited (ML) which was under completion stage. During the audit, you came to know that the
newly appointed finance controller (FC) is a close friend of the audit manager which was not disclosed by
him to the firm. You decided to disclose this matter to the engagement partner, however, you came to
know that the engagement partner has been visiting China from last two weeks due to winter Olympics
and has not yet discussed the progress of the audit with the audit team. You decided to communicate this
matter to the firm’s quality control partner through an email and brought all such observations in his
knowledge.
Required
i. Discuss the professional and ethical issues arising in the above situation and advise the course of
action that the firm’s quality control partner should take. (08)
ii. What matters should be included in audit documentation regarding quality control.
(04)
Q.6 You are audit manager of Lodhi & Company Chartered and Accountants (LC) and currently deputed at
the audit of Flix Stream Limited (FSL) which provides internet streaming services in various countries.
You are reviewing extract of audit strategy document prepared by audit senior.
Issues Response
(i) Materiality: (06) Materiality will be based on total assets for the first time
Internet streaming services in different countries have this year due to the significant reduction in revenue
been subject to considerable disruption. As a result of and profit.
this, a significant number of customers have cancelled Based on 1% of assets, materiality is determined at Rs. 14
their subscriptions and the company is projected to million.
make a loss this year. In the previous year, materiality based on revenue was
determined to be Rs. 12 million.

(ii) Sale of property: (04) Planned audit procedures:

FSL sold a small, unused building to chief executive  Confirm Rs. 5,000,000 is included in receivables
officer (CEO) during the year, for Rs. 5,000,000. The within current assets.
amount is still outstanding for payment. The CEO is No further audit procedures are considered necessary
planning to use the property as a holiday home. because the transaction is not material to the financial
statements, and management has decided not to disclose
this transaction.
 (ii) Trade Payable: (10) Planned Audit Approach:
Trade payables are material item of the financial i. Audit approach is similar to the approach used for
statements and represent following risk of misstatement. the audit of trade receivables. Direct confirmation
of supplier balances is always used to confirm
i. Non-existent liabilities being included in the balances.
financial statements (Existence Assertion). This ii. Suppliers’ statements, sometimes available, are
is considered to be the main risk. usually unreconciled with clients ledgers and do
ii. Not all liabilities of the reporting entity being not provide details of transactions but rather a
summary of transactions. These statements are
included in the financial statements not used as reliable evidence.
(Completeness). This risk is rarer. iii. Obtain or prepare a listing of balances on supplier
iii. Liabilities are not being properly disclosed in accounts in the payable’s ledger.
the financial statements (classification iv. In selecting the sample of balances for testing, the
and0presentation assertion) auditor should consider the following points.
a. Select large balances as main audit emphasis
is on existence and overstatement.
b. Do not include number of accounts showing
nil balances and debit balances
c. Include major suppliers based on
the knowledge of auditor
d. Include static balance to see whether
such balance is still payable
v. Compare the balance from the payables listing with
the balance shown in the supplier’s statement and
if there is any difference, the auditor should
reconcile it.

Required:
Evaluate the extract from the audit strategy and comment on the audit strategy responses.
(Total Marks: 20)
Q.7 Donetsk Limited (DL) is a manufacturer of footballs and is a new audit client for your firm. You are
required to assess the sales system and recommend control improvements.
DL sells footballs to a range of large and small sports equipment retailers in several countries.
Sales are made through a network of sales staff employed by DL, but new customer leads are
generated through a third party company. Sales staff are responsible for assessing new customers’
credit worthiness and proposing a credit limit which is then authorised by the sales director. The
sales staff have monthly sales targets and are able to use their discretion in granting sales
discounts up to a maximum of 10%. They then record any discount granted in the customer
master data file.
The sales staff visit customer sites personally and orders are completed using a two-part pre-
printed order form. One copy is left with the customer and the other copy is retained by the
salesperson. The sales order number is based on the salesperson’s own identification (ID) number.
The company markets itself on being able to despatch all orders within three working days. Once
the order is taken, the salesperson emails the finance department and warehouse despatch
team with the customer ID and the sales order details and from this a pick list is generated.
Sequentially numbered goods despatched notes are completed and filed in the warehouse.
/Sequentially numbered invoices are generated using the pick lists for quantities and the
 customer master data file for prices. Standard credit terms for customers are 30 days and on a
monthly basis, sales invoice which are over 90 days outstanding are notified to the relevant
salesperson to chase payment directly with the customer.
Required:
Identify and explain six deficiencies in the sales system of DL and provide a recommendation to
address each of these deficiencies. (12)

(THE END)
 Cer
ti
fi
cat
einAccount
ing&Fi
nanceSt
ageExami
nat
ion

TheHISAB
SchoolofAc
count
anc
y
Lahore

Moc
kSol
ut
ion

Instruct
ionstoexaminees:
(i) Answeral lquest ions.
(ii) Answeri nbl ackpenonl y.
(ii)Ment
i ionyouCRNnumberi nanswerscr
ipt

Ans.1
AmurLi
mit
ed(
AL)
:Ev
aluat
ion:
(3Mar
ks)

Thev
alueoft
hepl
anti
s42.
5%oft
hepr
ofi
tbef
oret
ax,
ther
efor
e,i
tismat
eri
alt
othef
inanci
alst
atement
s.
Thecancell
ati
onoforderduet osecondwav eofCov i
d-19isanindi
catorofpossi bl
eimpair
mentof
manufact
uri
ng plantand t
he enti
re cash gener
ati
ng unitinv
olv
ed int he producti
on ofsur
gical
i
nstr
uments.AL’smanagementhadtoconductanimpair
mentrevi
ewofthesaidplantin2020.
I
tappearsthatnosuchexer
cisehasbeencarri
edoutbyAL’smanagementneitherin2020norin2021as
thepl
antissti
ll
appear
ingati
tsbookvalue.Fur
ther
more,ther
eisnosigni
fi
cantsalesofsuchaproducti
n
Paki
stanorotherAsi
ancountri
es,t
her
efore,i
tismostl
ikelyt
hatthepri
oryearfi
nancialst
atement
swere
mater
ial
lymisstat
ed.
Cour
seofAct
ion:
(4Mar
ks)

i
. Askt hemanagementt oconductani mpai r
mentr evi
ewexer cisefortheyearended2020.
ii
. Fori dentif
icationofCGU, i
nquirehowmanagementmoni t
or st heenti
ty’
soperati
ons,productl i
nes,
etc.andhowmanagementmakesdeci sionsaboutcont i
nuingordi sposingoft heentity
’sasset s
oroper ati
ons.
ii
i. Assesst heappr opri
at enessoft heAL’ si dent i
fi
cati
onofCGUsf orali
gnmentwi thourknowl edge
oft hebusi nessandi tsinternalreporti
ngst r ucture.
i
v. Ev aluatet hef orecastpr icesincor poratedi ntot heimpairmentt esti
ngbycompar i
ngi nputst o
avai l
ablemar ketdataandex t
ernall
yav ailablebenchmar ks.
v. Agr eet hemanagementwor kingt ot hel at estapprovedpl ansandbudget sandassessedt he
histor i
calaccur acyoft hepl ansandbudget s.
vi
. Assesst her easonabl enessofassumpt ionst akenbythemanagementanddi scountrateused.
vii
. Consi derinv olvi
ngaudi t
or’sexpert.
v
ii
i. Ver i
fyt hatthepr ioryearf i
nancialstatement sar eproper
lyr est at
edandal lt
hedisclosuresrelated
tor estatementandi mpai rmenthav ebeenmade.
I
mpactonOpi
nion:
I
ft hef i
nanci
alstatement
shavebeenproperl
yr est
ated,appropriat
edisclosureshav ebeenmadeand
properimpair
menthasbeenr ecor
ded,t
heauditorwillexpressanunmodi fiedopi ni
on.AnOtherMat ter
paragraphwil
lalsobeincl
udedi
ntheaudi
tor
’sreport,i
ndicati
ngthatthepredecessoraudi t
orr
eportedon
thefinanci
alstatementsoft
hepri
orperi
od.Anunmodi f
iedopinionwasexpr essedbyt hepredecessor
audi
torandt
hedat
eoft
hatr
epor
t.(
3Mar
ks)

Ifthef i
nanci
alst
atementshavenotbeenpr oper
lyr
estat
edorappr opr
iat
ediscl
osureshav enotbeen
made, andmanagementhasnotr ecor
dedimpai
rment
,theaudi
torshal
lexpr
essaquali
fiedopini
onast he
writtendownv al
ueoft heplantis42.5% ofthepr
ofitbef
oretaxwhi chismateri
altot hefinancial
statements.(
1Mar
ks)

BelugaLimited(
BL):
Theacquisiti
onandfor
eigncur
rencytr
ansacti
onshav
ebeenaccount
edf
orcor
rect
ly.Thef
ir
m shoul
d
theref
oreissueanunmodifi
edopini
on.(
1Mark)

AsBLisalist
edentit
yt heauditrepor
tmustincl
udeaKeyAudi tMatt
ers(KAM)sect
ion.Theacquisi
ti
on
andfor
eigncurr
encyt ransact
ionsarehi
ghlymat eri
alandwer eidenti
fi
edasareasofsi gni
fi
cantri
sk
whi
chrequi
redasigni
ficantamountofaudi
tresource.(2Mar
ks)

Theymustt
her
efor
ebei
ncl
udedi
ntheKAM sect
ion.TheKAM sect
ionmusti
ncl
ude:
(3Mar
ks)

 adescript
ionofeachmatter
 anex pl
anati
onastowhyeachmat terhasbeenincl
udedint
heKAM sect
ion
 adescript
ionofhowt hematt
ersweredeal
twithduri
ngtheaudi
t
 ref
erencetoanyrelat
eddiscl
osur
esinthefi
nancial
stat
ements.

Ans.2

i
. Duet ot hedomi nantnat ureofJunai dandi neffecti
vegov ernancest ruct ur
et herei sar i
skof
fraudul entfinanci al reporti
ngduet oi ncreasedr iskofmanagementov er ri
deofcont rols.(2Mar ks)
ii
. Violation ofl aws and r egul ati
ons i saf raud r isk f actor .AI L managed t or enew r equi red
cer t
ifi
cat i
onmayi nvolvespeedmoneyt otheaut horiti
es.( 1Mar k)
i
i
i. Signi f
icantt urnov eri nmanagementcanal sor esultinsi gnificantr isk.I ncaseofhi ghr otation, the
responsi bili
tiescannotbef i
xed.Ther emi ghtbesomeunet hicalpr actices/ fr
audgoi ngoni nt he
company .(1Mar k)
i
v. Management ’sr efusalofsendi ngwr ittenconf i
rmat iont ot hecl ientf ormat eri
albalancei saf raud
i
ndi cator.Wr it
tenr epresent ati
onsof feredbymanagementcannotbet akenasal ternat iveaudi t
ev i
dence.( 1Mar k)
v. Signi f
icantsal esoft heAI Lar et oaf ewmaj orcust omer swi thwhom t hecompanyseemst ohav e
closer elationshi p.Ther ei sar iskofmani pul ationinr evenue, sincet hecl oser el
ati
onshi pwi tht he
cust omer smi ghtl eadt ofr audulentact ivi
ty.(2Mar ks)
vi
. TheAI L’smoneymi ghthav ebeenusedbyt heempl oyeesf ort heirper sonalbenef its/pur posesor
byt hecompanyi tselfnotf orthepur poseofbusi ness.( 1Mar k)
vii
. AILof fersper for mance- basedbonusesatal llevels,i ncludi ngt heseni ormanagement .Thi s
aspectmi ghtcr eat er i
skt hatr evenue/pr ofi
t sf i
gurescoul dbemani pulat edt oshowt hedesi red
per f
or mancebyt hemanagement .(1Mar k)
v
ii
i. Ex cessi v
epr essur eonmanagementt oraiseaddi ti
onaldebti ndicatest her iskoff r
audi nt hef orm
off raudulentf inanci al r
epor ti
ngt hr
oughmanagementov erri
deofcont rolst oobtainl oan.( 1Mar k)

Ans.3(
a)
i
. HChasal readyacceptedhi
sappoint
mentasaudi torofHLandaspercompani esAct,If
,aft
er
appoint
ment ,anaudit
orbecomessubjecttoanyoft hedi
squali
fi
cat
ionsduetoanyreason
mentioned,hewillbedeemedtohavev acatedhi
sof fi
ceasaudit
orwithef
fectf
rom t
hedat eof
di
squalif
icati
on.So,HCwillbedeemedt ohavevacatedhisoff
iceon20thDecember-21.The
di
sclosureanddisposalofshar
esisir
relevanti
nthiscase.
i
i
. LCcannotbeappoint
edasaudi torofMSbecauseofempl oymentofMr.LockheedinMSduring
thepr
ecedi
ngthreeyear.Howev er
,employmentandpartner
shi
pwithdi
rectorwasbeforet
his
appoi
ntmentandonlycurrentemploymentandpart
nershipi
snotall
owed.Further
,conv
ict
ionby
 Lahor
ehi
ghcour
tduet
omor
alt
urpi
tudei
snotr
elev
antwi
thr
espectt
oappoi
ntmentdeci
sion.
(
b)(
Maxi
mum Mar
ks:10,
2mar
ksf
ori
dent
if
icat
ionanddi
scussi
onofeachappl
i
cat
ioncont
rol
)

Cont
rol
tot
als
Thetot
alofalltheinv
oices,suchasthegrossvalue,ismanuall
ycalcul
ated.Byusingcontr
oltot
als,t
he
i
nvoi
cesareinput,t
hesystem aggr
egatesthet
otaloftheinputi
nvoi
ces’grossvalueandthi
siscompared
tot
hecontr
ol t
otal
.Thiswillhel
ptoensurecompletenessandaccur
acyofi nput
.
Checkdi
git
s

Thiscontrolhel
pstoreducetheri
skoft ransposit
ionerror
s.Mathematicalcal
culat
ionsar
eperformedby
thesy st
em onapar ti
culardatafi
eld,suchassuppl iernumber ,amat hemati
calformul
ai srunbyt he
system,thischeckst
hatt hedat
aent er
edi nt
ot hesystem isaccur
ate.Thishelpstoensureaccuracyof
i
nput .
Rangechecks
Apre-
deter
mi nedmaximum i sinputi
ntothesystem f
orgr ossinvoicev
alue,f
orexample,Rs.1,
000,000
wheninvoi
cesareinputiftheamountkey edinisincorrect
lyenteredasbeingaboveRs.1,000,
000,the
sy
stem wil
lrej
ectt
heinvoice.Thishel
pstoensureaccuracyofinput.
Exi
stencechecks
Thesyst
em i
ssetupsothatcert
ainkeydatamustbeent
ered,
suchassuppl
i
ername,
other
wiset
he
i
nvoi
ceisrej
ect
ed.Thi
shelpstoensureaccur
acyofi
nput
.
Rev
iewofout
putt
oexpect
edv
alue
Anindependentassessmentismadeoftheval
ueofpurchasei
nvoi
cestobeinput
,thi
si stheexpect
ed
val
ue.Theinvoi
cesareinputandthet
otal
val
ueofi
nvoi
cesiscomparedt
otheexpect
edv alue.Thi
shel
ps
toensur
ecompl et
enessofinput.
Recor
d/Bat
chcount
s
Thenumberofi
nvoi
cestobeinputarecount
ed,t
heinvoicesarethenenter
edonebyone,att
heendt he
numberofi
nvoi
cesi
nputischeckedagai
nstther
ecord/batchcount.Thi
shelpst
oensur
ecompleteness
ofi
nput.
SequenceCheck
Thi
scont
rol
hel
pst
otr
ackdocument
sbyensur
ingt
heal
lsuchdocument
sar
esequent
ial
l
ynumber
ed.
Ans.4(
3Mar
ksmaxi
mum,
1mar
keachpoi
nt)

(
i)
 Theengagementt eam’sevaluati
onoft hefi
r m’si ndependenceinrelat
iontotheaudit
engagement.
 Whetherappropriateconsult
ationhast akenpl aceonmat ter
sinvolvi
ngdiff
erencesofopi
nion
orotherdi
ffi
cultorcontenti
ousmat t
ers,andt heconcl usionsari
singfrom t
hose
consult
ati
ons.
 Whetherauditdocument ati
onsel ect
edf orreviewr efl
ectsthewor kperfor
medi nrel
ati
ont
ot he
si
gnifi
cantj
udgment sandsuppor tstheconcl usionsreached.
(
ii
)(1Mar
kforeachbul
l
et,
6Mar
ksmaxi
mum)

Repaymentofloant otheholdingcompanyinthef
orm oftr
ansferofassetsi
ndi
catesasigni
fi
cantand
unusualr
elat
edpar t
ytransact
ion,whi
chisoutsi
detheent
it
y’snormalcourseofbusi
ness.I
nthisregar
d
fol
lowi
ngauditproceduresmaybeper f
ormed:
 I
nspectt
heunder
lyi
ngcont
ract
soragr
eement
stoev
aluat
ewhet
her
:
 – t het ermsoft hecont ractsetc.areconsistentwithmanagement ’sexpl anat
ions.
– t het ransacti
onshav ebeenpr operl
yaccount edforanddi sclosed.
– t hecont ractsandagr eement swer eenteredt oengagei nf raudulentfinanci
al r
epor
ti
ngorto
hidet hemi sappropri
at i
onofasset s(alackofbusi nessr ationalemi ghtindi
catethi
s).
 Obt ai
nev idencet hatthetransactionswer eproperlyauthorised.
 Ifmanagementhasmadeast atementinthenot estot hef i
nanci alstatement sthatarelat
edpart
y
transactionwasmadeont hesamet ermsasanar m’sl engtht ransaction,theaudi t
ormustobtai
n
ev i
dencet osuppor tthisstatement .
(
ii
i)(
1Mar
kforeachbul
l
et,
4Mar
ksmaxi
mum)

Sinceitwi
llbethef
ir
stti
me,wewi l
lbeaudi
ti
ngStem Li
mit
ed,
Iwi
l
lhav
etodi
scusst
hef
oll
owi
ng
addit
ional
mat t
erswit
htheengagementpar
tner
:
 Arrangement st obemadewi ththepredecessorauditor,f
orexampl e,toreviewthepredecessor
auditor’
swor kingpapers;
 Anymaj ori ssues( i
ncl
udingtheapplicati
onofaccount i
ngpr i
nciplesorofaudi ti
ngandr epor t
ing
standards)di scussedwithmanagementi nconnect i
onwi t
ht hei ni
tialselecti
onasaudi tor,the
communi cat i
onoft hesematterstothosechargedwi thgovernanceandhowt hesemattersaffect
theov er
all auditstrat
egyandauditplan;
 Theaudi tpr oceduresnecessarytoobt ai
nsuff
icientappropr
iateauditev i
denceregardi
ngopeni ng
balances; and
 Otherprocedur esrequir
edbyt hef
irm’ssystem ofqualit
ycontrolforinit
ialaudi
tengagement s.
Ans.5(
i)

Nodi
scussionontheprogr
essoftheauditwor
kbytheengagementpartneri
ndi
cat
est
hatel
ement
sof
I
SA220relatedt
orevi
ewoftheengagementhav
ebeenbr
eached.(
1Mark)

Revi
ewsshouldhappenonat i
melybasisthr
oughouttheaudittoenabl
eprobl
emst ober
esolvedatan
appropr
iat
eti
me.Furt
her,auditpar
tnerneednotreviewal
lauditdocument
ati
on,butnodi
scussionwi
th
theaudi
tteam i
ndi
cat
ethatareasofriskorcr
it
ical
judgementhavenotbeen
r
evi
ewed.Revi
ewsshoul
dalsobehier
archi
cal
,andi
tappear
sthatt
heaudi
tpar
tnerhasnotr
evi
ewedt
he
wor
koftheaudi
tmanager
.(2Mar
ks)

Thesigni
fi
canceofthi
sissuei
sfur
theri
ncreasedbecausetheaudi tmanageri
sclosefr
iendoft
heCFO
whi
chi snotdi
scl
osedbyhi mtot
hefir
m.Ther ef
ore,aver
ythoroughr ev
iewcouldhavebeenper
for
med
bytheengagementpar
tneroft
heworkoftheauditmanager
.(2Marks)

Audi
tmanagerbei ngtheclosefriendofCFO cr eat
edf amil
iar
it
y,self
-i
nter
est
,andinti
midat
ionthreat
.
Ther
efore,t
heauditmanagernotdi scl
osinghi
sf ri
endshipwiththeCFOi sabreachoftheprov
isi
onof
I
CAPcodeofet hi
cs.Thefirm shouldimmediatelyremov ehim astheauditmanagerandperfor
m an
i
ndependentqual
it
ycontr
olrevi
ew.( 3Mar
ks)

(
ii
)(4Mar
ks)

Theaudi
torshal
li
ncl
udei
ntheaudi
tdocument
ati
on:

 Issuesident i
fiedwithrespectt
ocompl iancewi t
hr el
ev antethicalrequir
ement sandhowt hey
wer er
esolv ed.
 Conclusionsoncompl i
ancewithindependencer equirement sthatappl ytotheauditengagement
andanyr elev antdiscussi
onswiththefirmt hatsuppor ttheseconcl usi
ons.
 Conclusionsr eachedr egar
dingtheacceptanceandcont i
nuanceofcl i
entrel
ationshi
psandaudit
engagement s.
 Thenat ureandscopeofandconcl usi
onsr esult
ingfrom, consult
ationsundertakenduri
ngthe
courseoft heaudi tengagement.

Ans.6
Mat
eri
ali
ty:(
5Mar
ks,
1mar
kforeachpoi
nt,
onebonusmar
kfor50%cor
rectanswer
)

i
. Apar tfrom pr of essi onaljudgement ,aper cent agei sof tenappl iedt oachosenbenchmar kasa
starti
ngpoi ntindet er
mi ningmat eriali
t yfort hef inanci al statement sasawhol e,anditi s
accept ablet ouseabenchmar kof1%oft otal asset sasabasi sf ormat eriali
ty.Howev er,
this
woul dnor mal lybeusedf oracapi tal-i
nt ensiv ebusi ness, notf oracompanyl ikeFSL, whichi s
servicebased.
ii
. Aper cent ageofpr of i
tisdeemedanappr opriatemet hodofcal culat i
ngmat er i
ali
tyi
napr ofit
-
maki ngbusi ness.Thef actt hatthecompanyhasmadeal osst hisy eardoesnotmeant hat
mat eri
al i
tyshoul dbebasedonasset sal one.
i
i
i. LCshoul dr evisithowmat eriali
tyhasbeendet ermi ned.I tmaybeappr opr iatetouseadi fferent
mat eri
al i
tylev el forpr ofi
tandl ossbal ances, forex ampl e,onebasedonr evenue, oranadj usted
profitfigurei smor eappr opr i
atet hant her epor t
edpr of i
t( orloss)bef oret ax .Incaseof
except i
onal decr easeori ncreasei npr of i
t,theaudi tormi ghtuseanor mal izedpr ofi
tbef oretax
fr
om cont inuingoper ati
onsf igurebasedonpastr esul ts.
i
v. Thef actt hatmat eriali
tyhasbeensetatahi gherl ev elthisy eari snotl i
kel ytobeappr opriate
givent hatt hecompanyi sl ossmaki ngandf acingunusual t
radi ngcondi t i
onswi t
ht helossof
manycust omer s.Thi sindi catest hatt heaudi tisl i
kel ytobehi gherr isk,soal owerl evelof
mat eri
al i
tyshoul dbeappl i
edandassuchi mpl i
est hatappr opriat epr ofessi onal j
udgementhas
notbeenappl ied.
v. Ther emustbef ulldocument ati
onofhowmat erial
ityhasbeendet er mi nedont heaudi tf i
l
e.This
shoul dcov ert her ati
onalef ordet ermi ningdi fferentmat er i
alityl evelswhi chhav ebeendeci ded
uponf ordi fferentcl assesoft ransact ionandbal ances.
Sal
eofPr
oper
ty:
i
. I ti sr elatedpar tytransact ionwhi chneedt obedi sclosedi r respect i
v eofamountast he
transact i
onwoul dal sobeconsi deredasmat erialbynat ure.Ther ef ore,thepr ocedur es
shoul dbeper formedf ort hev er
ifi
cat i
onofsucht ransacti
ons.( 1Mar k)
i
i
.Thecashpr oceedsar isingont hesal eoftheproper t
yar ewel lbelowt hemat eriali
tylevel,sot hi
s
mi ghtj ustifythemi nimal auditpr ocedureswhi chhav ebeenpl annedi nrelationt othef inancial
stat ement s.Howev er,thepr ocedur esdonotconsi derhowt hepr ofitorl ossbei ngmadeont he
disposal i
sdet ermi nedorwhet hert heassethasbeenpr oper l
yr emov edf rom t heaccount i
ng
r
ecor ds.Thecar r
y i
ngamountoft heasseti t
selfmaybemat erial tothef inancial statement soft he
company .(1Mark)
i
i
i.Ther emaybeani ncent i
v et orecogni zeahi gherprofitthanisappr opr i
ateont hist ransactiondue
tot radi ngdi f
ficulti
esencount er
edbyt hecompanydur ingthey ear ,sot het r
ansact i
onmaybeat
ri
skofmat erialmisst atementwi tht heobject
iveofmaxi mi zingt hepr ofi
trecogni zed.(1Mar k)
i
v. TheCEOhasnoty etpai df orthepr opertyandt hewhol et ransact ioncoul dbeanat t emptt o
wi ndowdr esst hef i
nanci alst at
ement s.Therefore,subsequentr ealizationofpr oceedsf r om CEO
shoul dal sobev eri
fied.(1Mar k)

Tr
adePay
abl
e:(
Maxi
mum Mar
ks10,
3mar
ksf
ori
,1mar
kfori
i
,ivandv
ieach,
2mar
kseachf
ori
i
iandv
)

i
. Tr
aderecei vablesaremat eri
al i
tem ofthef i
nancialst
at ement susuall
yrepresentf oll
owingr i
skof
misstatement
;
a.Non- existentli
abi l
it
iesbei ngincludedi nthef i
nanci alstat
ements( Existence,Right sand
ObligationAsser ti
ons).Thi sri
skisr arer
.
b.Notal ll i
abil
i
ties oft he reporti
ng ent i
tybeing i ncluded inthe financi alstatements
(Compl eteness) .Thisisconsi deredt obethemai nrisk.
c. Liabil
iti
esnotbei ngpr oper l
ydisclosedint hefinancialstatements(thecl assifi
cati
onand
present ati
onasser t
ion.(Seemsf ine)
d.Cut -offbet ween goods i nwards and l i
abil
it
yr ecording bei
ng incorrect( the cut-off
asser ti
on–ani ncomest atementasser tionthathasaknock- onef fectt otheaudi tof
 tr
adepay ables
ii
. Audi tappr oachi ssimilartot heappr oachusedf ortheauditoft rader eceivabl
es.Howev er,a
majordi ffer
encel i
esi nthef actthatdirectconf irmationofbalanceswi thsuppl i
ers,al
though
somet imesused, isnotat y
picalaudittestingpr ocedure
i
i
i. A suppl i
er‟sstatementi sapr i
ntedst atement ,receivedatr egularintervalsfrom asuppl i
er
(usuallyeachmont h),showi ngdet ai
lsoft r
ansact i
onsbet weent hesuppl i
erandi t
scust omer
(purchases,pur chaser eturnsandpay ment s)si ncet hepreviousst atement ,andt heamount
owingasatt hedateoft hest at
ement .Thesest atementsandt heent ity‟
sownl ist
ingoft rade
payablesar ethemai nrecor dsusedbyt heaudi torfortest
ingtr
adepay ables.
iv. Iflistpreparedbyclient,checki tsari
thmet icalaccuracy.
v. I nselecti
ngt hesampl eofbal ancesfortesting,theauditorshouldconsidert hefoll
owingpoints
a. I
tisnoti
mpor
tantt
oselectl
argebal
ances,
ast
hemai
naudi
temphasi
s
i
soncomplet
enessandunderst
atement
b. I
ncl
udenumberofaccount
sshowi
ngni
lbal
ancesdebi
tbal
ances
c. Seemsappr
opr
iat
e
d. Seemsappr
opr
iat
e

v
i. Compar ethebal
ancefrom t
hepay
ablesl
i
stingwi t
hthebal
anceshowninthe
suppli
er‟
sstatementandift
her
eisanydi
fference,t
heaudi
torshoul
daskcli
entf
or
reconci
li
ati
on.
Ans.7

Contr
oldefici
ency Control recommendat ion
1.Newcust omers’cr
edi
twort
hinessisassessed 1.Newcust omer sshoul dcompl etea
byasalespersonwhosetst
hecr edi
tli
mit,whi
ch credi tappl icati
onwhi chshoul dbe
i
sauthorizedbythesal
esdi
rector. checkedt hr oughacr edi
tdepar tment
withacr editlimitset.Once
aut hor i
zedbyt hesal esdi rector,the
2.Salesst affhavediscret
iont ograntsal esdiscounts l
imi tshoul dbeent eredintot he
tocust omer sofupt o10%.Thi scoul dr esul
tina syst em byacr editcont r
oller.
l
ossofr evenueast heymayawar dunr eali
sti
c 2.Al ldi scount stobegr antedt o
discount ssimplyt
omeetsal est argets.The cust omer sshoul dbeaut hor i
zedi n
discount sgrant
edbysal esstaf
far enotbei ng adv ancebyar esponsi bl
eof ficial
,
reviewedandcoul dr esultinunauthoriz eddiscount
s suchast hesal esdirector.Ifnot
all
owed. pract ical,thent hesuper v i
soroft he
3.Salesst affareabl
et omakechangest othe salesst affshoul dunder taket his
cust omermast erdatafile,i
nordert or ecord role.
discount sall
owedandt hesechangesar enot
reviewed.
3.Salesst affshoul dnotbeabl eto
4.Inv
entoryav
ail
abil
i
tydoesnotappeart
obe accesst hemast erdat af il
et omake
checkedbythesal
espersonatt
hetimetheor
der amendment s.Anysuchamendment s
i
splaced. tomast erfil
edat ashoul dbe
restri
ct edsot hatonl ysuper visors
andabov ecanmakechanges.
5.Customerordersarerecordedonatwo-partpr
e- 4.Priortot hesal esper sonf i
nali
z i
ngt he
pri
ntedf
orm, onecopyisleftwit
hthecustomer order,thei nvent orysy stem shoul d
andonewitht hesal
esperson. becheckedi nor derf oranaccur ate
assessmentoft heav ailabil
ityof
6.Thesal esdepartmentofSLdoesnotholdthese goodst obenot ifi
edt ocust omer s.
orderscentral
lyandhencewouldnotbeableto 5.Theor derf orm shoul dbeamendedt o
moni t
orifordersarebei
ngful
fi
ll
edonat imely beatl eastf our-par t.Thet hirdpar tof
basis.Thiscouldresul
tinal
ossofrevenueand theor dershoul dbesentt othe
customergoodwi ll
. war ehousedepar tmentandt hefour th
partsentt othef inancedepar tment .
7.Customeror dersar egivenanumberbasedont he 6.Thecopyt hesal esper sonhasshoul d
salesperson’sowni dentif
icati
on( ID)number .These best oredcent r
al l
yi nt hesal es
number sar enotsequent i
al.Wi t
houtsequent ial depar tment .Upondi spat ch, t
he
number s,itisdiff
icultforDLt oident i
fymi ssi ng goodsdi spatchnot eshoul dbe
ordersandt omoni torifallordersar ebei ng mat chedt otheor der ;ar egular
dispatchedi natimel ymanner ,l
eadi ngt oal ossof reviewofunmat chedor der sshoul d
customergoodwi ll. beunder takenbyt hesal es
8.Thesal espersonemai lsthewar ehousedi spat ch depar tmentt oi dent ifyanyunf ulf
illed
team wi t
ht hecust omerI Dandt hesal esor der orders.
detail
s,ratherthanacopyoft hesal esor deri tself
, 7.Sales or ders shoul d be
andapi ckl i
stisgener atedf r
om t his. sequent iall
y number ed.On a
9.Sequent i
allynumber edgoodsdi spat chednot es regular basi s, a sequence
(GDNs)ar ecompl etedandf i
l
edbyt hewar ehouse check of or der s shoul d be
department . under taken t o i dent i
fy any
missingor ders.
 I
ft hef
inancedepartmentdoesnotr
ecei
veacopyof depar t
ment ,sal
esdepartmenttoconf ir
m dispatcho
theseGDNs, theywil
lnotknowwhentorai
sethe goodsandacopyf orthefi
nancedepar tment .Upon
rel
atedsalesinvoi
ces.Thi
scoul
dresul
tingoods receiptoftheGDN, oncemat chedt othefourthpar t
beingdispat
chedbutnotbeingi
nvoi
ced,l
eadi
ngto thesalesor derfor
m, anaccountantshoul draisethe
alossofr ev
enue salesinvoicesinatimelymanner ,confi
rmingal ldet
totheGDNandor der.
10.Thesal espersonisgivenresponsibi
l
itytochase 10.Acr editcontrol
l
ershouldbeappoi nted,anditshoul
customer sdirectl
yforpaymentonceani nv
oiceis bet hei
rrole,rat
herthanthesalesperson,tochasea
outstandingfor90day s.Thisisconsider
ablyin outstandingsalesinvoi
ceswhichar emor ethan30
excessoft hecompany ’
screditt
ermsof30day s day sold.
whichwi lll
eadt opoorcashf l
ow.