RTP Nov 2022

INTERMEDIATE COURSE
GROUP – II
REVISION TEST PAPERS

NOVEMBER, 2022
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)
New Delhi
© The Institute of Chartered Accountants of India

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Edition : August, 2022
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Contents
Page Nos.
Objective & Approach ......................................................................................... i –vii
Objective of Revision Test Paper................................................................................. i
Planning & Preparing for Examination ........................................................................ ii
Subject-wise Guidance – An Overview ...................................................................... iii
Paper-wise RTPs
Paper 5: Advanced Accounting....................................................................... 1 – 40
Part – I : Announcements Stating Applicability & Non-Applicability ...... 1 – 3
Part – II : Questions and Answers .................................................... 3 – 40
Paper 6: Auditing and Assurance ................................................................ 41 – 70
Part – I : Academic Update ............................................................. 41 – 43
Part – II : Questions and Answers .................................................. 43 – 70
Paper 7: Enterprise Information Systems and Strategic Management ............ 71 – 95
Section A: Enterprise Information Systems ............................................ 71 – 83
Section B: Strategic Management .......................................................... 84 – 95
Paper 8: Financial Management and Economics for Finance ......................... 96 – 125
Part A: Financial Management ............................................................. 96 – 118
Part B: Economics for Finance ........................................................... 119 – 125
Applicability of Standards/Guidance Notes/Legislative Amendments etc.
for November, 2022 – Intermediate Examination .............................................. 126 – 129

REVISION TEST PAPER, NOVEMBER, 2022 – OBJECTIVE & APPROACH
(Students are advised to go through the following paragraphs carefully to derive
maximum benefit out of this RTP)
I. Objective of Revision Test Paper
Revision Test Papers are one among the many educational inputs provided by the Board
of Studies (BOS) to its students. Popularly referred to as RTP by the students, it is one of
the very old publications of the BOS whose significance and relevance from the
examination perspective has stood the test of time.
RTPs provide glimpses of not only the desirable ways in which examination questions are
to be answered but also of the professional quality and standard of the answers expected
of students in the examination. Further, aspirants can assess their level of preparation for
the examination by answering various questions given in the RTP and can also update
themselves with the latest developments in the various subjects relevant from the
examination point of view.
The primary objectives of the RTP are:
• To help students get an insight of their preparedness for the forthcoming examination;
• To provide an opportunity for a student to find all the latest developments relevant for
the forthcoming examination at one place;
• To supplement earlier studies;
• To enhance the confidence level of the students adequately; and
• To leverage the preparation of the students by giving guidance on how to approach
the examinations.
RTPs contain the following:
(i) Planning and preparing for examination
(ii) Subject-wise guidance – An overview
(iii) Updates applicable for a particular exam in the relevant subjects
(iv) Topic-wise questions and detailed answers thereof in respect of each paper
(v) Relevant announcement applicable for the particular examination
Students must bear in mind that the RTP contains a variety of questions based on different
sections of the syllabi and thus a comprehensive study of the entire syllabus is a pre-
requisite before answering the questions of the RTP. In other words, in order to derive
maximum benefit out of the RTPs, it is advised that before proceeding to solve the
questions given in the RTP, students ought to have thoroughly read the Study Materials.

REVISION TEST PAPER ii
The topics on which the questions are set herein have been carefully selected and
meticulous attention has been paid in framing different types of questions. Detailed
answers are provided to enable the students to do a self-assessment and have a focused
approach for effective preparation.
Students are welcome to send their suggestions for fine tuning the RTP to the Director,
Board of Studies, The Institute of Chartered Accountants of India, A-29, Sector-62, Noida
201 309 (Uttar Pradesh). RTP is also available on the Institute’s website www.icai.org
under the BOS knowledge portal in students section for downloading.
II. Planning and preparing for examination
Ideally, when the RTP reaches your hand, you must have finished reading the relevant
Study Materials of all the subjects. Make sure that you have read the Study Materials
thoroughly as they cover the syllabus comprehensively. Get a good grasp of the concepts/
provisions discussed therein. Solve each and every question/illustration given therein to
understand the application of the concepts and provisions.
After reading the Study Materials thoroughly, you should go through the Updates provided
in the RTP and then proceed to solve the questions given in the RTP on your own. RTP
is in an effective tool to revise and refresh the concepts and provisions discussed in the
Study Material. RTPs are provided to you to help you assess your level of preparation.
Hence you must solve the questions given therein on your own and thereafter compare
your answers with the answers given therein.
Examination tips
How well a student fares in the examination depends upon the level and depth of his
preparation. However, there are certain important points which can help a student better
his performance in the examination. These useful tips are given below:
 Reach the examination hall well in time.
 As soon as you get the question paper, read it carefully and thoroughly. You are
given separate 15 minutes for reading the question paper.
 Plan your time so that appropriate time is awarded for each question. Keep sometime
for checking the answers as well.
 First impression is the last impression. The question which you can answer in the
best manner should be attempted first.
 Always attempt to do all questions. Therefore, it is important that you must finish
each question within allocated time.
 Read the question carefully more than once before starting the answer to understand
very clearly as to what is required.
 Answer all parts of a question one after the other; do not answer different parts of the
same question at different places.

iii INTERMEDIATE EXAMINATION: NOVEMBER, 2022
 Write in a neat and legible hand-writing.

 Always be concise and write to the point and do not try to fill pages unnecessarily.
 There must be logical expression of the answer.
 In case a question is not clear, you may state your assumptions and then answer the
question.
 Check your answers carefully and underline important points before leaving the
examination hall.
III. Subject-wise Guidance – An Overview
PAPER 5: ADVANCED ACCOUNTING
The Revisionary Test Paper (RTP) of Advanced Accounting is divided into two parts viz
Part I - Relevant Announcement stating Applicability and Non-Applicability for November,
2022 examination and Part II –Questions and Answers.
It may be noted that the September, 2021 edition of the Study Material is relevant for
November, 2022 Examination.
Part I of the Revisionary Test Paper consists of the ‘Relevant Amendments and
Notifications - applicable and not applicable’ for November, 2022 examination. The
purpose of this information in the RTP is to apprise the students with the latest
developments applicable for November, 2022 examination. The brief summary of the same
has been given as under:
A. Applicable for November, 2022 examination:
I. Amendments in Schedule III (Division I) to the Companies Act, 2013
II. Revised Guidance Note on Accounting for Share-based Payments for the topic
‘Accounting for ESOPs’.
III. Limited Liability Partnership (Amendment) Act, 2021
IV. SLR holdings in Held to Maturity (HTM category)
B. Not applicable for November, 2022 examination:
I. Ind ASs issued by the Ministry of Corporate Affairs.
Part II of the Revisionary Test Paper consists of twenty questions together with their
answers. First eleven questions are based on different topics discussed in the study
material. Last nine questions of this RTP are based on Accounting Standards. For easy
reference, the topic / accounting standard number on which the question is based has been
quoted at the top of each question. The details of topics, on which questions in the RTP
are based, are as under:

REVISION TEST PAPER iv
Question No. Topic

1a Dissolution of partnership firm
1b Limited Liability Partnerships
2 Conversion of Partnership firm into a company
3 Accounting for ESOPs
4 Buy Back of Securities
5 Equity Shares with Differential Rights
6 Amalgamation of companies
7 Internal Reconstruction of a Company
8 Liquidation of a Company
9 NBFCs
10 Banking Companies
11 Consolidated Financial Statements
12 to 20 Accounting Standards
Answers to the questions have been given in detail along with the working notes for easy
understanding and comprehending the steps in solving the problems. The answers to the
questions have been presented in the manner which is expected from the students in the
examination. The students are expected to solve the questions under examination
conditions and then compare their solutions with the solutions given in the Revisionary
Test Paper and further strategize their preparation for scoring more marks in the
examination.
PAPER – 6: AUDITING AND ASSURANCE
RTP is a tool to refresh your knowledge which you have acquired while doing your
conceptual study from Study Material and other modes of knowledge like student journal,
bare acts etc.
The Revisionary Test Paper (RTP) of Auditing and Assurance for November, 2022 carries
twenty eight descriptive questions along with Integrated Case Scenarios followed by MCQs
and standalone MCQs along with their answers. These questions have been taken from
the entire syllabus which is divided into thirteen chapters along with engagement and
quality control standards etc. discussed in the study material.
The various Chapters/topics as mentioned above are Standards on Auditing, Nature,
Objective and Scope of Audit, Audit Strategy, Audit Planning and Audit Programme, Audit
Documentation and Audit Evidence, Risk Assessment and Internal Control, Fraud and
Responsibilities of Auditor in this Regard, Audit in an Automated Environment, Audit
Sampling, Analytical Procedures, Audit of Items of Financial Statements, The Company

v INTERMEDIATE EXAMINATION: NOVEMBER, 2022
Audit, Audit Report, Audit of Banks and Audit of Different Types of Entities. The chapter’s
name is also clearly indicated before each question. The questions in the RTP have been
arranged in the same sequence as prescribed in the study material to facilitate easy
revision by the students. An attempt has been made to cover the syllabus
comprehensively.
This RTP of Auditing and Assurance has been divided into two parts viz Part I – Legislative
Amendments / Notifications / Circulars / Rules / Guidelines issued by Regulating Authority
relevant for November, 2022 examination and Part II – Questions and Answers.
The relevant notified sections of the Companies Act, 2013 and other legislative
amendments including relevant Notifications / Circulars / Rules / Guidelines issued by
Regulating Authorities up to 30th April, 2022 are applicable for November, 2022
Examination. The questions have been answered in this RTP keeping in view latest
amendments as per above mentioned date.
PAPER – 7: ENTERPRISE INFORMATION SYSTEMS AND STRATEGIC MANAGEMENT

Section – A: Enterprise Information Systems
The Revision Test Paper on Enterprise Information Systems is a supplementary tool that
provides comprehensive coverage of the entire syllabus which is divided into five chapters.
The chapter-wise questions and answers are provided so that students could test their level
of preparedness for the forthcoming examination.
The RTP for November 2022 examination contains total 15 questions out of which first 5
questions are Multiple Choice Questions (MCQ) based on an Integrated Case Scenario to
test Analysis and Application skillset of the student. Each MCQ has four options out of which
student is required to select only one correct option.
Remaining 10 Descriptive questions numbered 6 to 15 are provided chapter-wise with 2
questions from each chapter. These questions have been selected from various chapters
keeping in view the complete and uniform coverage of the complete syllabus to check the
students’ preparedness on answering the questions based on different skill levels
“Comprehension & Knowledge” as well as “Analysis & Application”. The questions provide
an insight to the students to evaluate their understanding of the fundamental concepts of
Information Systems and Business Process flows, Financial and Accounting Systems, Core
Banking Systems and e-Commerce/m-Commerce transactions. Full answer to each
descriptive question is provided so that students would be benefited without searching the
answers in the study material.
All the best !!

REVISION TEST PAPER vi
Section – B: Strategic Management

The Revision Test Paper in the subject of Strategic Management for the November 2022
examination contains twenty-two questions. The questions have been selected from all the
sections/chapters uniformly to cover whole syllabus. Questions are based on different skill
levels, i.e., “Comprehension & Knowledge” as well as “Analysis & Application”.
The questions included are of different categories – multiple choice questions based on
case scenario, application based and simple multiple choice questions, distinguish
between, short notes, descriptive and questions based on practical scenarios. The first
question contains multiple choice questions based on case scenario are subdivided into
five different parts. Questions from two to six are mixed of application based and simple
multiple choice questions. All multiple choice questions are given with four alternatives and
the student has to opt the correct option. Subsequently, sixteen different questions have
been included to cover all the eight chapters of the syllabus. Chapter names have been
mentioned before questions. A descriptive question based on practical scenario has been
included from each section. Another descriptive question has also been included from each
section of the syllabus.
The students should take up this Revision test paper as a tool to check their preparedness
in the subject. Mere reading of Revision Test Paper will not be helpful. To properly self-
assess the preparation in the subject, students must attempt the questions on their own.
Compare your answers with the suggested answers and hints given to assess the level of
preparation and identify areas where more focus is required. Then you may work on these
areas to improve the quality of answers that you write.
Work hard and perform well in the examination!
PAPER – 8: FINANCIAL MANAGEMENT AND ECONOMICS FOR FINANCE

Section A: Financial Management
The Revision Test Paper (RTP) of Financial Management comprises of ten questions for
full coverage of the syllabus. Theoretical questions along with computational problems
have also been incorporated so that you can give emphasis to the theoretical portion of
the syllabus as well. Since this paper’s inclination is more towards numerical-oriented
questions which involve mathematical calculations, therefore, it is very important that you
have thoroughly studied the theoretical aspects of the subject and are also clear about the
concepts and logic behind the mathematical workings and formulae.
A summary of the questions both theoretical and computational has been given for your
reference:
Q. No. Topic About the Problem
1. Ratio Analysis Preparation of Balance Sheet and Profit & Loss
Statement using ratios.

vii INTERMEDIATE EXAMINATION: NOVEMBER, 2022
2. Cost of Capital Calculation of rate of interest on bank loan and

debentures.
3. Capital Structure Ascertainment of probable price of the share after
raising additional funds.
4. Leverage Ascertainment of financial leverage.
5. Investment Decision regarding purchase of machinery using NPV
Decisions and PI method.
6. Risk Analysis in Decision between projects using concept of risk
Capital Budgeting premium and the coefficient of variation.
7. Dividend Calculation of amount of investment and dividend
Decisions applying MM hypothesis.
8. Management of Preparation of monthly cash budget.
Cash
9. Management of Ascertainment of working capital requirement using
working capital operating cycle method.
10 (a) Types of financing Comparison between Financial Lease and Operating
Lease.
10 (b) Types of financing Features of Samurai Bonds.
Section B: Economics for Finance
At the intermediate level, students are expected to acquire not only professional knowledge
but also the ability to apply such knowledge in problem solving. Therefore, the questions
have been framed in such a manner that not only your knowledge and understanding are
tested but also how you apply this knowledge in solving problems.
The first question relates to simple calculations of National Income aggregate and
Keynesian theory in determination of National income.
Second question is about Challenges in national income, Market failure, Calculation of M1,
Propensity to Consume and Save.
Third question relates to Arbitrage, leakages in multiplier, Recession.
The fourth question is Quantity theory of money, appreciation, and depreciation of currency
& International Trade.
Fifth question relates to Characteristic of Private Goods, Import Quota, Money multiplier,
factor endowment and Narrow Money.
Some answers have been given in detail so as to enable you to understand and
comprehend the steps involved in answering/solving the problems; for others only, hints
have been provided. Students must attempt the questions themselves under examination
conditions and then see the answers. This will help you in knowing your level of
preparedness and further strategize your final preparation and presentation.

PAPER – 5: ADVANCED ACCOUNTING
PART – I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

FOR NOVEMBER, 2022 EXAMINATION
A. Applicable for November 2022 Examination

I. Amendments in Schedule III (Division I) to the Companies Act, 2013
In exercise of the powers conferred by sub-section (1) of section 467 of the
Companies Act, 2013 (18 of 2013), the Central Government made amendments in
Schedule III (Division I) to the said Act, vide MCA Notification dated 24 th March, 2021,
applicable with effect from 1 st day of April, 2021. These amendments have been
incorporated in Appendix “Schedule III to the Companies Act” in Module II of
September, 2021 Edition. The students are advised to refer the link
https://resource.cdn.icai.org/66657bos53803-mod2-appx.pdf for the revised content.
II. The Institute of Chartered Accountants of India revised the Guidance Note on
Accounting for Share-based Payments in year 2020. This revised Guidance Note is
applicable for the topic “Accounting for Employee Stock Option Plans” for November,
2022 Examination. The provisions of the Guidance Note cover employee stock option
plans, the grant date in respect of which falls on or after 1 April 2021. An enterprise
is not required to apply this Guidance Note to employee stock option plans to equity
instruments that are not fully vested as on 1 April 2021. The chapter on “Employee
Stock Option Plans” given in Module II of September, 2021 Edition of the Study
Material is revised accordingly. The students are advised to refer link
https://resource.cdn.icai.org/66641bos53803-cp3.pdf for the revised chapter.
III. Limited Liability Partnership (Amendment) Act, 2021
The Ministry of Law and Justice made amendments to the Limited Liability Partnership
Act, 2008 (LLP Act) through the LLP (Amendment) Act, 2021. The relevant
amendments (for para 1.8 “Issues related to Accounting in LLPs” of unit 1 of chapter
2 of the study material) can be given as follows:
In section 2 of the LLP Act, 2008, in sub-section (1), the following clause has been
inserted:
“Small limited liability partnership” means a limited liability partnership—
(i) the contribution of which, does not exceed twenty-five lakh rupees or such higher
amount, not exceeding five crore rupees, as may be prescribed; and
(ii) the turnover of which, as per the Statement of Accounts and Solvency for the
immediately preceding financial year, does not exceed forty lakh rupees or such
higher amount, not exceeding fifty crore rupees, as may be prescribed; or

2 INTERMEDIATE EXAMINATION: NOVEMBER 2022
Definition of business has been amended. As per the Amendment, definition of

"business" includes every trade, profession, service [and occupation except any
activity which the Central Government may, by notification, exclude].
Designated Partners
In section 7 of the LLP Act, 2008— (a) in sub-section (1), in the Explanation, for the
words “eighty-two days during the immediately preceding one year”, the words
“twenty days during the financial year” shall be substituted. Thus, now for the
purposes of this section, the term resident in India means a person who has stayed
in India for a period of not less than one hundred and twenty days during the financial
year.
Financial Disclosures and Returns
In section 34 of the LLP Act, 2008, under sub-section (4), the following shall be added:
Provided that the Central Government may, by notification in the Official Gazette,
exempt any class or classes of limited liability partnerships from the requirements of
this sub-section.
For sub-section (5), the following sub-sections shall be substituted, namely:
“(5) Any limited liability partnership which fails to comply with the provisions of sub -
section (3), such limited liability partnership and its designated partners shall be liable
to a penalty of one hundred rupees for each day during which such fail ure continues,
subject to a maximum of one lakh rupees for the limited liability partnership and fifty
thousand rupees for every designated partner.
(6) Any limited liability partnership which fails to comply with the provisions of sub -
section (1), sub-section (2) and sub-section (4), such limited liability partnership shall
be punishable with fine which shall not be less than twenty-five thousand rupees, but
may extend to five lakh rupees and every designated partner of such limited liability
partnership shall be punishable with fine which shall not be less than ten thousand
rupees, but may extend to one lakh rupees.”
In section 35 of the LLP Act, 2008, the following shall be inserted:
[(2) If any limited liability partnership fails to file its annual return under sub-section
(1) before the expiry of the period specified therein, such limited liability partnership
and its designated partners shall be liable to a penalty of one hundred rupees for
each day during which such failure continues, subject to a maximum of one lakh
rupees for the limited liability partnership and fifty thousand rupees for designated
partners.]
IV. SLR holdings in Held to Maturity (HTM category) (relevant for chapter 8 “Banking
Companies” of the study material))

PAPER – 5 : ADVANCED ACCOUNTING 3
Vide circular RBI/2022-23/21; DOR.MRG.REC.14/21.04.141/2022-23 dated April 8,

2022, it has now been decided by the RBI to further enhance the existing HTM limit
of 22 per cent of NDTL to 23 per cent of NDTL and allow banks to include securities
acquired between April 1, 2022 and March 31, 2023 under the enhanced limit of 23
per cent. At present, banks have been granted a special dispensation of enhanced
Held to Maturity (HTM) limit of 22 per cent of Net Demand and Time Liabilities (NDTL),
for Statutory Liquidity Ratio (SLR) eligible securities acquired between September 1,
2020 and March 31, 2022, until March 31, 2023. The enhanced HTM limit of 23 per
cent shall be restored to 19.5 percent in a phased manner, beginning from the quarter
ending June 30, 2023, i.e. the excess SLR securities acquired by banks during the
period September 1, 2020 to March 31, 2023 shall be progressively reduced such
that the total SLR securities held in the HTM category as a percentage of the NDTL
do not exceed:
(a) 22.00 per cent as on June 30, 2023
(b) 21.00 per cent as on September 30, 2023
(c) 20.00 per cent as on December 31, 2023
(d) 19.50 per cent as on March 31, 2024
NOTE: September, 2021 Edition of the Study Material on Paper 5 Advanced Accounting
is applicable for November 2022 Examination.
B. Not applicable for November, 2022 examination
Non-Applicability of Ind AS for November, 2022 Examination
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards)
Rules, 2015 on 16 th February, 2015, for compliance by certain class of companies. These
Ind AS are not applicable for November 2022 Examination.
PART – II : QUESTIONS AND ANSWERS
QUESTIONS
Dissolution of Partnership Firm

1. (a) The partners P, Q & R have called you to assist them in winding up the affairs of their
partnership on 31.12.2020. Their balance sheet as on that date is given below:
Equity & Liabilities Amount ` Assets Amount `
Capital Accounts: Land & Building 50,000
P 65,000 Plant & Machinery 46,000
Q 50,500 Furniture & Fixture 10,000

R 32,000 Stock 14,500

Creditors 16,000 Debtors 14,000
Cash at Bank 9,000
Loan- P 13,000
Loan- Q 7,000
Total 1,63,500 Total 1,63,500
(a) The partners share profit and losses in the ratio of 4:3:2.
(b) Cash is distributed to the partners at the end of each month.
(c) A summary of liquidation transactions are as follows:
January 2021
• ` 9,000 - collected from debtors; balance is uncollectable.
• ` 8,000 - received from the sale of entire furniture.
• ` 1,000 - Liquidation expenses paid.
• ` 6,000 - Cash retained in the business at the end of month.
February 2021
• As part payment of his capital, R accepted a machinery for ` 9,000 (book
value ` 3,500).
• ` 2,000 - Cash retained in the business at the end of month.
March 2021
• ` 38,000 - received on the sale of remaining plant and machinery.
• ` 10,000 - received from the sale of entire stock.
• ` 41,000 - Received on sale of land & building.
• No Cash is retained in the business.
You are required to prepare a schedule of cash payments amongst the partners by
"Higher Relative Capital Method".
Limited Liability Partnerships
(b) Can a partner be called upon to pay the liability of the LLP? If yes, under what
circumstances?

Conversion of Partnership firm into a Company

2. A and V, sharing profits and losses equally, desired to convert their business into a limited
company on 31st December, 2021 when their balance sheet stood as follows:
Equity & Liabilities ` ` Assets `
Sundry creditors 1,92,000 Sundry debtors 2,40,000
Loan creditors 1,60,000 Bills receivable 40,000
Bank overdraft 64,000 Stock in trade 1,44,000
Reserve fund 24,000 Patents 32,000
Capital accounts: Plant and machinery 64,000
A 1,60,000 Land and building 2,40,000
V 1,60,000 3,20,000
7,60,000 7,60,000
(a) The goodwill of the firm was to be valued at two years' purchase of the profits average
of the previous three years.
(b) All assets and liabilities were taken over by the company. The loan creditor agreed
to accept 7½% redeemable preference shares in settlement of his claim.
(c) Land and buildings and plant and machinery were to be valued at ` 4,00,000 and
` 96,000 respectively.
(d) The vendors were to be allotted equity shares.
(e) The past working results of the firm showed that they had made profits of
` 1,20,000 in 2019, ` 1,44,000 in 2020 and ` 1,68,000 in 2021 after setting aside
` 8,000 to reserve fund each year.
You are required to show realisation account and partners’ capital accounts in the books
of the firm assuming that all the transactions are duly completed.
Accounting for ESOPs
3. Mehta Ltd. grants 1,500 stock options to its employees on 1.4.2019 at ` 50. The vesting
period is two and a half years. The maximum exercise period is one year. Market price on
that date is ` 80. Fair value per option is ` 30. All the options were exercised on 30.9.2022.
Give the necessary journal entries if the face value of equity share is ` 10 per share.
Buy Back of Securities
4. Umesh Ltd. resolves to buy back 4 lakhs of its fully paid equity shares of ` 10 each at
` 22 per share. This buyback is in compliance with the provisions of the Companies Act
and does not exceed 25% of Company’s paid up capital in the financial year. For the
purpose, it issues 1 lakh 11 % preference shares of ` 10 each at par, the entire amount

being payable with applications. The company uses ` 16 lakhs of its balance in Securities
Premium Account apart from its adequate balance in General Reserve to fulfill the legal
requirements regarding buy-back. Give necessary journal entries to record the above
transactions.
Equity Shares with Differential Rights
5. (a) What is meant by “equity shares with differential rights”. Can preference shares be
also issued with differential rights?
(b) L, M, N and O hold Equity capital in the proportion of 30:30:20:20 in AB Ltd. and X,
Y, Z and K hold preference share capital in the proportion of 40:30:20:10.
You are required to identify the voting rights of shareholders in case of resolution of
winding up of the company if the paid-up capital of the company is ` 80 Lakh and
Preference share capital is ` 40 Lakh.
Amalgamation of Companies
6. The balance sheets of Truth Limited and Myth Limited as at 31.03.2021 is given below.
Myth Limited is to be amalgamated with Truth Limited from 1.04.2021. The amalgamation
is to be carried out in the nature of purchase.
Particulars Note No. Truth Ltd. (`) Myth Ltd. (`)

(1) Equity and Liabilities
1. Shareholders’ Funds
(a) Share Capital 1 10,00,000 4,00,000
(b) Reserves and Surplus 2 11,35,000 4,13,000
2. Non -Current Liabilities 3 - 1,50,000
3. Current Liabilities 4 1,40,000 1,82,000
Total 22,75,000 11,45,000
(2) Assets
1. Non -Current Assets
(a) Property, Plant & 15,75,000 6,80,000
Equipment
(b) Investments 1,87,500 1,00,000
2. Current Assets 5 5,12,500 3,65,000
Total 22,75,000 11,45,000

Note Particulars Truth Limited (`) Myth Limited (`)

No.
1 Share Capital
Equity shares of ` 10 each 10,00,000 4,00,000
2 Reserves & Surplus
General Reserve 5,05,000 2,30,000
Profit & Loss A/c 4,45,000 1,58,000
Export Profit Reserve 1,85,000 25,000
11,35,000 4,13,000
3 Non- Current Liabilities
14% Debentures --- 1,50,000
4 Current Liabilities
Trade Payables 90,000 1,42,000
Other Current Liabilities 50,000 40,000
1,40,000 1,82,000
5 Current Assets
Inventory 2,15,000 85,000
Trade Receivables 2,02,500 1,75,000
Cash and Cash equivalents 95,000 1,05,000
5,12,500 3,65,000
Truth Limited would issue 12% debentures to discharge the claim of the debenture holders
of Myth Limited so as to maintain their present annual interest income. Non -trade
investment, which constitute 80% of their respective total investments yielded incom e of
20% to Truth Limited and 15% to Myth Limited. This income is to be deducted from profits
while computing average profit for the purpose of calculating goodwill. Profit before tax of
both the companies during the last 3 years were as follows:
Truth Limited (`) Myth Limited (`)
2018-2019 8,20,000 2,55,000
2019-2020 7,45,000 2,15,000
2020-2021 6,04,000 2,14,000
Goodwill is to be calculated on the basis of simple average of three years profit by using
Capitalization method taking 18% as normal rate of return. Ignore taxation. Purchase
consideration is to be discharged by Truth Limited on the basis of intrinsic value per share.
Prepare Balance Sheet of Truth Limited after the amalgamation.

Internal Reconstruction of a Company

7. Planet Limited has decided to reconstruct the Company since it has accumulated huge
losses. The following is the balance sheet of the company as on 31 st March, 2022 before
reconstruction:
Particulars Note No. Amount (` In lakh)
Equity & Liabilities
Shareholders' Funds
Share Capital 1 2,100
Reserves & Surplus 2 (783)
Non-Current Liabilities
Long term Borrowings 3 1,050
Current Liabilities
Trade Payables 4 153
Other Liabilities 5 36
Total 2,556
Assets
Non-Current Assets
PPE 6 1,125
Current Investments 7 300
Inventories 8 450
Trade Receivables 9 675
Cash & Cash Equivalents 10 6
Total 2,556
Notes to Accounts:
` In lakh
(1) Share capital
Authorised:
300 lakh Equity shares of ` 10 each 3,000
12 lakh, 8% Preference Shares of ` 100 each 1,200
4,200
Issued, Subscribed and Paid up:
150 Lakh Equity Shares of ` 10 each, fully paid up 1,500

6 lakh 8% Preference Shares of ` 100 each, fully paid up 600

2,100
(2) Reserves and Surplus
Debit balance of Profit & Loss A/c (783)
(3) Long term borrowings
6% Debentures (Secured by freehold property) 600
Director’s Loan 450
1,050
(4) Trade payables
Trade payables for Goods 153
(5) Other Liabilities
Interest Accrued and Due on 6% Debentures 36
(6) PPE
Freehold Property 825
Plant & machinery 300
1,125
(7) Current Investment
Investment in Equity Instruments 300
(8) Inventories
Finished Goods 450
(9) Trade Receivables
Trade receivables for Goods 675
(10) Cash and Cash equivalents
Balance with bank 6
The Board of Directors of the company decided upon the following scheme of
reconstruction with the consent of respective shareholders:
(1) Preference Shares are to be written down to ` 75 each and Equity Shares to ` 2
each.
(2) Preference Shares Dividend in arrears for 3 years to be waived by 2/3rd and for
balance 1/3rd, Equity Shares of ` 2 each to be allotted.
(3) Debenture holders agreed to take one Freehold Property at its book value of ` 450
lakh in part payment of their holding. Balance Debentures to remain as liability of the
company.

(4) Interest accrued and due on Debentures to be paid in cash.

(5) Remaining Freehold Property to be valued at ` 550 lakh.
(6) All investments sold out for ` 425 lakh.
(7) 70% of Directors' loan to be waived and for the balance, Equity Shares of ` 2 each
to be allotted.
(8) 40% of Trade receivables and 80% of Inventories to be written off.
(9) Company's contractual commitments amounting to ` 900 lakh have been settled by
paying penalty of ` 72 lakhs.
You are required to:
(a) Pass Journal Entries for all the transactions related to internal reconstruction;
(b) Prepare Capital Reduction Account, Bank Account; and
(c) Prepare Notes to Accounts on Share Capital and PPE, immediately after the
implementation of internal reconstruction.
Liquidation of Company
8. Debit and credit Balances of Blossam Ltd. as on 31.12.2021 were as follows:
Dr. Balances Cr. Balances
Share Capital:
Land & Building 1,25,000 8,000 Preference Shares of ` 10 80,000
each
Other Fixed Assets 3,00,000 12,000 Equity Shares of ` 10 each 1,20,000
Inventory 5,25,000 Bank Loan 4,00,000
Trade receivables 1,00,000 8% Debentures 1,00,000
Profit & Loss A/c (-ve 58,000 Interest Outstanding on 8,000
bal.) Debentures
Trade payables 4,00,000
11,08,000 11,08,000
The Company went into Liquidation on that date. Prepare liquidator’s account after taking
following:
(a) Liquidation Expenses ` 3,000.
(b) Liquidator Remuneration ` 10,000.
(c) Bank Loan was secured by pledge of Stock.
(d) Debentures & Interest thereon are secured by floating charge on all assets.

(e) Fixed Assets were realized at book values and Current Assets @ 80% of book values.
NBFCs
9. XYZ Finance Ltd. is a non-banking finance company. The extract of its balance sheet are
as follows: (` in lakhs)
Amount
Equity and Liabilities
Shareholders’ Funds
Paid-up equity capital 200
General Reserve 600
Non-Current Liabilities
Loans 500
Deposits 600
1,900
Assets
Non-current assets
Property Plant and Equipment 900
Investments:
In shares of subsidiaries 250
In debentures of group companies 400
Current Assets
Cash and bank balances 350
1,900
You are required to compute ‘Net Owned Fund’ of XYZ Finance Ltd. as per Non -Banking
Financial Company – Systemically Important Non-Deposit taking company and Deposit
taking company (Reserve Bank) Directions, 2016.
Banking Companies
10. The following are the figures extracted from the books of TOP Bank Limited as on
31.3.2022.
`
Interest and discount received 59,29,180
Interest paid on deposits 32,59,920
Issued and subscribed capital 16,00,000
Salaries and allowances 3,20,000
Directors fee and allowances 48,000
Rent and taxes paid 1,44,000
Postage and telegrams 96,460

Statutory reserve fund 12,80,000

Commission, exchange and brokerage 3,04,000
Rent received 1,04,000
Profit on sale of investments 3,20,000
Depreciation on bank’s properties 48,000
Statutory expenses 44,000
Preliminary expenses 40,000
Auditor’s fee 28,000
The following further information is given:
(i) A customer to whom a sum of ` 16 lakhs has been advanced has become insolvent
and it is expected only 40% can be recovered from his estate.
(ii) There were also other debts for which a provision of ` 2,10,000 was found necessary
by the auditors.
(iii) Rebate on bills discounted on 31.3.2021 was ` 19,000 and on 31.3.2022 was
` 25,000.
(iv) Preliminary expenses are to be fully written off during the year.
(v) Provide ` 9,00,000 for Income-tax and transfer 25% of profits to statutory reserves.
(vi) Profit and Loss account opening balance was Nil as on 31.3.2021.
Prepare the Profit and Loss account of TOP Bank Limited for the year ended 31.3.20 22.
Consolidated Financial Statements
11. On 31st March, 2022, H Ltd. and S Ltd. give the following information:
H Ltd. S Ltd.
(` in 000’s) (` in 000’s)
Equity Share Capital – Authorised 5,000 3,000
Issued and subscribed in Equity Shares of 4,000 2,400
` 10 each fully paid
General Reserve 928 690
Profit and Loss Account (Cr. Balance) 1,305 810
Trade payables 611 507
Provision for Taxation 220 180
Other Provisions 65 17
Plant and Machinery 2,541 2,450
Furniture and Fittings 615 298

Investment in the Equity Shares of S Ltd. 1,500 −

Inventory 983 786
Trade receivables 820 778
Cash and Bank Balances 410 102
Sundry Advances (Dr. balances) 260 190
Following Additional Information is available:
(a) H Ltd. purchased 90 thousand Equity Shares in S Ltd. on 1st April, 2021. On that date
the following balances stood in the books of S Ltd.:
General Reserve ` 1,500 thousand; Profit and Loss Account ` 633 thousand.
(b) On 14th July, 2021 S Ltd. declared a dividend of 20% out of pre-acquisition profits. H
Ltd. credited the dividend received to its Profit and Loss Account.
(c) On 1st November, 2021, S Ltd. issued 3 fully paid Equity Shares of ` 10 each, for
every 5 shares held as bonus shares out of pre-acquisition General Reserve.
(d) On 31st March, 2021, the Inventory of S Ltd. included goods purchased for ` 50
thousand from H Ltd., which had made a profit of 25% on cost.
(e) Details of Trade payables and Trade receivables:
H Ltd. S Ltd.
(` in 000’s) (` in 000’s)
Trade payables
Bills Payable 124 80
Sundry creditors 487 427
611 507
Trade receivables
Debtors 700 683
Bills Receivables 120 95
820 778
Prepare a consolidated Balance Sheet as at 31st March, 2022.
AS 4 Contingencies and Events occurring after the Balance Sheet Date
12. Explain accounting treatment of Contingent Gains as per AS 4 “Contingencies and Events
occurring after the Balance Sheet Date”.

AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies
13. (a) Bela Ltd. has a vacant land measuring 20,000 sq. mts, which it had no intention to
use in the future. The company decided to sell the land to tide over its liquidity
problems and made a profit of `10 Lakhs by selling the said land. Moreover, there
was a fire in the factory and a part of the unused factory shed valued at ` 8 Lakhs
was destroyed. The loss from fire was set off against the profit from sale of land and
profit of `2 lakhs was disclosed as net profit from sale of assets. Do you agree with
the treatment and disclosure? If not, state your views.
AS 7 Construction Contracts
(b) On 1st December, 2020, “Sampath” Construction Limited undertook a contract to
construct a building for ` 108 lakhs. On 31 st March, 2021 the company found that it
had already spent ` 83.99 lakhs on the construction. A prudent estimate of additional
cost for completion was ` 36.01 lakhs.
You are required to compute the amount of provision for foreseeable loss, which must
be made in the Final Accounts for the year ended 31 st March, 2021 based on AS 7
“Accounting for Construction Contracts.”
AS 9 Revenue Recognition
14. When revenue will be recognized in the following situation:
(i) Where the purchaser makes a series of installment payments to the seller and the
seller deliver the goods only when the final payment is received.
(ii) Where seller concurrently agrees to repurchase the same goods at a later date .
(iii) Where goods are sold to distributors, dealers or others for resale.
(iv) Commissions on service rendered as agent on insurance business.
AS 17 Segment Reporting
15. A Company has an inter-segment transfer pricing policy of charging at cost less 10%. The
market prices are generally 25% above cost. Is the policy adopted by the company correct?
AS 18 Related Party Transactions
16. SP Hotels Limited enters into an agreement with Mr. A for running its hotel for a fixed return
payable to the later every year. The contract involves the day-to-day management of the
hotel, while all financial and operating policy decisions are taken by the Board of Directors
of the company. Mr. A does not own any voting power in SP Hotels Limited. Would he be
considered as a related party of SP Hotels Limited?

AS 19 Leases
17. WIN Ltd. has entered into a three year lease arrangement with Tanya sports club in respect
of Fitness Equipment’s costing ` 16,99,999.50. The annual lease payments to be made at
the end of each year are structured in such a way that the sum of the Present Values of
the lease payments and that of the residual value together equal the cost of the equipments
leased out. The unguaranteed residual value of the equipment at the expiry of the lease is
estimated to be ` 1,33,500. The assets would revert to the lessor at the end of the lease.
Given that the implicit rate of interest is 10%. You are required to compute the amount of
the annual lease payment and the unearned finance income. Discounting Factor at 10%
for years 1, 2 and 3 are 0.909, 0.826 and 0.751 respectively.
AS 20 Earnings Per Share
18. The following information relates to XYZ Limited for the year ended 31 st March, 2022:
Net Profit for the year after tax: ` 37,50,000
Number of Equity Shares of ` 10 each outstanding: 5,00,000
Convertible Debentures Issued by the Company (at the beginning of the year)
Particulars Nos.
8% Convertible Debentures of ` 100 each 50,000
Equity Shares to be issued on conversion 55,000
The Rate of Income Tax: 30%.
You are required to calculate Basic and Diluted Earnings Per Share (EPS).
AS 22 Accounting for Taxes on Income
19. (a) Define following as per AS 22:
(i) Accounting income (loss)
(ii) Taxable income (tax loss)
(iii) Tax expense (tax saving)
AS 24 Discontinuing Operations
(b) What are the disclosure requirements in interim financial reports as per AS 24 for
discontinuing operations?
AS 26 Intangible Assets
20. (a) K Ltd. launched a project for producing product X in October, 2021. The Company
incurred ` 40 lakhs towards Research and Development expenses upto 31 st March,
2022. Due to prevailing market conditions, the Management came to conclusion that

the product cannot be manufactured and sold in the market for the next 10 years.
The Management hence wants to defer the expenditure write off to future years.
Advise the Company as per the applicable Accounting Standard.
AS 29 Provisions, Contingent Liabilities and Contingent Assets
(b) Chaos Limited is in the process of finalizing its accounts for the year ended
31st March, 2022. It seeks your advice in the following cases:
(i) Chaos Limited has filed a court case in 2014-2015 against its competitors. It is
evident to its lawyers that Chaos Limited may lose the case and would have to
pay ` 3,00,000 being the cost of litigation. No entries/provisions have been
made in the books.
(ii) A new regulation has been passed in 2021-22 by the healthcare ministry to
upgrade facilities. Deadline set by the government is 31.03.2023. The company
estimates an expenditure of ` 10,00,000 for the said upgrade.
Kindly give your answer for each of above with proper reasoning according to the
relevant Accounting Standard. Also state the principles for recognition of provision,
as per AS 29.
SUGGESTED ANSWERS
1. (a)
Cash Creditors Capitals
Particulars
` ` P ( `) Q (`) R ( `)
Balance due after loan 16,000 52,000 43,500 32,000
January
Balance available 9,000
Realization less expenses 10,000
and cash retained
Amount available and paid 19,000 (16,000) - - (3,000)
Balance due - - 52,000 43,500 29,000
February
Opening Balance 6,000
Expenses paid and cash
carried forward 3,000
Available for distribution 3,000

Cash paid to Q and

Machinery given to R - 3,000 9,000
Balance due - 52,000 40,500 20,000
March
Opening Balance 2,000
Amount realized less
expenses 87,300
Amount paid to partners 89,300 41,689 32,767 14,844
Loss 10,311 7,733 5,156
Working Note:
(i) Highest Relative Capital Basis
P ( `) Q (`) R ( `)
Scheme of payment for January 2021
Balance of Capital Accounts 65,000 50,500 32,000
Less: Loans (13,000) (7,000) -
(A) 52,000 43,500 32,000
Profit Sharing Ratio 4 3 2
Capital / Profit sharing Ratio 13,000 14,500 16,000
Capital in profit sharing ratio, taking P’s 52,000 39,000 26,000
capital as base (B)
Excess of R’s capital and Q’s Capital (A – B) 4,500 6,000
(i)
Profit Sharing Ratio 3 2
Capital / Profit sharing Ratio 1,500 3,000
Capital in profit sharing ratio, taking Q’s 4,500 3,000
capital as base (ii)
Excess of R’s Capital over Q’s capital (i – ii) 3,000
(ii) Scheme of distribution of available cash for March:
P ( `) Q (`) R ( `)
Balance of Capital Accounts at end of February 52,000 40,500 20,000
(A)
Profit Sharing Ratio 4 3 2
Capital / Profit sharing Ratio 13,000 13,500 10,000

Capital in profit sharing ratio, taking R’s capital 40,000 30,000 20,000
as base (B) (i)
Excess of P’s Capital and Q’s Capital (A – B) 12,000 10,500
(i)
Profit Sharing Ratio 4 3
Capital / Profit sharing Ratio 3,000 3,500
Capital in profit sharing ratio taking P’s capital 12,000 9,000
as base (ii)
Excess of Q’s Capital over P’s Capital (i – ii) - 1,500
Payment ` 1500 (C) (1,500)
Balance of Excess Capital 12,000 9,000
(i –C)
Payment ` 21000 (D) (12,000) (9,000)
Balance due (A – C – D) 40,000 30,000 20,000
Balance cash Payment (` 89,300 – ` 22,500) (29,689) (22,267) (14,844)
= ` 66,800 (E)
Total Payment (` 89,000) (C + D +E) (iii) 41,689 32,767 14,844
Loss (A – iii) 10,311 7,733 5,156
(b) Under section 27 (3) LLP Act, 2008, any obligation of the LLP arising out of a contract
or otherwise shall be the sole obligation of the LLP. The partners of an LLP in the
normal course of business are not liable for the debts of the LLP. The liabilities of an
LLP shall be met out of the assets / properties of the LLP. However, a partner shall
be liable for his own wrongful acts or commissions, but shall not be liable for the
wrongful acts or commissions of other partners of the LLP. Wrongful acts will include
acts of fraud and wilful omissions. Hence, the liability may fall only on that partner,
who is guilty of any wrongful acts or commissions in respect of debts or liabilities
acquired by such acts.
2. Books of A and V
Realisation Account
` ` `
To Sundry debtors 2,40,000 By Sundry creditors 1,92,000
To Bills receivable 40,000 By Loan creditors 1,60,000
To Stock in trade 1,44,000 By Bank overdraft 64,000
To Patents 32,000 By Purchasing Company 8,40,000
To Plant and Machinery 64,000 (W.N. 2)

To Land and Building 2,40,000

To Capital A/c (Profit)
A 2,48,000
V 2,48,000 4,96,000
12,56,000 12,56,000
Partners’ Capital Accounts
A V A V
` ` ` `
To Shares in Purchasing 4,20,000 4,20,000 By Balance b/d 1,60,000 1,60,000
Company By Reserves 12,000 12,000
By Realization 2,48,000 2,48,000
A/c
4,20,000 4,20,000 4,20,000 4,20,000
Working Notes:
1. Goodwill = (1,20,000 + 1,44,000 + 1,68,000 + 24,000*)/3 x 2 Years = 3,04,000
*Profit transferred to reserve @ ` 8,000 for 3 years.
2. Calculation of Purchase Consideration
` `
Assets taken over:
Goodwill (W.N.1) 3,04,000
Land and Buildings 4,00,000
Plant and Machinery 96,000
Sundry Debtors 2,40,000
Bills Receivable 40,000
Stocks in trade 1,44,000
Patents 32,000
12,56,000
Less: Liabilities taken over:
Sundry Creditors 1,92,000
Loan Creditors 1,60,000
Bank Overdraft 64,000 4,16,000
Purchase Consideration 8,40,000

3. Books of Mehta Ltd.

Journal Entries
Date Particulars Debit Credit

` `
31.3.2020 Employees Compensation Expense Account Dr. 18,000
To Employees Stock Option 18,000
Outstanding Account
(Being compensation expense recognized in
respect of 1,500 options granted to employees at
discount of ` 30 each, amortized on straight line
basis over 2½ years) (WN 2)
Profit and Loss Account Dr. 18,000
To Employees Compensation Expense 18,000
Account
(Being employees compensation expense of the
year transferred to P&L A/c)
To Employees Stock Option Outstanding 18,000
Account
(Being compensation expense recognized in
respect of 1,500 options granted to employees
at discount of ` 30 each, amortized on straight
line basis over 2½ years) (WN 2)
Account
To Employees Stock Option Outstanding 9,000
Account
(Being balance of compensation expense
amortized ` 45,000 less ` 36,000) (WN 2)


Account
30.9.2022 Bank Account (` 50 × 1,500) Dr. 75,000
To Equity Share Capital Account 15,000
To Securities Premium Account 60,000
(Being exercise of 1,500 options at an exercise
price of ` 50)
30.9.2022 Stock Option Outstanding A/c (` 30 x 1,500) Dr. 45,000
To Securities Premium Account 45,000
(Being the balance in the Employees Stock
Option Outstanding Account transferred to
Securities Premium A/c)
Working Notes:
1. Total employees compensation expense = 1,500 x (` 80 – ` 50) = ` 45,000
2. Employees compensation expense has been written off during 2½ years on straight
line basis as under:
I year = ` 18,000 (for full year)
II year = ` 18,000 (for full year)
III year = ` 9,000 (for half year)
4. Journal Entries in the books of Umesh Ltd.
` `
1. Bank A/c Dr. 10,00,000
To 11% Preference share application
& allotment A/c 10,00,000
(Being receipt of application money on
preference shares)
2. 11% Preference share application & allotment
A/c Dr. 10,00,000
To 11% Preference share capital A/c 10,00,000
(Being allotment of 1 lakh preference shares)

3. General reserve A/c Dr. 30,00,000

To Capital redemption reserve A/c 30,00,000
(Being creation of capital redemption reserve for
buy back of shares)
4. Equity share capital A/c Dr. 40,00,000
Premium payable on buyback A/c Dr. 48,00,000
To Equity shareholders/Equity shares
buy back A/c 88,00,000
(Amount payable to equity shareholder on buy
back)
5. Equity shareholders/ Equity shares buy back A/c Dr. 88,00,000
To Bank A/c 88,00,000
(Being payment made for buy back of shares)
6. Securities Premium A/c Dr. 16,00,000
General reserve A/c 32,00,000
To Premium payable on buyback A/c 48,00,000
(Being premium on buyback charged from
securities premium and general reserve)
Working Notes:
1. Calculation of amount used from General Reserve Account
`
Amount paid for buy back of shares (4,00,000 shares x ` 22) 88,00,000
Less: Proceeds from issue of Preference Shares (10,00,000)
(1,00,000 shares x `10)
Less: Utilization of Securities Premium Account (16,00,000)
Balance used from General Reserve Account 62,00,000
* Used under Section 68 for buy back 32,00,000
Used under Section 69 for transfer to CRR (W.N 2) 30,00,000
62,00,000
2. Amount to be transferred to Capital Redemption Reserve account
`
Nominal value of shares bought back 40,00,000
(4,00,000 shares x `10)

Less: Nominal value of Preference Shares issued for such buy

back (1,00,000 shares x `10) (10,00,000)
Amount transferred to Capital Redemption Reserve Account 30,00,000
5. (a) Equity shares with Differential Rights means the share with dissimilar rights as to
dividend, voting or otherwise. Preference shares cannot be issued with differential
rights. It is only the equity shares, which are issued.
(b) L, M, N and O hold Equity capital in the proportion of 30:30:20:20 and X, Y, Z and K
hold preference share capital in the proportion of 40:30:20:10. As the paid -up equity
share capital of the company is ` 80 Lakhs and Preference share capital is ` 40 Lakh
(2:1), then relative weights in the voting right of equity shareholders and preference
shareholders will be 2/3 and 1/3. The respective voting right of various shareholders
will be
L = 2/3X30/100 = 3/15
M = 2/3X30/100 = 3/15
N = 2/3X20/100 = 2/15
O = 2/3X20/100 = 2/15
X = 1/3X40/100 = 2/15
Y = 1/3X30/100 = 1/10
Z = 1/3X20/100 = 1/15
K = 1/3X10/100 = 1/30
6. Balance Sheet of Truth Ltd. (after amalgamation with Myth Ltd.) as at 1.4.2021
Particulars Note No. ( `)
I. Equity and liabilities
(1) Shareholder's funds
(a) Share capital 1 13,13,750
(b) Reserves and surplus 2 20,76,250
(2) Non-current liabilities
12% Debentures 3 1,75,000
(3) Current liabilities
(a) Trade payables 4 2,32,000
(b) Other current liabilities 5 90,000
Total 38,87,000

II. Assets
(1) Non-current assets
(a) Property, plant and equipment 6 22,55,000
(b) Intangible assets (Goodwill) [WN 1] 4,67,000
(c) Non-current investments 7 2,87,500
(2) Current assets
(a) Inventories (2,15,000 + 85,000) 3,00,000
(b) Trade receivables (2,02,500 + 1,75,000) 3,77,500
(c) Cash & cash equivalents (95,000 + 1,05,000) 2,00,000
Total 38,87,000
Notes to Accounts
(`) (`)
1. Share Capital
1,31,375 Equity Shares of ` 10 each 13,13,750
[1,00,000 + 31,375]
(of the above shares, 31,375 shares were issued
to the vendors otherwise than for cash)
2. Reserves and surplus
General Reserve 5,05,000
Profit and Loss A/c 4,45,000
Securities Premium [31,375 x 30] 9,41,250
Export profit reserve 1,85,000
Add: Balance of Myth Ltd. 25,000 2,10,000
Amalgamation Adjustment Reserve (25,000) 20,76,250
3. Long Term Borrowings
12% Debentures issued to Myth Ltd. 1,75,000
4. Trade payables
Trade payables 90,000
Add: Taken over 1,42,000 2,32,000
5 Other Current Liabilities
Truth Ltd. 50,000
Myth Ltd. 40,000 90,000
6. Property, Plant & Equipment
Truth Ltd. 15,75,000
Myth Ltd. 6,80,000 22,55,000

7. Investment
Truth Ltd. 1,87,500
Myth Ltd. 1,00,000 2,87,500
Working Notes:
(1) Valuation of Goodwill
(i) Capital Employed
Truth Ltd. Myth Ltd.
` ` ` `
Assets as per Balance Sheet 22,75,000 11,45,000
Less: Non-trade Investment (1,50,000) (80,000)
21,25,000 10,65,000
Less: Liabilities:
14% Debentures - 1,50,000
Trade payables 90,000 1,42,000
Other current liabilities 50,000 (1,40,000) 40,000 (3,32,000)
Capital Employed 19,85,000 7,33,000
(ii) Average Profit before Tax
2018-2019 8,20,000 2,55,000
2019-2020 7,45,000 2,15,000
2020- 2021 6,04,000 2,14,000
Total profit of 3 years (a) 21,69,000 6,84,000
Simple Average [(a)/3] 7,23,000 2,28,000
Less: Non-trading income* (30,000) (12,000)
6,93,000 2,16,000
(iii) Goodwill
Capitalised value of [(6,93,000 / 38,50,000 [(2,16,000 / 12,00,000
average profit 18) x 100] 18) x 100]
Less: Capital Employed
[From (i) above] (19,85,000) (7,33,000)
Goodwill 18,65,000 4,67,000
* For Truth Ltd. = 1,87,500 x 80% x 20% = 30,000; and
Myth Ltd. = 1,00,000 x 80% x 15% = 12,000

(2) Intrinsic Value per Share

` `
Goodwill [W.N. 1] 18,65,000 4,67,000
Other Assets 22,75,000 41,40,000 11,45,000 16,12,000
Less: Liabilities
12% Debentures - 1,75,000**
Trade payables 90,000 1,42,000
Provision for Tax 50,000 (1,40,000) 40,000 (3,57,000)
Net Assets 40,00,000 12,55,000
Intrinsic value per share 40,00,000 / 12,55,000 /
[Net Assets / No. of Shares] 1,00,000 40,000
= ` 40 = ` 31.375
14%
** 1,50,000 x = 1,75,000
12%
(3) Purchase Consideration & manner of its discharge
Intrinsic Value of Myth Ltd. [a] ` 31.375 per share
No. of shares [b] 40,000 shares
Purchase Consideration c= [a x b] ` 12,55,000
Intrinsic Value of Truth Ltd. [d] ` 40 per share
No. of shares to be issued [c / d] 31,375 shares
7. (a) Journal Entries related to internal reconstruction
in the books of Planet Ltd.
(` in lakhs)
Particulars Debit Credit
` `
i 8% Preference share capital A/c (` 100 each) Dr. 600
To 8% Preference share capital A/c (` 75 each) 450
To Capital reduction A/c 150
(Being the preference shares of ` 100 each reduced to
` 75 each as per the approved scheme)
ii Equity share capital A/c (` 10 each) Dr. 1,500

To Equity share capital A/c (` 2 each) 300

To Capital reduction A/c 1,200
(Being the equity shares of ` 10 each reduced to ` 2 each)
iii Capital reduction A/c Dr. 48
(Being 1/3rd of arrears of preference share dividend of three
years to be satisfied by issue of 24 lakh equity shares of
` 2 each)
iv 6% Debentures A/c Dr. 450
To Freehold property A/c 450
(Being claim settled in part by transfer of freehold property)
v Accrued debenture interest A/c Dr. 36
To Bank A/c 36
(Being accrued debenture interest paid)
vi Freehold property A/c Dr. 175
(Being appreciation (550-375) in the value of freehold
property)
vii Bank A/c Dr. 425
To Investment A/c 300
(Being investment sold on profit)
viii Director’s loan A/c Dr. 450
(Being director’s loan waived by 70% and balance being
discharged by issue of 67.5 lakh equity shares of ` 2 each)
ix Capital Reduction A/c Dr. 1,485
To Profit and loss A/c 783
To Trade receivables A/c (675 x 40%) 270
To Inventories-in-trade A/c (450 x 80%) 360
To Bank A/c 72

(Being various assets, penalty on cancellation of contract,

profit and loss account debit balance written off through
capital reduction account)
x Capital Reduction A/c Dr. 432
To Capital reserve A/c 432
(Being balance transferred to capital reserve account as
per the scheme)
(b) Capital Reduction Account (` in lakhs)
To Equity Share Capital 48 By 8% Pref. Share Capital 150

To P & L A/c 783 By Equity Share Capital 1,200
To Trade Receivables 270 By Freehold property 175
To Inventories 360 By Bank (profit on sale of 125
investment)
To Bank 72 By Director’s loan 315
To Capital Reserve 432
1,965 1,965
Bank Account (` in lakhs)
To Balance b/d 6 By Accrued debenture interest 36
To Investments 300 By Capital Reduction Account (Penalty 72
on cancellation of contract)
To Capital reduction 125 By Balance c/d 323
431 431
(c) Note to Accounts on Share Capital and PPE
after implementation of internal reconstruction
Share Capital (` in lakhs)
Authorised:
300 lakh shares of ` 2 each 600
12 lakh, 8% Preference shares of ` 75 each 900
1,500
Issued, subscribed and paid up:
241.5 lakh Equity shares of ` 2 each 483

(out of which 91.5 lakh shares have been issued for consideration other
than cash)
6 lakh, 8% Preference shares of `75 each fully paid up 450
Total 933
PPE
Freehold property 825
Less: Utilised to pay Debenture holders (450)
Add: Appreciation 175 550
Plant and machinery 300
Total 850
Working Note:
Calculation of number of equity shares issued
To Equity shareholders 150 Lakh
To Preference shareholders (in lieu of arrear of preference dividend) 24 Lakh
To Directors 67.5 Lakh
241.5 Lakh
8. Liquidator’s Statement of account
` ` ` `
Assets Liquidation 3,000
Realized Expenses
Land & 1,25,000 Liquidator’s 10,000
Building Remuneration
Other Fixed 3,00,000 Debenture holders
Assets
Inventory 4,20,000 8% Debentures 1,00,000
(80% x
5,25,000)
Less: bank (4,00,000) 20,000 Add: Interest 8,000 1,08,000
loan Outstanding
Trade 80,000 Trade payables 4,00,000
receivables
(80% x Pref. Shareholders
1,00,000)
On 8,000 Shares @ 4,000
50 Paise per Share
5,25,000 5,25,000

Working Notes:
(a) Value of Debentureholders `
8% Debentures = 1,00,000
Add: Interest Outstanding = 8,000
= 1,08,000
(b) Value of Preference Shareholders to be paid
8,000 Shares @ 50 paise per share
8,000 x 0.50 = ` 4,000
9. Statement showing computation of 'Net Owned Fund'
` in lakhs
Paid up Equity Capital 200
Free Reserves 600
A 800
Investments
In shares of subsidiaries 250
In debentures of group companies 400
B 650
10% of A 80
Excess of Investment over 10% of A (650 – 80) C 570
Net Owned Fund [(A) - (C)] (800 – 570) 230
10. TOP Bank Limited

Profit and Loss Account for the year ended 31 st March, 2022
Schedule Year ended
31.03.2022
(` in ‘000s)
I. Income:
Interest earned 13 5,923.18
Other income 14 728.00
Total 6,651.18

II. Expenditure
Interest expended 15 3,259.92
Operating expenses 16 768.46
Provisions and contingencies (960+210+900) 2,070.00
Total 6,098.38
III. Profits/Losses
Net profit for the year 552.80
Profit brought forward nil
552.80
IV. Appropriations
Transfer to statutory reserve (25%) 138.20
Balance carried over to balance sheet 414.60
552.80
Year ended
31.3. 2022
(` in ‘000s)
Schedule 13 – Interest Earned
I. Interest/discount on advances/bills (Refer W.N.) 5,923.18
5,923.18
Schedule 14 – Other Income
I. Commission, exchange and brokerage 304
II. Profit on sale of investments 320
III. Rent received 104
728
Schedule 15 – Interest Expended
I. Interests paid on deposits 3,259.92
Schedule 16 – Operating Expenses

I. Payment to and provisions for employees 320
II. Rent and taxes 144
III. Depreciation on bank’s properties 48
IV. Director’s fee, allowances and expenses 48
V. Auditors’ fee 28
VI. Law (statutory) charges 44

VII. Postage and telegrams 96.46

VIII. Preliminary expenses 40
768.46
Working Note:
(` in ‘000s)
Interest/discount 5,929.18
Add: Rebate on bills discounted on 31.3. 2021 19.00
Less: Rebate on bills discounted on 31.3. 2022 (25.00)
5,923.18
11. Consolidated Balance Sheet of H Ltd. with its subsidiary S Ltd. as at 31st March,
2022
Particulars Note No. (` in 000’s)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 4,000
(b) Reserves and Surplus 2 3,063
(2) Minority Interest (W.N.6) 1,560
(3) Current Liabilities
Trade payables 3 1,118
Short term provisions 4 482
Total 10,223
II. Assets
(1) Non-current assets
PPE 5 5,904
(2) Current assets
(a) Inventories 6 1,759
(b) Trade receivables 7 1,598
(c) Cash and cash equivalents 8 512
(d) Short term loans and advances 9 450
Total 10,223

Notes to Accounts
(` in 000’s) (` in 000’s)
1. Share Capital
Authorised share capital
5 lakhs equity shares of ` 10 each 5,000
Issued, Subscribed and Paid up
4 lakhs equity shares of ` 10 each fully paid 4,000
2. Reserves and surplus
Capital Reserve (Note 5) 679.8
General Reserve 928
Profit and Loss Account:
H Ltd. ` 1,305
Add: Share in S Ltd ` 340.20
` 1,645.20
Less: Dividend wrongly credited ` (180)
` 1,465.20
Less: Unrealised profit (50 X 1/5) ` (10) 1,455.20 3,063
3. Trade payables
H Ltd. 611
S Ltd. 507 1,118
4. Short –term provisions
Provision for Taxation H Ltd. ` 220
S Ltd. ` 180 400
Other Provisions H Ltd ` 65
S Ltd. ` 17 82 482
5. PPE
Plant and Machinery
H Ltd. ` 2,541
S Ltd. ` 2,450 4,991
Furniture and fittings
H Ltd. ` 615
S Ltd. ` 298 913 5,904
6. Inventories
Inventory H Ltd. ` 983
S Ltd. ` 786 1,769
Less: Unrealised profit (` 50 x 1/5) (10) 1,759

7. Trade receivables
H Ltd. 820
S Ltd. 778 1,598
8. Cash and cash equivalents
Cash and Bank Balances H Ltd 410
S Ltd. 102 512
9. Short term loans and advances
Sundry Advances H Ltd. 260
S Ltd. 190 450
Working Notes:
Share holding pattern
Particulars Number of % of holding
Shares
a. S Ltd.
(i) Purchased on 01.04.2021 90,000
(ii) Bonus Issue (90,000/5 x 3) 54,000
Total 1,44,000 60%
(1,44,000 /2,40,000*x 100)
b. Minority Interest 96,000 40%
*2,40,000 is after issue of bonus shares as per balance sheet as at 31.3.2022
1. S Ltd. General Reserve
(` in 000) (` in 000)
To Bonus to equity shareholders 900 By Balance b/d 1,500
 2,400  3  By Profit and Loss A/c
 
 8 
To Balance c/d 690 (Balancing figure) 90
1,590 1,590
2. S Ltd.’s Profit and Loss Account
(` in 000) (` in 000)
To General Reserve 90 By Balance b/d 633
To Dividend paid on 14.7.2021 300 By Net Profit for the
1,500  20 year (Balancing 567*
100 figure)
To Balance c/d 810
1,200 1,200
* Out of ` 5,67,000 profit for the year, ` 90,000 has been transferred to reserves by S Ltd.

3. Distribution of Revenue Profits

` in ’000
Revenue Profit as above 567.00
Share of H Ltd. (60%) 340.20
Share of Minority shareholders (567– 340.20) 226.80
4. Computation of Capital Profits
` in 000 ` in 000
General Reserve on the date of acquisition 1,500
Less: Bonus issue of shares (900)
600
Profit and Loss Account balance on the date of acquisition 633
Less: Dividends paid (300) 333
933
Share of H Ltd. (60%) 559.80
Share of Minority shareholders 373.20
5. Computation of Capital Reserve
` in ’000
60% of share capital of S Ltd. 1,440
Add: Share of H Ltd. in the capital profits as in working note (4) 559.80
1,999.80
Less: Investments in S Ltd. 1,500
Less: Dividends received out of pre- acquisition profits
` 300  60 (180) (1,320)
100
679.80
6. Calculation of Minority Interest

` in ’000
40% of share capital of S Ltd. 960.00
Add: Share of Revenue Profits (Note 3) 226.80
Share of Capital Profits (Note 4) 373.20
1,560.00

12. Accounting Treatment of Contingent Gains

Contingent gains are not recognised in financial statements since their recognition may
result in the recognition of revenue which may never be realised. However, when the
realisation of a gain is virtually certain, then such gain is not a contingency and accounting
for the gain is appropriate.
13. (a) As per AS 5 “Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies” Extraordinary items should be disclosed in the statement of profit
and loss as a part of net profit or loss for the period. The nature and the amount of
each extraordinary item should be separately disclosed in the statement of profit and
loss in a manner that its impact on current profit or loss can be perceived.
In the given case the selling of land to tide over liquidation problems as well as fire in
the factory does not constitute ordinary activities of the Company. These items are
distinct from the ordinary activities of the business. Both the events are material in
nature and expected not to recur frequently or regularly. Thus, these are
Extraordinary Items.
Therefore, in the given case, disclosing net profits by setting off fire losses against
profit from sale of land is not correct. The profit on sale of land, and loss due to fire
should be disclosed separately in the statement of profit and loss.
(b) Calculation of foreseeable loss for the year ended 31 st March, 2021
(as per AS 7 “Construction Contracts”)
(` in lakhs)
Cost incurred till 31 st March, 2021 83.99
Prudent estimate of additional cost for completion 36.01
Total cost of construction 120.00
Less: Contract price (108.00)
Foreseeable loss 12.00
According to AS 7 (Revised 2002) “Construction Contracts”, when it is probable that
total contract costs will exceed total contract revenue; the expected loss should be
recognized as an expense immediately. Therefore, amount of `12 lakhs is required
to be provided for in the books of Sampath Construction Ltd. for the year ended 31 st
March, 2021.
14. (i) Revenue from sales where the purchaser makes a series of instalment payments to
the seller, and the seller delivers the goods only when the final payment is received,
should not be recognised until goods are delivered. However, when experience
indicates that most such sales have been consummated, revenue may be recognised
when a significant deposit is received.

(ii) For sale where seller concurrently agrees to repurchase the same goods at a later
date, such transactions are in substance a financing agreement. In such a situation,
the resulting cash inflow should not be recognised as revenue.
(iii) Revenue from sales of goods to distributors, dealers or others for resale can generally
be recognised if significant risks of ownership have passed. However, in some
situations the buyer may in substance be an agent and in such cases the sale should
be treated as a consignment sale.
(iv) Commissions on service rendered as agent on insurance business should be
recognised as revenue when the service is completed. Insurance agency
commissions should be recognised on the effective commencement or renewal dates
of the related policies.
15. AS 17 ‘Segment Reporting’ requires that inter-segment transfers should be measured on
the basis that the enterprise actually used to price these transfers. The basis of pricing
inter-segment transfers and any change therein should be disclosed in the financial
statements. Hence, the enterprise can have its own policy for pricing inter-segment
transfers and hence, inter-segment transfers may be based on cost, below cost or market
price. However, whichever policy is followed, the same should be disclosed and applied
consistently. Therefore, in the given case inter-segment transfer pricing policy adopted by
the company is correct if, followed consistently.
16. Mr. A will not be considered as a related party of SP Hotels Limited in view of AS 18 which
states, “individuals owning, directly or indirectly, an interest in the voting power of the
reporting enterprise that gives them control or significant influence over the enterprise, and
relatives of any such individual”. In the given case, in the absence of share ownership, Mr.
A would not be considered to exercise significant influence on SP Hotels Limited, even
though there is an agreement giving him the power to manage the company. Further, the
fact that Mr. A does not have the ability to direct or instruct the board of directors does not
qualify him as a key management personnel.
17. (i) Computation of annual lease payment to the lessor
`
Cost of equipment 16,99,999.50
Unguaranteed residual value 1,33,500.00
Present value of residual value after third year @ 10%
(` 1,33,500 × 0.751) 1,00,258.50
Fair value to be recovered from lease payments
(` 16,99,999.5– ` 1,00,258.5) 15,99,741.00
Present value of annuity for three years is 2.486
Annual lease payment = ` 15,99,741/ 2.486 6,43,500.00

(ii) Computation of Unearned Finance Income

`
Total lease payments (` 6,43,500 x 3) 19,30,500
Add: Unguaranteed residual value 1,33,500
Gross investment in the lease 20,64,000.00
Less: Present value of investment (lease payments and
residual value) (` 1,00,258.5+ ` 15,99,741) (16,99,999.50)
Unearned finance income 3,64,000.50
18. Computation of basic earnings per share
Net profit for the current year / Weighted average number of equity shares outstanding
during the year
` 37,50,000 / 5,00,000 = ` 7.50 per share
Adjusted net profit for the current year
Computation of diluted earnings per share
Weighted average number of equity shares
Adjusted net profit for the current year
`
Net profit for the current year 37,50,000
Add: Interest expense for the current year 4,00,000
Less: Tax relating to interest expense (30% of ` 4,00,000) (1,20,000)
Adjusted net profit for the current year 40,30,000
Number of equity shares resulting from conversion of debentures
= 55,000 Equity shares (given in the question)
Weighted average number of equity shares used to compute diluted earnings per
share
= 5,55,000 shares (5,00,000 + 55,000)
Diluted earnings per share
= 40,30,000/ 5,55,000 = ` 7.26 per share
Note: Conversion of convertible debentures into Equity Share will be dilutive potential
equity shares. Hence, to compute the adjusted profit the interest paid on such debentures
will be added back as the same would not be payable in case these are converted into
equity shares.

19. (a) Accounting income (loss) is the net profit or loss for a period, as reported in the
statement of profit and loss, before deducting income-tax expense or adding income
tax saving.
Taxable income (tax loss) is the amount of the income (loss) for a period,
determined in accordance with the tax laws, based upon which income-tax payable
(recoverable) is determined.
Tax expenses is the aggregate of current tax and deferred tax charged or credited
to the statement of profit and loss for the period.
(b) Disclosure in interim financial reports
Disclosures in an interim financial report in respect of a discontinuing operation
should be made in accordance with AS 25, ‘Interim Financial Reporting’, including:
(a) Any significant activities or events since the end of the most recent annual
reporting period relating to a discontinuing operation and
(b) Any significant changes in the amount or timing of cash flows relating to the
assets to be disposed or liabilities to be settled.
20. (a) As per AS 26 “Intangible Assets”, expenditure on research should be recognized as
an expense when it is incurred. An intangible asset arising from development (or
from the development phase of an internal project) should be recognized if, and only
if, an enterprise can demonstrate all of the conditions specified in the standard. An
intangible asset (arising from development) should be derecognised when no future
economic benefits are expected from its use according to the standard. Thus, the
manager cannot defer the expenditure write off to future years in the given case.
Hence, the expenses amounting ` 40 lakhs incurred on the research and
development project has to be written off in the current year ending 31 st March, 2022.
(b) Principles for recognition of provisions:
As per AS 29, “a provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a result of a past
event;
(b) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these
conditions are not met, no provision shall be recognised.”

Accounting treatment under the given scenarios:

(i) On 31st March, 2022, since it is evident to the lawyer that Chaos Limited may
lose the case and also a reliable estimate of the outflow can be made as
` 3,00,000, there is a present obligation. Hence, provision should be recognised
for ` 3,00,000 for the amount which may be required to settle the obligation.
(ii) Under new regulation, an entity is required to upgrade its facilities by
31st March, 2023. However, on 31 st March, 2022, i.e. at the end of the reporting
period, there is no obligation because there is no obligating event either for the
costs of upgrading the facilities or for fines under the regulations. Hence, no
provision should be recognised on 31 st March, 2022 for upgrading the facilities
by 31st March, 2023.

PAPER – 6: AUDITING AND ASSURANCE
PART – I : ACADEMIC UPDATE
Chapter 9 (Printed Copy)
At Page 10- Topic “Shares issued at a discount” is revised and being given hereunder. Students
are advised to study this topic from here and not from printed copy of the study material.
Shares issued at a discount
According to Section 53 of the Companies Act, 2013,
(1) a company shall not issue shares at a discount, except in the case of an issue of sweat
equity shares given under Section 54 of the Companies Act, 2013.
(2) any share issued by a company at a discounted price shall be void.
(2A) Notwithstanding anything contained in sub-sections (1) and (2), a company may issue
shares at a discount to its creditors when its debt is converted into shares in pursuance of
any statutory resolution plan or debt restructuring scheme in accordance with any
guidelines or directions or regulations specified by the Reserve Bank of India under the
Reserve Bank of India Act, 1934 or the Banking (Regulation) Act, 1949.
(3) Where any company fails to comply with the provisions of this section, such company and
every officer who is in default shall be liable to a penalty which may extend to an amount
equal to the amount raised through the issue of shares at a discount or five lakh rupees,
whichever is less, and the company shall also be liable to refund all monies received with
interest at the rate of twelve per cent. per annum from the date of issue of such shares to
the persons to whom such shares have been issued.
The auditor needs to check
(i) the movement in share capital during the year and wherever there is any issue,
(ii) he should verify that the Company has not issued any of its shares at a discount by reading
the minutes of meeting of its directors and shareholders authorizing issue of share capital
and the issue price.
(iii) Further, auditor should also verify that whether the company has issued shares at a
discount to its creditors when its debt is converted into shares in pursuance of any statutory
resolution plan or debt restructuring scheme in accordance with any guidelines or
directions or regulations specified by the Reserve Bank of India under the Reserve Bank
of India Act, 1934 or the Banking (Regulation) Act, 1949.
This topic has also been revised at page no. 10 of chapter 9 and students can refer at the link
given below:
https://resource.cdn.icai.org/66605bos53774-cp9.pdf

42 INTERMEDIATE EXAMINATION: NOVEMBER, 2022
Chapter 10 – COMPANY AUDIT

Chapter 10 (Printed Copy) At Page 10.61- Topic “Punishment for non-compliance” is revised
and being given hereunder. Students are advised to study this topic from here and not from
printed copy of the study material.
Punishment for non-compliance - Section 147 of the Companies Act, 2013 prescribes
following punishments for contravention:
(1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened, the company
shall be punishable with fine which shall not be less than twenty-five thousand rupees, but
which may extend to five lakh rupees and every officer of the company who is in default
shall be punishable with fine which shall not be less than ten thousand rupees, but which
may extend to one lakh rupees.
(2) If an auditor of a company contravenes any of the provisions of section 139, section 144
or section 145, the auditor shall be punishable with fine which shall not be less than twenty -
five thousand rupees, but which may extend to five lakh rupees or four times the
remuneration of the auditor, whichever is less.
It may be noted that if an auditor has contravened such provisions knowingly or willfully
with the intention to deceive the company or its shareholders or creditors or tax authorities,
he shall be punishable with imprisonment for a term which may extend to one year and
with fine which shall not be less than fifty thousand rupees but which may extend to twenty -
five lakh rupees or eight times the remuneration of the auditor, whichever is less.
(3) Where an auditor has been convicted under sub-section (2), he shall be liable to: -
(i) refund the remuneration received by him to the company.
(ii) and pay for damages to the company statutory bodies or authorities or to members
or the creditors of the Company for loss arising out of incorrect or misleading
statements of particulars made in his audit report.
(4) The Central Government shall, by notification, specify any statutory body or authority of an
officer for ensuring prompt payment of damages to the company or the persons under
clause (ii) of sub-section (3) and such body, authority or officer shall after payment of
damages such company or persons file a report with the Central Government in respect of
making such damages in such manner as may be specified in the said notification.
(5) Where, in case of audit of a company being conducted by an audit firm, it is proved that
the partner or partners of the audit firm has or have acted in a fraudulent manner or abetted
or colluded in an fraud by, or in relation to or by, the company or its d irectors or officers,
the liability, whether civil criminal as provided in this Act or in any other law for the time
being in force, for such act shall be the partner or partners concerned of the audit firm and

PAPER – 6: AUDITING AND ASSURANCE 43
of the firm jointly and severally. However, in case of criminal liability of an audit firm, in
respect of liability other than fine, the concerned partner or partners, who acted in a
fraudulent manner or abetted or, as the case may be, colluded in any fraud shall only be
liable.
This topic has also been revised at page no. 10.61 of chapter 10 and students can refer at the
link given below:
https://resource.cdn.icai.org/66606bos53774-cp10.pdf
PART – II: QUESTIONS AND ANSWERS
PART – II A: Multiple Choice Questions based on Case Scenarios

Case Scenario - 1
SAM & Company, a Chartered Accountant firm, is in the process of finalising the audit of Health
is Wealth Limited which is a Company listed on the Bombay Stock Exchange. Health is Wealth
Limited has made its presence felt in over 10 countries, including India, making it a leader in the
global fitness industry. It runs a chain of fitness centres that offers energetic group workouts
and multiple workout formats to choose from. It also offers the best equipment, knowledgeable
staff and personal advice in a welcoming environment.
SAM & Company being a very reputed firm, was appointed for the statutory audit of Health is
Wealth Limited. The Engagement Partner CA A and her team of 8 members have conducted
the audit in an efficient and effective manner. The senior manager in the team, CA K is of the
opinion that they have obtained sufficient appropriate audit evidence, which concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the financial
statements. One of the articled clerks, Mr. N, is a fresher and this audit is his first experience
as an auditor in a limited company. He is a sharp boy and has grasped all the concepts and
techniques very well. However, the term “pervasive” confused him so CA K patiently explained
to Mr. N the pervasive effects on the financial statements as per the auditor’s judgement . He
explained that - Pervasive effects on the financial statements are those that, in the auditor’s
judgement:
(i) Are not confined to specific elements, accounts or items of the financial statements;
(ii) If so confined, represent or could represent a substantial proportion of the financial
statements; or
(iii) In relation to disclosures, are fundamental to users’ understanding of the financial
statements.
(iv) Are confined to specific elements, accounts or items of the financial statements.
Mr. N understood the term well and thanked CA K for clearing all his doubts.

CA A disagreed with CA K that they have obtained sufficient appropriate audit evidence, which
concludes that misstatements, individually or in the aggregate, are material, but not pervasive,
to the financial statements. So, the entire team held various meetings and discussions, and
finally reached to a conclusion. They concluded that they have obtained reasonable assurance
that the financial statements as a whole are free from material misstatement, whether due to
fraud or error. That conclusion took into account:
(a) Whether sufficient appropriate audit evidence had been obtained.
(b) Whether uncorrected misstatements were material, individually or in aggregate.
(c) The evaluations.
The Auditor’s Report was prepared in writing and it was decided that an unmodified opinion
would be expressed. The first section of the auditor’s report included the auditor’s opinion and
had the heading “Opinion”. Following the Opinion section was a section with the heading “Basis
for Opinion”. When expressing an unmodified opinion on financial statements, the auditor’s
opinion used the following phrase,
“In our opinion, the accompanying financial statements give a true and fair view of […] in
accordance with [the applicable financial reporting framework].”
During the audit, the audit team had observed that there was uncertainty in Health is Wealth
Limited relating to the future outcome of a regulatory action. So, a paragraph was included in
the auditor’s report that referred to this matter which was appropriately disclosed in the financial
statements and that, in the auditor’s judgment, was of such importance that it was fundamental
to users’ understanding of the financial statements.
CA A also determined whether the financial statements included the co mparative information
required by the applicable financial reporting framework and whether such information was
appropriately classified. One team member, Mr R was curious to know whether the auditor’s
opinion referred to the corresponding figures or not, whenever the corresponding figures are
presented. CA A explained the circumstances to Mr R in which, when the corresponding figures
are presented, auditor’s opinion referred to the corresponding figures.
Based on the above information, answer the following questions:
1.1 CA K explained to Mr. N the pervasive effects on the financial statements in the auditor’s
judgement. Which of the following combination best answers as explained by CA K ?
(a) (i) and (ii)
(b) (ii) and (iii)
(c) (iii) and (iv)
(d) (i), (ii) and (iii)

1.2 When expressing an unmodified opinion on financial statements, SAM & Company used
the following phrase:
“In our opinion, the accompanying financial statements give a true and fair view of […] in
accordance with [the applicable financial reporting framework].”
Which is the other phrase which is regarded as being equivalent to the above phrase and
could also be used by SAM & Company?
(a) In our opinion, the accompanying financial statements give a true and correct view of
[…] in accordance with [the applicable financial reporting framework];
(b) In our opinion, the accompanying financial statements present correctly, in all material
respects, […] in accordance with [the applicable financial reporting framework];
(c) In our opinion, the accompanying financial statements present fairly, in all material
respects, […] in accordance with [the applicable financial reporting framework];
(d) In our opinion, the accompanying financial statements give a correct and fair view of
[…] in accordance with [the applicable financial reporting framework].
1.3 Which of the following statements is not included in the section with the heading “Basis for
Opinion” in the Auditor’s Report?
(a) Audit was conducted in accordance with the Accounting Standards.
(b) Auditor is independent of the entity in accordance with the relevant ethical
requirements relating to the audit and has fulfilled the auditor’s other ethical
responsibilities in accordance with these requirements.
(c) Description of the auditor’s responsibilities under the SAs.
(d) States whether the auditor believes that the audit evidence the auditor has obtained,
is sufficient and appropriate to provide a basis for the auditor’s opinion.
1.4 A paragraph was included in the Auditor’s Report of Health is Wealth Limited that referred
to a matter which was appropriately disclosed in the financial statements that, in the
auditor’s judgment, was of such importance that it was fundamental to users’
understanding of the financial statements. What is this section of the Auditor’s Report
called?
(a) Other Matters.
(b) Emphasis of Matters.
(c) Key Audit Matters.
(d) Auditor’s Responsibilities for the Audit of the Financial Statements.

1.5 CA A explained the circumstances to Mr. R in which, when the corresponding figures a re
presented, auditor’s opinion referred to the corresponding figures. Which of these
circumstances did he mention to Mr. R?
(a) If the auditor obtains audit evidence that a material misstatement exists in the prior
period financial statements on which a modified opinion has been previously issued.
(b) If the auditor’s report on the prior period, as previously issued, included a qualified
opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise
to the modification is resolved.
(c) Prior Period Financial Statements are audited by another auditor.
(d) Prior Period Financial Statements not audited.
Case Scenario - 2
Bharat Bank, a nationalised bank, has branches all over India and has been the most popular
public sector bank in India for the past few years. The bank is governed by the Banking
Regulations Act, 1949 and the Central Statutory Auditors of the bank, ABC & Associates, were
appointed according to the provisions of the relevant enactments. The engagement partner
CA C commenced the audit with his team of seven members so that the audit is completed on
time and all the documents are submitted before the due date. The audit at all the branches also
started simultaneously and ABC & Associates was in constant touch with all the branc h auditors
to ensure timely completion of the audit.
As per the audit strategy and plan, CA Q along with Ms. R and Mr. P were assigned the audit of
the advances of Bharat Bank. Advances constituted the largest item on the asset s side of the
balance sheet of the bank. Since audit of advances is one of the most important areas covered
by auditors in a bank audit, it was assigned to CA Q since he was aware of the various functional
areas of the bank/branches, its processes, procedures, systems and prevailing internal controls
with regard to advances.
CA Q started with verifying whether the advances were classified as per RBI Prudential Norms.
There were five categories of advances which were available to CA Q for verification. They
were: Standard Regular, Sub Standard, Doubtful, Loss and Special Mention Accounts. An
ageing analysis was available for doubtful advances and Special Mention Accounts which was
examined in detail by CA Q.
Ms. R, on being instructed by CA Q, verified the securities offered by the borrowers for the bank
finance. For a particular customer named Aquabrass Pvt Ltd., the security was in the form of
delivery of goods by Aquabrass to Bharat Bank with the intention of creating a charge thereon
as security for the advance. The legal ownership of the goods remained with Aquabrass. In case
of another customer named Prism Works, there was a transfer of a life insurance policy in favour
of the bank as security. The bank had absolute right over the policy.Ms. R examined all the
relevant documents for the above two cases in detail. She continued with her examination of
other securities based on the sample selected by her.

While checking the classification of NPA, Mr. P came across a customer named Trustworthy
whose term loan instalment was overdue for 90 days at the year-end, but it was 100% secured
against the office building. The same was classified as a Substandard asset. There was another
customer named Super40, who had a cash credit account and a term loan with the bank.
Super40 had been paying the instalments on the term loan as well as the interest on the cash
credit account regularly and there was no overdue amount. Mr. P verified the drawing power of
Super40 and found it to be less than the sanctioned limit throughout the year. The outstanding
balance of Super40 during the whole year exceeded the drawing power but was less than the
sanctioned limit. Both the advances to Super40 were classified as Standard Advances since the
recoveries were regular and outstanding balance in the cash credit was less than the sanctioned
limit.
On examination of large advances, CA Q noticed that a customer named Stylish N Smart Private
Limited had one funded loan (term loan) and one non funded loan (bank guarantee) sanctioned
from the bank. CA Q checked in detail whether commission earned by the bank on the bank
guarantee was provided for on accrual basis.
CA Q along with Ms. R and Mr. P verified the advances in detail and also recommended a few
changes in the classification/provisions based on the examination of the sample selected by them.
Based on the above information, answer the following questions:
2.1 What are the sub categories of the special mention accounts?
(a) SMA 0 (accounts showing stress signals), SMA 1 (Overdue between 31-60 days) and
SMA 2 (Overdue between 61-90 days)
(b) SMA 0 (accounts showing stress signals), SMA 1 (Overdue between 0-45 days) and
(c) SMA 0 (accounts not yet due for payment), SMA 1 (Overdue between 31 -60 days)
and SMA 2 (Overdue between 61-90 days)
(d) SMA 0 (accounts not yet due for payment), SMA 1 (Overdue between 0-45 days) and
2.2 Creation of security of Aquabrass Private Ltd. and Prism Works was in the form of:
(a) Mortgage and Hypothecation.
(b) Lien and Set-off.
(c) Hypothecation and Pledge.
(d) Pledge and Assignment.
2.3 In your opinion is Trustworthy a standard asset or a substandard asset?
(a) Though it is due for 90 days, it is 100% secured so it is a standard asset.
(b) Since it is due for 90 days, it is a substandard asset irrespective of the security.

(c) Since it is not due for more than 90 days, it is a standard asset irrespective of the
security.
(d) Since it is not due for more than 90 days and it is 100 % secured, it is a standard
asset.
2.4 Is Super40 correctly classified as a standard asset?
(a) Yes, since the recoveries in both term loan and cash credit were regular and
outstanding balance in the cash credit was less than the sanctioned limit.
(b) No, since the outstanding balance of the cash credit facility exceeded the drawing
power for more than 90 days, so both the advances, that is, the term loan and cash
credit facility will be classified as NPA.
(c) No, since the outstanding balance of the cash credit facility exceeded the drawing
power for more than 90 days, the cash credit facility will be classified as NPA and
term loan as standard.
(d) Yes, since the recoveries in both term loan and cash credit were regular, there is no
relevance of sanctioning power/drawing power.
2.5 Which among the following is a non- funded loan?
(a) Demand Loans
(b) Bills Discounted and Purchased
(c) Letter of Credit
(d) Participation on Risk Sharing basis
General MCQs
1. As per SA-210, preconditions for an audit do not include which of the following?
(a) Acceptability of financial reporting framework
(b) Responsibility of management regarding preparation of financial statements
(c) Making available records to the auditor
(d) Integrity of key management personnel
2. An auditor signs a false audit report knowingly. Which of the following fundamental
principles of professional ethics is violated in such a case?
(a) Objectivity
(b) Integrity
(c) Professional Competence and due care
(d) Professional behaviour

3. Which of the following statements is MOST APPROPRIATE?

(a) Audit programme is a detailed plan of audit strategy
(b) Audit programme cannot be reviewed
(c) Audit programme is a detailed plan of applying audit procedures
(d) Audit programme is relevant for year for which it is prepared, it is useless for
subsequent years.
4. A company is engaged in business of obtaining eggs from one day old chicks. Which of
the following is NOT an example of an event or condition that may cast significant doubt
on the ability of the company to continue as a going concern?
(a) Mortality of 90% of livestock of the company
(b) Decision by govt to ban commercial rearing of birds amidst protests by activi sts for
preventing cruelty to animals
(c) Shifting of farm labour to respective villages due to MGNREGA scheme of Govt
causing acute scarcity throughout the year
(d) Increase in cost of feed of chicks by 20% during the year
5. “Letters of credit” and “Foreign bills purchased and discounted” are examples of
respectively:
(a) Funded facility and non- funded facility
(b) Non-funded facility and funded facility
(c) Funded facility and funded facility
(d) Non-funded facility and Non-funded facility
PART II B – DESCRIPTIVE QUESTIONS
1. State with reason (in short) whether the following statements are true or false:
(i) The level of sampling risk that the auditor is willing to accept will not affect the sample
size.
(ii) There is no difference between “audit” and “review.”
(iii) Negative assertions, encountered in the financial statements, may be expressed or
implied.
(iv) Development of an audit plan is important before the establishment of the overall
audit strategy to address the various matters.
(v) An unexplained decrease in GP Ratio may result due to fictitious sales.
(vi) An auditor has to report on the matters specified in section 143(1) of the Companies
Act, 2013.

(vii) There is an inverse relationship between detection risks and the combined level of
inherent and control risks.
(viii) For auditor’s opinion, reasonable assurance is an absolute level of assurance.
Chapter 1 - Nature, Objective and Scope of Audit
2. (a) There are practical and legal limitations on the auditor’s ability to obtain audit
evidence. Explain giving examples. Also explain the difference between audit and
investigation.
(b) The auditor cannot be expected to disregard past experience of the honesty and
integrity of the entity’s management and those charged with governance.
Nevertheless, a belief that management and those charged with governance are
honest and have integrity does not relieve the auditor of the need to maintain
professional skepticism. Explain.
3. (a) The firm should establish policies and procedures designed to provide it with
reasonable assurance that it has sufficient personnel with the capabilities,
competence, and commitment to ethical principles. Explain stating clearly personnel
issues addressed by such policies and procedures.
(b) An auditor who, before the completion of the engagement, is requested to change the
engagement to one which provides a lower level of assurance, should consider the
appropriateness of doing so. Explain the circumstances which may contribute towards
a request from the client for the auditor to change the engagement.
Chapter 2 - Audit Strategy, Audit Planning and Audit Programme
4. (a) The nature, timing and extent of the direction and supervision of engagement team
members and review of their work vary depending on many factors. Discuss those
factors.
(b) Explain what do you mean by documentation of audit plan. Discuss the purpose
served by it and also elaborate the tools used by the auditor to reflect the particular
engagement circumstances.
5. While developing an audit programme, the auditor may conclude that relying on certain
internal controls is an effective and efficient way to conduct his audit. Explain stating
clearly the points to be kept in mind while developing an audit programme.
Chapter 3 - Audit Documentation and Audit Evidence
6. (a) CA R comes to know some very critical information with regards to the business cycle
of an entity for which he has issued the audit report, which become known to him as
an auditor after the date of the auditor’s report but which existed at that date and
which, if known at that date, might have caused the financial statements to be
amended or the auditor to modify the opinion in the auditor’s report. He wants to
perform additional audit procedures to satisfy himself. As an auditor what he shall

document, on the matters arising after the date of audit report?

(b) The auditor shall prepare audit documentation that is sufficient to enable an
experienced auditor to understand significant matters arising during the audit. Explain
the above statement and also give examples of significant matters.
7. (a) An auditor is called upon to assess the actualities of the situation, review the
statements of account and give an expert opinion about the truth and fairness of such
accounts. This he cannot do unless he has examined the financial statements
objectively. Explain.
(b) Manya Textiles is manufacturer of bed sheets, curtain cloths, other handloom items
etc. having its plant at Panipat. Auditors SJ & Co. is having doubts over the reliability
of information given to him as audit evidence. Also, auditors observed inconsistent
information while conducting audit. Guide the auditor as to how they should proceed
in the given situation.
8. External confirmation procedures frequently are relevant when addressing assertions
associated with account balances and their elements but need not be restricted to these
items. Apart from confirmations for bank balances and accounts receivables, what are the
other situations where external confirmation procedures may provide relevant audit
evidence in responding to assessed risks of material misstatement?
Chapter 4 - Risk Assessment and Internal Control
9. (a) Define Monitoring of Controls and in respect of monitoring of controls, answer the
following questions:
(i) How monitoring of controls would be helpful in assessing the effectiveness of
controls?
(ii) How can management accomplish monitoring of controls?
(iii) What is included in the Management’s monitoring activities?
(b) Explain the matters which should be included for factors relevant to the auditors'
judgement about whether a control is relevant to the audit.
10. The review of internal controls will enable the auditor to know the areas where control is
weak. Explain stating clearly the benefits of evaluation of internal control to the auditor.
Chapter 5 - Fraud and Responsibilities of the Auditor in this Regard.
11. Fraudulent financial reporting often involves management override of controls that
otherwise may appear to be operating effectively. Illustrate techniques by which fraud can
be committed by management overriding controls.
12. Write the examples of circumstances that indicate the possibility of fraud due to
problematic or unusual relationship between the auditor and management .

Chapter 6 - Audit in an Automated Environment

13. List the points that an auditor should consider to obtain an understanding of the Company's
automated environment.
14. Which are specific risks to the company's internal control having IT environment?
Chapter 7- Audit Sampling
15. Explain the meaning of Audit Sampling as per the relevant standard on auditing. State the
requirements relating to audit sampling, sample design, sample size and selection of items
for testing.
16. This method is considered appropriate provided the population to be sampled consists of
reasonably similar units and fall within a reasonable range i.e. it is suitable for a
homogeneous population having a similar range. Explain about that method.
Chapter 8 - Analytical Procedures
17. Explain the aspects to be considered by an auditor when designing and performing
substantive analytical procedures, either alone or in combination with test of details, as
substantive procedures in accordance with SA 330.
18. Discuss with examples the factors that are relevant when determining whether data is
reliable for purposes of designing substantive analytical procedures.
Chapter 9 - Audit of Items of Financial Statements
19. Name the assertions for the following audit procedures:
(i) Year end inventory verification.
(ii) Depreciation has been properly charged on all assets.
(iii) The title deeds of the lands disclosed in the Balance Sheet are held in the name of
the company.
(iv) All liabilities are properly recorded in the financial statements.
(v) Related party transactions are shown properly.
20. PK Pvt Ltd, based in Moradabad, is engaged in export of brassware goods. The company
has huge export receivables as on 31 st March 2022. It is also analysed from Export Sales
account of the company that large number of small shipments were almost despatched
daily during month of March 2022. List out few audit procedures you would adopt as an
auditor to verify completeness assertion of export trade receivables.
Chapter 10 - The Company Audit
21. XYZ Limited is engaged in the business of Shoes having geographical presence across
India. Following details are available from the last audited financial statements of XYZ
Limited for the financial year 2020-21:

Particulars `
Paid-up Capital as on 31 st March, 2021 9.8 Crores
Turnover for Financial Year 2020-21 98 Crores
Outstanding Loan from Bank as on 31 st March, 2021 25 Crores
Liability on Outstanding Debentures as on 31 st March, 2021 26 Crores
Comment on the applicability of constitution of Audit Committee for XYZ Limited for the
financial year 2021-22 based on the above information.
22. S Private Limited has a paid-up share capital of ` 49 Crores and borrowings from bank of
` 99 Crores. The audit firm P & Company was appointed as statutory auditors of the
Company for one term of five consecutive years. Whether the provision of rotation of
auditors applicable to the company? Comment.
23. Enumerate the circumstances under which the retiring auditor can be re-appointed.
Chapter 11 - Audit Report
24. Mention the examples of circumstances where the auditor may consider it necessary to
include an Emphasis of Matter paragraph.
25. While drafting auditor’s report of LK Ltd., what are the matter to be included by auditor in
Opinion Section paragraph?
Chapter 12 - Bank Audit
26. CA. Puranjay is appointed as statutory branch auditor of two branches of a nationalized
bank for year 2021-22. During the course of audit, he came across the following:
(a) While verifying advances of one semi-urban branch, he noticed substantial number
of accounts categorized as SMA (Special mention accounts). In this context, explain
the nature and significance of SMA.
(b) While verifying interest income of a mid-corporate branch of an urban centre having
advances consisting of only cash credit limits for large borrowers, it was noticed that
advances of ` 300 crores were outstanding as on balance sheet date carrying
average interest rate @8% p.a.
One articled clerk in audit team makes quick back of the envelope calculations of
interest income of ` 24 crores on advances. However, schedule of profit & loss a/c
shows interest income on advances for ` 10 crores. Discuss any two probable
reasons for such variation.
27. In carrying out audit of advances, the auditor is primarily concerned with obtaining evidence
about amounts included in balance sheet in respect of advances which are outstanding.
Explain stating clearly all the considerations in this context.

Chapter 13 - Audit of Different Types of Entities

28. (a) You have been appointed as an auditor of ABC Hotel, a three star hotel, for Financial
Year 2021-22. As an auditor what are the special points that need to be considered
in verifying the Inventories in the nature of food and beverages?
(b) Cinescreen Multiplex Ltd. is operating cinemas in different locations in Mumbai and
has appointed you as an internal auditor. What are the areas that need to be verified
in relation to receipts from sale of Tickets?
SUGGESTED ANSWERS
Answer Key- Case Scenario - 1

Question Answer
No.
1.1 (d) (i), (ii) and (iii)
1.2 (c) In our opinion, the accompanying financial statements present fairly, in
all material respects, […] in accordance with [the applicable financial
reporting framework];
1.3 (a) Audit was conducted in accordance with the Accounting Standards.
1.4 (b) Emphasis of Matters.
1.5 (d) Prior Period Financial Statements not audited.
Answer Key- Case Scenario - 2

Question Answer
No.
2.1 (a) SMA 0 (accounts showing stress signals), SMA 1 (Overdue between
31-60 days) and SMA 2 (Overdue between 61-90 days)
2.2 (d) Pledge and Assignment.
2.3 (c) Since it is not overdue for more than 90 days, it is a standard asset
irrespective of the security.
2.4 (b) No, since the outstanding balance of the cash credit facility exceeded
the drawing power for more than 90 days, so both the advances, that is,
the term loan and cash credit facility will be classified as NPA.
2.5 (c) Letter of Credit

Answer Key- General MCQ’s

1. (d)
2. (b)
3. (c)
4. (d)
5. (b)
Descriptive Answers
1. (i) Incorrect: As per SA 530, “Audit Sampling” the level of sampling risk that the auditor
is willing to accept affects the sample size required. The lower the risk the auditor is
willing to accept, the greater the sample size will need to be.
(ii) Incorrect: “Audit” and “Review” are two different terms. Audit is a reasonable
assurance engagement, and its objective is reduction in assurance engagement risk
to an acceptably low level in the circumstances of the engagement. However, “review”
is a limited assurance engagement, and its objective is a reduction in assurance
engagement risk to a level that is acceptable in the circumstances of the engagement
(iii) Correct: Negative assertions are also encountered in the financial statements and
the same may be expressed or implied. For example, if it is stated that there is no
contingent liability it would be an expressed negative assertion; on the other hand, if
in the balance sheet there is no item as “building”, it would be an implied negative
assertion that the entity did not own any building on the balance sheet date.
(iv) Incorrect: As per SA-300, “Planning an Audit of Financial Statements”, the auditor
shall establish an overall audit strategy that sets the scope, timing and direction of
the audit, and that guides the development of the audit plan. Once the overall audit
strategy has been established, an audit plan can be developed to address the various
matters identified in the overall audit strategy, taking into account the need to achieve
the audit objectives through the efficient use of the auditor’s resources.
(v) Incorrect: A fictitious sale will increase the GP Ratio, instead of decreasing it. GP
ratio normally comes down if there are unrecorded sales or reversal of fictitious sale
entries recorded in the previous year or fictitious purchase or decrease in closing
stock.
(vi) Incorrect: The auditor is not required to report on the matters specified in section
143(1) of the Companies Act, 2013 unless he has any special comments to make on
any of the items referred to therein. If he is satisfied as a result of the inquiries, he
has no further duty to report that he is so satisfied. However, the auditor should make
a report to the members in case he finds answer to any of these matters in adverse.
(vii) Correct: There is an inverse relationship between detection risks and the combined
level of inherent and control risks. For example, when inherent and control risks are

high. acceptable detection risks need to be low to reduce audit risk to an acceptably
low level. On the other hand, when inherent and control risks are low, an auditor can
accept a higher detection risks and still reduce audit risks to an acceptably low level.
(viii) Incorrect: Reasonable assurance is a high level but not an absolute level of
assurance, because there are inherent limitations of an audit which result in most of
the audit evidence on which the auditor draws conclusions and bases the auditor’s
opinion being persuasive rather than conclusive.
2. (a) The Nature of Audit Procedures: There are practical and legal limitations on the
auditor’s ability to obtain audit evidence. For example:
1. There is the possibility that management or others may not provide, intentionally
or unintentionally, the complete information that is relevant to the preparation
and presentation of the financial statements or that has been requested by the
auditor.
2. Fraud may involve sophisticated and carefully organised schemes designed to
conceal it. Therefore, audit procedures used to gather audit evidence may be
ineffective for detecting an intentional misstatement that involves, for example,
collusion to falsify documentation which may cause the auditor to believe that
audit evidence is valid when it is not. The auditor is neither trained as nor
expected to be an expert in the authentication of documents.
3. An audit is not an official investigation into alleged wrongdoing. Accordingly, the
auditor is not given specific legal powers, such as the power of search, which
may be necessary for such an investigation.
We have to clearly understand that audit is distinct from investigation.
Investigation is a critical examination of the accounts with a special purpose. For
example, if fraud is suspected and it is specifically called upon to check the
accounts whether fraud really exists, it takes character of investigation.
The objective of audit, on the other hand as we have already discussed, is to
obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, thereby
enabling the auditor to express an opinion.
Therefore, audit is never started with a pre-conceived notion about state of
affairs; about wrong-doing; about some wrong having been committed. The
auditor seeks to report what he finds in normal course of examination of
accounts. However, it is quite possible that sometimes investigation results from
the prima facie findings of the auditor. It may happen that auditor has given some
findings of serious concern. Such findings may prompt for calling an
investigation.

(b) The auditor shall plan and perform an audit with professional skepticism recognising
that circumstances may exist that cause the financial statements to be materially
misstated.
Professional skepticism includes being alert to, for example:
 Audit evidence that contradicts other audit evidence obtained.
 Information that brings into question the reliability of documents and responses
to inquiries to be used as audit evidence.
 Conditions that may indicate possible fraud.
 Circumstances that suggest the need for audit procedures in addition to those
required by the SAs.
 Maintaining professional skepticism throughout the audit is necessary if the
auditor is to reduce the risks of:
 Overlooking unusual circumstances.
 Over generalising when drawing conclusions from audit observations.
 Using inappropriate assumptions in determining the nature, timing, and extent
of the audit procedures and evaluating the results thereof.
Professional skepticism is necessary to the critical assessment of audit evidence. It
also includes consideration of the sufficiency and appropriateness of audit evidence
obtained in the light of the circumstances, for example in the case where fraud risk
factors exist and a single document, of a nature that is susceptible to fraud, is the
sole supporting evidence for a material financial statement amount.
The auditor may accept records and documents as genuine unless the auditor has
reason to believe the contrary. Nevertheless, the auditor is required to consider t he
reliability of information to be used as audit evidence. In cases of doubt about the
reliability of information or indications of possible fraud, the SAs require that the
auditor investigate further and determine what modifications or additions to audit
procedures are necessary to resolve the matter.
The auditor cannot be expected to disregard past experience of the honesty and
integrity of the entity’s management and those charged with governance.
Nevertheless, a belief that management and those charged with governance are
honest and have integrity does not relieve the auditor of the need to maintain
professional skepticism.
3. (a) The firm should establish policies and procedures designed to provide it with
reasonable assurance that it has sufficient personnel with the capabilities,
competence, and commitment to ethical principles necessary to perform its
engagements in accordance with professional standards and regulatory and legal

requirements, and to enable the firm or engagement partners to issue report s that are
appropriate in the circumstances.
Such policies and procedures address the following personnel issues:
(a) Recruitment.
(b) Performance evaluation.
(c) Capabilities.
(d) Competence.
(e) Career development.
(f) Promotion;
(g) Compensation; and
(h) Estimation of personnel needs.
(b) An auditor who, before the completion of the engagement, is requested to change the
engagement to one which provides a lower level of assurance, should consider the
appropriateness of doing so.
A request from the client for the auditor to change the engagement may result from -
1. a change in circumstances affecting the need for the service,
2. a misunderstanding as to the nature of an audit or related service originally
requested.
3. a restriction on the scope of the engagement, whether imposed by management
or caused by circumstances.
4. (a) The nature, timing and extent of the direction and supervision of engagement team
members and review of their work vary depending on many factors, including:
➢ The size and complexity of the entity.
➢ The area of the audit.
➢ The assessed risks of material misstatement (for example, an increase in the
assessed risk of material misstatement for a given area of the audit ordinarily
requires a corresponding increase in the extent and timeliness of direction and
supervision of engagement team members, and a more detailed review of their
work).
➢ The capabilities and competence of the individual team members performing the
audit work.

(b) The documentation of the audit plan is a record of the planned nature, timing and
extent of risk assessment procedures and further audit procedures at the assertion
level in response to the assessed risks.
It also serves as a record of the proper planning of the audit procedures that can be
reviewed and approved prior to their performance.
The auditor may use standard audit programs and/or audit completion checklists,
tailored as needed to reflect the particular engagement circumstances.
5. While developing an audit programme, the auditor may conclude that relying on certain
internal controls is an effective and efficient way to conduct his audit. However, the auditor
may decide not to rely on internal controls when there are other more e fficient ways of
obtaining sufficient appropriate audit evidence. The auditor should also consider the timing
of the procedures, the coordination of any assistance expected from the client, the
availability of assistants, and the involvement of other auditors or experts.
For the purpose of programme construction, the following points should be kept in mind:
(1) Stay within the scope and limitation of the assignment.
(2) Prepare a written audit programme setting forth the procedures that are needed to
implement the audit plan.
(3) Determine the evidence reasonably available and identify the best evidence for
deriving the necessary satisfaction.
(4) Apply only those steps and procedures which are useful in accomplishing the
verification purpose in the specific situation.
(5) Include the audit objectives for each area and sufficient details which serve as a set
of instructions for the assistants involved in audit and help in controlling the proper
execution of the work.
(6) Consider all possibilities of error.
(7) Co-ordinate the procedures to be applied to related items.
6. (a) As per SA 230, “Audit Documentation”, if, in exceptional circumstanc es, the auditor
performs new or additional audit procedures or draws new conclusions after the date
of the auditor’s report, the auditor shall document:
(i) The circumstances encountered;
(ii) The new or additional audit procedures performed, audit evidence obtained, and
conclusions reached, and their effect on the auditor’s report; and
(iii) When and by whom the resulting changes to audit documentation were made
and reviewed.

(b) The auditor shall prepare audit documentation that is sufficient to enable an
experienced auditor, having no previous connection with the audit, to understand
significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions.
Judging the significance of a matter requires an objective analysis of the facts and
circumstances. Examples of significant matters include:
 Matters that give rise to significant risks.
 Results of audit procedures indicating (a) that the financial statements could be
materially misstated, or (b) a need to revise the auditor’s previous assessment
of the risks of material misstatement and the auditor’s responses to those risks.
 Circumstances that cause the auditor significant difficulty in applying necessary
audit procedures.
 Findings that could result in a modification to the audit opinion or the inclusion
of an Emphasis of Matter paragraph in the auditor’s report.
7. (a) Auditing is a logical process. An auditor is called upon to assess the actualities of the
situation, review the statements of account and give an expert opinion about the truth
and fairness of such accounts. This he cannot do unless he has examined the
financial statements objectively.
Objective examination connotes critical examination and scrutiny of the accounting
statements of the undertaking with a view to assessing how far the statements present
the actual state of affairs in the correct context and whether they give a true and fair
view about the financial results and state of affairs. An opinion founded on a rather
reckless and negligent examination and evaluation may expose the auditor to legal
action with consequential loss of professional standing and prestige.
He needs evidence to obtain information for arriving at his judgement.
SA 500 – “Audit Evidence”, explains what constitutes audit evidence in an audit of
financial statements, and deals with the auditor’s responsibility to design and perform
audit procedures to obtain sufficient appropriate audit evidence to be able to draw
reasonable conclusions on which to base the auditor’s opinion.
(b) If:
(a) audit evidence obtained from one source is inconsistent with that obtained from
another; or
(b) the auditor has doubts over the reliability of information to be used as audit
evidence,
the auditor shall determine what modifications or additions to audit procedures are
necessary to resolve the matter, and shall consider the effect of the matter, if any, on
other aspects of the audit.

8. Other examples of situations where external confirmations may be used include the
following:
 Inventories held by third parties at bonded warehouses for processing or on
consignment
 Property title deeds held by lawyers or financiers for safe custody or as security
 Investments held for safekeeping by third parties, or purchases from stockbrokers but
not delivered at the balance sheet date
 Amounts due to lenders, including relevant terms of repayment and restrictive
covenants.
 Accounts payable balances and terms
 Long outstanding share application money.
9. (a) Monitoring of controls Defined: Monitoring of controls is a process to assess the
effectiveness of internal control performance over time.
(i) Helps in assessing the effectiveness of controls on a timely basis: It
involves assessing the effectiveness of controls on a timely basis and taking
necessary remedial actions.
(ii) Management accomplishes through ongoing activities, separate
evaluations etc.: Management accomplishes monitoring of controls through
ongoing activities, separate evaluations, or a combination of the two. Ongoing
monitoring activities are often built into the normal recurring activities of an entity
and include regular management and supervisory activities.
(iii) Management’s monitoring activities include: Management’s monitoring
activities may include using information from communications from external
parties such as customer complaints and regulator comments that may indicate
problems or highlight areas in need of improvement.
(b) Controls Relevant to the Audit: Factors relevant to the auditor’s judgment about
whether a control, individually or in combination with others, is relevant to the audit
may include such matters as the following:
(i) Materiality.
(ii) The significance of the related risk.
(iii) The size of the entity.
(iv) The nature of the entity’s business, including its organisation and ownership
characteristics.
(v) The diversity and complexity of the entity’s operations.
(vi) Applicable legal and regulatory requirements.

(vii) The circumstances and the applicable component of internal control.

(viii) The nature and complexity of the systems that are part of the entity’s internal
control, including the use of service organisations.
(ix) Whether, and how, a specific control, individually or in combination with others,
prevents, or detects and corrects, material misstatement.
10. Benefits of Evaluation of Internal Control to the Auditor
The review of internal controls will enable the auditor to know:
(i) whether errors and frauds are likely to be located in the ordinary course of operations
of the business;
(ii) whether an adequate internal control system is in use and operating as planned by
the management;
(iii) whether an effective internal auditing department is operating;
(iv) whether any administrative control has a bearing on his work (for example, if the
control over worker recruitment and enrolment is weak, there is a likelihood of dummy
names being included in the wages sheet and this is relevant for the auditor);
(v) whether the controls adequately safeguard the assets;
(vi) how far and how adequately the management is discharging its function in so far as
correct recording of transactions is concerned;
(vii) how reliable the reports, records and the certificates to the management can be;
(viii) the extent and the depth of the examination that he needs to carry out in the di fferent
areas of accounting;
(ix) what would be appropriate audit technique and the audit procedure in the given
circumstances;
(x) what are the areas where control is weak and where it is excessive; and
(xi) whether some worthwhile suggestions can be given to improve the control system.
11. Techniques of frauds committed by Management: Fraudulent financial reporting often
involves management override of controls that otherwise may appear to be operating
effectively. Fraud can be committed by management overriding controls using such
techniques as:
(1) Recording fictitious journal entries, particularly close to the end of an account ing
period, to manipulate operating results or achieve other objectives
(2) Inappropriately adjusting assumptions and changing judgments used to estimate
account balances
(3) Omitting, advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period

(4) Concealing, or not disclosing, facts that could affect the amounts recorded in the
financial statements
(5) Engaging in complex transactions that are structured to misrepresent the financ ial
position or financial performance of the entity
(6) Altering records and terms related to significant and unusual transactions.
12. Examples of circumstances that indicate the possibility of fraud due to problematic
or unusual relationship between the auditor and management are:
1. Denial of access to records, facilities, certain employees, customers, vendors, or
others from whom audit evidence might be sought.
2. Undue time pressures imposed by management to resolve complex or contentious
issues.
3. Complaints by management about the conduct of the audit or management
intimidation of engagement team members, particularly in connection with the
auditor’s critical assessment of audit evidence or in the resolution of potential
disagreements with management.
4. Unusual delays by the entity in providing requested information.
5. Unwillingness to facilitate auditor access to key electronic files for testing through the
use of computer-assisted audit techniques.
6. Denial of access to key IT operations staff and facilities, including security, operations,
and systems development personnel.
7. An unwillingness to add or revise disclosures in the financial statements to make them
more complete and understandable.
8. An unwillingness to address identified deficiencies in internal control on a timely
basis.
9. Unwillingness by management to permit the auditor to meet privately with those
charged with governance
10. Accounting Policy that appears to be variance with industry norms
11. Frequent changes in accounting estimates that do not appear to result from changed
circumstances
12. Tolerance of variations in the entity’s code of conduct
13. Understanding of the Company’s Automated Environment: Given below are some of
the points that an auditor should consider to obtain an understanding of the company’s
automated environment
• Information systems being used (one or more application systems and what they are)
• their purpose (financial and non-financial)
• Location of IT systems - local vs global

• Architecture (desktop based, client-server, web application, cloud based)

• Version (functions and risks could vary in different versions of same application)
• Interfaces within systems (in case multiple systems exist)
• In-house vs Packaged
• Outsourced activities (IT maintenance and support)
• Key persons (CIO, CISO, Administrators)
14. IT poses specific risks to the Company’s internal control, which include-
(i) Reliance on systems or programs that are inaccurately processing data, processing
inaccurate data, or both.
(ii) Unauthorised access to data that may result in destruction of data or improper
changes to data, including the recording of unauthorised or nonexistent transactions,
or inaccurate recording of transactions. Particular risks may arise where multiple
users access a common database.
(iii) The possibility of IT personnel gaining access privileges beyond those necessary to
perform their assigned duties thereby breaking down segregation of duties.
(iv) Unauthorised changes to data in master files.
(v) Unauthorised changes to systems or programs.
(vi) Failure to make necessary changes to systems or programs. Inappropriate manual
intervention.
(vii) Potential loss of data or inability to access data as required.
15. Audit Sampling: As per SA 530 on “Audit Sampling”, the meaning of the term Audit
Sampling is – the application of audit procedures to less than 100% of items within a
population of audit relevance such that all sampling units have a chance of selection in
order to provide the auditor with a reasonable basis on which to draw conclusions about
the entire population.
The requirements relating to sample design, sample size and selection of items for testing
are explained below-
▪ Sample design - When designing an audit sample, the auditor shall consider the
purpose of the audit procedure and the characteristics of the population from which
the sample will be drawn.
▪ Sample Size - The auditor shall determine a sample size sufficient to reduce sampling
risk to an acceptably low level.
▪ Selection of Items for Testing - The auditor shall select items for the sample in such
a way that each sampling unit in the population has a chance of selection.

16. Simple Random Sampling: Under this method each unit of the whole population e.g.
purchase or sales invoice has an equal chance of being selected. It is considered that
random number tables are simple and easy to use and also provide assurance that the
auditors’ bias does not affect the selection. Each item in a population is selected by use
of random number table either with a help of computer or picking up a number in a random
way (may be randomly from a drum). Today random numbers are also generated using
various applications on the cellphones like the random number generator.
This method is considered appropriate provided the population to be sampled consists of
reasonably similar units and fall within a reasonable range i.e. it is suitable for a
homogeneous population having a similar range.
17. Analytical procedures used as substantive tests: When designing and performing
substantive analytical procedures, either alone or in combination with test of details as,
substantive procedures in accordance with SA 330, the auditor shall:
(i) Determine the suitability of particular substantive analytical procedures for given
assertions, taking account of the assessed risks of material misstatement and test of
details, if any, for these assertions.
(ii) Evaluate the reliability of data from which the auditor's expectation of recorded
amounts or ratios is developed, taking account of source, comparability, and nature
and relevance of information available, and controls over preparation.
(iii) Develop an expectation of recorded amounts or ratios and evaluate whether the
expectation is sufficiently precise to identify a misstatement that, individually or when
aggregated with other misstatements, may cause the financial statements to be
materially misstated.
(iv) Determine the amount of any difference of recorded amounts from expected values
that is acceptable without further investigation.
18. The reliability of data is influenced by its source and nature and is dependent on the
circumstances under which it is obtained. Accordingly, the following are relevant when
determining whether data is reliable for purposes of designing substantive analytical
procedures:
(i) Source of the information available. For example, information may be more reliable
when it is obtained from independent sources outside the entity;
(ii) Comparability of the information available. For example, broad industry data may
need to be supplemented to be comparable to that of an entity that produces and
sells specialised products;
(iii) Nature and relevance of the information available. For example, whether budgets
have been established as results to be expected rather than as goals to be achieved;
and

(iv) Controls over the preparation of the information that are designed to ensure its
completeness, accuracy and validity. For example, controls over the preparation,
review and maintenance of budgets.
19. (i) Year-end inventory verification: Existence Assertion.
(ii) Depreciation has been properly charged on all assets: Valuation Assertion.
(iii) Title deed of lands disclosed in the Balance Sheet are held in the name of the
Company: Rights & Obligations Assertion.
(iv) All liabilities are properly recorded in the financial statements: Completenes s.
(v) Related party transactions are shown properly: Presentation & Disclosure.
20. Completeness assertion in respect of account balances means that all balances which
should have been recorded have been recorded. The auditor needs to satisfy himself about
cut off so that there is no understatement or overstatement in account balances of export
receivables.
In this context, while verifying completeness assertion of export trade receivables,
following audit procedures are required: -
(1) Check that in respect of invoices raised in last few days nearing the cut off date,
goods have been actually dispatched and not lying with the company.
(2) Check stock records, e-way bill, and transporter receipt regarding actual movement
of goods. It would provide assurance that export invoices in respect of which revenue
was booked have been actually moved out of company’s premises.
(3) Ensure that all goods invoiced prior to cut off date/year end have been included in
export receivables on test check basis.
(4) Ensure that no goods despatched after year end have been included in export
receivables by tracing entries in export sales, stock records of next year. The same
can be verified from e-way bills also.
(5) Match invoices to despatch/shipping details. Further match invoices dates to
despatch dates to see if sales are being recorded in correct accounting period.
(6) Test invoices in receivable report. Select invoices from ageing report of export
receivables and compare them with supporting documentation to ensure that these
are billed with correct names, dates and amounts.
21. Applicability of Constitution of Audit Committee: According to Section 177 of the
Companies Act, 2013, in addition to listed public companies, following classes of
companies shall constitute and Audit Committee -
(i) All public companies with a paid-up capital of ten crore rupees or more;
(ii) All public companies having turnover of one hundred crore rupees or more;

(iii) All public companies, having in aggregate, outstanding loans or borrowings o r

debentures or deposits exceeding fifty crore rupees or more.
Explanation - The paid-up share capital or turnover or outstanding loans or
borrowings or debentures or deposits, as the case may be, as existing on the date of
last audited Financial Statements shall be taken into account for the purposes of this
rule.
Therefore, provisions of constitution of audit committee are applicable only to listed
companies and public companies satisfying criteria as stated above.
In the given case, XYZ Limited, engaged in the business of Shoes, is a public company
and it’s having paid-up capital of 9.8 crore rupees and turnover of 98 crore which is less
than prescribed limit (i.e., 10 crores for paid-up capital and 100 crores for turnover).
However, aggregate of its outstanding loan from bank (25 crores) and liability on
outstanding debentures (26 crore) is exceeding the prescribed limit i.e., 50 crore rupees.
Therefore, provisions relating to constitution of Audit Committee will be applicable for XYZ
Limited.
22. As per rules prescribed in Companies (Audit and Auditors) Rules, 2014, for applicability of
section 139(2) the class of companies shall mean the following classes of companies
excluding one person companies and small companies-
(i) all unlisted public companies having paid up share capital of rupees ten crore or more;
(ii) all private limited companies having paid up share capital of rupees fifty crore or more;
(iii) all companies having paid up share capital of below threshold limit mentioned above,
but having public borrowings from financial institutions, banks or public deposits of
rupees fifty crores or more.
In the given case, S Private Limited is a private limited Company, having paid up share
capital of ` 49 crore but having borrowing from banks of ` 99 crore, provision of rotation
of auditor will be applicable on S Private Limited as borrowings from bank are exceeding
the prescribed limit of 50 crore rupees.
Further, as per section 139(2), appointment of audit firm can be made only for one term
of five consecutive years and then another one more term of five consecutive years .
S Private Limited, appointed M/s P & Company, a Chartered Accountant firm, as the
statutory auditor in its AGM for one term of five years. Here, the appointment of
M/s P & Company is valid in accordance with section139(2) of the Companies Act, 2013.
23. Re-appointment of auditor: A retiring auditor may be re-appointed at an annual general
meeting, if-
(i) he is not disqualified for re-appointment.
(ii) he has not given the company a notice in writing of his unwillingness to be re-
appointed; and

(iii) a special resolution has not been passed at that meeting appointing some other
auditor or providing expressly that he shall not be re-appointed.
(iv) Where at any annual general meeting, no auditor is appointed or re-appointed, the
existing auditor shall continue to be the auditor of the company.
24. Examples of circumstances to include Emphasis of Matter Paragraph: As per SA 706
(Revised) on “Emphasis of Matter Paragraphs and Other Matter Paragraphs In The
Independent Auditor’s Report”, the examples of circumstances where the auditor may
consider it necessary to include an Emphasis of Matter paragraph are;
(a) An uncertainty relating to the future outcome of an exceptional litigation or regulatory
action.
(b) A significant subsequent event that occurs between the date of the financial
statements and the date of the auditor’s report.
(c) Early application (where permitted) of a new accounting standard that has a material
effect on the financial statements.
(d) A major catastrophe that has had, or continues to have, a significant effect on the
entity's financial position.
25. The first section of the auditor’s report shall include the auditor’s opinion, and shall
have the heading “Opinion”.
Opinion Section of the Auditor’s report shall also:
(i) Identify the entity whose financial statements have been audited;
(ii) State that the financial statements have been audited;
(iii) Identify the title of each statement that comprises the financial statements;
(iv) Refer to the summary of significant accounting policies and other explanatory
information; and
(v) Specify the date or period covered by each financial statement comprising the
financial statements.
26. (a) Special Mention accounts (SMA) are those accounts which are resulting signs of
incipient stress leading to the possibility that borrowers may default on debt
obligations. These are in the nature of warning system to alert the banks about
probable NPAs so that remedial action can be taken before accounts actually turn
NPAs. Therefore, their significance lies in the fact that proper and timely identification
of SMAs can help in preventing turning potential NPAs into actual NPAs.
(b) The probable reasons for difference in interest calculation could be due to following:
(i) Cash credit accounts, by their very nature, are running accounts and their
utilization depends upon needs of business. Further, interest on cash credit
account is charged on the extent of funds utilized by the borrower. It could be

possible that all cash credit limits were not fully utilized during the year which
resulted in lower interest income.
(ii) Some large accounts may have been sanctioned during later part of the year
resulting in lower interest income on advances for whole year.
27. Advances generally constitute the major part of the assets of the bank. There are large
number of borrowers to whom variety of advances are granted. The audit of advances
requires the major attention from the auditors.
In carrying out audit of advances, the auditor is primarily concerned with obtaining
evidence about the following:
(a) Amounts included in balance sheet in respect of advances which are outstanding at
the date of the balance sheet.
(b) Advances represent amount due to the bank.
(c) Amounts due to the bank are appropriately supported by loan documents and other
documents as applicable to the nature of advances.
(d) There are no unrecorded advances.
(e) The stated basis of valuation of advances is appropriate and properly applied and the
recoverability of advances is recognised in their valuation.
(f) The advances are disclosed, classified and described in accordance with recognised
accounting policies and practices and relevant statutory and regulatory requirements.
(g) Appropriate provisions towards advances have been made as per the RBI norms,
Accounting Standards and generally accepted accounting practices.
28. (a) Verification of inventories in the nature of food and beverages: The inventories
in any hotel are both readily portable and saleable particularly the food and beverage
inventories. It is therefore extremely important that all movements and transfers of
such inventories should be properly documented to enable control to be exercised
over each individual stores’ areas and sales point. The auditor should carry out tests
to ensure that all such documentation is accurately processed. Therefore, following
points may be noted in this regard:
(a) All movement and transfer of inventories must be properly documented.
(b) Areas where inventories are kept must be kept locked and the key retained by
the departmental manager.
(c) The key should be released only to trusted personnel and unauthorized persons
should not be permitted in the stores area.
(d) Many hotels use specialized professional valuers to count and value the
inventories on a continuous basis throughout the year.

(e) The auditor should ensure that all inventories are valued at the year end and
that he should himself be present at the year-end physical verification, to the
extent practicable, having regard to materiality consideration and nature and
location of inventories.
(b) Audit of Cinema: The special steps involved in the audit of receipts from sale of
tickets are stated below-
(i) Verify that entrance to the cinema-hall during show is only through printed
tickets;
(ii) Verify that they are serially numbered and bound into books;
(iii) Verify that the number of tickets issued for each show and class, are different
though the numbers of the same class for the show on the same day, each week,
run serially;
(iv) Verify that for advance booking a separate series of tickets is issued;
(v) Verify that the inventory of tickets is kept in the custody of a responsible official.
(vi) Confirm that at the end of show, a statement of tickets sold is prepared and cash
collected is agreed with it.
(vii) Verify that a record is kept of the ‘free passes’ and that these are issued under
proper authority.
(viii) Reconcile the amount of Entertainment Tax collected with the total number of
tickets issued for each class.
(ix) Vouch the entries in the Cash Book in respect of cash collected on sale of tickets
for different shows on a reference to Daily Statements which have been test
checked as aforementioned with record of tickets issued for the different shows
held.

PAPER – 7: ENTERPRISE INFORMATION SYSTEMS AND STRATEGIC
MANAGEMENT
SECTION – A: ENTERPRISE INFORMATION SYSTEMS
QUESTIONS
Multiple Choice Questions
Since 1990s, RS Ltd. has been one of the leading companies in India dealing in the business
of pulses. Lately in 2019, with the purpose to expand its business, the management of RS Ltd.
decided to start its business in the field of spices as well. To develop infrastructure and
procure necessary processing equipment in order to promote cross sell activities, the
management used various data analytics techniques to predict customer’s behavior and
probability of equipment failure. Based on the results of said analysis, the management of RS
Ltd. selected a supplier XY Ltd. and obtained the requisite equipment from it so as to increase
its production and to provide quality products to its customers. At that time, XY Ltd. had a
policy to offer a discount of 2% to its customers if the cash payment was made within 7 days.
However, RS Ltd. made the payment of Rs. 5 lakh after 10 days using Real Time Gross
Settlement (RTGS) facility and didn’t avail the discount offered by XY Ltd.
RS Ltd. installed these new procured machines in its various operational units and to operate
them, the workforce of RS Ltd. was strengthened. Furthermore, RS Ltd. decided to expand its
business ventures through online mode by collaborating with various renowned e-commerce
websites where it can offer its products to customers under various discounts and schemes.
These websites would display the electronic catalogue of RS Ltd. and in return RS Ltd. shall
pay these websites suitable commission charges from the sales revenue generated from these
sites.
With the business expansion, the management of RS Ltd. noticed to bring out following
changes in their existing automated setup:
• Their organization’s security policy shall be made more robust and Business Continuity
Plans shall be formulated.
• To mitigate the risk of unauthorized entries in their working environment, the RS Ltd.
switched its manual attendance system to biometric system.
• To enhance the physical security like the deployment of security guards, installation of
CCTV cameras is required to supervise the visitor’s access.
Based on the above case scenario, answer the Question No(s) 1 to 5.
1. The company RS Ltd. decides to buy new equipment for its latest business of spices.
Which risk management strategy is being exercised by the management, if they decided
to buy new machineries from XY Ltd.?
(a) Tolerate the risk

(b) Terminate the risk

(c) Transfer the risk
(d) Treat the risk
2. Which type of Core Banking Services is being used by RS Ltd. to make the payment to
XY Ltd. for the purchase of necessary processing equipments?
(a) Remittances
(b) Collection
(c) Clearing
(d) Granting of Advances
3. For new business of spices, RS Ltd. decides to collaborate with renowned e -commerce
websites for selling its products through online mode. Which of the following term related
to e-marketing fits best in this case?
(a) e-Malls
(b) Buyer Aggregator
(c) e-auction
(d) e-distribution
4. Considering the expansion of business, RS Ltd. uses various data analytics tools to
predict customers’ behavior. Which advance data analytics tool you think has been used
by the company?
(a) Numerical Analysis
(b) Data Warehouse
(c) Predictive Analysis
(d) Data Mining
5. RS Ltd. decides to restrict the unauthorized access in the company by changing its
employee attendance system from manual to biometric system. Which Control under
Application Control Framework deals with biometric authentication?
(a) Input Control
(b) Processing Control
(c) Boundary Control
(d) Communication Control

PAPER – 7: ENTERRPRISE INFORMATION SYSTEMS AND STRATEGIC MANAGEMENT 73
Descriptive Questions
Chapter 1: Automated Business Processes
6. Risks are not always countered by implementing controls. Based on the types of risks
and its significance to business, certain risk management strategies can be used in
isolation or in combination. Briefly explain the risk management strategies that can be
used to manage various risks associated with any business.
7. As technology is taking new forms every day, the business processes and standards
adapted by various enterprises should consider different set of IT related risks and
challenges from time to time. Discuss them.
Chapter 2: Financial and Accounting Systems
8. An organization ABC Ltd. has well implemented Enterprise Resource Planning (ERP) in
its working environment. Mr. Karan is hired to conduct audit of ABC Ltd.’s ERP system
for which he decides to segregate the audit in two parts- Audit of data and Audit of
processes. What aspects shall he consider under these audits?
9. The ERP environment of an organization consists of many business process modules.
These processes have either a direct or indirect effect on financial status of the
organization, out of which Controlling module is one such module. Discuss its key
features.
Chapter 3: Information Systems and its Components
10. An efficient and effective telecommunication network gives an organization the capability
to move information rapidly among various employees and suppliers to cooperate with
each other from anywhere and anytime. Discuss the types of computer network and also
its benefits.
11. For an organization XYZ Ltd., the data is critical resource which needs to be managed
and controlled properly. Discuss various Data Resource Management controls that
should be well implemented in the organization to achieve this objective.
Chapter 4: E-Commerce, M-Commerce and Emerging Technologies
12. It has been observed that in most of the organizations, computer nodes in their network
remain underutilized leading to wastage of the computing resources at large. Identify the
computing technology that may address this issue and further discuss its benefits.
13. In an e-business environment, all the e-commerce and m-commerce transactions have
various risks associated with them. Discuss various risks that prevail in any e -business
environment.
Chapter 5: Core Banking Systems
14. The technology components of Core Banking Systems allow the banks to deploy new
state of art and innovative banking services. As prescribed under Cyber Security

Framework of RBI, highlight key measures that are required to implement Network
Security and secure Configuration of Core Banking System.
15. Most of the banks offer Credit card as the key product service to their customers. The
process flow of credit cards may have certain amount of risks that may differ from bank
to bank. Discuss various risks involved in credit card process of bank along with their
corresponding controls.
SUGGESTED ANSWERS
1. (b) Terminate the risk

2. (a) Remittances
3. (a) e-Malls
4. (c) Predictive Analysis
5. (c) Boundary Control
6. The various risk management strategies that can be used to manage various risks
associated with any business are as follows:
• Tolerate/Accept the risk. One of the primary functions of management is
managing risk. Some risks may be considered minor because their impact and
probability of occurrence is low. In this case, consciously accepting the risk as a
cost of doing business is appropriate. The risks should be reviewed periodically to
ensure that their impact remains low. A common example of risk acceptance is
planning for potential production delays (within a reasonable time range) since it’s
often difficult to predict a precise delivery schedule in advance.
• Terminate/Eliminate the risk. Especially in the case of risks that have high
probability and impact values, it may be best to modify any project strategy to avoid
them altogether. For example - it is possible for a risk to be associated with the use
of a technology, supplier, or vendor. The risk can be eliminated by replacing the
technology with more robust products and by seeking more capable suppliers and
vendors.
• Transfer/Share the risk. Risk mitigation approaches can be shared with trading
partners and suppliers. A good example is outsourcing infrastructure management.
In such a case, the supplier mitigates the risks associated with managing the IT
infrastructure by being more capable and having access to more highly skilled staff
than the primary organization. Risk also may be mitigated by transferring the cost of
realized risk to an insurance provider.
• Treat/mitigate the risk. Where other options have been eliminated, suitable
controls must be devised and implemented to prevent the risk from manifesting itself

or to minimize its effects. A good example of risk mitigation is planning for the
eventuality in case an enterprise won’t have sufficient capacity or supplies to deal
with a very high demand. In that case, enterprise shall have a mitigation strategy in
place that allows them to rapidly scale their capacity, or to subcontract some of the
work to other parties to meet the high demand.
7. The IT related risks and challenges that an enterprise should consider from time to time
are as follows:
(i) Downtime due to technology failure: Information system facilities may become
unavailable due to technical problems or equipment failure. A common example of
this type of failure is non-availability of system due to server failure.
(ii) Frequent changes or obsolescence of technology: Technology keeps on
evolving and changing constantly and becomes obsolete very quickly. Hence, there
is always a challenge that the investment in technology solutions unless properly
planned may result in loss to the organization due to risk of obsolescence.
(iii) Multiplicity and complexity of systems: The technology architecture used for
services could include multiple digital platforms and is quite complex. Hence, this
requires the personnel to have knowledge about requisite technology skills or the
management of the technology could be outsourced to a company having the
relevant skill set.
(iv) Different types of controls for different types of technologies/systems:
Deployment of technology often gives rise to new types of risks. These risks need to
be mitigated by relevant controls as applicable to the technology/information
systems deployed.
(v) Proper alignment with business objectives and legal/regulatory requirements:
Organizations must ensure that the systems implemented cater to all the business
objectives and needs, in addition to the legal/regulatory requirements envisaged.
(vi) Dependence on vendors due to outsourcing of IT services: In systems’
environment, the organization requires staff with specialized domain skills to
manage IT deployed. Hence, these services could be outsourced to vendors and
there is heavy dependency on vendors and gives rise to vendor risks which should
be managed by proper contracts, controls and monitoring.
(vii) Vendor related concentration risks: There may not be one but multiple vendors
providing different services. For example, network, hardware, system software and
application software services may be provided by different vendor or these services
may be provided by a single vendor. Both these situations result in higher risks due
to heavy dependence on vendors.
(viii) Segregation of Duties (SoD): Organizations may have a highly-defined
organization structure with clearly defined roles, authority and responsibility. The
Segregation of Duties as per organization structure should be clearly mapped. This

is a high-risk area since any SoD conflicts can be a potential vulnerability for
fraudulent activities. For example, if a single employee can initiate, authorize and
disburse a loan, the possibility of misuse cannot be ignored.
(ix) External threats leading to cyber frauds/ crime: The system environment
provides access to customers anytime, anywhere using internet. Hence, information
system which was earlier accessible only within and to the employees is now
exposed as it’s open to be accessed by anyone from anywhere. Making the
information available is business imperative but this is also fraught with risks of
increased threats from hackers and others who could access the software to commit
frauds/crime.
(x) Higher impact due to intentional or unintentional acts of internal employees:
Employees in a technology environment are the weakest link in an enterprise.
Employees are expected to be trusted individuals that are granted extended
privileges, which can easily be abused.
(xi) New social engineering techniques employed to acquire confidential
credentials: Fraudsters use new social engineering techniques such as socializing
with employees and extracting information which is used to commit frauds. For
example: extracting information about passwords from staff acting as genuine
customer and using it to commit frauds.
(xii) Need for governance processes to adequately manage technology and
information security: Controls in system should be implemented from macro and
business perspective and not just from function and technology perspective. With
BPA, technology becomes the key enabler for the organization and is implemented
across the organization. The senior management should be involved in directing
how technology is deployed in and approve appropriate policies. This requires
governance process to implement security as required.
(xiii) Need to ensure continuity of business processes in the event of major
exigencies: The high dependence on technology makes it imperative to ensure
resilience to ensure that failure does not impact the organization’s services. Hence,
a documented business continuity plan with adequate technology and information
systems should be planned, implemented and monitored.
8. Auditing aspects that Mr. Karan should consider in case of the ERP system of ABC Ltd.
are as follows:
(i) Auditing of Data
• Physical Safety – Ensuring physical control over data.
• Access Control – Ensuring access to the system is given on “need to know”
(a junior accountant need not view Profit & Loss Account of the business) and
“need to do basis” (HR executive need not record a Purchase Order).

(ii) Auditing of Processes

• Functional Audit – This includes testing of different functions / features in the
system and testing of the overall process or part of process in the system and
its comparison with actual process. For example- Purchase Process, Sales
Process, Salary Calculation Process, Recruitment Process, etc. Auditor may
check this process in the system and compare it with actual process. It is quite
possible that all the aspect present in the actual process may not be integrated
in the ERP system. There may be some manual intervention.
• Input Validations – These stands for checking of rules for input of data into
the system. For example- a transaction of cash sales on sales counter must
not be recorded in a date other than today (not a future date or a back date),
amount field must not be zero, stock item field shall not be empty, etc. Input
validations shall change according to each data input form.
9. The key features of Controlling Module of ERP are as follows:
• Cost Element Accounting: This component provides overview of the costs and
revenues that occur in an organization. The cost elements are the basis for cost
accounting and enable the user the ability to display costs for each of the accounts
that have been assigned to the cost element. Examples of accounts that can be
assigned are Cost Centres, Internal Orders, and Work Breakdown Structures
(WBS).
• Cost Centre Accounting: This provides information on the costs incurred by the
business. Cost Centres can be created for such functional areas as Marketing,
Purchasing, Human Resources, Finance, Facilities, Information Systems,
Administrative Support, Legal, Shipping/Receiving, or even Quality. Some of the
benefits of Cost Centre Accounting are that the managers can set budget / cost
Centre targets; Planning; Availability of Cost allocation methods; and Assessments /
Distribution of costs to other cost objects.
• Activity-Based-Accounting: This analyse cross-departmental business processes
and allows for a process-oriented and cross-functional view of the cost centres.
• Internal Orders: Internal Orders provide a means of tracking costs of a specific job,
service, or task. These are used as a method to collect those costs and business
transactions related to the task. This level of monitoring can be very detailed but
allows management the ability to review Internal Order activity for better -decision
making purposes.
• Product Cost Controlling: This calculates the costs that occur during the
manufacture of a product or provision of a service and allows the management the
ability to analyse their product costs and to make decisions on the optimal price(s)
to market their products.

• Profitability Analysis: This allows the management to review information with

respect to the company’s profit or contribution margin by individual market segment.
• Profit Centre Accounting: This evaluates the profit or loss of individual,
independent areas within an organization.
10. The types of computer network are as follows:
 Connection Oriented networks: Wherein a connection is first established between
the sender and the receiver and then data is exchanged like it happens in case of
telephone networks.
 Connectionless Networks: Where no prior connection is made before data
exchanges. Data which is being exchanged in fact has a complete contact
information of recipient and at each intermediate destination, it is decided how to
proceed further like it happens in case of postal networks.
The important benefits of a computer network are as follows:
(i) Distributed nature of information: There would be many situations where
information must be distributed geographically. For example- In the case of Banking
Company, accounting information of various customers could be distributed across
various branches but to make Consolidated Balance Sheet at the year-end, it would
need networking to access information from all its branches.
(ii) Resource Sharing: Data could be stored at a central location and can be shared
across different systems. Even resource sharing could be in terms of sharing
peripherals like printers, which are normally shared by many systems. For example -
In the case of a Core Banking System, Bank data is stored at a Central Data Centre
and could be accessed by all branches as well as ATMs.
(iii) Computational Power: The computational power of most of the applications would
increase drastically through load balancing when the processing is distributed
amongst computer systems. For example- processing in an ATM machine in a bank
is distributed between ATM machine and the central Computer System in a Bank,
thus reducing load on both.
(iv) Reliability: Many critical applications should be available 24x7, if such applications
are run across different systems which are distributed across network, then the
reliability of the applications would be high. For example- In a city, there could be
multiple ATM machines so that if one ATM fails, one could withdraw money from
another ATM.
(v) User communication: Networks allow users to communicate using e-mail,
newsgroups, video conferencing, etc.

11. Various Data Resource Management controls under the management control framework
are as follows:
(i) Definition Controls: These controls are placed to ensure that the database always
corresponds and comply with its definition standards.
(ii) Existence/Backup Controls: These controls ensure the existence of the database
by establishing backup and recovery procedures. Backup refers to making copies of
the data so that these additional copies may be used to restore the original data
after a data loss. Backup controls ensure the availability of system in the event of
data loss due to unauthorized access, equipment failure or physical disaster; the
organization can retrieve its files and databases. Various backup strategies like dual
recording of data; periodic dumping of data; logging input transactions and changes
to the data may be used.
(iii) Access Controls: These controls are designed to prevent unauthorized individual
from viewing, retrieving, computing, or destroying the entity's data. User Access
Controls are established through passwords, tokens and biometric controls; and
Data Encryption controls are established by keeping the data in database in
encrypted form.
(iv) Update Controls: These controls restrict update of the database to authorized
users in two ways either by permitting only addition of data to the database or
allowing users to change or delete existing data.
(v) Concurrency Controls: These controls provide solutions, agreed-upon schedules,
and strategies to overcome the data integrity problems that may arise when two
update processes access the same data item at the same time.
(vi) Quality Controls: These controls ensure the accuracy, completeness, and
consistency of data maintained in the database. This may include traditional
measures such as program validation of input data and batch controls over data in
transit through the organization.
12. Grid Computing is the computing technology that may address the issue of
underutilization of computing resources.
The benefits of Grid Computing are as follows:
(i) Making use of Underutilized Resources: In most organizations, there are large
amounts of underutilized computing resources including even the server machines.
Grid computing provides a framework for exploiting these underutilized resources
and thus has the possibility of substantially increasing the efficiency of resource
usage. Grid computing (more specifically, a data grid) can be used to aggregate this

unused storage into a much larger virtual data store, possibly configured to achieve
improved performance and reliability over that of any single machine.
(ii) Resource Balancing: For applications that are grid-enabled, the grid can offer a
resource balancing effect by scheduling grid jobs on machines with low utilization.
This feature of grid computing handles occasional peak loads of activity in parts of a
larger organization. An unexpected peak can be routed to relatively idle machines in
the grid; and if the grid is already fully utilized, the lowest priority work being
performed on the grid can temporarily be suspended or even cancelled and
performed again later to make room for the higher priority work.
(iii) Parallel CPU Capacity: The potential for usage of massive parallel CPU capacity is
one of the most common vision and attractive feature of a grid. A CPU-intensive grid
application can be thought of as many smaller sub-jobs, each executing on a
different machine in the grid. To the extent that these sub-jobs do not need to
communicate with each other, the application becomes more scalable. A perfectly
scalable application will, for example, finish in one tenth of the time if it uses ten
times the number of processors.
(iv) Virtual resources and virtual organizations for collaboration: Grid computing
provides an environment for collaboration among a wider audience. The users of
the grid can be organized dynamically into several virtual organizations each with
different policy requirements. These virtual organizations can share their resources
such as data, specialized devices, software, services, licenses, and so on,
collectively as a larger grid. The grid can help in enforcing security rules among
them and implement policies, which can resolve priorities for both resources and
users.
(v) Access to additional resources: In addition to CPU and storage resources, a grid
can provide access to other resources as well. For example, if a user needs to
increase their total bandwidth to the Internet to implement a data mining search
engine, the work can be split among grid machines that have independent
connections to the Internet. In this way, total searching capability is multiplied, since
each machine has a separate connection to the Internet.
(vi) Reliability: High-end conventional computing systems use expensive hardware to
increase reliability. The machines also use duplicate processors in such a way that
when they fail, one can be replaced without turning the other off. Power supplies
and cooling systems are duplicated. The systems are operated on special power
sources that can start generators if utility power is interrupted. All of this builds a
reliable system, but at a great cost, due to the duplication of expensive comp onents.
(vii) Management: The goal to virtualize the resources on the grid and more uniformly
handle heterogeneous systems create new opportunities to better manage a larger,
more distributed IT infrastructure. The grid offers management of priorities among

different projects. Aggregating utilization data over a larger set of projects can
enhance an organization’s ability to project future upgrade needs. When
maintenance is required, grid work can be rerouted to other machines without
crippling the projects involved.
13. The various risks that prevail in any e-business environment are as follows:
(i) Privacy and Security: When an organization uses internet to engage in e-
commerce, it exposes itself to additional security threats and privacy issues. There
are often issues of security and privacy due to lack of personalized digital access
and knowledge. The nature of e-commerce operations is an important factor
determining the security risks perceptions of any e-commerce installation. For
example, if the type of industry is banking and finance, it would require more
stringent deployment of security solutions than would be for manufacturing industry.
(ii) Quality issues: There are quality issues raised by customers as the original
product differs from the one that was ordered.
(iii) Delay in goods and Hidden Costs: When goods are ordered from another country,
the shipment may be delayed due to factors such as port congestion, bad weather,
custom clearances, etc. Moreover, e-commerce companies may have these hidden
costs.
(iv) Needs Access to internet and lack of personal touch: The e-commerce requires
an internet connection which is an extra expense and lacks personal touch.
(v) Security and credit card issues: The credit card and debit card information may
be stolen and misused which poses a security threat. There is also possibility of
cloning of credit cards and debit cards.
(vi) Infrastructure: There is a greater need of not only digital infrastructure but also
network expansion of roads and railways which remains a substantial challenge in
developing countries.
(vii) Problem of anonymity: There is a need to identify and authenticate users in the
virtual global market where anyone can sell to or buy from anyone, anything from
anywhere.
(viii) Repudiation of contract: There is possibility that the electronic transaction in the
form of contract, sale order or purchase by the trading partner or customer may be
denied.
(ix) Lack of authenticity of transactions: The electronic documents that are produced
during an e-commerce transaction may not be authentic and reliable.

(x) Data Loss or theft or duplication: The data transmitted over the Internet may be
lost, duplicated, tampered with, or replayed.
(xi) Attack from hackers: Web servers used for e-commerce may be vulnerable to
hackers. A hacker is an unauthorized user who attempts to or gains access to the
system with/without the intention to steal or modify data or to insert viruses or
worms to cause damage to the system.
(xii) Denial of Service: Service to customers may be denied due to non-availability of
system as it may be affected by viruses, e-mail bombs and by transmitting so many
data packets to a server that it cannot process them all. The denial of service may
cause a network to shut down, making it impossible for users to access the site. For
busy e-commerce sites such as Flipkart, these attacks are costly; while the site is
shut down, customers cannot make purchases. Moreover, the longer a site is shut
down, the more damage is done to a site’s reputation.
(xiii) Non-recognition of electronic transactions: e-Commerce transactions, as
electronic records and digital signatures may not be recognized as evidence in
courts of law in some countries.
(xiv) Lack of audit trails: Audit trails in e-Commerce system may be lacking and the
logs may be incomplete, too voluminous, or easily tampered with.
(xv) Problem of piracy: Intellectual property such as copyright may not be adequately
protected when such property is transacted through e-Commerce.
14. The following key measures are required to be implemented to have Network Security
and Secure Configuration under cyber security framework of Core Banking System :
• Multi-layered boundary defense through properly configured proxy servers, firewalls,
intrusion detection systems to protect the network from any malicious attacks and to
detect any unauthorized network entries.
• Different LAN segments for in-house/onsite ATM and CBS/branch network to
confirm the adequacy of bandwidth to deal with the volume of transactions so as to
prevent slowing down and resulting in lower efficiency.
• To ensure secure network configuration; proper usage of routers, hubs and
switches should be envisaged.
• Periodic security review of systems and terminals to assess the network’s
vulnerability and identify the weaknesses.
• Identification of the risks to ensure that risks are within the bank’s risk appetite and
are managed appropriately.

15. The various risks involved in credit card process of bank are as follows:
S. Risks Key Controls
No.
1. Credit Line setup is The credit committee checks that the Financial
unauthorized and not in line Ratios, the Net-worth, the Risk factors and its
with the bank’s policy corresponding mitigating factors, the Credit
Line offered and the Credit amount etc. is in
line with Credit Risk Policy and that the Client
can be given the Credit Line.
2. Credit Line setup is Access rights to authorize the credit limit in the
unauthorized and not in line credit card system should be restricted to
with the bank’s policy. authorized personnel.
3. Masters defined for the Access rights to authorize the customer
customer are not in master in credit card system should be
accordance with the Pre- restricted to authorized personnel, SoD exist
Disbursement Certificate. in credit card system such that the system
restricts the maker having checker rights to
approve the facilities booked by self in the
credit card system.
4. Credit Line setup can be Transaction cannot be made if the aggregate
breached. limit of outstanding amount exceeds the
credit limit assigned to customer.
5. Inaccurate interest / charge Interest on fund-based credit cards and
being calculated in the Credit charges are automatically calculated in the
Card system. credit card system as per the defined masters.
6. Inaccurate reconciliations Daily reconciliation for the balances received
performed. from credit card network with the transactions
updated in the credit card system on card
network level.

SECTION – B: STRATEGIC MANAGEMENT
Multiple Choice Questions

1. In July 2014, Fresh Air Hospitality and Resorts launched a major project called ‘Fit in
Future’ after being in losses for three consecutive years. According to analysis by senior
management many customers were not returning and repeat sales of rooms were low.
The costs were also high with a lot of wastage in kitchen. If the losses were allowed to
continue the survival of the organisation was doubtful.
‘Fit in Future’ project was organisation-wide, employee driven initiative that focused in
reversing the trend and find ways to find out how the organisation can survive. Focus
was to provide high-quality services while finding new ways of delivery to improve
customer satisfaction and reduce costs. The idea was to create a conducive
organisational culture and work climate. At the time, Shailja Mehta joined the
organisation as the new Resident Manager. She brought with her considerable
experience in improving the quality of services in restaurants, banquet sale and room
reservations. She immediately set about spending two months talking to staff on the front
line followed by a series of meetings, where discussions were held about bringing a
guest-first approach. Some of the staff members expressed frustration that their
suggestions on improving services were often not heard making them demotivated. The
new manager noted their concerns. Over time, she offered enthusiasm and inspired staff
to exert them for the good of the organization.
As an outcome of the project, it was decided that both in internal as well as external
interactions, customers will be called guests and treated accordingly. There was general
agreement that reducing wastages and improving the quality of services shall be chief
priority from top to bottom. It was decided that the team leaders shall always work
together with front-line staff for speedy decisions. Focussed training programmes were
organised to train the front-line staff to remain well-groomed and courteous to guests at
all times. Accordingly, a new system was put in place from January 2015. As a result of
the efforts, the satisfaction level of guests improved, and their loyalty reflected in form of
increase in repeat sales over next two years.
After two years, while the organisation was able to make some profits, they were still low
considering the capital employed. In July 2018, Shailja Mehta suggested to make
extensive study to radically redesign existing ways of doing work and deliver se rvices.
Based on the above case scenario answer the following multiple-choice questions:
(i) ‘Fit in Future’ project can be best related to:
(a) Improving leadership
(b) Improving morale
(c) Coordination

PAPER – 7: ENTERPRISE INFORMATION SYSTEMS AND STRATEGIC MANAGEMENT 85
(d) Turnaround
(ii) Name the strategic tool to measure and set goals for wastage in kitchen as per best
practices.
(a) Benchmarking
(b) Cost control
(c) Loss assessment
(d) Turnaround
(iii) The leadership style of Shailja Mehta can be best described as
(a) Autocratic
(b) Motivational
(c) Transactional
(d) Transformational
(iv) The suggestions made by Shailja Mehta in July 2018 are related to:
(a) Business Process Reengineering
(b) Leverage
(c) Organisational redesign
(d) Strategic Control
(v) To succeed Fresh Air Hospitality and Resorts needs to:
(i) Deliver better value to customers.
(ii) Improve efficiencies.
(iii) Fix minimum profit percentage over costs.
(a) (i) and (ii)
(b) (i) and (iii)
(c) (ii) and (iii)
(d) (i), (ii) and (iii)
2. Which of the following is more radical organisation design and is also called as non -
structure which virtually eliminates in house business functions and outsources many of
them?
(a) Network Structure
(b) Strategic Business Unit
(c) Hourglass Structure

(d) Divisional Structure

3. Smooth Ride and Comfort Ride are two car engine component manufacturers,
manufacturing identical auto parts. Both units are almost identical in every aspect. As a
Strategic Manager of Comfort Ride, which process would you suggest to the
management so that it has an edge over its competitor Smooth Ride.
(a) Management Business Process
(b) Strategic Business Process
(c) Business Process Reengineering
(d) Management Reengineering Process
4. Which approach of R & D to implement strategic decisions is a glamorous and exciting
strategy but also a dangerous one?
(a) Market new technology product
(b) Innovate imitator of successful products
(c) To be a low cost provider
(d) None of the above
5. Jaipur Mart an online marketplace where people from all over Rajasthan come and sell
their goods is charging zero commission for listing goods but they take 1% of the sales
per month from the seller. It is defined as?
(a) Business Intent
(b) Business Idea
(c) Business Definition
(d) Business Model
6. Hupo a honey brand decided to start a new brand for making honey ginger candies to
meet the rising demand. Identify their growth strategy?
(a) Conglomerate Diversification
(b) Concentric Diversification
(c) Vertical Integration
(d) Horizontal Integration
Descriptive Questions
Chapter 1-Introduction to Strategic Management
7. “Each organization must build its competitive advantage keeping in mind the business
warfare. This can be done by following the process of strategic management.”
Considering this statement, explain major benefits of strategic management.

8. Discuss the challenges faced by public sector units while designing for their
organisations.
Chapter 2-Dynamics of Competitive Strategy
9. Distinguish between Market Development and Product Development under Ansoff’s
Product Market Growth Matrix.
10. Woodworld Ltd. is a company manufactures a variety of household furniture items. They
offered traditional designs, low cost furniture items to low income group custom ers.
During the last couple of years, the company has been observing a fall in the market
share. This is due to the change in the taste and preferences, designing, better quality,
increase in purchasing power of buyers towards the household furniture. The customers
are switching away traditional designs and material that have been the backbone of
Woodworld Ltd.
As a CEO of Woodworld Ltd., what can be the strategic options available with you.
Chapter 3-Strategic Management Process
11. What should be the major components of a good mission statement?
12. Explain briefly the key areas in which the strategic planner should concentrate his mind
to achieve desired results.
Chapter 4-Corporate Level Strategies
13. Write a short note on Merger and Acquisition Strategy.
14. Airlines industry in India is highly competitive with several players. Businesses face
severe competition and aggressively market themselves with each other. Luxury Jet is a
private Delhi based company with a fleet size of 9 small aircrafts with seating capacity
ranging between 6 seats to 9 seats. There aircrafts are chartered by big business houses
and high net worth individuals for their personalised use. With customised tourism
packages their aircrafts are also often hired by foreigners. Identify and explain the
Michael Porter’s Generic Strategy followed by Luxury Jet.
Chapter 5-Business Level Strategies
15. Rajiv Arya is owner of an electrical appliance company that specializes in manufacturing
of domestic vacuum cleaners. There are four other manufacturers with similar products
and sales volume. Current rival firms also own a number of patents related to the
product. The supplier base for procurement of raw material is also very large as there are
multiple suppliers.
Identify Porter’s Five Forces that may be classified as significant for the company?
Explain.
16. A startup company is thinking of launching of a low cost detergent powder in the market.
The market of the said product is already dominated by a big FMCG player.

You are advised to put forward your suggestions to the management of the company to
deal with the problems of 'Entry 'Barrier' while launching the low cost detergent powder.
Chapter 6-Functional Level Strategies
17. "Projected financial statement analysis is a central strategy-implementation technique."
Justify the statement.
18. Modern marketing is highly promotion oriented. Discuss citing major direct promotional
methods for products.
Chapter 7-Organisation and Strategic Leadership
19. 'A strategy-supportive culture promotes good strategy execution.' - Explain.
20. "Samar Electronics Limited" is engaged in manufacturing and sale of consumer
electronic goods globally. The company is rated 'best' in "customer satisfaction survey'
for 5 years in a row. The spread of the current pandemic has affected the internal and
external environment of the company adversely. Such adverse impact has negatively
impacted the revenue of the company. In order to survive and· retain the business, the
company decided to outsource a major part of its organisational activities, like
manufacturing, distribution channels, after sales service etc. Now the organisation's
business functions are scattered worldwide with a small headquarter connected to
independent business units digitally.
What type of organisational structure is the company transitioning into? List the·basic
features of this new structure and the disadvantages that the company may face in future
in this new structural arrangement.
Chapter 8-Strategy Implementation and Control
21. Zumba Robots, an electronic robot manufacturing company is a leader in its business
segment. Over a period of time, it started losing its grip on the market as its overall
position started to weaken. Discuss the type of audit that you would like to suggest to
analyse the situation of the company?
22. What is strategic control? Briefly explain the different types of strategic control?
SUGGESTED ANSWERS
1. (i) (d) (ii) (a) (iii) (d) (iv) (a) (v) (a)
2. (a)
3. (c)
4. (a)
5. (d)
6. (b)

7. Each organization has to build its competitive advantage over the competitors in the
business warfare in order to win. This can be done only by following the process of
strategic management. Strategic Management is very important for the survival and
growth of business organizations in dynamic business environment. Other major benefits
of strategic management are as follows:
 Strategic management helps organizations to be more proactive rather than reactive
in dealing with its future. It facilitates to work within vagaries of environment and
remains adaptable with the turbulence or uncertain future. Therefore, they are able
to control their own destiny in a better way.
 It provides better guidance to entire organization on the crucial point – what it is
trying to do. Also provides frameworks for all major business decisions of an
enterprise such as on businesses, products, markets, organizational structures, etc.
 It facilitates to prepare the organization to face the future and act as pathfinder to
various business opportunities. Organizations are able to identify the available
opportunities and identify ways and means as how to reach them.
 It serves as a corporate defence mechanism against mistakes and pitfalls. It helps
organizations to avoid costly mistakes in product market choices or investments.
 Over a period of time strategic management helps organization to evolve certain
core competencies and competitive advantages that assist in the fight for survival
and growth.
8. Central, state, municipal agencies, Public Sector Units, departments are responsible for
formulating, implementing, and evaluating strategies that use taxpayers' money in the
most cost-effective way to provide services and programs. The Challenges faced by the
public sector units while designing their organizations are on account of basic nature of
such organizations.
Public sector units face the following challenges while designing strategies for the ir
organizations:
• Operating with less strategic autonomy.
• Cannot diversify into unrelated businesses or merge with other firms.
• Strategists usually enjoy little freedom while altering the organization’s mission or
redirecting objectives when needed.
• Legislators and politicians control over major decisions and resources.
• Fear of media debate over the strategic issues.
• Chances of politicization of issues resulting fewer strategic choice.

9. Following are the differences between the market development and product
development:
Market Development Product Development
Meaning Meaning
• It refers to a growth strategy where • It refers to a growth strategy
the business seeks to sell its existing where business aims to introduce
products into new markets. It is a new products into existing
strategy for company growth by markets. It is a strategy for
identifying and developing new company growth by offering
markets for current company modified or new products to
products. current markets.
Strategy Application Strategy Application
• It may be achieved through new • It is for company’s growth and
geographical markets, new product requires the development of new
dimensions or packaging, new competencies and the business
distribution channels or different to develop modified products
pricing policies to attract different which can appeal to existing
customers or create new market markets.
segments.
10. Woodworld is having a product portfolio that is evidently in the decline stage. The product
is being replaced with the latest designs with better quality of the product. Strategically,
the company should minimize their dependence on the existing products and identi fy
other avenues for the survival and growth. As a CEO of Woodworld Ltd., following can be
the strategic options available with the CEO:
• Invest in new product development and switchover to the latest designs. Woodworld
Ltd. also need time to invest in hiring interior designers.
• They can acquire or takeover a competitor, provided they have or are able to
generate enough financial resources.
• They may also consider unrelated growth and identify other areas for expansion.
This will enable Woodworld Ltd. to spread their risks.
• In longer run, they should divest the existing products. However, they may continue
with the existing products in a limited manner for such time there is demand for the
product.
11. Mission statements broadly describe an organizations’ present capabilities, customer
focus, activities, and business makeup. Following points are useful while writing a good
mission statement of a company:
• Good mission statement is highly personalized – unique to the organization for
which it is developed.

• *Mission statement should emphasize on giving an organization its own special

identity, business emphasis and path for development.
• *Mission statement should clearly specify that, what needs it is trying to satisfy,
customer groups it is targeting, technologies and competencies it uses and the
activities it performs.
• Technology, competencies and activities are important in defining a company’s
business because they indicate the boundaries on its operation.
• The mission should not be to make profit.
12. A strategic manager defines the strategic intent of the organisation and take it on the
path of achieving the organisational objectives. There can be a number of areas that a
strategic manager should concentrate on to achieve desired results. They commonly
establish long-term objectives in seven areas as follows.
• Profitability.
• Productivity.
• Competitive Position.
• Employee Development.
• Employee Relations.
• Technological Leadership.
• Public Responsibility.
13. Merger and acquisition in simple words are defined as a process of combining two or
more organizations together. There is a thin line of difference between the two terms but
the impact of combination is completely different in both the cases.
Merger is considered to be a process when two or more companies come together to
expand their business operations. In such a case the deal gets finalized on friendly terms
and both the organizations share profits in the newly created entity. In a merger two
organizations combine to increase their strength and financial gains along with breaking
the trade barriers.
When one organization takes over the other organization and controls all its business
operations, it is known as acquisitions. In this process of acquisition, one financially
strong organization overpowers the weaker one. Acquisitions often happen during
recession in economy or during declining profit margins. In this process, one that is
financially stronger and bigger establishes it power. The combined operations then run
under the name of the powerful entity. A deal in case of an acquisition is often done in an
unfriendly manner, it is more or less a forced association where the powerful organization
either consumes the operation or a company in loss is forced to sell its entity.

14. The Airlines industry faces stiff competition. However, Luxury Jet has attempted to create
a niche market by adopting focused differentiation strategy. A focused differentiation
strategy requires offering unique features that fulfil the demands of a narrow market .
Luxury Jet compete in the market based on uniqueness and target a narrow market
which provides business houses, high net worth individuals to maintain strict schedules.
The option of charter flights provided several advantages including, flexibility, p rivacy,
luxury and many a times cost saving. Apart from conveniences, the facility will provide
time flexibility. Travelling by private jet is the most comfortable, safe and secure way of
flying your company’s senior business personnel.
Chartered services in airlines can have both business and private use. Personalized
tourism packages can be provided to those who can afford it.
15. The competitive rivalry will be a significant force in case of company of Rajiv Arya as all
the rivals are similar in sizes and are manufacturing similar products. It is difficult for any
single manufacturer to dominate the market. Large number of patents will make it difficult
for new entrants to break into the market. Further, as there are a large number of small
suppliers the power that suppliers can exert will also be low.
There is no information relating to substitutes and bargaining power of customers in the
information given in scenario. However, a domestic vacuum cleaner will directly compete
with other options such as house maids. Availability of house maids at low cost can
significantly disturb the sales of products.
Further, as the products are similar customers can easily shift from one company to
another. This will only enhance competitive rivalry.
The competitive rivalry will be significant in Rajiv Arya’s dealing industry as all rivals are
similar in sizes and manufacture similar products, making it difficult for anyone
manufacturer to dominates the market or gain market share. The large number of patents
will make it hard for new entrants to break into the market, while the fact that Rajiv Arya
buys from a large number of small suppliers suggests that supplier power is also low.
Finally, there is no information relating to substitutes and bargaining power of customers
in the information given in scenario.
16. There are number of factors that can act as entry barrier for the start -up company. An
FMCG, big in size, is already dominating the market space and will act as a strong
deterrent for the new start-up. The following will be some suggestions to the
management of the start-up to deal with the problem of entry barriers:
1. The company is working on producing low cost detergent. Keeping other expenses
also on the lower side the management can create price advantage that is
competitive to the existing established players including the large FMCG.
2. The company focussing on single product in comparison to multiple products of an
FMCG can develop competencies to produce and sell the low cost detergent that

are difficult to deploy by the FMCG by its strategy that addresses needs of multiple
products.
3. The start-up needs to have strong financial strength to sustain the onslaught from
the dominant FMCG and other players. The start-up can identify sources of capital
well in advance and be able to use it judiciously to their advantage.
4. The start-up should identify the customer segments that are likely to switch to the
product well in advance so as to target the same and generate the initial hold on the
market. Once the product gets some hold and their brands get some identity, the
market can be further developed to address other customers.
5. The start-up should identify the environmental factors that go to their advantage.
These may include special scheme of the government to encourage entrepreneurs,
tax holiday, low interest rates, advantages available to small and medium sized
enterprises alike.
6. It has to create an image in the market that its products are qualitative and ‘Made in
India’ to attract a particular segment of customers.
7. They need to have a team of experts and dedicated management professionals who
can implement strategies formulated by top management.
17. Projected financial statement analysis is a central strategy-implementation technique
because it allows an organization to examine the expected results of various actions and
approaches. This type of analysis can be used to forecast the impact of various
implementation decisions. Nearly all financial institutions require a projected financial
statement whenever a business seeks capital.
A projected income statement and balance sheet allow an organization to compute
projected financial ratios under various strategy-implementation scenarios. When
compared to prior years and to industry averages, financial ratios provide valuable
insights into the feasibility of various strategy-implementation approaches.
A financial budget is also a document that details how funds will be obtained and spent
for a specified period of time. Fundamentally, financial budgeting is a method for
specifying what must be done to complete strategy implementation successfully.
Financial budgeting is a method for obtaining the most productive and profitable use of
an organization’s resources. Financial budgets can be viewed as the p lanned allocation
of a firm’s resources based on forecasts of the future.
18. Modern marketing is highly promotional oriented and include personal selling,
advertising, publicity and sales promotion.
Personal selling – involves face to face interaction of salespersons with the prospective
customers and provides a high degree of personal attention. It involves working with one
customer at a time and hence not cost effective. The intention of oral communication is
sale.

Advertising – is a non-personal, flexible and dynamic promotion method. The media for
advertising are several and choice of an appropriate one is important for effectiveness of
message. Sale of the product and the amount of expenditure cannot be directly
measured.
Publicity – is also non-personal but no payments are made to the media. Publicity is
communication of a product, brand or business by placing information about it in the
media without paying for the time or media space directly. It could be through press
releases, press conferences, reports, etc.
Sales promotion – includes all activities that are undertaken to promote the business
but are not specifically included under personal selling, advertising or publicity. Activities
like discounts, contests, money refunds, exhibitions etc. are included.
19. Strong cultures promote good strategy execution when there’s fit and hurt execution
when there’s negligible fit. A culture grounded in values, practices, and behavioral norms
that match what is needed for good strategy execution helps energize people throughout
the organization to do their jobs in a strategy-supportive manner. A culture built around
such business principles as listening to customers, encouraging employees to take pride
in their work, and giving employees a high degree of decision-making responsibility. This
is very conducive to successful execution of a strategy of delivering superior customer
service.
A work environment where the culture matches the conditions for good strategy
execution provides a system of informal rules and peer pressure regarding how to
conduct business internally and how to go about doing one’s job.
A strong strategy-supportive culture makes employees feel genuinely better about their
jobs and work environment and the merits of what the company is trying to accomplish.
Employees are stimulated to take on the challenge of realizing the organizational vision,
do their jobs competently and with enthusiasm, and collaborate with others.
20. Samar Electronics Limited transitioning into network structure. It is a newer and
somewhat more radical organisational design. Its essential features are as follows:
1. It is termed as “non-structure” as it eliminates in house functions and outsources
many of them.
2. An organisation organised in this manner is often called “virtual organisation”
because it is composed of a series of project groups or collaborations linked by
constantly changing nonhierarchical, cob-web like structures.
3. Network structures become most useful when the environment of a firm is unstable
and is expected to remain so. Under such conditions, there is usually a strong need
for innovation and quick response.
4. Instead of having salaried employees, it may contract with people for a specific
project or length of time.

5. Long term contracts with suppliers and distributors replace services that company
could provide for itself.
However, network structure does have following disadvantages that the company may
face in future:
1. The availability of numerous potential partners can be a source of trouble.
2. Co-ordination among the functioning of business partners is perhaps, the biggest
problem for the management in the networking structure.
3. Employees may lack the level of confidence necessary to participate actively in
organisation sponsored learning experiences.
21. The audit of management performance with regard to its strategies helps ‘Zumba Robots’
identify problem areas and correct the strategic approaches that have not been effective
so far. A strategy audit is a review of a company's business plan and strategies to
identify weaknesses and shortcomings and enable a successful development of the
company. An assessment of the external environment shows where changes happen and
where organization’s strategic management no longer match the demands of the
marketplace. Based on such analysis, Zumba Robots can improve business performance
by periodically conducting such an audit.
22. Strategic Control focuses on the dual questions of whether: (1) the strategy is being
implemented as planned; and (2) the results produced by the strategy are those
intended.
There are four types of strategic control:
 Premise control: A strategy is formed on the basis of certain assumptions or
premises about the environment. Premise control is a tool for systematic and
continuous monitoring of the environment to verify the validity and accuracy of the
premises on which the strategy has been built.
 Strategic surveillance: Strategic surveillance is unfocussed. It involves general
monitoring of various sources of information to uncover unanticipated information
having a bearing on the organizational strategy.
 Special alert control: At times, unexpected events may force organizations to
reconsider their strategy. Sudden changes in government, natural calamities,
unexpected merger/acquisition by competitors, industrial disasters and other such
events may trigger an immediate and intense review of strategy.
 Implementation control: Managers implement strategy by converting major plans
into concrete, sequential actions that form incremental steps. Implementation
control is directed towards assessing the need for changes in the overall strategy in
light of unfolding events and results.

PAPER – 8: FINANCIAL MANAGEMENT AND ECONOMICS FOR FINANCE
PART A: FINANCIAL MANAGEMENT
QUESTIONS
Ratio Analysis
1. The following information of ASD Ltd. relate to the year ended 31 st March, 2022:
Net profit 8% of sales
Raw materials consumed 20% of Cost of Goods Sold
Direct wages 10% of Cost of Goods Sold
Stock of raw materials 3 months’ usage
Stock of finished goods 6% of Cost of Goods Sold
Gross Profit 15% of Sales
Debt collection period 2 Months
(All sales are on credit)
Current ratio 2:1
Fixed assets to Current assets 13 : 11
Fixed assets to sales 1:3
Long-term loans to Current liabilities 2:1
Capital to Reserves and Surplus 1:4
You are required to PREPARE-
(a) Profit & Loss Statement of ASD Limited for the year ended 31 st March, 2022 in the
following format.
Particulars (`) Particulars (`)
To Direct Materials consumed ? By Sales ?
To Direct Wages ?
To Works (Overhead) ?
To Gross Profit c/d ?
? ?
To Selling and Distribution Expenses ? By Gross Profit b/d ?
To Net Profit ?
? ?

PAPER – 8: FINANCIAL MANAGEMENT AND ECONOMICS FOR FINANCE 97
(b) Balance Sheet as on 31st March, 2022 in the following format.

Liabilities (`) Assets (`)
Share Capital ? Fixed Assets 1,30,00,000
Reserves and Surplus ? Current Assets:
Long term loans ? Stock of Raw Material ?
Current liabilities ? Stock of Finished Goods ?
Debtors ?
Cash ?
? ?
Cost of Capital
2. Bounce Ltd. evaluates all its capital projects using discounting rate of 15%. Its capital
structure consists of equity share capital, retained earnings, bank term loan and
debentures redeemable at par.
Rate of interest on bank term loan is 1.5 times that of debenture. Remaining tenure of
debenture and bank loan is 3 years and 5 years respectively. Book value of equity share
capital, retained earnings and bank loan is ` 10,00,000, ` 15,00,000 and ` 10,00,000
respectively. Debentures which are having book value of ` 15,00,000 are currently trading
at ` 97 per debenture. The ongoing P/E multiple for the shares of the company stands at
5. You are required to CALCULATE the rate of interest on bank loan and debentures if tax
rate applicable is 25%.
Capital Structure
3. ABC Limited provides you the following information:
(`)
Profit (EBIT) 2,80,000
Less: Intt. on Debt @10% 40,000
EBT 2,40,000
Less: Income Tax @ 50% 1,20,000
1,20,000
No. of Equity Shares (` 10 each) 30,000
Earnings per share (EPS) 4
Price / EPS (P/E) Ratio 10
Ruling Market price per share 40

The company has undistributed reserves of ` 7,00,000 and needs ` 4,00,000 further for
expansion. This investment is expected to earn the same rate as funds already invested.
You are informed that a debt equity (debt/ debt +equity) ratio higher than 32% will push
the P/E ratio down to 8 and raise the interest rate on additional borrowings (debentures)
to 12%. You are required to ASCERTAIN the probable price of the share.
(i) If the additional funds are raised as debt; and
(ii) If the amount is raised by issuing equity shares at ruling market price of ` 40 per
share.
Leverage
4. Debu Ltd. currently has an equity share capital of ` 1,30,00,000 consisting of 13,00,000
Equity shares. The company is going through a major expansion plan requiring to raise
funds to the tune of ` 78,00,000. To finance the expansion the management has following
plans:
Plan-I : Issue 7,80,000 Equity shares of ` 10 each.
Plan-II : Issue 5,20,000 Equity shares of ` 10 each and the balance through long-term
borrowing at 12% interest p.a.
Plan-III : Issue 3,90,000 Equity shares of ` 10 each and 39,000, 9% Debentures of ` 100
each.
Plan-IV : Issue 3,90,000 Equity shares of ` 10 each and the balance through 6%
preference shares.
EBIT of the company is expected to be ` 52,00,000 p.a.
Considering corporate tax rate @ 40%, you are required to-
(i) CALCULATE EPS in each of the above plans.
(ii) ASCERTAIN financial leverage in each plan and comment.
Investment Decisions
5. K. K. M. M Hospital is considering purchasing an MRI machine. Presently, the hospital is
outsourcing the work received relating to MRI machine and is earning commission of
` 6,60,000 per annum (net of tax). The following details are given regarding the machine:
(`)
Cost of MRI machine 90,00,000
Operating cost per annum (excluding Depreciation) 14,00,000
Expected revenue per annum 45,00,000
Salvage value of the machine (after 5 years) 10,00,000
Expected life of the machine 5 years

Assuming tax rate @ 40%, whether it would be profitable for the hospital to purchase the
machine?
Give your RECOMMENDATION under:
(i) Net Present Value Method, and
(ii) Profitability Index Method.
PV factors at 10% are given below:
Year 1 2 3 4 5
PV factor 0.909 0.826 0.751 0.683 0.620
Risk Analysis in Capital Budgeting

6. Consider the below mentioned table for the risk premium and the coefficient of variation
Co-efficient of Variation Risk Premium
0 0
0 to 0.25 2%
0.25 to 0.50 3%
0.50 to 0.75 4%
0.75 to 1 6%
A company is evaluating two projects with an initial investment of ` 1,50,000 for each
project with cash inflows from them occurring at the end of 5th Year which depends on
possible scenarios prevailing during the investment period. The details of the same are as
follows:
Scenario Project X Project Y
Cash Flow (`) Probability Cash Flow (`) Probability
Superb 5,00,000 0.20 4,00,000 0.30
Better 3,00,000 0.30 3,50,000 0.20
Moderate 1,50,000 0.15 2,50,000 0.20
Bad 50,000 0.20 75,000 0.20
Worse 10,000 0.15 5,000 0.10
If the ongoing government bond yield is 6%, identify WHICH project to be undertaken.

Dividend Decision
7. Ordinary shares of a listed company are currently trading at ` 10 per share with two lakh
shares outstanding. The company anticipates that its earnings for next year will be
` 5,00,000. Existing cost of capital for equity shares is 15%. The company has certain
investment proposals under discussion which will cause an additional 26,089 ordinary
shares to be issued if no dividend is paid or an additional 47,619 ordinary shares to be
issued if dividend is paid.
Applying the MM hypothesis on dividend decisions, CALCULATE the amount of investment
and dividend that is under consideration by the company.
Management of Cash
8. A company was incorporated w.e.f. 1st April, 2021. Its authorised capital was ` 1,00,00,000
divided into 10 lakh equity shares of ` 10 each. It intends to raise capital by issuing equity
shares of ` 50,00,000 (fully paid) on 1 st April. Besides this, a loan of ` 6,50,000 @ 12%
per annum will be obtained from a financial institution on 1 st April and further borrowings
will be made at same rate of interest on the first day of the month in which borrowing is
required. All borrowings will be repaid along with interest on the expiry of one year. The
company will make payment for the following assets in April.
Particulars (`)
Plant and Machinery 10,00,000
Land and Building 20,00,000
Furniture 5,00,000
Motor Vehicles 5,00,000
Stock of Raw Materials 5,00,000
The following further details are available:

(1) Projected Sales (April-September):
(`)
April 15,00,000
May 17,50,000
June 17,50,000
July 20,00,000
August 20,00,000
September 22,50,000
(2) Gross profit margin will be 25% on sales.
(3) The company will make credit sales only and these will be collected in the second
month following sales.

(4) Creditors will be paid in the first month following credit purchases. There will be credit
purchases only.
(5) The company will keep minimum stock of raw materials of ` 5,00,000.
(6) Depreciation will be charged @ 10% per annum on cost on all fixed assets.
(7) Payment of miscellaneous expenses of ` 50,000 will be made in April.
(8) Wages and salaries will be ` 1,00,000 each month and will be paid on the first day of
the next month.
(9) Administrative expenses of ` 50,000 per month will be paid in the month of their
incurrence.
(10) No minimum cash balance is required.
You are required to PREPARE the monthly cash budget (April-September), the projected
Income Statement for the 6 months period and the projected Balance Sheet as on
30th September, 2021.
Management of Working Capital
9. Trading and Profit and Loss Account of Beat Ltd. for the year ended 31 st March, 2022 is
given below:
Particulars Amount Amount Particulars Amount Amount
(`) (`) (`) (`)
To Opening Stock: By Sales (Credit) 1,60,00,000
- Raw Materials 14,40,000 By Closing Stock:
- Work-in- progress 4,80,000 - Raw Materials 16,00,000
- Finished Goods 20,80,000 40,00,000 - Work-in-progress 8,00,000
To Purchases (credit) 88,00,000 - Finished Goods 24,00,000 48,00,000
To Wages 24,00,000
To Production Exp. 16,00,000
To Gross Profit c/d 40,00,000
2,08,00,000 2,08,00,000
To Administration Exp. 14,00,000 By Gross Profit b/d 40,00,000
To Selling Exp. 6,00,000
To Net Profit 20,00,000
40,00,000 40,00,000
The opening and closing payables for raw materials were ` 16,00,000 and ` 19,20,000
respectively whereas the opening and closing balances of receivables were ` 12,00,000
and ` 16,00,000 respectively.

You are required to ASCERTAIN the working capital requirement by operating cycle
method.
Miscellaneous
10. (a) Under financial lease, lessee bears the risk of obsolescence; while under operating
lease, lessor bears the risk of obsolescence. In view of this, you are required to
COMPARE the financial lease and operating lease.
(b) BRIEF OUT salient features of Samurai Bond.
SUGGESTED ANSWERS
1. Working Notes:
(i) Calculation of Sales
Fixed Assets 1
=
Sales 3
1,30,00,000 1
 = ⇒ Sales = ` 3,90,00,000
Sales 3
(ii) Calculation of Current Assets
Fixed Assets 13
=
Current Assets 11
1,30,00,000 13
 = ⇒ Current Assets = ` 1,10,00,000
Current Assets 11
(iii) Calculation of Raw Material Consumption and Direct Wages
`
Sales 3,90,00,000
Less: Gross Profit (15 % of Sales) 58,50,000
Cost of Goods sold 3,31,50,000
Raw Material Consumption (20% of Cost of Goods Sold) ` 66,30,000
Direct Wages (10% of Cost of Goods Sold) ` 33,15,000
(iv) Calculation of Stock of Raw Materials (= 3 months usage)
3
= 66,30,000  = ` 16,57,500
12
(v) Calculation of Stock of Finished Goods (= 6% of Cost of Goods Sold)

6
= 3,31,50,000  = ` 19,89,000
100
(vi) Calculation of Current Liabilities
Current Assets
=2
Current Liabilities
1,10,00,000
=2 ⇒ Current Liabilities = ` 55,00,000
Current Liabilities
(vii) Calculation of Debtors
Debtors
Average collection period = × 12 months
Credit Sales
Debtors
× 12 = 2 ⇒Debtors = ` 65,00,000
3,90,00,000
(viii) Calculation of Long-term Loan
Long term Loan 2
=
Current Liabilities 1
Long term loan 2
= ⇒Long term loan = ` 1,10,00,000
55,00,000 1
(ix) Calculation of Cash Balance
`
Current assets 1,10,00,000
Less: Debtors 65,00,000
Raw materials stock 16,57,500
Finished goods stock 19,89,000 1,01,46,500
Cash balance 8,53,500
(x) Calculation of Net worth
Fixed Assets 1,30,00,000
Current Assets 1,10,00,000
Total Assets 2,40,00,000
Less: Long term Loan 1,10,00,000
Current Liabilities 55,00,000 1,65,00,000
Net worth 75,00,000
Net worth = Share capital + Reserves = ` 75,00,000

Capital 1 1
= ⇒Share Capital = ` 75,00,000 × = ` 15,00,000
Reserves and Surplus 4 5
4
Reserves and Surplus = ` 75,00,000 × = ` 60,00,000
5
Profit and Loss Statement of ASD Ltd.
for the year ended 31 st March, 2022
To Direct Materials 66,30,000 By Sales 3,90,00,000
consumed
To Direct Wages 33,15,000
To Works (Overhead) 2,32,05,000
(Bal. fig.)
To Gross Profit c/d 58,50,000
(15% of Sales)
3,90,00,000 3,90,00,000
To Selling and Distribution 27,30,000 By Gross Profit b/d 58,50,000
Expenses (Bal. fig.)
To Net Profit (8% of Sales) 31,20,000
58,50,000 58,50,000
Balance Sheet of ASD Ltd.
as at 31 st March, 2022
Liabilities (`) Assets (`)
Share Capital 15,00,000 Fixed Assets 1,30,00,000
Reserves and Surplus 60,00,000 Current Assets:
Long term loans 1,10,00,000 Stock of Raw Material 16,57,500
Current liabilities 55,00,000 Stock of Finished Goods 19,89,000
Debtors 65,00,000
Cash 8,53,500
2,40,00,000 2,40,00,000
2. Let the rate of Interest on debenture be x
 Rate of Interest on loan = 1.5x
RV-NP
Int (1-t)+
 Kd on debentures n
= RV+ NP
2

100 − 97
100x(1 − 0.25) +
3
= 100 + 97
2
75x + 1
=
98.5
 Kd on bank loan = 1.5x (1 – 0.25) = 1.125x
EPS 1 1 1
Ke = = = P/E = = 0.2
MPS MPS / EPS 5
KY = Ke = 0.2
Computation of WACC
Capital Amount (`) Weights Cost Product
Equity 10,00,000 0.2 0.2 0.04
Reserves 15,00,000 0.3 0.2 0.06
Debentures 15,00,000 0.3 (75x+1)/98.5 (22.5x + 0.3)/98.5
Bank Loan 10,00,000 0.2 1.125x 0.225x
50,00,000 1 0.1 + 0.225x +
22.5x + 0.3
98.5
WACC = 15%
22.5x 0.3
 0.1 + 0.225x + + = 0.15
98.5 98.5
 9.85+22.1625x+22.5x+0.3 = (0.15) (98.5)
 44.6625x = 14.775 – 9.85 – 0.3
 44.6625x = 4.625
4.625
x=
44.6625
 x = 10.36 %
 Rate of interest on debenture = x = 10.36%
Rate of interest on Bank loan = 1.5x = (1.5) (10.36%) = 15.54%.

3. Ascertainment of probable price of shares

Particulars Plan (i) Plan (ii)
(If ` 4,00,000 (If ` 4,00,000 is
is raised as raised by
debt) (`) issuing equity
shares) (`)
Earnings Before Interest (EBIT) 3,60,000 3,60,000
20% on (14,00,000 + 4,00,000)
Less: Interest on old debentures @ 10% on
4,00,000 40,000 40,000
3,20,000 3,20,000
Less: Interest on New debt @ 12% on ` 4,00,000 48,000 -
Earnings Before Tax (After interest) 2,72,000 3,20,000
Less: Tax @ 50% 1,36,000 1,60,000
Earnings for equity shareholders (EAIT) 1,36,000 1,60,000
Number of Equity Shares (in numbers) 30,000 40,000
Earnings per Share (EPS) 4.53 4.00
Price/ Earnings Ratio 8 10
Probable Price Per Share 36.24 40
(8 x 4.53) (10 x 4)
Working Notes:
(`)
1. Calculation of Present Rate of Earnings
Equity Share capital (30,000 x ` 10) 3,00,000
 100  4,00,000
10% Debentures  40,000  
 10 
Reserves (given) 7,00,000
14,00,000
Earnings before interest and tax (EBIT) given 2,80,000
 2,80,000  20%
Rate of Present Earnings =   100 
 14,00,000 
 4,00,000  10,000
2. Number of Equity Shares to be issued in Plan  
 40 

Thus, after the issue total number of shares 30,000 + 10,000

= 40,000
3. Debt/Equity Ratio if ` 4,00,000 is raised as debt:  8,00,000 
 18,00,000 ×100 
 
= 44.44%
As the debt equity ratio is more than 32% the P/E ratio shall be 8 in plan (i)
4.
Sources of Capital Plan I Plan II Plan III Plan IV
Present Equity Shares 13,00,000 13,00,000 13,00,000 13,00,000
New Issue 7,80,000 5,20,000 3,90,000 3,90,000
Equity share capital (`) 2,08,00,000 1,82,00,000 1,69,00,000 1,69,00,000
No. of Equity shares 20,80,000 18,20,000 16,90,000 16,90,000
12% Long term loan (`) − 26,00,000 − −
9% Debentures (`) − − 39,00,000 −
6% Preference Shares (`) − − − 39,00,000
Computation of EPS and Financial Leverage

Sources of Capital Plan I Plan II Plan III Plan IV
EBIT (`) 52,00,000 52,00,000 52,00,000 52,00,000
Less: Interest on 12% Loan (`) − 3,12,000 − −
Less: Interest on 9% debentures − − 3,51,000 −
(`)
EBT (`) 52,00,000 48,88,000 48,49,000 52,00,000
Less: Tax@ 40% 20,80,000 19,55,200 19,39,600 20,80,000
EAT (`) 31,20,000 29,32,800 29,09,400 31,20,000
Less: Preference Dividends (`) − − − 2,34,000
(a) Net Earnings available for 31,20,000 29,32,800 29,09,400 28,86,000
equity shares (`)
(b) No. of equity shares 20,80,000 18,20,000 16,90,000 16,90,000
(c) EPS (a  b) (`) 1.50 1.61 1.72 1.71

Financial leverage (
EBIT
) 1.00 1.06 1.07 1.08*
EBT
EBIT
* Financial Leverage in the case of Preference dividend = ( Dp )
(EBIT – Interest) – ((1 - t) )
52,00,000 52,00,000
=( 2,34,000 ) = (48,10,000 ) = 1.08
(52,00,000 – 0) – ( )
(1 - .40)
5. Determination of Cash inflows

Elements (`)
Sales Revenue 45,00,000
Less: Operating Cost 14,00,000
31,00,000
Less: Depreciation (90,00,000 – 10,00,000)/5 16,00,000
Net Income 15,00,000
Tax @ 40% 6,00,000
Earnings after Tax (EAT) 9,00,000
Add: Depreciation 16,00,000
Cash inflow after tax per annum 25,00,000
Less: Loss of Commission Income 6,60,000
Net Cash inflow after tax per annum 18,40,000
In 5th Year:
New Cash inflow after tax 18,40,000
Add: Salvage Value of Machine 10,00,000
Net Cash inflow in year 5 28,40,000
Calculation of Net Present Value (NPV)
Year CFAT PV Factor @10% Present Value of Cash
inflows
1 to 4 18,40,000 3.169 58,30,960
5 28,40,000 0.620 17,60,800
75,91,760
Less: Cash Outflows 90,00,000
NPV (14,08,240)

Sum of discounted cash inflows 75,91,760

Profitability Index= = = 0.844
Present value of cash outflows 90,00,000
Advise: Since the net present value is negative and profitability index is also less than 1,
therefore, the hospital should not purchase the MRI machine.
6. Calculation of Expected Cash Flow, Standard Deviation & Co-efficient of variation
(a) Project X
Probability (P) Cash Flows (x) P.x P.x2
0.20 5,00,000 1,00,000 50,00,00,00,000
0.30 3,00,000 90,000 27,00,00,00,000
0.15 1,50,000 22,500 3,37,50,00,000
0.20 50,000 10,000 50,00,00,000
0.15 10,000 1,500 1,50,00,000
2,24,000 80,89,00,00,000
Expected Cash flow = ∑ P.x = 2,24,000 = X
 P.x 2 − (  P.x )
2
Standard Deviation =
80,89,00,00,000 − ( 2,24,000 )
2
=
= 30,71,40,00,000
x = 1,75,254
x
Co-efficient of variation =
X
1,75,254
=
2,24,000
COVx = 0.7824
(b) Project Y
Probability (P) Cash Flows (y) P.y P.y2
0.3 4,00,000 1,20,000 48,00,00,00,000
0.2 3,50,000 70,000 24,50,00,00,000
0.2 2,50,000 50,000 12,50,00,00,000
0.2 75,000 15,000 1,12,50,00,000

0.1 5,000 500 25,00,000

2,55,500 86,12,75,00,000
Expected Cash flow = ∑ P.y = y = 2,55,500
 P.y 2 − (  P.y )
2
Standard Deviation =
86,12,75,00,000 − ( 2,55,500 )
2
=
y = 1,44,386
y
Co-efficient of variation =
Y
1,44,386
= 2,55,500
COVY = 0.5651
B. Calculation of Risk Adjusted Discount Rate
Project COV Risk Premium RADR

X 0.7824 6% 6% + 6% = 12%
Y 0.5651 4% 6% + 4% = 10%
C. Calculation of NPV
Year Project X Project Y
Cash PVF @ PV Cash PVF @ PV
Flows 12% Flows 10%
0 (1,50,000) 1 (1,50,000) (1,50,000) 1 (1,50,000)
5 2,24,000 0.5674 1,27,098 2,55,500 0.6209 1,58,640
NPV (22,902) 8,640
NPV of project Y is higher, Project Y should be selected.

7. P0 = ` 10 n = 2,00,000, E = ` 5,00,000
Ke = 15%, ∆n = 26,089, I = ?
P1
P0 =
1+ K e

P1
10 =
1.15
 P1 = 11.5
I − E + nD1
∆n =
P1
I − 5,00,000
26,089 =
11.5
I = 8,00,024
Now,
P0 = ` 10, n = ` 2,00,000,
E = ` 5,00,000, I = 8,00,024,
Ke = 15%, ∆n 47,619, D 1 = ?
P1 + D1
P0 =
1+ K e
P1 + D1
10 =
1.15
P1 + D1 = 11.5
 P1 = 11.5 - D1 ………………………… 1
I − E + nD1
∆n =
P1
8,00,024-5,00,000+2,00,000D1
47,619 =
P1
47,619 P1 = 2,00,000 D 1 + 3,00,024

From 1,
47619 (11.5 – D1) = 2,00,000 D1 + 3,00,024
5,47,618.5 – 47,619D1 = 2,00,000D1 + 3,00,024
 2,47,594.5 = 2,00,000D1 + 47,619 D1

 2,47,594.5 = 2,47,619 D 1
2,47,594.5
 D1 = 2,47,619 = 0.99  ` 1
 P1 = 11.5 – D1
P1 = 11.5 – 1
P1 = 10.5
(n + n)P1 − I + E
n.P0 =
1+ K e
(2,00,000+47,619)(10.5)-8,00,024+5,00,000
= 1.15
n.P0 = `19,99,979  `20,00,000
Using direct calculation,
n.P0 = 2,00,000 ×10 = ` 20,00,000
8. Monthly Cash Budget (April-September) (`)
April May June July August September
Opening cash - 10,50,000 - 1,37,500 5,25,000 7,25,000
balance
A. Cash inflows
Equity shares 50,00,000 - - - - -
Loans (Refer to 6,50,000 1,25,000 - - - -
working note 1)
Receipt from
debtors - - 15,00,000 17,50,000 17,50,000 20,00,000
Total (A) 56,50,000 11,75,000 15,00,000 18,87,500 22,75,000 27,25,000
B. Cash Outflows
Plant and 10,00,000 - - - - -
Machinery
Land and Building 20,00,000 - - - - -
Furniture 5,00,000 - - - - -
Motor Vehicles 5,00,000 - - - - -
Stock of raw 5,00,000 - - - - -
materials
(Minimum stock)

Miscellaneous 50,000 - - - - -
expenses
Payment to - 10,25,000 12,12,500 12,12,500 14,00,000 14,00,000
creditors for credit
purchases (Refer
to working note 2)
Wages and - 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000
salaries
Admn. expenses 50,000 50,000 50,000 50,000 50,000 50,000
Total :(B) 46,00,000 11,75,000 13,62,500 13,62,500 15,50,000 15,50,000
Closing balance 10,50,000 - 1,37,500 5,25,000 7,25,000 11,75,000
(A)-(B)
Budgeted Income Statement for six-month period ending 30 th September

To Purchases 83,37,500 By Sales 1,12,50,000
To Wages and Salaries 6,00,000 By Closing stock 5,00,000
To Gross profit c/d 28,12,500
1,17,50,000 1,17,50,000
To Admn. expenses 3,00,000 By Gross profit b/d 28,12,500
To Depreciation 2,00,000
(10% on ` 40 lakhs for six months)
To Accrued interest on loan 45,250
(Refer to working note 3)
To Miscellaneous expenses 50,000
To Net profit c/d 22,17,250
28,12,500 28,12,500
Projected Balance Sheet as on 30th September, 2021

1BLiabilities Amount Assets Amount
(`) (`)
Share Capital: Fixed Assets:
Authorised Land and Building 20,00,000

capital Less: Depreciation 1,00,000 19,00,000
10,00,000 equity
1,00,00,000 Plant and 10,00,000
shares of ` 10
Machinery
each
Less: Depreciation 50,000 9,50,000

Issued, Furniture 5,00,000

subscribed and Less: Depreciation 25,000 4,75,000
paid up capital
5,00,000 equity 50,00,000 Motor Vehicles 5,00,000
shares of ` 10 Less: Depreciation 25,000 4,75,000 38,00,000
each
Current Assets:
Reserve and
Surplus: Stock 5,00,000
Sundry debtors 42,50,000
Profit and Loss 22,17,250 Cash 11,75,000 59,25,000
Long-term loans 7,75,000
Current liabilities
and provisions:
Sundry creditors 15,87,500

Accrued interest 45,250
Outstanding 1,00,000 17,32,750
expenses 97,75,000 97,75,000
Working Notes:
Subsequent Borrowings Needed (`)
April May June July August September
A. Cash Inflow
Equity shares 50,00,000
Loans 6,50,000
Receipt from
debtors - - 15,00,000 17,50,000 17,50,000 20,00,000
Total (A) 56,50,000 - 15,00,000 17,50,000 17,50,000 20,00,000
B. Cash Outflow
Purchase of 40,00,000
fixed assets
Stock 5,00,000
Miscellaneous 50,000
expenses
Payment to - 10,25,000 12,12,500 12,12,500 14,00,000 14,00,000
creditors
Wages and - 1,00,000 1,00,000 1,00,000 1,00,000 1,00,000
salaries
Administrative
expenses 50,000 50,000 50,000 50,000 50,000 50,000

Total 46,00,000 11,75,000 13,62,500 13,62,500 15,50,000 15,50,000

Surplus/ (Deficit) 10,50,000 (11,75,000) 1,37,500 3,87,500 2,00,000 4,50,000
Cumulative 10,50,000 (1,25,000) 12,500 4,00,000 6,00,000 10,50,000
balance
1. There is shortage of cash in May of ` 1,25,000 which will be met by borrowings in

May.
2. Payment to Creditors
Purchases = Cost of goods sold - Wages and salaries
Purchases for April = (75% of 15,00,000) - ` 1,00,000 = ` 10,25,000
(Note: Since gross margin is 25% of sales, cost of manufacture i.e. materials plus
wages and salaries should be 75% of sales)
Hence, Purchases = Cost of manufacture minus wages and salaries of ` 1,00,000)
The creditors are paid in the first month following purchases.
Therefore, payment in May is ` 10,25,000
The same procedure will be followed for other months.
April (75% of 15,00,000) - ` 1,00,000 = ` 10,25,000
May (75% of 17,50,000) - ` 1,00,000 = ` 12,12,500
June (75% of 17,50,000) - ` 1,00,000 = ` 12,12,500
July (75% of 20,00,000) - ` 1,00,000 = ` 14,00,000
August (75% of 20,00,000) - ` 1,00,000 = ` 14,00,000
September (75% of 22,50,000) - ` 1,00,000 = ` 15,87,500
Minimum Stock ` 5,00,000
Total Purchases ` 83,37,500
3. Accrued Interest on Loan
12% interest on ` 6,50,000 for 6 months 39,000
Add: 12% interest on ` 1,25,000 for 5 months 6,250
45,250

9. Computation of Operating Cycle

(1) Raw Material Storage Period (R)
Average Stock of Raw Material
Raw Material Storage Period (R) =
Daily Average Consumption of Raw material
(14,40,000 + 16,00,000) / 2
= = 64.21 Days
86,40,000 /365
Raw Material Consumed = Opening Stock + Purchases – Closing Stock
= ` 14,40,000+` 88,00,000–` 16,00,000 = ` 86,40,000
(2) Conversion/Work-in-Process Period (W)
AverageStock of WIP
Conversion/Processing Period =
Daily Average Pr oduction cos t
(4,80,000 + 8,00,000) / 2
= = 18.96 days
1,23,20,000 / 365
Production Cost: `
Opening Stock of WIP 4,80,000
Add: Raw Material Consumed 86,40,000
Add: Wages 24,00,000
Add: Production Expenses 16,00,000
1,31,20,000
Less: Closing Stock of WIP 8,00,000
Production Cost 1,23,20,000
(3) Finished Goods Storage Period (F)
Average Stock of Finished Goods
Finished Goods Storage Period =
Daily Average Cost of Good Sold
(20,80,000 + 24,00,000) / 2
= = 68.13 Days
1,20,00,000 / 365
Cost of Goods Sold `
Opening Stock of Finished Goods 20,80,000
Add: Production Cost 1,23,20,000
1,44,00,000

Less: Closing Stock of Finished Goods (24,00,000)

1,20,00,000
(4) Receivables Collection Period (D)
AverageReceivables
Receivables Collection Period =
Daily averagecredit sales
(12,00,000 + 16,00,000) / 2
= = 31.94 Days
1,60,00,000 / 365
(5) Payables Payment Period (C)
AveragePayables
Payables Payment Period =
Daily averagecredit purchase
(16,00,000 + 19,20,000) / 2
= = 73 Days
88,00,000 / 365
(6) Duration of Operating Cycle (O)
O = R+W+F+D–C
= 64.21 + 18.96 + 68.13 + 31.94 – 73
= 110.24 days
Computation of Working Capital
(i) Number of Operating Cycles per Year
= 365/Duration Operating Cycle = 365/110.24 = 3.311
(ii) Total Operating Expenses `
Total Cost of Goods sold 1,20,00,000
Add: Administration Expenses 14,00,000
Add: Selling Expenses 6,00,000
1,40,00,000
(iii) Working Capital Required
Total Operating Expenses
Working Capital Required =
Number of Operating Cycles per year
1,40,00,000
= 3.311
= ` 42,28,329.81

10. (a) Comparison between Financial Lease and Operating Lease

Financial Lease Operating Lease
1. The risk and reward incident to The lessee is only provided the use
ownership are passed on to the of the asset for a certain time. Risk
lessee. The lessor only remains the incident to ownership belong wholly
legal owner of the asset. to the lessor.
2. The lessee bears the risk of The lessor bears the risk of
obsolescence. obsolescence.
3. The lessor is interested in his As the lessor does not have difficulty
rentals and not in the asset. He in leasing the same asset to other
must get his principal back along willing lessee, the lease is kept
with interest. Therefore, the lease is cancelable by the lessor.
non-cancellable by either party.
4. The lessor enters into the Usually, the lessor bears cost of
transaction only as financier. He repairs, maintenance or operations.
does not bear the cost of repairs,
maintenance or operations.
5. The lease is usually full payout, that The lease is usually non-payout,
is, the single lease repays the cost since the lessor expects to lease the
of the asset together with the same asset over and over again to
interest. several users.
(b) Salient features of Samurai Bonds

• Samurai bonds are denominated in Japanese Yen JPY
• Issued in Tokyo
• Issuer Non- Japanese Company
• Regulations: Japanese
• Purpose: Access of capital available in Japanese market
• Issue proceeds can be used to fund Japanese operation
• Issue proceeds can be used to fund a company’s local opportunities.
• It can also be used to hedge foreign exchange risk.

SECTION B: ECONOMICS FOR FINANCE

QUESTIONS
1. (a) What is the Value-added Method in the National Income Accounting?
(b) In a three-sector model what role does the government play?
(c) Calculate Net National Product at Market Price
Items ` in Thousand Cr.
Compensation in employees 800
Profit 300
Rent 200
Mixed income of self employed 600
Net Factor income from abroad 25
Interest 60
Import 40
Export 15
Consumption of fixed Capital 30
Net Indirect taxes 20
Net current transfer to abroad 10
2. (a) What are the Challenges in compilation of in National Income Accounting?
(b) Does government intervention always result in correcting market failure?
(c) (i) Calculate Narrow Money (M1) from the following data.
Currency with Public ` 10000 Cr
Demand deposit with banking system ` 500000Cr
Other deposits with RBI ` 200000Cr
Time deposits with banking system ` 250000 Cr
Saving Deposits of Post office Saving banks ` 300000 Cr
(ii) What will be the value of average propensity to save when
(i) C = 500 at Y = 2000
(ii) S = 650 at Y 1500
3. (a) What do you understand by Arbitrage?
(b) What are the factors that causes leakages in the multiplier?

(c) How changes in high powered money and currency ratio influence the money supply
in an economy?
(d) What type of Policy is preferable during the time of recession?
4. (a) Distinguish between the Cambridge and classical version of quantity theory of
money?
(b) What is meant by crowding out?
(c) How does appreciation and depreciation of currency affect real economy?
(d) How do trade Policy influence international trade?
5. (a) What is the Characteristic of Private Goods?
(b) Domestic Industries and Consumers are affected by Import Quota, Comment.
(c) What determine the size of money multiplier?
(d) In the theory of International Trade what is meant by factor endowment?
Or
Define Narrow Money?
ANSWERS
1. (a) The value-added method measures the contribution of each producing enterprise in
the domestic territory of the country in an accounting year and entails consolidation
of production of each industry less intermediate purchases from all other industries.
This method of measurement shows the unduplicated contribution by each industry
to the total output.
The values of the following items are also included:
(i) Own account production of fixed assets by government, enterprises, and
households.
(ii) Imputed value of production of goods for self- consumption, and
(iii) Imputed rent of owner-occupied houses.
(iv) Change in stock (inventory
(b) The three-sector Keynesian model is commonly constructed assuming that
government purchases are autonomous. The equilibrium national income is
determined at a point where both aggregate demand and aggregate supply are equal,
that is,
AD = Y = AS
C + I+ G =Y= C + S+ T

The autonomous expenditure components namely, investment and government

spending do not directly depend on income and are exogenous variables determined
by factors outside the model.
The government influences the level of income through taxes, transfer payments,
government purchases and government borrowing.
(c) NDPFC = Compensation of employees + Mixed Income of self employed + Rent +
Interest + Profit
= 800+600+200+60+300
= ` 19,600 Cr.
National Income (NNP FC) = NDPFC + NFIA (Factor Income from abroad – factor
income to abroad)
= 1960 ( -25-10)
= ` 1915 Cr.
NNPMP = NNPFC + Net Indirect taxes
NNPMP = 1915 + 20
= ` 1935 Cr.
2. (a) The Challenges in compiling in National Income Accounting is as under:
(a) production for self-consumption,
(b) absence of recording of incomes due to illiteracy and ignorance,
(c) lack of proper occupational classification, and
(d) accurate estimation of consumption of fixed capital
(e) Inadequacy of data and lack of reliability of available data,
(f) presence of non-monetized sector
(b) We cannot be sure whether the government interventions would be effective or
whether it would make the functioning of the economy less efficient. Government
failures where government intervention in the economy to correct a market failure
creates inefficiency and leads to a misallocation of scarce resources occur very often.
Government failure occurs when:
• intervention is ineffective causing wastage of resources expended for the
intervention
• intervention produces fresh and more serious problems
There are costs and benefits associated with any Government intervention in a
market, and it is important that policy makers consider all of the costs and benefits of
a policy intervention.

(c) (i) M1 = Currency with public + Demand deposits with banking system + Other
Deposits with the RBI
= 10000+ 500000 + 200000
= ` 710,000 Cr
(ii) (i) APS = S/Y, S = Y-C = 2000-500 = 1500, Therefore, APS = S/Y = 1500/2000
= 0.75
(ii) When S = 650 and Y = 1500, APS = S/Y = 650/1500 = 0.433
3. (a) Arbitrage refers to the practice of making risk-less profits by intelligently exploiting
price differences of an asset at different dealing locations. There is potential for
arbitrage in the forex market if exchange rates are not consistent between currencies.
When price differences occur in different markets, participants purchase foreign
exchange in a low-priced market for resale in a high-priced market and makes profit
in this process. Due to the operation of price mechanism, the price is driven up in the
low-priced market and pushed down in the high-priced market. This activity will
continue until the prices in the two markets are equalized, or until they differ only by
the amount of transaction costs involved in the operation. Since forex markets are
efficient, any profit spread on a given currency is quickly arbitraged away
(b) Multiplier refers to the phenomenon whereby a change in an injection of expenditure
will lead to a proportionately larger change (or multiple changes) in the equilibrium
level of national income. The investment multiplier explains how many times the
equilibrium aggregate income increases as a result of an increase in autonomous
investment.
• progressive rates of taxation which result in no appreciable increase in
consumption despite increase in income
• high liquidity preference and idle saving or holding of cash balances and an
equivalent fall in marginal propensity to consume
• increased demand for consumer goods being met out of the existing stocks or
through imports
• additional income spent on purchasing existing wealth or purchase of
government securities and shares from shareholders or bond holders
• undistributed profits of corporations
• part of increment in income used for payment of debts
• case of full employment additional investment will only lead to inflation,
• scarcity of goods and services despite having high MPC

(c) The excess reserves (ER) which are funds that a bank keeps back beyond what is
required by regulation form a very important determinant of money supply. The
additional units of high-powered money that goes into ‘excess reserves’ of the
commercial banks do not lead to any additional loans, and therefore, these excess
reserves do not lead to creation of money. Therefore, if the central bank injects money
into the banking system and these are held as excess reserves by the banking
system, there will be no effect on deposits or currency and hence no effect on money
supply.
(d) A recession is said to occur when overall economic activity declines, or in other words,
when the economy ‘contracts. A recession sets in with a period of declining real
income, as measured by real GDP simultaneously with a situation of rising
unemployment. If an economy experiences a fall in aggregate demand during a
recession, it is said to be in a demand-deficient recession. Due to decline in real GDP,
the aggregate demand falls and therefore, lesser quantity of goods and services will
be produced. To combat such a slump in overall economic activity, the government
can resort to expansionary fiscal policies.
4. (a) The demand for money was primarily determined by the need to conduct transactions
which will have a positive relationship to the money value of aggregate expenditure.
Since the latter is equal to money national income, the Cambridge money demand
function is stated as:
Where Md = k PY
Md = is the demand for money balances,
Y = real national income
P = average price level of currently produced goods and services
PY = nominal income
K = proportion of nominal income (PY) that people want to hold as cash balances
The term ‘k’ in the above equation is called ‘Cambridge k’ is a parameter reflecting
economic structure and monetary habits, namely the ratio of total transactions to
income and the ratio of desired money balances to total transactions. The equation
above explains that the demand for money (M) equals k proportion of the total money
income.
Fisher’s version, also termed as ‘equation of exchange’ or ‘transaction approach’ is
formally stated as follows
MV = PT
Where,
M = the total amount of money in circulation (on an average) in an economy
V = transactions velocity of circulation i.e. the average number of times across all

transactions a unit of money (say Rupee) is spent in purchasing goods and

services
P = average price level (P = MV/T)
T = the total number of transactions.
(b) The crowding out view is that a rapid growth of government spending leads to a
transfer of scarce productive resources from the private sector to the public sector
where productivity might be lower. An increase in the size of government spending
during recessions will ‘crowd-out’ private spending in an economy and lead to
reduction in an economy’s ability to self-correct from the recession, and possibly also
reduce the economy’s prospects of long-run economic growth.
(c) Currency appreciation raises the price of exports, decrease exports; increase imports,
adversely affect the competitiveness of domestic industry, cause larger deficits, and
worsens the trade balance.
A depreciation of domestic currency primarily increases the price of foreign goods
relative to goods produced in the home country and diverts spending from foreign
goods to domestic goods.
When a country’s currency depreciates, production for exports and of import
substitutes become more profitable. Therefore, factors of production will be induced
to move into the tradable goods sectors and out of the non- tradable goods sectors.
The reverse will be true when the currency appreciates. These types of resource
movements involve economic wastes.
(d) Trade policy encompasses all instruments that governments may use to promote or
restrict imports and exports. Trade policy also includes the approach taken by
countries in trade negotiations. While participating in the multilateral trading system
and/or while negotiating bilateral trade agreements, countries assume obligations that
shape their national trade policies. The instruments of trade policy that countries
typically use to restrict imports and/ or to encourage exports can be broadly classified
into price- related measures such as tariffs and non- price measures or non-tariff
measures (NTMs).
5. (a) Most of the goods produced and consumed in an economy are private goods. A few
examples are food items, clothing, movie ticket, television, cars, houses etc.
• Private goods refer to those goods that yield utility to people. Since they are
scarce anyone who wants to consume them must purchase them.
• Owners of private goods can exercise private property rights and can prevent
others from using the good or consuming their benefits.
• Consumption of private goods is ‘rivalrous’ that is the purchase and consumption
of a private good by one individual prevents another individual from consuming
it.

• Private goods are ‘excludable’ i.e., it is possible to exclude or prevent consumers

who have not paid for them from consuming them or having access to them
• Private goods do not have the free-rider problem. This means that private goods
will be available to only those persons who are willing to pay for them.
(b) With a quota, the government, of course, receives no revenue. The profits received
by the holders of such import licenses are known as ‘quota rents. While tariffs directly
interfere with prices that can be charged for an imported good in the domestic market,
import quota interferes with the market prices indirectly. Obviously, an import quota
always raises the domestic price of the imported good. The license holders are able
to buy imports and resell them at a higher price in the domestic market and they will
be able to earn a ‘rent’ on their operations over and above the profit they would have
made in a free market.
(c) The money multiplier is the reciprocal of the reserve ratio. Deposits, unlike currency
held by people, keep only a fraction of the high-powered money in reserves and the
rest is lent out and culminate in money creation. If R is the reserve ratio in a country
for all commercial banks, then each unit of (say Rupee) money reserves generate 1/R
money.
Therefore, for any value of R, the Money Multiplier is 1/R
For example, if R = 10%, the value of money multiplier will be 10. If the reserve ratio
is only 5 %, then money multiplier is 20. Thus, the higher the reserve ratio, the less
of each deposit banks loan out, and the smaller the money multiplier.
(d) In a general sense of the term, ‘factor endowment’ refers to the overall availability of
usable resources including both natural and man-made means of production.
Nevertheless, in the exposition of the modern theory, only the two most important
factors—labour and capital—are taken into account. The Heckscher-Ohlin theory of
trade states that comparative advantage in cost of production is explained exclusively
by the differences in factor endowments of the nations.
Or
M1(narrow money) is defined as the sum of currency held by the public demand
deposits of the banks and other deposits with the RBI. Banks include commercial and
cooperative banks.

Applicability of Standards/Guidance Notes/Legislative Amendments etc. for
November, 2022 Examination
Intermediate Course
Paper 5: Advanced Accounting
List of Applicable Accounting Standards
AS 4: Contingencies and Events Occurring After the Balance Sheet Date
AS 5: Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting
Policies
AS 7: Construction Contracts
AS 9: Revenue Recognition
AS 14: Accounting for Amalgamations
AS 17: Segment Reporting
AS 18: Related Party Disclosures
AS 19: Leases
AS 20: Earnings Per Share
AS 22: Accounting for Taxes on Income
AS 24: Discontinuing Operations
AS 26: Intangible Assets
AS 29: Provisions, Contingent Liabilities and Contingent Assets.
Applicability of the Companies Act, 2013 and other Legislative Amendments for
November, 2022 Examination
The relevant notified Sections of the Companies Act, 2013 and legislative amendments
including relevant Notifications / Circulars / Rules / Guidelines issued by Regulating
Authorities up to 30 th April, 2022 will be applicable for November, 2022 Examination.
Non-Applicability of Ind AS
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards)
Rules, 2015 on 16th February, 2015, for compliance by certain class of companies. These Ind
AS do not form part of the syllabus and hence are not applicable.

REVISION TEST PAPER 127
Paper 6: Auditing and Assurance

List of topic-wise inclusion in the syllabus
I. List of applicable Engagements and Quality Control Standards on Auditing
S. No. SA Title of Standard on Auditing
1 SQC 1 Quality Control for Firms that Perform Audits and Reviews of
Historical Financial Information, and Other Assurance and
Related Services Engagements
2 SA 200 Overall Objectives of the Independent Auditor and the Conduct of
an Audit in Accordance with Standards on Auditing
3 SA 210 Agreeing the Terms of Audit Engagements
4 SA 220 Quality Control for Audit of Financial Statements
5 SA 230 Audit Documentation
6 SA 240 The Auditor’s responsibilities Relating to Fraud in an Audit of
Financial Statements
7 SA 250 Consideration of Laws and Regulations in An Audit of Financial
Statements
8 SA 299 Joint Audit of Financial Statements (Revised)
9 SA 300 Planning an Audit of Financial Statements
10 SA 315 Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and its Environment
11 SA 320 Materiality in Planning and Performing an Audit
12 SA 500 Audit Evidence
13 SA 501 Audit Evidence - Specific Considerations for Selected Items
14 SA 505 External Confirmations
15 SA 510 Initial Audit Engagements-Opening Balances
16 SA 520 Analytical Procedures
17 SA 530 Audit Sampling
18 SA 550 Related Parties
19 SA 560 Subsequent Events
20 SA 570 Going Concern (Revised)
21 SA 580 Written Representations
22 SA 610 Using the Work of Internal Auditors (Revised)
23 SA 700 Forming an Opinion and Reporting on Financial Statements
(Revised)

24 SA 701 Communicating Key Audit Matters in the Independent Auditor’s

Report (New)
25 SA 705 Modifications to the Opinion in the Independent Auditor’s Report
(Revised)
26 SA 706 Emphasis of Matter Paragraphs and Other Matter Paragraphs in
the Independent Auditor’s Report (Revised)
27 SA 710 Comparative Information – Corresponding Figures and
Comparative Financial Statements
II Applicability of the Companies Act, 2013 and other Legislative Amendments

(i) The September, 2021 Edition of the Study Material on Intermediate Paper 6:
Auditing and Assurance [comprising of 2 Modules – Modules 1 – 2] is relevant for
November, 2022 Examinations. This is an integrated Study Material cum
Practice Manual.
Students are expected to be updated with the notifications, circulars and other
legislative amendments made upto 6 months prior to the examination. For
instance, for November, 2022 examination, significant notifications and
circulars issued upto 30th April, 2022 would be relevant.
The relevant notified Sections of the Companies Act, 2013 and legislative
amendments including relevant Notifications / Circulars / Rules / Guidelines issued
by Regulating Authority up to 30th April, 2022 will be applicable for November, 2022
Examination. It may be noted that the significant notifications and circulars
issued up to 30th April, 2022, which are not covered in the September, 2021
Edition of the Study Material, would be given as Academic Update in the
Revision Test Paper for November, 2022 Examination.
NOTE:
Applicability of the Amendments to Schedule III to the Companies Act, 2013
The Central Government made certain amendments in Schedule III to the
Companies Act, 2013 (vide Notification dated 24th March, 2021), with effect from
1st day of April, 2021.These amendments to Schedule III are applicable for
November, 2022 Examination.
(ii) Companies (Auditor’s Report) Order, 2020 issued by Ministry of Corporate Affairs is
applicable for November, 2022 Examination.
List of topic-wise exclusion in the syllabus
I. Statement on Reporting under Section 227(1A) of the Companies Act, 1956 (Section
143(1) of the Companies Act, 2013) excluded.

REVISION TEST PAPER 129
II. Following Engagements and Quality Control Standards on Auditing excluded:

(1) (2) (3)
S. No SA Exclusions
1 SA 260 Communication with Those Charged with Governance (Revised)
2 SA 265 Communicating Deficiencies in Internal Control to Those Charged
with Governance and Management
3 SA 330 The Auditor’s Responses to Assessed Risks
4 SA 402 Audit Considerations Relating to an Entity Using a Service
Organization
5 SA 450 Evaluation of Misstatements Identified during the Audits
6 SA 540 Auditing Accounting Estimates, Including Fair Value Accounting
Estimates, and Related Disclosures
7 SA 600 Using the Work of Another Auditor
8 SA 620 Using the Work of an Auditor’s Expert
9 SA 720 The Auditor’s Responsibilities Relating to Other Information
III. Following Guidance Notes are excluded:
1. Guidance Note on Audit of Inventories.
2. Guidance Note on Audit of Debtors, Loans and Advances.
3. Guidance Note on Audit of Investments.
4. Guidance Note on Audit of Cash and Bank Balances.
5. Guidance Note on Audit of Liabilities.
6. Guidance Note on Audit of Revenue.
7. Guidance Note on Audit of Expenses.
8. Guidance Note on Reporting under section 143(3)(f) and (h) of the Companies Act,
2013

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INTERMEDIATE COURSE

REVISION TEST PAPERS

© The Institute of Chartered Accountants of India

Edition : August, 2022

Department/Committee : Board of Studies

Published by : The Publication Department on behalf of The Institute of Chartered

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

 Write in a neat and legible hand-writing.

© The Institute of Chartered Accountants of India

Question No. Topic

© The Institute of Chartered Accountants of India

PAPER – 7: ENTERPRISE INFORMATION SYSTEMS AND STRATEGIC MANAGEMENT

© The Institute of Chartered Accountants of India

Section – B: Strategic Management

PAPER – 8: FINANCIAL MANAGEMENT AND ECONOMICS FOR FINANCE

© The Institute of Chartered Accountants of India

2. Cost of Capital Calculation of rate of interest on bank loan and

© The Institute of Chartered Accountants of India

PART – I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

A. Applicable for November 2022 Examination

© The Institute of Chartered Accountants of India

Definition of business has been amended. As per the Amendment, definition of

© The Institute of Chartered Accountants of India

Vide circular RBI/2022-23/21; DOR.MRG.REC.14/21.04.141/2022-23 dated April 8,

PART – II : QUESTIONS AND ANSWERS

Dissolution of Partnership Firm

© The Institute of Chartered Accountants of India

R 32,000 Stock 14,500

© The Institute of Chartered Accountants of India

Conversion of Partnership firm into a Company

© The Institute of Chartered Accountants of India

Particulars Note No. Truth Ltd. (`) Myth Ltd. (`)

© The Institute of Chartered Accountants of India

Note Particulars Truth Limited (`) Myth Limited (`)

© The Institute of Chartered Accountants of India

Internal Reconstruction of a Company

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6 lakh 8% Preference Shares of ` 100 each, fully paid up 600

© The Institute of Chartered Accountants of India

(4) Interest accrued and due on Debentures to be paid in cash.

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Statutory reserve fund 12,80,000

© The Institute of Chartered Accountants of India

Investment in the Equity Shares of S Ltd. 1,500 −

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

© The Institute of Chartered Accountants of India

Cash paid to Q and

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© The Institute of Chartered Accountants of India

To Land and Building 2,40,000

© The Institute of Chartered Accountants of India

3. Books of Mehta Ltd.

Date Particulars Debit Credit