SUGGESTED ANSWERS TO

THE QUESTIONS SET AT

CHARTERED ACCOUNTANCY PROFESSIONAL
CAP II LEVEL - GROUP I

DECEMBER 2023 EXAMINATION

The Institute of Chartered Accountants of Nepal

ICAN Marg, Satdobato, Lalitpur
The Institute of Chartered Accountants of Nepal
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Year and month of Publication: 2024 April

Disclaimer:
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answers in the examination. The answers are prepared by the concerned resource persons and
compiled by the Technical Directorate of the Institute with a view to assist the students in their
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the answers published herewith.
 CONTENTS
Paper 1 - Advanced Accounting 4-23
Paper 2 - Audit & Assurance 24-33
Paper 3 - Corporate and Other Laws 34-47
Suggested Answers - December 2023 - Advanced Accounting

ADVANCED ACCOUNTING
Roll No……………. Maximum Marks - 100
Total No. of Questions - 6 Total No. of Printed Pages - 16
Time Allowed - 3 Hours
Marks

All questions are compulsory. Working notes should form part of the answer.
Make assumptions wherever necessary.
1. A and B are partners sharing profits and losses equally. Their Balance Sheet as on 31.12.2021 was
as follows:
Liabilities Rs. Assets Rs.
Capital Accounts Premises 30,000
A 60,000 Furniture 14,000
B 70,000 Stock 74,000
Creditors 30,000 Debtors 24,000
Bank 18,000
160,000 160,000
On 1.1.2022, they decided to admit C as a partner on the following items:
1. C should pay Rs. 60,000 as capital for being entitled to one-third share of profits. The remain-
ing profits are to be shared by the old partners equally.
2. Stock to be valued at Rs. 70,000 and premises to be taken at 95% of book value.
3. After the conclusion of the first trading year, Goodwill is to valued at three times of the net
profit of the year in excess of Rs. 30,100. Such goodwill should be divided between A and B in
the ratio of their sacrifices in favour of C.
Transactions during the year ended 31.12.2022 were as follows:
Purchases Rs. 5,30,000;
Sales Rs. 6,00,000;
Payments for purchases at 98% in
full settlement at Rs. 4,80,200;
Collection from debtors (after allowing 5%
against a prompt payment of dues Rs. 40,000) Rs. 3,38,000;
Sundry expenses Rs. 18,000;
Administration expenses Rs. 60,000;
Drawings of partners:
A Rs. 5,000;
B Rs. 4,000 and
C Rs. 3,000.
On 31.12.2022, Stock was Rs. 1,20,000. Depreciation to be provided on furniture was Rs. 900. C
contributed sufficient cash to make his capital proportionate to his share of profit after goodwill was
calculated and given effect.

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 Suggested Answers - December 2023 - Advanced Accounting

Required:  20
a) Prepare amended Balance Sheet of the firm on 1.1.2022; and
b) Prepare Balance Sheet of the firm on 31.12.2022 after giving effect to the required adjustments.
Answer
Solution:
Balance Sheet as on 1st January, 2022
Liabilities Rs. Assets Rs.
Capital Accounts (W3) Premises (95% of Rs. 30,000) 28,500
A 57,250 Furniture 14,000
B 67,250 Stock 70,000
C 60,000 Debtors 24,000
Creditors 30,000 Bank (18,000 + 60,000) 78,000
214,500 214,500
Balance Sheet as on 31st December, 2022
Liabilities Rs. Assets Rs.
Capital Accounts (W3) Premises 28,500
A 77,950 Furniture 14,000
B 88,950 Less: Depreciation 900 13,100
C 83,450 Stock 120,000
Creditors (W5) 70,000 Debtors (W4) 284,000
Bank Overdraft (W6) 125,250
445,600 445,600
Working Notes:
(1) Trading and Profit and Loss Account for the year ended 31st December, 2022
Particulars Rs. Particulars Rs.
To Opening Stock 70,000 By Sales 600,000
To Purchases 530,000 By Closing Stock 120,000
To Gross Profit c/d 120,000
720,000 720,000
To Sundry Expenses 18,000 By Gross Profit b/d 120,000
By Discount Received
To Administrative Expenses
60,000 (480,200/98*2) 9,800
To Discount allowed (5% on
40,000) 2,000
To Depreciation on Furniture 900
To Share of Profit
A 16,300
B 16,300
C 16,300 48,900
129,800 129,800

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Suggested Answers - December 2023 - Advanced Accounting

(2) Valuation of Goodwill

3 times of the net profits of the year 2022 in excess of ~ 30,100. Therefore, the value of the good-
will is 3 ˟ (48,900 - 30,100) = Rs. 56,400.
(3) Partners’ Capital Accounts
Date Particulars A B C Date Particulars A B C
1.1.2022 To Revalua- 2,750 2,750 - 1.1.2022 By Balance 60,000 70,000 -
tion A/c b/d
To Balance 57,250 67,250 60,000 By Bank A/c - - 60,000
c/d
60,000 70,000 60,000 60,000 70,000 60,000
31.12.2022 To Drawings 5,000 4,000 3,000 1.1.2022By Balance 57,250 67,250 60,000
A/c b/d
To Goodwill 18,800 18,800 18,800 31.12.2022 By Share of 16,300 16,300 16,300
A/c Profit A/c
To Balance 77,950 88,950 83,450 By Goodwill 28,200 28,200 -
c/d A/c (W2)
By Bank A/c - - 28,950
(Bal. fig.)
101,750 111,750 105,250 101,750 111,750 105,250
Revaluation A/c
Particulars Rs. Particulars Rs.
To Stock A/c 4,000 By Partner's Capital A/c
To Premises A/c 1,500 A 2,750
B 2,750
5,500 5,500
(4) Debtors Account
Particulars Rs. Particulars Rs.
To Balance b/d 24,000 By Bank A/c 338,000
To Sales A/c 600,000 By Discount Allowed A/c 2,000
By Balance c/d 284,000
624,000 624,000
(5) Creditors Account
Particulars Rs. Particulars Rs.
To Bank A/c 480,200 By Balance b/d 30,000
To Discount Received A/c 9,800 By Purchases A/c 530,000
To Balance c/d 70,000
560,000 560,000
(6) Bank Account
Particulars Rs. Particulars Rs.
By Balance b/d 78,000 By Creditors A/c 480,200
By Debtors A/c 338,000 By Sundry Expenses A/c 18,000
To C Capital A/c 28,950 By Adm. Expenses A/c 60,000
To Balance c/d 125,250 By Drawings A/c 12,000
570,200 570,200
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 Suggested Answers - December 2023 - Advanced Accounting

2.

a) The summarized balance sheet of CD Limited as on 31st December 2021 and 2022 were as
follows:
Balance Sheet
Liabilities 2021 2022 Assets 2021 2022
Share capital 100,000 150,000 Freehold property 110,000 130,000
Share premium 15,000 35,000 Plant and machinery 120.000 151,000
Profit and loss A/C 28,000 70,000 Fixtures and fittings 24,000 29,000
Debentures 70,000 30,000 Stock 37,000 51,000
Bank overdraft 14,000 - Debtors 43,000 44,000
Creditors 34,000 48,000 Bank balance - 16,000
Proposed dividends 15,000 20,000 Premium of redemption - 1,000
of debenture
Accumulated Depre-
ciation
Plant 45,000 54,000
Fixtures 13,000 15,000
334,000 422,000 334,000 422,000

Additional information:  10
1. There had been no disposal of freehold property in the year.
2. A machine tool which has cost Rs. 8,000 and accumulated depreciation Rs. 6,000 was sold for
Rs. 3,000.
3. A fixture which cost Rs. 5,000. Accumulated depreciation Rs. 2,000 was sold Rs. 1,000.
4. The actual premium on redemption of debenture was Rs. 2,000 of which Rs. 1,000 has been
written off from the profit and loss account.
5. No interim dividend has been paid.
Required:
Prepare a Cash Flow Statement for the year ended 31st December 2022.
b) The Financial Position of D & D Ltd. as on 31.10.2022 appears as follows:
Liabilities Rs. Rs.
Share Capital
Equity share capital 300,000Equity of Rs.10 - 3,000,000
each
10,000, 11% Preference Share of Rs .100 - 1,000,000
each fully paid

Secured Loans
10% Debentures 1,000,000
Interest accrued and due on debenture 220,000
Bank overdraft 1,260,000 2,480,000
Unsecured loans -

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Suggested Answers - December 2023 - Advanced Accounting

Unsecured loans 1,000,000

Add: interest accrued and due 300,000 1,300,000
Current liability and Provisions - 1,000,000
Total - 8,780,000
Assets -
Fixed assets as cost 4,000,000
Less: Depreciation provisions (3,000,000) 1,000,000
Current assets
Stocks and Store - 1,200,000
Bills receivable - 2,900,000
Other current assets - 400,000
Profit or Loss Account - 3,280,000
Total - 8,780,000
A scheme of reconstruction has been agreed amongst the shareholder and the creditors with the
following salient features:
a) Interest due on unsecured loans is waived.
b) 75% interest due on debenture is waived.
c) The 11% Preference shareholder right are to be reduced to 75% and converted in the 15%
debenture of Rs. 100 each.
d) Current liability would be reduced by Rs. 100,000 on account of provision no longer re-
quired.
e) The bank agrees to the arrangements and to increase the cash credit or overdraft limit by Rs.
200,000 upon the shareholder agreeing to bring in a like amount by way of new equity.
f) Besides additional subscription as above the equity holders agree to convert the existing eq-
uity share in to new ten rupees share of total value of Rs.1,000,000.
g) The debit balance in profit and loss account to be written off totally. Rs. 520,000 to be pro-
vided for the doubtful debts and the value of fixed assets shall be increased by Rs. 800,000.
Required:  10
Redraft the financial position of the company based on the above scheme of recon-
struction.
Answer
2 a)
Solution:
As per NAS 7-cash flow statement, Bank overdraft is treated as cash and cash equivalents.
Cash Flow Statement
Net profit before tax (70,000-28,000+20000) 62,000
Add: Non-operating expenses:
Depreciation for the year (15,000+4,000) 19,000
Loss on sale of fixture 2,000
Premium on redemption of debenture 1,000 22,000
84,000

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 Suggested Answers - December 2023 - Advanced Accounting

Less: Non-operating income:

Profit and sale of machine 1,000
Operating profit 83,000
Increase in current liabilities
Creditors 14,000
14,000
97,000
Less: Increase in current assets:
Stock 14,000
Debtors 1,000
Decrease in current liabilities 14,000
Bank overdraft 29,000
i. Net cash available from operating activities 68,000
Cash available from investing activities:
Sale of machine tool 3,000
Sale of fixture and fittings 1,000
Purchase of machine (39,000)
Purchase of freehold property (20,000)
Purchase of fixture (10,000)
ii. Net cash outflow from investing activities (65,000)
Cash available from financing activities:
Issue of share with premium 70,000
Dividend Paid (15,000)
Redemption of debenture with premium (42,000)
iii. Net cash available from financing activities 13,000
Net changes in cash or equivalent to cash (i+ii+iii) 16,000
Add: Opening cash balance 0
Cash balance at the end 16,000

Accumulated Depreciation Account (Plant) Cr.

Particulars Amount Particulars Amount
To Plant A/C Rs. 6,000 By Balance b/d Rs 45,000
To Balance b/d 54,000 By Depreciation for the 15,000
year
60,000 60,000

Accumulated Depreciation Account (Fixtures) Cr.

Particulars Amount Particulars Amount
To Fixtures Rs. 2,000 By Balance b/d Rs 13,000
To Balance c/d 15,000 By Depreciation for the 4,000
year
17,000 17,000

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Freehold Property Account Cr.

Particulars Amount Particulars Amount
To Balance b/d Rs. 110,000 By balance c/d Rs. 130,000

To Cash (Purchase) 20,000 By balance c/d

130,000 130,000

Plant and Machinery Account

Particulars Amount Particulars Amount
To Balance b/d Rs. 120,000 By Sale Rs. 3,000
To Profit on sale 1,000 By Accumulated depreciation 6,000
To Cash (Purchase) 39,000 By Balance c/d 151,000
160,000 160,000

Fixture and Fitting Account

Particulars Amount Particulars Amount
To Balance b/d 24,000 By Cash (Sale) 1,000
To Cash (Purchase) 10,000 By Loss on sale 2,000
By Accumulated depreciation 2,000
By Balance c/d 29,000
34,000 34,000

Alternative solution 1
As per NAS 7- Cash flow Statement, Bank overdraft is treated as cash and cash
equivalents.
Net profit before tax (70,000-28,000+20000) 62,000
Add: Non-operating expenses:
Depreciation for the year (15,000+4,000) 19,000
Loss on sale of fixture 2,000
Premium on redemption of debenture 1,000 22,000
84,000
Less: Non-operating income:
Profit and sale of machine 1,000
Operating profit 83,000
Increase in current liabilities
Creditors 14,000
14,000
97,000
Less: Increase in current assets:
Stock 14,000
Debtors 1,000 15,000
i. Net cash available from operating activities 82,000
Cash available from investing activities:

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 Suggested Answers - December 2023 - Advanced Accounting

Sale of machine tool 3,000

Sale of fixture and fittings 1,000
Purchase of machine (39,000)
Purchase of freehold property (20,000)
Purchase of fixture (10,000)
ii. Net cash outflow from investing activities (65,000)
Cash available from financing activities:
Issue of share with premium 70,000
Dividend Paid (15,000)
Redemption of debenture with premium (42,000)
iii. Net cash available from financing activities 13,000
Net changes in cash or equivalent to cash (i+ii+iii) 30,000
Add: Opening cash and cash equivalents (14000)
Cash and cash equivalents at the end 16,000

Accumulated Depreciation Account (Plant) Cr.

Particulars Amount Particulars Amount
To Plant A/C Rs. 6,000 By Balance b/d Rs 45,000
To Balance b/d 54,000 By Depreciation for the year 15,000
60,000 60,000

Accumulated Depreciation Account (Fixtures) Cr.

Particulars Amount Particulars Amount
To Fixtures Rs. 2,000 By Balance b/d Rs 13,000
To Balance c/d 15,000 By Depreciation for the year 4,000
17,000 17,000

Freehold Property Account Cr.

Particulars Amount Particulars Amount
To Balance b/d Rs. 110,000 By balance c/d Rs. 130,000

To Cash (Purchase) 20,000 By balance c/d

130,000 130,000

Plant and Machinery Account

Particulars Amount Particulars Amount
To Balance b/d Rs. 120,000 By Sale Rs. 3,000
To Profit on sale 1,000 By Accumulated depreciation 6,000
To Cash (Purchase) 39,000 By Balance c/d 151,000
160,000 160,000

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Fixture and Fitting Account

Particulars Amount Particulars Amount
To Balance b/d 24,000 By Cash (Sale) 1,000
To Cash (Purchase) 10,000 By Loss on sale 2,000
By Accumulated depreciation 2,000
By Balance c/d 29,000
34,000 34,000

2 b) Financial position of D & D Ltd. (and reduced) as at 31.10. 2022

Liabilities Rs. Rs.
Share Capital (7Marks)
Authorized capital …. Equity shares of Rs…each
issued and subscribed capital
Equity share capital 120,000 Equity @10 each - 1,200,000
Reserve and Surplus account -

Secured Loan
10% debenture 1,000,000
Interest accrued and due on debenture 55,000
15% debenture 750,000
Bank overdraft (1,260,000-200,000) 1,060,000 2,865,000
Unsecured loans
Unsecured loans 1,000,000
Add: interest accrued and due - 1,000,000
Current liability and Provisions 900,000
Total 5,965,000
Assets
Fixed assets as cost 4,000,000
Less: Depreciation provisions
(3,000,000) -
Add: appreciation 800,000 1,800,000
Current assets
Stocks and Store 1,200,000
Bills receivable 2,900,000
Less: Provisions (520,000) 2,380,000
Other current assets 400,000
Reconstruction Account 185,000
Total 5,965,000

Capital Reduction Account 3 marks.

Particular Rs. Particular Rs.
Profit or Loss Account 3,280,000 by Interest on unsecured loans 300,000

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 Suggested Answers - December 2023 - Advanced Accounting

Provision for doubtful debts a/c 520,000 by interest on debenture 165,000

by 11% preference share capital 250,000
by current liability 100,000
Equity share capital 2,000,000
by fixed assets 800,000
by balance cd 185,000
Total 3,800,000 3,800,000

3 a) The following data of Jelly Life Insurance Company is available for the year ended 31st Decem-
ber 2022:
Description Rs. In million
Regular premium individual policies 21,533
Group policies with cash value 350
Group policies without cash value 4,108
Single premium individual policies 439
Reinsurance premium ceded 1,156
Provision for premium refund 119
Investment income 17,881
Net fair value losses on financial assets at fair value through profit or loss 2,568
Net rental income 742
Other income 362
Claims under individual policies 12,448
Claims under group policies 8,105
Recoveries from reinsurer 497
Claims related expenses 10
Net increase in insurance liabilities (other than outstanding claims) 9,325
Acquisition expense 5,892
Marketing and administrative expenses 1,386
Other expenses 211
Finance cost 20

Required:
Prepare statement of profit or loss of Jelly Life Insurance Company for the year ended 31st Decem-
ber 2022. 10

b) The main business of Sagarmatha Company is building work. At the end of September 2023
there is an uncompleted contract on the books, details of which are as follows.
Date commenced 1.4.2021
Expected completion date 23.12.2023
Rs.
Total contract revenue 290,000
Costs to 30.9.23 210,450

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Suggested Answers - December 2023 - Advanced Accounting

Value of performance obligations satisfied to 30.9.23 230,000

Amounts invoiced for work certified to 30.9.23 210,000
Cash received to 30.9.23 194,000
Estimated costs to completion at 30.9.23 20,600
Sagarmatha calculates satisfaction of performance obligations based on work certified as a percent-
age of contract price.
Required: 5
Prepare calculations showing the amount to be included in the statement of profit or loss and state-
ment of financial position at 30 September 2023 in respect of the above contract. 5
Answer
3 a)
Jelly Life Insurance Company
Statement of profit or loss
For the year ended 31 December 2022
Particulars Rs. In million
Premium revenue (21,533+350+4,108+439)–119 26,311
Premium ceded to reinsurers -1,156
Net premium revenue 25,155
Investment income 17,881
Net fair value losses on financial assets at fair value through profit or
loss -2,568
Net rental income 742
Other income 362
16,417
Net income 41,572
Insurance benefits 12,448+8,105 20,553
Recoveries from reinsurers -497
Claims related expenses 10
Net Insurance Claims 20,066
Net change in insurance liabilities (other than outstanding claims) 9,325
Acquisition expenses 5,892
Marketing and administration expenses 1,386
Other expenses
(Alternate – Service charge (0.75%) = 188.66) 211
Total Expenses (Alternate = 16,814 – 188.66 = 1,6625.34) 16,814
Finance cost 20
Profit for the year (Alternate profit = 16,605.34) 4,672

3 b) This is a contract where performance obligations are recognized over time. It will be in-
cluded in the statement of financial position at cost plus recognized profit less amounts
invoiced.
The estimated final profit is:
Rs.
Final contract price 290,000

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 Suggested Answers - December 2023 - Advanced Accounting

Less: costs to date (210,450)

estimated future costs (20,600)
Estimated final profit 58,950

The recognized profit can be calculated as follows:

= 58,950 * 230,000/290,000
= 58,950 * 79.31%
Profit recognized = 46,753

STATEMENT OF PROFIT OR LOSS

Rs.
Revenue (work certified) 230,000
Cost of sales ((210,450 + 20,600) * 79.31%) (183,247)
Gross profit 46,753

STATEMENT OF FINANCIAL POSITION

Contract asset
Rs.
Costs to date 210,450
Attributable profit 46,753
257,203
Amounts invoiced (210,000)
Contract asset 47,203
Contract receivables (210,000 – 194,000) 16,000\

4.

a) The books of Mr Y showed the following figures:

Particulars 31.03.2022 31.03.2023
Rs. Rs.
Cash at Bank 3,500 8,500
Cash in Hand 410 850
Stock in Trade 22,500 25,500
Sundry Debtors 18,000 ?
Sundry Creditors 8,000 7,300
Bills Payable 20,000 18,000
Furniture and Fittings 5,000 ?
Outstanding Salary 200 ?

The cash book analysis showed the following figures amongst others:
Particulars Rs. Particulars Rs.
Furniture purchased on
Receipts from Customers 105,000 01.10.2022 1,000
Discount allowed to Customers 1,300 Drawings 6,000

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Suggested Answers - December 2023 - Advanced Accounting

Salary up to 31.03.2023 2,600 Payment to Creditors 19,000

Discount received from
Rent
3,600 Creditors 2,600
Sundry Trade Expenses 8,500 Payment for Bills Payable 80,000
Depreciation is provided on furniture and fittings @ 10% per annum. No figures are available for
total sales. However, Mr Y informs you that he maintains a steady gross profit rate of 25% on sales.
Required: 10
Prepare Mr Y’s Trading and Profit and Loss Account for the year ended 31st March, 2023 and a
Balance Sheet as on that date.

b) ABCD who carried on a retail business opened a branch X on 1 st January 2020, all sales were
on credit basis. All goods required by the branch were supplied from the Head Office and were
invoiced to the branch at 10% above cost.
January 2020 Feb 2020 March 2020
Rs. Rs. Rs.
Goods sent to Branch (Purchase price) 40,000 50,000 60,000
Sales as shown by the branch monthly report 38,000 42,000 55,000
Cash received from Debtors and remitted to H. O 20,000 51,000 35,000
Returns to H.O. (Invoice price to Branch) 1,200 600 2,400
The stock of goods held by the branch on 31 March, 2020 amounted to Rs. 53,400 at invoice to
st

branch.

Required: 5
Record these transactions in the Head Office books, showing balances as on 31st March 2020 and the
branch gross profit the three months ended on that date. 5

Answer
4 a) Mr. Y
Trading, Profit and Loss Account for the year ended on 31st March, 2023
Particulars Rs. Particulars Rs.
To Opening Stock 22,500 By Sales
To Purchases (W2) 98,900 Cash (W4) 21,140
To Gross Profit (25% of Sales) 31,967 Credit (W6) 106,727
By Closing Stock 25,500
153,367 153,367
To Discount Allowed 1,300 By Gross Profit b/d 31,967
To Salary 2600 By Discount Received 2,600
Less: Opening Outstanding 200 2,400
To Rent 3,600
To Sundry Trade Expenses 8,500
To Depreciation on Furniture (500+50) 550
To Net Profit 18,217
34,567 34,567

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 Suggested Answers - December 2023 - Advanced Accounting

Balance Sheet of Mr Y as at 31st March, 2023

Liabilities Rs. Assets Rs.
Capital Furniture & Fittings
Opening Balance (W1) 21,210 Opening Balance 5,000
Add: Net Profit 18,217 Purchases 1,000
Less: Drawings (6,000) 33,427 Less: Depreciation (550) 5,450
Stock 25,500
Bills Payable 18,000 Sundry Debtors (W5) 18,427
Sundry Creditors 7,300 Cash at Bank 8,500
Cash in Hand 850
58,727 58,727

Working Notes:
(1) Balance Sheet of Mr Y as at 1st April, 2022
Liabilities Rs. Assets Rs.
Capital (Balancing figure) 21,210 Furniture & Fittings 5,000
Bills Payable 20,000 Stock 22,500
Sundry Creditors 8,000
O/s Salary 200 Sundry Debtors 18,000
Cash at Bank 3,500
Cash in Hand 410
49,410 49,410

(2) Sundry Creditors Account

Date Particulars Rs. Date Particulars Rs.
To Cash/Bank 19,000 1.4.2022 By Balance b/d 8,000
To Discount Received 2,600 By Purchases (Bal. fig.) 98,900
To Bills Payable (W3) 78,000
31.3.2023 To Balance c/d 7,300
106,900 106,900

(3) Bills Payable Account

Date Particulars Rs. Date Particulars Rs.
To Cash/Bank 80,000 1.4.2022 By Balance b/d 20,000
To Balance c/d 18,000 By Creditors (Bal. fig.) 78,000
98,000 98,000

(4) Cash Account

Date Particulars Rs. Date Particulars Rs.
1.4.2022 To Balance b/d By Salaries 2,600
Bank 3,500 By Rent 3,600

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By Sundry Trade Expens-

Cash 410 es 8,500
To Sundry Debtors 105,000 By Furniture 1,000
To Sales (Bal. fig.) 21,140 By Drawings 6,000
By Sundry Creditors 19,000
By Bills Payable 80,000
By Balance c/d
Bank 8,500
Cash 850
130,050 130,050

(5) Sundry Debtors Account

Date Particulars Rs. Date Particulars Rs.
1.4.2022 To Balance b/d 18,000 By Cash/Bank 105,000
To Sales (W6) 106,727 By Discount Allowed 1,300
By Balance c/d (Bal.
31.3.2023 fig.) 18,427
124,727 124,727

(6) Cost of Goods Sold and Credit Sales

Opening Stock 22,500
Add: Purchases 98,900
1,21,400
Less: Closing Stock 25,500
Cost of Goods Sold 95,900
Profit (25% on Sales or 1/3 of Cost of Goods Sold) 31,967
Total Sales 1,27,867
Credit Sales = Total Sales - Cash Sales
= Rs. 1,27,867 – Rs. 21,140 (Note 4)
= Rs. 1,06,727

4 b)
Books of Sell Well
Branch Account
Particulars Amount Particulars Amount
To Goods sent to Branch A/c 1,65,000 By Cash collected from debtors 106,000
(110 × 150,000)
100

To Stock Reserve (W.N2) 4,855 By Goods sent to Br- returns 4,200

To Balance Proft to General 37,363 By Goods sent to Br- (W.H.I) 14,618
Profit & Loss A/C

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 Suggested Answers - December 2023 - Advanced Accounting

By Balance c/d: 82,400

-Stock 53,400
-Debtors 29,000

207,218 207,218
Memorandum Branch Debtors Account
2020 Particulars Amount 2020 Particulars Amount
Jan 1 To Balance - Jan-March By Cash /Bank 106,000
b/d
Jan-March To Sales 135,000 By Balance c/d 29,000
1,35,000 1,35,000
(Note: Alternatively Memorandum Trading Account can be prepared for calculation of Branch gross
profit 37,363)

Working Notes:
1. Loading on Goods sent to Branch = 1/11 of (Rs. 165,000 ‍-Rs. 4,200) = Rs. 14,618
Stock Reserve = 1/11 of Rs. 53,400 = Rs. 4,855
5.
a) Chemical company Ltd. causes contamination of land but cleans up only when required to do so
under the laws of the country in which it operates. The country in which it operates did not have
any legislation requiring cleaning up, and the entity has been contaminating land in that country
for several years.
However, the entity has adopted an environmental policy in which it undertakes to clean up all
contamination that it causes. The company’s environmental cleaning policy is also posted on the
website. Various environmental protection groups have demonstrated against the company. But
the company has not responded positively to such a demonstration. The company has not so far
created any provision. Should the company create a provision as per NAS 37? 5

b) State with reasons, how the following events would be dealt with in the financial statements of
XYZ Ltd. for the year ended 31stAshadh, 2080: (2.5+2.5=
5)
i) An agreement to sell a land for Rs. 30 lakhs to another company were entered into on 1stA-
shadh, 2080. The value of land is shown at Rs. 20 lakhs in the Balance sheet as on 31stA-
shadh, 2080. However, the sale deed was registered on 15th Shrawan, 2080.
ii) The negotiation with another company for acquisition of its business was started on 2nd-
Magh, 2079. XYZ Ltd. invested Rs. 40 lakhs on 12thAshoj, 2080

c) Mr. J gives the following information relating to the items forming part of the inventory as on
31.03.2019. His enterprise produces product P using Raw Material X.
i) 900 units of Raw Material X (purchases @ Rs 100 per unit). Replacement cost of Raw Ma-
terial X as on 31.03.2019 is Rs 80 per unit
ii) 400 units of partly finished goods in the process of producing P. Cost incurred till date is Rs
245 per unit. These units can be finished next year by incurring additional cost of Rs 50 per
unit.
iii) 800 units of Finished goods P and total cost incurred is Rs 295 per unit.

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Suggested Answers - December 2023 - Advanced Accounting

Expected selling price of product P is Rs 280 per unit, subject to a payment of 5% brokerage on
selling price.
Determine how each item of inventory will be valued as on 31.03.2019. Also calculate the value
of total Inventory as on 31.03.2019. 5
Answer
5 a)
As per NAS 37, a provision shall be recognized when
a) There is present / probable obligation as a result of past event;
b) There is probable outflow of resources and
c) Reliable estimate can be made

obligation can either be legal or constructive. A constructive obligation is such which arises from
entity’s action where;

i) By an established pattern of past practice, published notices or a sufficiently specific current

statement, an entity has indicated to other parties that it will accept certain responsibility. and
ii) As a result, entity has created a valid expectation on the part of those other parties

In this case, posting of environmental policy by chemical company Ltd. In website which
undertakes to clean up all the contamination it causes seems to have created constructive obli-
gation for an entity itself.

In light of above provision and scenario, a provision should be booked provided a reliable
estimate could be made.

5 b)
i. According to NAS 10 ''Event after the reporting period'', assets and liabilities should be
adjusted for events occurring after the reporting period that provide additional evidence
of conditions existing at the end of the reporting period. In the given case, sale of im-
movable property was carried out before the closure of the books of accounts. The agree-
ment to sell was affected on 1stAshadh, 2080 and registration of the sale deed happened
on 15thShrawan, 2080, provides evidence of sale transaction that took place prior to
31st Ashadh. Therefore, adjustment to assets for sale of land is necessary in the financial
statements of XYZ Ltd for the year ended 31stAshadh, 2080.
ii. Events after the reporting period are those events, favorable and unfavorable, that occur
between the end of the reporting period and the date when the financial statements are
authorized for issue. Two types of events can be identified:
• those that provide evidence of conditions that existed at the end of the reporting pe-
riod (adjusting events after the reporting period); and
• those that are indicative of conditions that arose after the reporting period (non-ad-
justing events after the reporting period).
In the given case, though the negotiations took place during the Financial Year, the actu-
al transaction took place during the next financial year. Therefore, no adjustments need
to be made in the financial statements for the year ended 31st Ashadh 2080. However,
as per the provisions of NAS 10, significant events after the reporting period which can
influence economic decision of users should be disclosed in the notes to the financial
statements. In this case, XYZ Ltd. should make disclosure in its financial statements in
accordance with the disclosure requirements of NFRS 3 Business Combination

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 Suggested Answers - December 2023 - Advanced Accounting

5 c) As per NAS 2 “Inventories”, materials and other supplies held for use in the production of invento-
ries are not written down below cost if the finished products in which they will be incorporated are
expected to be sold at cost or above cost. However, when there has been a decline in the price of
materials and it is estimated that the cost of the finished products will exceed net realizable value,
the materials are written down to net realizable value. In such circumstances, the replacement cost
of the materials may be the best available measure of their net realizable value. In the given case,
selling price of product P is Rs 266 and total cost per unit for production is Rs 295.
Hence the valuation will be done as under:
(i) 900 units of raw material X will be written down to replacement cost as market value of fin-
ished product is less than its cost, hence valued at Rs 80 per unit.
(ii) 400 units of partly finished goods will be valued at 216 per unit i.e., lower of cost (Rs 245)
or Net realizable value Rs 216 (Estimated selling price Rs 266 per unit less additional cost of
Rs 50).
(iii) 800 units of finished product P will be valued at NRV of Rs 266 per unit since it is lower than
cost Rs 295.
Valuation of Total Inventory as on 31.03.2019

NRV / Replace- Value = units x cost or NRV

Particulars Units Cost (Rs)
ment cost whichever is less (Rs)
Raw material X 900 100 80 72,000
Partly finished goods 400 245 216 86,400
Finished goods P 800 295 266 212,800
Value of Inventory 371,200

6. Write short notes: (5×3=15)

a) Related Party Transactions
b) Watch list in Loan loss provisioning
c) General Purpose Financial Statements
d) Self -balancing system of ledgers
e) Winding up of company
Answer

6 a) Related Party Transactions

NAS 24 requires disclosure of related party transactions and outstanding balances in the separate
financial statements of a parent, venture or investor company or entity. The following informa-
tion shall be disclosed in the financial statements as per this Accounting Standard.
• Relationship between parents and subsidiaries shall be disclosed irrespective of
whether there have been transactions between those related parties.
• An entity shall disclose key management personnel compensation.
• If there have been transactions between related parties, an entity shall disclose the
nature of the related party relationship as well as information about the transactions
and outstanding balances necessary for an understanding of the potential effect of
the relationship on the financial statements.
Items of the similar nature may be disclosed in aggregate except when separate disclosure is nec-
essary for an understanding of the effects of related party transactions on the financial statements
of the entity.
6 b) Watch list in Loan loss provisioning
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Suggested Answers - December 2023 - Advanced Accounting

Watch list in Loan loss provisioning Nepal Rastra Bank (NRB) has formulated a new category of
loan for provisioning purposes. As per the NRB’s Rule, all loans are required to be classified into 6
different categories including Watch List whereby 5% of the total loan is required to be kept as pro-
visioning though the provision can be reversed when the loan becomes performing later. Provision
made for watch list loans is a general loan loss provision. As per the circular issued by NRB, the
loans having the following characteristics are to be classified as Watch List loans:
1. If interest and principal repayments are overdue for more than a month.
2. Short term/Working Capital Loans that are not renewed on time and are renewed on temporary
basis.
3. Loan and advances to customers/ group of customers who have been categorized as non per-
forming by other banks and financial institutions.
4. Firms/Companies/Organizations having negative net worth or net loss though interest and prin-
cipal are served on regular basis.
5. Loan and advances having multiple banking exposure more than Rs. 1 billion and have not
entered into consortium agreement.
6. Specifically specified by NRB after due inspection.
7. Debt equity ratio is more than 80:20
8. Debt to income ratio.
6 c) General Purpose Financial Statements: General Purpose Financial Statements means those state-
ments, intended to meet the needs of users who are not in a position to require an entity to prepare
reports tailored to their particular information needs. General purpose financial reporting focuses
on providing information to meet the common information needs of users who are unable to com-
mand the preparation of reports tailored to their particular information needs. These users must rely
on the information communicated to them by the reporting entity.
The format of General-Purpose Financial Statements includes the following:
(i) Statement of Financial Position – Balance Sheet
(ii) Statement of Comprehensive Income - Income Statement
(iii) Statement of Changes in Equity
(iv) Statement of Cash Flows
(v) Statement of Basic Accounting Policies and Notes to Accounts
6 d) All the ledgers of a bank are maintained on the self-balancing system. The general ledger contains
Control Accounts or total accounts in connection with various subsidiary ledgers i.e., Deposit Led-
gers, Investment Ledgers, Loan ledgers, etc. Total balances of individual accounts are compared
with the balance of Total Accounts on periodical interval. Thus, the self-balancing system renders
a useful tool of internal check of a Bank.
It implies a system of ledger keeping of which classifies ledgers as per nature of transactions, such
as sales ledger (customer ledger) purchase ledger (creditors ledger) and general ledger, etc.
• In order to make each ledger self-balanced, an extra “General ledger Adjustment A/c” is opened
in each of sales ledger & purchase ledger A/c.
• Preparation of such ledger facilitates easy & quick. Computation of total group accounts, such
as total debtors A/c, total creditors A/c.

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 Suggested Answers - December 2023 - Advanced Accounting

• It also renders a useful tool for internal check and ensuring arithmetical accuracy of individual
A/cs.
6 e) Winding up of company
Winding up of a company is a legal procedure to dissolve the company and put an end to its life. The
company ceases to be a 'going concern'. The term winding up is defined as, 'the process by which
the life of a company is ended, and its property is administered for the benefit of its members and
creditors.' During the process of winding up, the assets of the company are sold, and all the debts of
the company are paid off. An administrator, called the liquidator, is appointed to take control of the
winding up process of the company. If any surplus is left, the liquidator would distribute it among
the owners of the company in accordance with their rights. In case the assets are insufficient, the
owners may have to compensate if the agreement so specifies. Following are the steps of company
dissolution:
Winding Up:
When a company makes the decision to go out of business, it generally cannot simply close its doors
immediately after it makes that decision. Most businesses have long-term obligations to employees,
suppliers, and customers as well as landlords and various other parties. A company will have to take
time to end these relationships and handle any obligations it has to various stakeholders before it can
close its doors.
Liquidation
Once a company has wound up its affairs, it can then sell its remaining assets. Some of these assets,
such as remaining inventory, may be liquidated as part of the winding up phase. Others, such as land,
buildings and equipment will typically be sold only after the company has completely gone out of
business.
Distribution of Assets:
After a company's assets have been liquidated and converted into cash, the company must then dis-
tribute that cash to the appropriate stakeholders. If the company has any outstanding debt, the credi-
tors have the right to be repaid first, according to the order in which their debt is subordinated. Those
creditors with the most subordinated debt will be repaid last. Only after all creditors are repaid will
the owners of the company be repaid, typically in proportion to their level of ownership.
Dissolution:
Once the company has wound up its affairs, liquidated its assets and distributed the proceeds of that
liquidation, it will dissolve the company formally. Companies have legal identities that require a legal
creation. Similarly, when a company ceases to be a going concern, it must legally end its existence.
This is known as dissolution. Typically, this only requires informing the secretary of the state in
which the company was founded that the company has gone out of business.
Modes of winding up may be Voluntary winding up, winding up by Company Registrar Office and
Winding up by Court's order.

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Suggested Answers - December 2023 - Audit and Assurance

AUDIT & ASSURANCE

Roll No……………. Maximum Marks - 100
Total No. of Questions - 7 Total No. of Printed Pages - 9
Time Allowed - 3 Hours
Marks
Attempt all questions.
1. As an auditor, give your opinion with explanations on the following cases:
(4×5=20)
a) Surendra Clothing Pvt. Ltd. has been assessed to Income-tax, in which a demand of Rs. 10 lakhs
has been made. The company has gone in appeal. The company has deposited Rs. 6 lakhs against
the demand, on being pursued by the department. The company has been advised by its counsel
that there is 80% chance of losing in respect of one of the grounds which may end up confirming
the demand of rest Rs. 4 lakhs. How the company should treat the same while preparing the final
accounts for the year ending Asadh end, 2079.
b) PFK Limited has obtained loan of Rs. 10 Crore for the construction of plant from a bank at 8%
interest rate per annum in FY 2078/79. In FY 2079/80, there was a heavy rainfall and consequent
landslide caused construction work of the plant halted for 6 months period. Interest cost of full
year is already capitalized in the asset.
c) Financial statement of Planet Ltd. for the year ended 2079/80 was approved by its Board of
directors on Bhadra 27, 2080. A debtor against whom insolvency case was going on in court from
the beginning of 2079/80 was declared insolvent on Bhadra 15, 2080. Total amount receivable
from that debtor is Rs. 2 crores. Accountant is not sure about its impact on financial statements.
d) Local government gave grant amounting to Rs. 12 lakhs to a company to purchase a machine.
Company purchased the machine for Rs. 30 lakhs. Useful life of the machine was 4 years and
residual value was Rs. 6 lakhs. The company charged depreciation on Straight-line Method.
Machine was shown in statement of financial position, net of Grant. After 1 year, Grant became
refundable to the extent of Rs. 7.5 lakhs due to non-compliance with certain condition. Accountant
of the company debited Miscellaneous Expenses for refundable grant of Rs. 7.5 lakhs and no
adjustments were made in assets.
Answer
1 a) As per paragraph 14 of NAS 37, an entity shall recognize a provision when:
-a present obligation (legal or constructive) has arisen as a result of past event (the
obligating event),
-payment is probable (more likely than not)
-the amount can be estimated reliably
Here, the obligating event is an event that creates a legal or constructive obligation and therefore
results in an entity having no realistic alternative but to settle the
obligation. Contingent liability is a possible obligation depending on whether some uncertain future
event occurs or a present obligation but payment is not probable or the amount cannot be measured
reliably. Contingent liability is not recognised; rather it is disclosed in the notes to accounts in
financial statements.
In the given case, there is an assessment by income tax authority of Rs. 10 lakhs. This situation

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has arisen as a result of past event resulting in present obligation of the entity and there is an 80%
chance of losing the case. This extent of probability is substantial. The amount of obligation can
also be estimated reliably. Therefore, the company shall make provision for Rs. 10 lakhs. If the
provision of Rs. 6 lakhs already deposited has been accounted for as provision, additional provision
of Rs. 4 lakhs should be made and presented in financial statements accordingly.
1 b) As per NAS 23 “Borrowing Cost”, borrowing cost that is directly attributable to the acquisition,
construction or production of the qualifying asset shall be capitalized as a part of the cost of the
asset. However, if there is any suspension of active development of qualifying assets, an entity
shall suspend capitalization of borrowing cost during the extended period. Here in the question,
PFK limited has taken loan of Rs. 10 crore at 8% interest rate per annum for the construction of
plant which is a qualifying asset and borrowing cost related to construction of such assets shall be
capitalized. However, in FY 2079/80 construction of the plant was halted for 6 months due to heavy
rainfall and consequent landslide which caused suspension of active development of qualifying
asset, therefore, borrowing cost related to such period i.e. 6 months shall be recognised in profit or
loss rather than capitalize as a cost of the qualifying asset. Therefore, PFK Limited shall reverse
interest cost of Rs. 40 lakh (10 crore*8%*6/12) related to suspension period from the asset and
recognise as expenses in profit or loss.
1 c) As per NAS 10: Events after the Reporting Period,
Events after the reporting periods are those events, favorable and unfavorable, that occur between
the end of the reporting period and the date when the financial statements are authorized for issue.
These events are mainly categorized as:
i) Adjusting events after reporting period: those that provide evidence of conditions that existed
at the end of reporting period.
ii) Non adjusting events after reporting period: those that are indicative of conditions that arose
after the reporting period.
Here, court case against the debtor was going on since the beginning of 2079/80, hence there was
evidence of condition that existed at the end of reporting period. So this is an adjusting event. The
accountant should make provision for loss of Rs. 2 crore in the financial statements.
1 d) According to NAS 20 para 32, a government grant that becomes repayable should be accounted for
as a change in accounting estimates. When the government grants related to assets become repayable
it shall be recognized by increasing the amount of asset or reducing the deferred income balance
by amount repayable. The cumulative additional depreciation that would have been recognized in
profit or loss to date in the absence of the grant shall be recognized immediately in profit or loss.
Here, the treatment done by accountant is not correct. Cost of machinery should be increased by Rs
7.5 lakhs and amount of depreciation should be revised according to increased cost of machinery
and that should be charged to profit and loss account. Here revised depreciation amounting Rs 6.75
lakhs shall be charged for the year in profit and loss account.
Working Note:
Depreciation Calculation Year 2 = revised depreciation after refund of grant (W.N.1) +
cumulative additional depreciation that would have been recognized in profit or loss to date in the
absence of the grant (W.N. 2)
=4.875 + 1.875
=6.75

W.N. 1

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Suggested Answers - December 2023 - Audit and Assurance

Revised Depreciation for Year 2 = (30-12+7.5-6)/4=4.875

W.N. 2
Cumulative additional depreciation= Depreciation to be charged-depreciation charged in year 1
=4.875-(30-12-6)/4
=4.875-3
=1.875
2. Give your comments on the following cases: (4×5=20)
a) ABC and Associates, a new firm of chartered accountants has developed their website ‘www.
abcassociates.com’. The firm mentioned the website address on its letterheads and also sent the
information about its website to prospective clients and other professional members via email.
b) Star Ltd is in construction business. Mr. Q has been appointed as external auditor for the year
2079/80. Due to the technical aspects of the business Mr. Q sought help from the technical
consultants (experts). Explain the responsibilities of Mr. Q in relation to the work done by those
consultants.
c) DLL & Associates, a chartered accountant firm, paid Rs. 100,000 to Mr. Min for referring the
corporate clients to them.
d) Intelligent Ltd. entered into an agreement with Mr. Intellectual on 15th Ashadh, 2079 for FY
2079/80, whereby it agreed to pay him Rs. 2 lakhs per month as retainership fee for consultation in
IT department. No amount was actually paid, however Rs. 24 lakhs was charged in the Statement
of Profit and Loss for the year ending on Ashadh, 2080. The management of the company uttered
that need-based consultation was obtained throughout the year. However, on investigation, no
documentary or other evidence of receipt of such service was found.
Answer
2 a) According to section 4.1 of Guidelines on Marketing Professional Services by professional
accountants in public practice 2023 issued by ICAN, the firm should ensure that none of the
information contained in the website be circulated on their own or through email or by any other
mode or technique except on a specific "pull” request. The firm would also not issue any circular
or any other advertisement or any other material of any kind whatsoever by virtue of which they
solicit people to visit their website. The firm would, however, be permitted to mention their website
address on their professional stationery. Here, ABC and Associates sent the information about its
website to prospective clients and other professional members via email. Thus it is not permissible
to circulate the information as it would solicit people to visit their website. However, the website
address can be mentioned on the letter heads as per the provisions of the guidelines.
2 b) NSA 620 deals with the auditor’s responsibilities relating to the work of the expert. According to
it , the auditor has sole responsibility for the audit opinion expressed and that responsibility is not
reduced by the auditor’s use of the work of the auditor’s expert. However, the auditor can accept
the expert’s findings or conclusion as appropriate audit evidence when the auditor concludes that
work of such expert is adequate for the auditor’s purpose. To evaluate the adequacy of the expert’s
work auditor shall:
i) Evaluate whether the auditor’s expert has the necessary competence, capabilities and objectivity
for the auditor’s purpose.
ii) Obtain a sufficient understanding of the field of expertise of auditor’s expert for auditor to
determine the nature, scope and objectives of that expert’s work.
iii) Evaluate the adequacy of expert’s work by:

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 Suggested Answers - December 2023 - Audit and Assurance

• Evaluating relevance and reasonableness of expert’s findings or conclusions, and their

consistency with other audit evidences,
• Evaluating the relevance and reasonableness of significant assumptions used by the experts.
• Evaluating the relevance, completeness and accuracy of the source data used by the experts.
The auditor shall not refer to the work of an auditor's expert in an auditor's report containing an
unmodified opinion unless required by law or regulation to do so. If such reference is required by
law or regulation, the auditor shall indicate in the auditor's report that the reference does not reduce
the auditor's responsibility for the auditor's opinion.
If the auditor makes reference to the work of an auditor's expert in the auditor's report because
such reference is relevant to an understanding of a modification to the auditor's opinion, the auditor
shall indicate in the auditor's report that such reference does not reduce the auditor's responsibility
for that opinion.
2 c) As per provision prescribed in section 34 of Nepal Chartered Accountants Act, 2053, a member of
the institute shall not share or distribute portion of auditing fee or remuneration with any person
other than a member of the institute; and shall not pay any commission, brokerage etc. out of the
professional fees earned to any person or member. Considering the provision of the Act, payment of
Rs. 100,000 made by DLL & Associates to Mr. Min a nonmember person as a referral commission
for referring clients contravenes with the provision of the Act. Hence, it is considered misconduct
by DLL & Associate and therefore, the firm shall be liable for disciplinary action.
2d) Fraud Committed by Management of the Company: As per NSA 240 on “The Auditor’s
Responsibilities Relating to Fraud in an Audit of Financial Statements”, fraud can be committed
by management overriding controls using such techniques as recording fictitious journal entries,
particularly close to the end of an accounting period, to manipulate operating results or achieve
other objectives.
In the given case, Intelligent Ltd. has entered into an agreement with Mr. Intellectual, at year-end,
for consultation in IT department. It also charged yearly fee of Rs. 24 lakhs in the Statement of
Profit and Loss, however, no documentary or other evidence of receipt of such service was found,
on investigation. It is clear that company has passed fictitious journal entries, near year-end, to
manipulate the operating results.
Accordingly, the auditor would adopt the approach which will be based on the result of misstatement
on the basis of such fictitious journal entry, i.e. if, as a result of a misstatement resulting from fraud
or suspected fraud, the auditor encounters exceptional circumstances that bring into question the
auditor’s ability to continue performing the audit, the auditor shall determine the professional and
legal responsibilities applicable in the circumstances, including whether there is a requirement for
the auditor to report to the person or persons who made the auditor appointment or, in some cases,
to regulatory authorities; or the auditor may consider for appropriateness of withdrawal from such
engagement, where withdrawal from the engagement is legally permitted.
3. Answer the following: (3×5=15)
a) What approach should be used by the auditor to obtain sufficient appropriate audit evidence
regarding opening balances?
b) Describe the concept of substance over a form in the context of financial reporting and in
conducting an audit of financial statements.
c) What are the relevant criteria which determine whether the data is reliable for the purposes
of designing substantive analytical procedures?
Answer

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Suggested Answers - December 2023 - Audit and Assurance

3a) As per NSA 510: Initial Engagements-Opening Balances, an auditor shall read the most recent
financial statements, if any, and the predecessor auditor’s report thereon, if any, for information
relevant to opening balances, including disclosures. The auditor shall obtain sufficient appropriate
audit evidence about whether the opening balances contain misstatements that materially affect the
current period’s financial statements by:
a) Determining whether the prior period’s closing balances have been correctly brought forward to
the current period or, when appropriate, have been restated;
b) Determining whether the opening balances reflect the application of appropriate accounting
policies; and
c) Performing one or more of the following:
i) Where the prior year financial statements were audited, reviewing the predecessor auditor’s
working papers to obtain evidence regarding the opening balances;
ii) Evaluating whether audit procedures performed in the current period provide evidence
relevant to the opening balances; or
iii) Performing specific audit procedures to obtain evidence regarding the opening balances.
3 b) The concept of substance over a form is that financial statements should reflect the economic substance
of transactions and events rather than their legal form. This means that financial statements reflect
the underlying economic reality of a transaction or event rather than its legal form. For example,
if a company sells an asset and then lease it back form the purchaser under a sale and leaseback
transaction, the economic substance of this transaction is financing arrangement rather than a sale
therefore accounting treatment should reflect this substance.
While conducting audit, the auditor should keep in mind this concept, transactions/events may look
different in form than they are actually on substance. So, while arriving at conclusion this should
be considered appropriately.
3 c) Relevant Criteria for Determining Reliability of Data: NSA 520 on ‘Analytical Procedures’
provides that 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 criteria 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.
So while designing substantive analytical procedure, the auditor should consider testing the
operating effectiveness of controls over the entity's preparation of information used by the auditor
for the purpose of designing appropriate response to the assessed risks.

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4. Answer/Comment on the following: (3×5=15)

a) Mr. A, a professional accountant assumed the custody of client’s assets. Along with his own
assets, he used client’s assets in his business. Books of accounts for client's assets were not
kept. With reference to Guidelines on Custody of Clients Assets/Money issued by ICAN,
give your view on act of Mr. A.
b) During the fiscal year 2077/78 XYZ & Co., Chartered Accountants, a proprietorship firm has
done the following Statutory Audits:
Listed Company: 3
Public Limited Company: 10
Private Limited Company: 75
INGOs: 5
In 2078/79, one existing listed company did not continue the XYZ & Co. as auditor and other
two listed companies approached the firm to appoint him as auditor. In addition, 2 other public
limited company and 2 NGOs approached the firm for the audit of FY 2078/79.
c) Y and X Associates, an audit firm wants to provide audit services and the valuation =
services to the same client. Discuss in light of provisions laid down in Handbook of
the Code of Ethics for Professional Accountants issued by the Institute of Chartered
Accountants of Nepal.
Answer
4 a) As per Guidelines on custody of clients Assets/Money, 2023 assuming the custody of client’s asset/
monies creates self-interest threat and other threats to compliance with the principles of professional
behavior and the objectivity. The Accountant shall follow and adopt the precautions so that the
threats are maintained in tolerable level. Guidelines to be followed while taking the custody of
client’s assets can be summarized as:
• Before assuming the custody make enquiries about source of such assets and verify whether
all the legal and regulatory requirements are appropriately complied with.
• After assuming the custody assure that:
 Client’s assets are kept separately and not mixed with personal or firm’s asset
 Assets are used as intended by client or in accordance with the terms and conditions of the
engagement assignments and
 Book of accounts are appropriately maintained at all the times along with any incomes,
gains, dividends etc. accrued or received thereof.
 The PA shall verify & evaluate risk associated there to if he can provide safe custody to client
assets.
Here, Mr A can assume the custody of clients assets however he cannot mix those with his own
assets and use. Further he also has to maintain books of account for the same.
4 b) 194th ICAN Council meeting dated 16th February 2015 had revised the earlier council decision for
the number of audits that can be carried out by the ICAN COP holder with effect from 17th July
2015. As per revised decision, a member in practice can conduct the audit of 100 entities in a fiscal
year including the maximum 10 public companies.
In the given case the number of audit engagements of XYZ & Co for 2078/79 are as follows:
Listed Company: 3-1+2= 4
Limited Company: 10+2= 12,
Private Limited Company: 75,
INGOs: 5
NGOs: 2

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Suggested Answers - December 2023 - Audit and Assurance

Total: 98
Public Limited Company: 4+12 = 16.
As per the provision, a member in practice can audit 100 numbers of entities; however the public
limited company shall not exceed 10. In the given case, the total number is below 100, however, the
public limited company has exceeded 10. So, he can accept only 10 audit engagements of public
limited companies. He should not accept the audit of 6 public companies but can accept audit of =
two NGO’s offered.
4c) Handbook of the Code of Ethics for Professional Accountants 2023 issued by ICAN does provide
guidance as valuation services to be provided by the professional Accountants in practice. A
valuation comprises the making of assumptions with regard to future developments, the application
of appropriate methodologies and techniques, and the combination of both to compute a certain
value, or range of values, for an asset, a liability or for a business as a whole. Providing valuation
services to an audit client might create a self-review or advocacy threat. A self-review threat may
be created when a firm or network firm performs a valuation for a financial statement audit client
that is to be incorporated into the client's financial statements. As the valuation service is likely
to involve the valuation of matters material to the financial statements (e.g. the present value of
obligations) and the valuation involves a significant degree of subjectivity, the self-review threat
created may not be reduced to an acceptable level of the application of any safeguard. Accordingly:
• such valuation services should not be provided; or
• the firm should withdraw from the financial statement audit engagement. If the net liability was
not material to the financial statements the self-review threat may be reduced to an acceptable
level by the application of safeguards such as:
 involving an additional professional accountant who was not a member of the audit team to
review the work done by the member of firm;
 confirming with the audit client their understanding of the underlying assumptions of the
valuation and the methodology to be used and obtaining approval for their use;
 obtaining the audit client's acknowledgement of responsibility for the results of the work
performed by the firm; and
 making arrangement so that the partner providing the valuation services does not participate
in the audit engagement.
5. Answer/Comment on the following: (2×5=10)
a) The Office of the Auditor General in FY 2079/80 conducted the gender audit of one of
the local levels. Official of that Local level argues that OAG can only do financial audits
of the palika. State your view along with relevant legal provisions in this regard.
b) Bank and Financial Institutions Act, 2073 has provision related to ineligibility for
appointment as an auditor. Discuss about those provisions.
Answer
5 a) As per Section 3(1) of the Audit Act, 2075 audit of the following bodies shall be conducted by the
Auditor General:
a) Government Offices,
b) Corporate bodies wholly owned by the Government of Nepal, Provincial Government or
Local Level,
c) Bodies or institutions the audit of which is so specified by the Federal law as to be performed
by the Auditor General.
Section 5 further illustrates that the Auditor General may, on the selective basis, perform audit of
various matters such as information technology, performance, gender, forensic, environment, of the

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 Suggested Answers - December 2023 - Audit and Assurance

bodies referred to in sub-section (1) of Section 3, of which audit is to be performed, in addition to

their financial audit, having regard to, inter alia, the regularity, economy, efficiency, effectiveness
and the propriety thereof.
Therefore the contention of the official of that palika is incorrect and OAG is mandated to perform
the gender audit of the local level on selective basis.
5 b) As per Section 64 of Bank and Financial Institutions Act, 2073, following persons or any firm,
company or institution in which such person is a promoter or partner shall not be eligible to be
appointed as an auditor of a bank or financial institution: -
i) A promoter, Director, Chief Executive of a bank or financial institution or his\her family
member,
ii) An official, employee or internal auditor of the bank or financial institution,
iii) A person working as a partner of any promoter, Director or employee of the bank or financial
institution,
iv) A borrower of the bank or financial institution, a person with significant ownership or relevant
person or person having financial interests,
v) A person who has been declared bankrupt in Nepal or abroad,
vi) A person, firm, company or institution having subscribed one percent or more shares of the
bank or financial institution,
vii) A person, who has been punished in any criminal offense by the court and a period of five
years has not been lapsed after he\she has served the punishment,
viii) A person, who is disqualified to become an auditor according to prevailing laws.
Further, if any person appointed as auditor of bank or financial institution is found to be ineligible,
his/her appointment shall be deemed to have been ipso facto invalid.
6. Write short notes on the following:
(4×2.5=10)
a) Cut off procedures
b) Hot File review
c) Audit Trail in EDP environment
d) Role of Internal Audit in Corporate Governance
Answer
6 a) Cut-off procedures mean procedures employed to ensure the separation of transactions at the end of
one year from those in the commencement of the next year. For the cut off procedure of inventory,
the auditor should satisfy himself by examination and test check that these procedures adequately
ensure that:
• Goods purchased for which property has passed to the client have in fact been included in
inventories and that the liability if any, has been provided for.
• Goods sold have been excluded from the inventories and credit has been taken for sales.
The auditor may examine a sample of documents evidencing the movement of stocks into and
out of stores, including documents pertaining to period shortly before and shortly after the cutoff
date, and check whether the stocks represented by those documents were included or excluded, as
appropriate, during the stock-taking
6 b) Hot file review or hot review is usually conducted during the audit and/or after the audit work is
completed but before the auditor’s report is issued. This is a detailed review that is conducted with

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Suggested Answers - December 2023 - Audit and Assurance

an aim to find out if there’s any weakness in application of audit procedures or if the results have
been misinterpreted. Hot reviews are usually carried out by the senior of the audit team or someone
with the same authority who is not connected with the engagement. Such reviews mostly include
meetings with audit team personnel and reviewing their individual work so that both the work and
the skills of members are improved by pointing out discrepancies and providing recommendations.
6 c) Audit Trail: Audit trail means the situation where it is possible to relate the original input with final
output on one-to -one basis. Audit trail can’t be found generally on EDP environment and especially
in OLRT (On Line Real Time) system. The auditor needs to use computer assisted audit techniques
(CAAT) in such situation. There is no audit trail in EDP environment due to the following reasons:
• Direct data is entered in the system.
• Directly updating master files as in OLRT system
• No in-between reporting system, only direct final report is prepared.
6 d) Role of Internal Audit in Corporate Governance: Internal audit is the appraisal activity established
within the entity to monitor the internal control along with other matters related to maintaining
the effectiveness of internal control system. Corporate Governance is the policies, processes and
structures used by organization to direct activities, achieve objectives and protect the interests
of the stakeholders in the manner consistent with ethical standards. Internal audit function is
considered as one of the four pillars of corporate governance. Internal audit helps in maintaining
the corporate governance by:
• Reviewing the organization’s governance system, risk management system and management
controls,
• Reviewing the reliability of financial and management reporting, and compliance with laws
and regulations,
• Providing the suggestions to strengthen the internal control system,
• Reporting to appropriate authority about the critical issues.
7. Distinguish between:
(2×5=10)
a) Audit and Investigation
b) Control Risk and Detection Risk
Answer
7 a) Audit and Investigation
General objective of audit is to find out whether the accounts show true and fair view of the
affairs and the position of the entity. It never undertakes discovery of specific happenings and is
never started with a preconceived notion about the state of affairs. Auditor seeks to report what
an auditor finds in the normal course if examination of the accounts adopting generally followed
techniques unless circumstances call for a special probe: fraud, error, irregularity, whatever comes
to the auditor’s notice in the usual course of checking, are all looked into in depth and sometimes
investigation results from the prima facie findings of the auditor.
Investigation is a critical examination of the accounts with a special purpose. For example, if fraud
is suspected and an accountant is called upon to check the accounts to whether fraud really exits and
if so, the amount involved, the character of the enquiry changes into investigation. Investigation
normally concerns only specified areas, but at times, it may involve the whole field of accounting.
Its essence lies in going into the matter with some pre-conceived notion suited to the objective. The
techniques for investigation varies according to the nature of fraud.

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 Suggested Answers - December 2023 - Audit and Assurance

7 b) Control Risk and Detection Risk

Control risk is the risk that misstatement that could occur in an account balance or class of
transactions and that could be material, individually or when aggregated with mis-statements in
other balances or classes, will not be prevented or detected on a timely basis by the system of
internal control. There will always be some control risk because of the intrinsic limitation of any
system of internal control To assess control risk, the auditor should consider the adequacy of control
design, as well as test adherence to control procedures. In the absence of such an assessment, the
auditor should assume that control risk is high.
Detection risk is the risk that an auditor's procedures will not detect a misstatement that exists in
an account balance or class of transactions that could be material, individually or when aggregated
with misstatements in other balances or classes. The level of detection risk relates directly to the
auditor's procedures. Some detection risk would always be present even if an auditor were to
examine 100 percent of the account balance or class of transaction because, for example, the auditor
may select an inappropriate audit procedure.

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Suggested Answers - December 2023 - Corporate and Other Laws

CORPORATE AND OTHER LAWS

Roll No…………….  Maximum Marks – 100
Total No. of Questions - 7 Total No. of Printed Pages - 17
Time Allowed - 3 Hours
Marks
Attempt all questions.

1. Answer the following questions:

(5×5=25)
a) Mr. Kundan is a new shareholder of XYZ Real Estate Ltd who has subscribed 15,000 unit shares
having par value NPR 100 with full voting rights. The directors of the company suspect that the
fund used in subscribing the shares might have been invested by a corrupt person. So, they are
planning to enquire Mr. Kundan to identify the real owner of his shares.
Suggest the company if it is entitled to enquire him regarding the identification of beneficiary =
of the shares pursuant to Companies Act, 2063. Will your answer be different if the shares sub-
scribed by him were without voting rights?
b) Dudhiya Bhujiya Company Ltd. has Five lakh issued shares. The shares nominal value is pre-
scribed @ Rs.100. Among them Three Lakh no. of shares are paid on the nominal price. One
Lakh shares are issued @Rs.90. Is it possible? Discuss with the provision of the issue of share
at discount.
c) Mr. M is appointed as a director of 'X' company by its promoters. Chief Executive Office has =
called the first meeting of the Board of Directors. One of the agenda of the meeting is regarding the
powers and duties of the Board of directors. As you are a company secretary, present the powers
and duties of the directors of the company as provided in the Companies Act, 2063.
d) Kathmandu Construction Ltd. holds 15% shares in Nepal Engineering Service Ltd (NESL) and =
has appointed one director Ms. Suruchi Shah to sit on the board of Nepal Engineering Service
Ltd. representing Kathmandu Construction Ltd. It has also appointed one alternate director is
Mr. Arun Sharma. Ms. Suruchi Shah has informed BOD and Mr. Sharma that she will be out of
the country for two month; accordingly Mr. Arun Sharma attended the board meeting in place of
her. After she returned back to the office after two month and informed to Mr. Arun and Board of
Directors of NESL. Mr. Arun Sharma is still attending the board meeting of NESL. Is this lawful?
Give your opinion.
e) Advocate Master, company secretary of Random Pvt. Ltd. forgot to file the return in Office of =
Company Registrar (OCR) of FY 2078-79 on time and fine of Rs 20,000 was imposed by OCR
for the delay. Company decided to pay the fine incurred. Critically examine the event by answer-
ing the following based on Companies Act, 2063:
i) Mention the return to be filed as per Sec 81;
ii) Mention fine imposed as per Sec 81;
iii) Mention the official liable to pay the fine imposed.

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 Suggested Answers - December 2023 - Corporate and Other Laws

Q1a.Answer:
Section 47 of the Companies Act, 2063 prescribes following provisions regarding the collection of in-
formation on title to share:
If a company asks any shareholder to provide information as to what capacity one has obtained the
shares with full voting rights registered in his/her name or whether any other person has investment in
the shares registered in the name of such shareholder and where there is another person as a the benefi-
ciary of such shares, as to the identity and nature of the title of that person, it shall be the duty of such
shareholder to provide such information to the company within thirty days.
On receipt of the information sought under Sub-section (1), the company shall record opposite the name
of the concerned shareholder, in the register the date of demand of such information, date of receipt of
information and the contents of information received and provide the Office with information pertaining
there to within seven days.
In the given case, directors of the company suspect the fund used in subscribing 15,000 units of shares
with full voting rights by Mr. Kundan on the ground it might have been invested by a corrupt person. So,
they are planning to enquire him to identify the real owner or beneficiary of the shares.
Hence, pursuant to section 47 of the Act, the company is entitled to enquire Mr. Kundan regarding the
beneficiary of the shares as his subscribed shares are with full voting right shares.
However, if the shares subscribed by him were without voting rights, the company would not hold such
right because that enquiry authority under section 47 of the Act is entitled only on shares with full voting
right shares.
Q1b.Answer:
Regarding the issuance of share at discount, the Companies Act, 2063 has provided the following provi-
sion in Section 64:
1. A company shall not issue or sell its shares at a discount.
Notwithstanding anything contained in Sub-section(1), a company may, on the following con-
ditions, issue or sell shares at a discount by adopting a special resolution at the general meeting
to that effect, not being less than the percentage specified in that resolution:
a) In issuing or selling shares pursuant to a capital restructuring scheme of the company,
In issuing or selling shares pursuant to a scheme of converting loans borrowed by the com-
pany into shares with the consent of creditors;
b) In issuing or selling shares pursuant to an employee share scheme;
c) In issuing shares on such other conditions as approved by the Office
Hence, only in compliance with aforestated provisions of section 64(2), it is possible to
issue shares at discount.
Q1c. Answer:
Section 95 of Companies Act, 2063 has provided the powers and duties of board of directors
as follows:
1. Subject to the provisions contained in this Act and the articles of association and the decisions
of the general meeting, the directors shall manage all transaction, exercise of powers and per-
form duties of the company through the board of directors collectively.
2. Except in accordance with a decision of the general meeting no director of a public company
shall do anything yielding personal benefit to him/her through the company. Provided, however,
that a private company may make a reasonable provision on the benefit which the director may
derive thought the company, as mentioned in the memorandum of association and articles of

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Suggested Answers - December 2023 - Corporate and Other Laws

association or consensus agreement.

3. Except as otherwise provided in this Act, the memorandum of association and articles of asso-
ciation or the consensus agreements, the case of a private company, the board of directors may
appoint any director from amongst themselves or any employee of the company as its repre-
sentative and so delegate to him/her any or all of its powers, inter alia, to do any act or thing,
make correspondences or sign bills of exchange or cheques etc. On behalf of the company that
such powers are to be exercised individually or jointly. In so delegating the powers, at least one
director and their company secretary, if any, shall certify such delegation, pursuant to a decision
of the board of directors.
4. A company may recover damages from a person acting in the capacity of director or representa-
tive of the company for any loss or damage caused to the company from any act or action done
by such person beyond his jurisdiction.
5. If any person enters into any transaction with the director or with a representative as referred
to in Sub-section (3) despite the knowledge or having reason to believe that such director or
representative is dealing with any transaction for his/her personal interest or for causing loss or
damage to the company, such person shall not be entitled to make any claim against the compa-
ny in respect of such transaction.
6. Notwithstanding anything contained in Sub-section (3), the board of directors shall not delegate
the following powers conferred to the company and shall exercise such powers only by means
of resolutions passed at meetings of the board of directors :
a) The power to make calls on shareholders in respect of amount unpaid on their shares;
b) The power to issue debentures;
c) The power to borrow loans or amount otherwise than on debentures;
d) The power to invest the funds of the company;
e) The power to make loans.
f) The provision of Clause(e) of Sub-section(6) shall not apply to loans to be let and deposits
to be received in the ordinary course of business transaction by the companies carrying on
banking and financial business.
g) If the board of directors considers necessary to form a sub-committee for the discharge of
any specific business, it may form one or more than one sub-committee as required and get
such business discharged.
Q1d.Answer:
Section 87(2) of the Companies Act, 2063, provides that in case a corporate entity holds shares in a
company, the corporate body may appoint directors in proportion of the total number of directors of
the company and the number of shares subscribed by such body corporate and also an alternate director
for each director to attend and vote in a meeting of the board of directors instead of the director in cases
where such director will not be in a position to attend the meeting of the board for any reason.
Sub section (3) provides that where any director is not able to attend a meeting of the board of direc-
tors, such director shall give information thereof to his/her alternate director and the board of directors.
In such case, the alternate director shall be entitled to attend, and vote in, the meeting of the board of
directors.
As per Sub Section (4), an alternate director shall not be entitled to attend, and vote in, a meeting of the
board of directors unless so informed by the director.

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 Suggested Answers - December 2023 - Corporate and Other Laws

In the given case, Ms. Suruchi Shah is already back to office to be able to attend the board meeting.
Hence, pursuant to section 87(4) of the Act, the attendance of Mr. Arun Sharma in the board meeting
as an alternate director cannot be lawful.
Q1e.Answer:
Returns of companies as prescribed under section 51, 78, 80, 120, 131 or 156 and other relevant sec-
tions of the Companies Act, 2063 shall be submitted to Office of the Company Registrar. Section 81(1)
states that any return, notice or information required to be provided by the company to OCR or infor-
mation required to be provided by the officer or shareholder to the company pursuant to this Act shall
be provided by the director of the company or the officer or shareholder who has the duty to provide
such return, notice or information to the Officer or the company, as the case may be, within the time
limit, if any, prescribed by this Act for the provision of such return, notice or information.
i) Section 81(2) states that the director of a company or its officer who is in default in providing
the return, notice, information or reply as referred to in Section 51, 78, 80, 120, 131 or 156
within the time limit shall be punished by the Registrar with fine, as follows:
Paid up capital of the Fine up to 3 Fine for additional 3 Fine for addition- Fine beyond 1 year
Company months - Sec months - Sec 81(2b) al 6 months - Sec per year
81(2a) 81(2c) - Sec 81(2d)
Upto Rs 25 lakhs Rs 1,000 Rs 1,500 Rs 2,500 Rs 5,000
Upto Rs 1 crore Rs 2,000 Rs 3,000 Rs 5,000 Rs 10,000
More than 1 crore Rs 5,000 Rs 7,000 Rs 10,000 Rs 20,000

Section 81 (3) states that in case of a company not distributing profit which is in default in providing
such statement, information or notice within the time limit as referred to in sub-section (1) the director
or officer of such company shall be liable to the same fine as is imposable on a company of which paid
up capital is up to ten million rupees.
Section 81(4) states that any director, office or shareholder who is liable to pay the fine as referred to in
Sub-section (2) shall pay it to the Office and submit to the Office or the concerned company such returns
as required to be forwarded.
Section 81(5) states that in calculating the period of expiration of the time limit pursuant to Sub-section
(2), it shall be calculated from the date of commencement of this Act
Section 81(6) states that any director, officer or shareholder of a company who is in default in provid-
ing such other statement, notice or information as is required to be forwarded to the OCR pursuant to
this Act shall be punished with a fine of two hundred rupees for every month, after the expiration of
one month of the date of expiry of the time limit within which such statement, notice or information is
required to be provided. Hence, as per Section 81 of the Act, Advocate Master, company secretary of
Random Pvt. Ltd. with the responsibility to file the required return in the OCR is liable to pay the fine
imposed under section 81 of the Ac
2. Answer the following questions: (3×5=15)

a) Chairperson of Success Micro Finance Limited, a class “D” licensed institution floated a propos-
al in the meeting of Board of Directors for appointment of Mr. Bright Raj a credit manager of
Valid Bank Ltd. as a director of the company in the vacant post. After discussion feeling punch of
problem in the credit recovery, the BoD approved the decision of the appointment of Mr. Bright
Raj as a new director. Examine the validity of the decision of appointment of director mentioning
the provision in detail related to disqualification of director mentioned in Bank and Financial
Institution Act, 2073.

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Suggested Answers - December 2023 - Corporate and Other Laws

b) Write short notes on Exchange Equalization Fund - as per Bank and Financial Institutions Act,
2073.
c) Explain the functions that can be carried out by Nepal Rastra Bank as per Nepal Rastra Bank Act,
2058.
Q2a.Answer:
Fact:
Mr. Bright Raj a credit manager of Valid Bank Ltd. was appointed as a director of the Suc-
cess Micro Finance Ltd.
Legal Provision
Section 18 of the Banks & Financial Institutions Act 2073 mentions the disqualification for
appointment as director in BAFIs as follows:
1. Following persons shall not be eligible to become a Director of the bank or financial institu-
tion:-
a) Having not attained the age of 25 years,
b) Having unsound mind or insane,
c) Having declared bankrupt in Nepal or in abroad for being unable to pay debt,
d) Having blacklisted or declared defaulter in connection with any transaction with any bank
or financial institution in Nepal or in abroad, and a period of at least three years has not been
completed after removal of his\her name from blacklist or list of defaulter,
e) The incumbent Director or an employee of any corporate body carrying out transactions of
bank or financial institution or any institution collecting any type of deposits or carrying out
transactions relating to insurance,
f) Borrower or incumbent auditor or advisor of concerned bank or financial institution or the
person, firm or company who/which is the partner in any kind of contract with the concerned
bank or financial institution or having personal interests,
g) Who has acquired membership of the Stock Exchange to act as a securities broker of mer-
chant banker,
h) Incumbent Director of the bank or financial institution,
i) The person, who has not subscribed to the minimum number of shares required to be sub-
scribed to be eligible for appointment as a Director pursuant to the Articles of Association of
the bank or financial institution,
j) Incumbent employee of Government of Nepal, or an organization having ownership of Gov-
ernment of Nepal, or Rastra Bank or of a bank or financial institution,
k) Provided that this provision shall not be deemed to have made obstruction to nominate Direc-
tor in micro-finance or infrastructure development bank, of which share has been purchased
by Government of Nepal or the institution having under the ownership of Government of
Nepal or Rastra Bank or bank or financial institution.
l) Who, having a liability to pay tax pursuant to the laws in force, has failed to pay the same
m) Having not completed a period of ten years after replenishment of punishment upon being
convicted of an offence of theft, cheating, forgery, fraud, corruption, any offence involving
moral turpitude or a banking offence from a court of Nepal or of a foreign country,

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 Suggested Answers - December 2023 - Corporate and Other Laws

n) Having been taken action by a regulatory agency as per law for committing an act against law
and not having completed a period of five years after being taken such action,
o) In case of an independent director, promoter or shareholder holding ownership of more than
0.1 % share of concerned bank or financial institution,
p) Having remained to clear imprisonment and dues of fine as imposed by the court or having
defaulted to pay government due.
q) Notwithstanding anything contained in Part (e) of Sub-Section (1), an official or employee of
a bank or financial institution may work as a Director of the subsidiary company of the same
bank or financial institution.
Conclusion
Pursuant to section 18 of the Act, subject to its sub-section (2) and proviso clause under
clause (j), an incumbent employee of a bank or financial institution cannot be a director of
any bank/financial institution. Hence, in the given case, Mr. Bright Raj a credit manager
of Valid Bank Ltd. cannot be appointed as a director for the vacant post of Success Micro
Finance Limited.

Q2b.Answer:
As per section 45 of the Bank and Financial Institutions Act 2073, an institution licensed by Nepal Ra-
stra Bank and having permission for dealing in foreign exchange shall have to create a fund entitled
“Exchange Equalization Fund.”
Bank or financial institution carrying on foreign exchange business shall make necessary accounts ad-
justments in the profit and loss account of the revaluation profits earned as a result of fluctuations in the
exchange rates of foreign currencies, other than the Indian currency, every year at the end of the same
fiscal year. While making such accounts adjustment in the profit and loss account, if revaluation earning
has been made in any fiscal year, at least twenty five per cent of such profits shall be credited to the ex-
change equalization fund.
Provided that in the case of revaluation profit-loss resulting from fluctuation in the exchange rate of the
Indian currency, it shall be as prescribed by the Rastra Bank.
No amount credited to the exchange equalization fund pursuant to Sub-Section (1) shall, without the
approval of the Rastra Bank, be spent or transferred for any purpose other than the adjustment of loss
resulting from the devaluation of foreign currencies.
Q2c.Answer:
Section 5 of Nepal Rastra Bank Act, 2058 has prescribed following functions to be carried
out by the Nepal Rastra Bank:
1. In order to achieve the objectives referred to in Section 4, the functions, duties and powers of
the Bank shall be as follows:
a) To issue bank notes and coins;
b) To formulate necessary monetary policies in order to maintain price stability and to imple-
ment or cause to implement them;
c) To formulate foreign exchange policies and to implement or cause to implement them;
d) To determine the system of foreign exchange rate;
e) To manage and operate foreign exchange reserve;
f) To issue license to commercial banks and financial institutions to carry on banking and finan-

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Suggested Answers - December 2023 - Corporate and Other Laws

cial business and to regulate, inspect, supervise and monitor such transactions;
g) To act as a banker, advisor and financial agent of Government of Nepal;
h) To act as the banker of commercial banks and financial institutions and to function as the
lender of the last resort;
i) To establish and promote the system of payment, clearing and settlement and to regulate
these activities; and
j) (i1) To operate open market through necessary instruments for liquidity management; and
k) To implement or cause to implement any other necessary functions which the Bank has to
carry out in order to achieve the objectives of the Bank under this Act;
(1) While exercising the powers conferred by this Act or any other prevailing law, the
Bank shall have power to carry out other functions and take actions, which are inciden-
tal thereto.
(2) No one shall violate powers conferred on the Bank under this Act.

3. Answer the following questions:  (2×5=10)

a) Mr. Sharan is a newly appointed employee of the Securities Board of Nepal. He approached you
asking for the information that he can or cannot disclose obtained while working as an employ-
ee of the Board.
b) Mr. Ram Shanker Tripathi, CFO of the Nepal Insurance Authority wants to know about the pro-
vision about the Fund of the Nepal Insurance Authority as per the newly enacted Insurance Act
2079.
Q3a.Answer:
Section 21 of the Securities Act, 2063 prescribes following provisions regarding the secrecy:
1. No Chairperson, member, advisor, employee, auditor, agent or representative of the Board shall
perform the following business:-
a) To supply or disclose any confidential information or notice obtained in the course of per-
forming duties of office to another person,
b) To use such information or notice for personal benefits.
2. Notwithstanding anything contained in Sub-section (1), any confidential information or notice
may be disclosed on the following circumstances known to him or her in accordance with the
procedures as specified by the Board:-
a) Where the disclosure of such information or notice has been made in performing one's duty
publicly, rendering assistance to any law enforcing authority, carrying out an order given by
a court or competent authority,
b) Where such information or notice has been supplied to the external auditor of the Board in
the course of performing one's duties,
c) Where such information or notice has been disclosed in the interests of the Board in the
course of legal proceedings.
So, Mr. Sharan shall be advised to adhere to afore stated provisions prescribed under sec 21
of the securities Act, 2063.

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 Suggested Answers - December 2023 - Corporate and Other Laws

Q3b.Answer:
Section 20 of the Insurance Act, 2079 has provided following provisions regarding the fund of Nepal
Insurance Authority:
The Authority shall have a separate fund of its own and following amounts shall be consisted in the
fund so created:
a) The amount received from the Government of Nepal.
b) The amount received on establishment, pre-approval and issue of license of Insurance Company.
c) The amount received on issue of license or renew of license of insurance mediator.
The amount received as regulation fee of insurance business.
d) The amount received from any foreign government, international organization or association.
e) However approval from the Ministry of Finance shall be obtained before receiving such amount.
f) The amount received from any other sources.
All amount received as above shall be deposited in account opened in Bank and Financial Institution
licensed as per prevailing law.
All the expenses to be incurred on behalf of the Authority shall be borne from the account credited to
the Fund of the Authority created under sub-section (1).
4. Answer the following questions: (2×5=10)
a) Mr. Biraj, son of employee Mr. Siraj of Star Hotel Limited, apply to receive bonus amount of =
his father of F/Y 2079/80. Could he get the bonus amount? Can he get such amount in advance?
Discuss in reference to the Bonus Act, 2030.
b) Mrs Durga is a permanent employee of Emergency Services Pvt. Ltd.. Mrs Durga a pregnant
women with pregnancy of 7 months unfortunately suffers a miscarriage and as suggested by doc-
tor takes rest after informing the company. She returns to work after 14 weeks of being on leave.
Management of the company on arrival instructs her not be on such long leave as company is
involved in emergency services and informs her that she shall not get remuneration for the period
of leave as it was not a normal delivery. Is the decision of the management in line with Labour
Act, 2074? Advice the management of the company explaining the provisions of the Labour Act,
2074 in regard to maternity leave in detail.
Q4a.Answer:
Section 10 has given consensual provision on bonus to be given to the agent or to a Member of the Fam-
ily-like Biraj the son of Siraj, in the following conditions:
An employee who cannot be present to receive bonus may authorize any person, with a letter of consent
to receive the bonus payable to him/her.
If any employee dies, the bonus to be obtained by him/her shall be given to his/her nominee. If there
is no any nominee or such nominee have died before the deceased employees who nominated him/her
shall be obtained to his/her heir in accordance with the prevailing law relating to inheritance.
Explanation: In case, there are more than one relative nominated in the same order, all of them shall
receive the bonus of the deceased employee equally.
1. A person who dissatisfied with the bonus distributed pursuant to Sub-section (2), may file a
complaint in the Labour Court within thirty five days of such distribution and in such a case,
the decision of the Labour Court shall be final.
Bonus may be distributed as advance even to the family person as provided in the section 10 above, in
accordance with the provision of section 11 as follows:
If any enterprise fails to submit the balance-sheet and statement of profit and loss of such enterprise

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Suggested Answers - December 2023 - Corporate and Other Laws

within the time limit as provided in Sub-section (1) of Section 4, or if bonus could not be distributed
within the time limit of Section 9 by the reasons of inquiry or examination conducted by the concerned
Labour Office on the balance sheet and statement of profit and loss submitted pursuant to Sub-section
(2) of Section 4, the management of such enterprise, after making tentative computation, shall have to
distribute at least five percent of the net, income as bonus.
After preparation of balance-sheet and statement of profit and loss or after final assessment is made
in this matter, if the amount of bonus distributed pursuant to the Sub-section (1) is found less than the
amount to be distributed as bonus, the difference amount shall have to be redistributed to the employ-
ees proportionately having considered previously distributed amount.
If the amount, distributed as bonus is found excess to the amount assessed for distribution of bonus
under Sub-section (2), the excess amount, whatever may be, shall be deducted for recovery it, while
assessing the net income of the enterprise in the next fiscal year.

Hence, in compliance with aforestated provisions of Section 10 & 11 of Bonus Act 2030, Mr. Biraj,
the son employee Mr. Siraj of Star Hotel Limited can get the bonus amount and the bonus in advance
respectively.

Q4b.Answer:
Issue:
Emergency Services Pvt. Ltd. has not provided the benefit of maternity leave provided under Labour Act,
2074 citing miscarriage is not a normal delivery to claim the facility to Mrs Durga who suffered miscar-
riage of pregnancy of 7 months.
Legal Provision:
Section 45 “Maternity Leave” of the Labour Act, 2074 mentions about the maternity leave provided to
the employees. They are:
Section 45(1) states that a pregnant female labour shall get a maternity leave of a total of fourteen weeks
before or after delivery.
Section 45(2) states that a pregnant labour shall compulsorily take leave from at least two weeks before
the expected date of delivery to at least six weeks after the date of delivery.
Section 45(3) states that a female labour who takes the maternity leave shall get full remuneration for
sixty days and shall not get remuneration for the remaining period.
Section 45(4) states that where a recognized medical doctor recommends that the female labour who has
delivered a baby needs further rest for her or her baby’s health, the employer shall approve unpaid leave
of up to one month in addition to the period fourteen weeks or sanction such leave to be adjusted with
other leave, in continuity with the maternity leave.
Section 45(5) states that where a female labour in a state of seven months’ pregnancy or more than seven
months gives birth to a deceased child or suffers miscarriage, she shall get leave as if she made normal
delivery.
Section 45(6) states that where the mother dies before the completion of sixty days of the birth of her
child, the labour whose wife has so died may take paid leave for the remaining period for the care of the
child from the employer for whom he is working.
Section 45(7) states that if a male labour’s wife is going to deliver a baby, he shall get paid maternity care
leave for a period of fifteen days.

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 Suggested Answers - December 2023 - Corporate and Other Laws

Conclusion:
Decision of the Emergency Services Pvt. Ltd. not to provide benefit to Mrs Durga citing miscarriage is
not a normal delivery to claim the facility is against section 45(5) of Labour Act, 2074.
5. Answer the following questions:  (2×5=10)
a) Can Executive Director convene the meeting of the council? Discuss about meeting and decision=
as
provided in the Nepal Chartered Accountants Act, 2053.

b) What are the right and duties of Auditing Standards Board under the Nepal Chartered Ac-
countants Act, 2053?
Q5a. Answer:
Section 10 of Nepal Chartered Accountants Act, 2053 mentions about the Meeting and Decision of
the Council as follows:
1) The Executive Director shall convene the meeting of the Council on such date, time and place
as fixed by the President.
2) The Council shall generally meet six times a year, and the interval between two consecutive
meetings shall not be of more than three months.
3) The President shall chair meeting of the Council, and in his absence, the Vice-President; and in
the absence of both, a Council member, selected by the Council members from amongst them-
selves, shall chair the meeting of the Council.
4) If twenty-five percent of Council members request, in writing, to convene a Council meeting,
the President shall order the Executive Director to summon such meeting within fifteen days of
such request.
5) Presence of fifty-percent members shall be deemed to meet a quorum for the meeting of the
Council.
6) The majority opinion of the Council shall be deemed to be a decision of the Council and, in
case of a tie, person chairing the meeting shall cast the deciding vote.
7) The Executive Director shall authenticate decisions of the Council.
8) The Council may, if it deems appropriate, invite any office bearer of His Majesty's Govern-
ment, any national or foreign expert, advisor, or any prominent person in the field accounting
profession, to attend meeting of the Council as an observer.
9) Other procedures relating to the meeting of the Council shall be as fixed by the Council itself
Conclusion:
Hence, as per section 10(1) of the Act, the Executive Director can convene the meeting of the Council on
such date, time and place as fixed by the President.
Q5b.Answer:
The right and duties of Standards on Auditing Board to be formed pursuant to Section 15d are given
under Section 15e of the Nepal Chartered Accountants Act, 2053 as follows:
a) To develop Standards on Auditing, on the basis of relevant International Standards on Auditing,
in order to govern and regulate accounting and auditing profession,
b) To evolve appropriate process of development of Standards on Auditing and publish material
related to Standards on Auditing,
c) To redraft, improvise and revise Standards on Auditing,
d) To interpret the Standards on Auditing,

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Suggested Answers - December 2023 - Corporate and Other Laws

e) (e) To undertake other related tasks related to Standards on Auditing.

6. Answer the following questions: (5×4=20)

a) Mention the procedure of affiliation of social organizations and institutions with the social wel-
fare council as per the Social Welfare Act, 2049.
b) Define the term negotiation. What are the conditions under which a holder of negotiable instru-
ment need not submit notice of dishonor to prior parties?
c) If 'X' gets any benefit or advantage from another person, without for reason of doing any =
lawful act or fulfilling any obligation, the person who so gets the benefit or advantage. Do you
think that this is an unjust enrichment? Discuss on unjust enrichment provision on National Civil
Code, 2074.
d) What are the functions, duties and power of Industry and Investment Promotion Board specified
under the Industrial Enterprises Act, 2076?
e) Explain the provision related to reproduction and counterfeiting of currency prescribed by Nepal
Rastra Bank Act, 2058.
Q6a.Answer:
Section 13 “Affiliation with the Council” of Social Welfare Act, 2049 mentions the following pro-
vision related to affiliation:
1) Social organizations and institutions interested to keep affiliation with the Council shall have to
submit an application as prescribed in the form.
2) The organizations and institutions applying pursuant to Sub-section (1) shall submit and men-
tion its Constitution, name of executive committee members, their occupations and addresses
and the office where the organization or institution has been registered and the date of the regis-
tration along with the application.
3) After receiving the application pursuant to Sub-section (1) if it deems to be affiliated such
institutions or organization with the Council, the Council shall issue the certificate as prescribed
form taking the fees as prescribed.
4) The organization or institutions affiliated with the Council may keep out its affiliation as pre-
scribed.
Q6b.Answer:
As per section 2(d) of the Negotiable Instruments Act 2034, the term negotiation means the act of
transfer of a negotiable instrument from one person to any other person so as to constitute that latter
person the holder thereof.
Section 70 of the Act prescribes following conditions under which no notice of dishonor is necessary
to be forwarded by a holder of negotiable instrument to his prior parties:-
a) When it is dispensed with/waived off by the party entitled to receive the notice,
b) When the Drawer has stopped/countermanded the payment,
c) When the party has not suffered damage for want of notice,
d) When the acceptor is also a Drawer,
e) In the case of a Promissory Note which is not negotiable.
f) When the party entitled to notice cannot after due search be found or the party bound to give
notice, is for any other reason, unable without any fault of his/her own to give it, or

44 | The Institute of Chartered Accountants of Nepal

 Suggested Answers - December 2023 - Corporate and Other Laws

d) When the party entitled to notice, knowing the facts, promises unconditionally to pay the
amount due on the Negotiable Instrument.
Q6c.Answer:
Section 664 of National Civil Code, 2074 has provided following provisions regarding unjust
enrichment:
1) If any person gets any benefit or advantage from another person, without for the reason
of doing any lawful act or fulfilling any obligation, the person who so gets the benefit or
advantage shall be deemed to have got an unjust enrichment.
2) A person shall be deemed to have got an unjust enrichment under sub-section (1) in any of the
following circumstances:
e) If there is an increment in his or her property or decrease in his or her liability,
f) If he or she receives a service from another or causes another to do a work,
g) If other’s property is used for him or her.
3) Notwithstanding anything contained in sub-section (1) or (2), even if any person gets
any goods, service, benefit or advantage in any manner, except in any of the following
circumstances, he or she shall be deemed to have got an unjust enrichment:
a) If any goods, service, benefit or advantage can be obtained from any person under a law or
contract,
b) If the person, from whom any goods, service, benefit or advantage have been obtained, has
agreed with free consent not to take back or reimburse the same.
4) In determining whether or not and to what extent any person has got an unjust enrichment
under this Chapter, no consideration shall be granted to any disadvantage or loss or damage
caused thereby to him or her after he or she has got the unjust enrichment.
5) If a person gets an unjust enrichment pursuant to this Section, the person shall bear the
obligation under this Chapter.
Conclusion:
Yes, in the given case, it is deemed that Mr. 'X' did the unjust enrichment pursuant to section 664 of the
National Civil Code 2074.
Q6d.Answer:
Section 21(1) of Industrial Enterprise Act, 2076 has made provision of the Functions, Duties and
Power of the Industry and Investment Promotion Board which are as follows:
a) To make recommendations to the Government of Nepal for the formulation of policies relating to
industrial promotion, protection and promotion of investment and industrialization and adoption
of relevant policy decisions;
b) To regularly appraise the policy, institutional, legal, institutional and procedural framework and
modus operandi relating to the overall industrialization of the country and make recommenda-
tions to the Government for necessary reforms;
c) To make recommendations to the Government of Nepal for the adoption of necessary policy de-
cisions on foreign investment and technology transfer, subject to the prevailing law;
d) To make recommendations to the Government of Nepal for the formulation of policies relating
to industrial pollution control and adoption of relevant policy decisions;

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Suggested Answers - December 2023 - Corporate and Other Laws

e) To make comprehensive evaluation and appraisal of the situation of industrial development of

the country and make suggestions and recommendations to the Government of Nepal for taking
necessary steps;
f) To hear grievances of entrepreneurs and resolve, or cause to be resolved, the problems and make
guidance to the concerned bodies in this respect;
g) To make recommendations to the Government of Nepal if it is required to make an alteration or
change in the level, classification and nature of industries;
h) To carry out, or cause to be carried out, studies, research woks and surveys as required in the
context of enhancing domestic and foreign investment in the industrial sector;
i) To do, or cause to be done, necessary work for building a competitive industrial environment,
in effective coordination and harmonious collaboration with the public, private and cooperative
sectors;
j) To give policy guidelines on matters requiring coordination between the Province and Local Lev-
els for the development and expansion of industrial enterprises, and make necessary provision
for coordination;
k) To facilitate the removal of the difficulty or confusion, if any, arising in the implementation of
any law relating to industry;
l) To coordination or facilitate with respect to the operation of the one stop service center;
m) To perform, or cause to be performed, other functions as prescribed.
Q6e.Answer:
Section 61 of Nepal Rastra Bank Act, 2058 prescribes about the reproduction and counterfeiting of
currency which are as follows:
1) No one shall commit or cause to commit any of the following acts:-
a) To forge, counterfeit or alter banknotes and coin in circulation as legal tender in Nepal or any
cheques or payment card or to do any other act relating to it or to assist in any of such acts;
b) To possess, transport or issue any banknote or coin or cheque or payment card with the
knowledge that such banknote or coin, cheque or payment card was falsely made, forged,
counterfeited or altered or to assist in such acts in any manner;
c) To possess, transport any sheet of metal, stone, paper, die or any other material or substance
with the knowledge that it was destined to be used in falsely making, forging, counterfeiting
or altering any banknote or coin, cheque or payment card or to assist in any of such acts.
Any reproduction of banknotes, coins, cheques, or payment cards, denominated in Rupee, and the
creation of any objects that by their design imitate any such banknote, coin, cheques or payment card,
shall require the prior written authorization of the Bank.
1) The Bank may take appropriate action to prevent the issue of fake note or counterfeit currency
or duplicate cheque or payment. The Bank may issue necessary order, directives or notices
while taking such actions.
7. Write Short notes: (2×5=10)

a) Duties of workers about the occupational safety and health under the Labour Act, 2074.

b) Procedure for introduction of bills in the house of federal parliament.

46 | The Institute of Chartered Accountants of Nepal

 Suggested Answers - December 2023 - Corporate and Other Laws

Q7a.Answer:
Section 73 of the Labour Act, 2074 has imposed the various duties to be followed by the workers at
to the matter of occupational safety and health. The duties are as under-
a) Not to perform such act at the workplace intentionally or recklessly causing adverse effect or risk
on the safety and health of him/her or others.
b) To provide necessary assistance to the employer or concerned person to fulfill the duties stated
under this chapter.
c) To obtain information about the manuals, instructions and other matters prepared for the oper-
ation and use of the equipment, product or material to be operated and used in the workplace
safely and cautiously.
d) To operate and use the workplace, equipment, product or materials safely and carefully in accor-
dance with the manuals, information and instructions prepared for operation and use of such a
workplace, equipment, product or material, and.
e) To use compulsorily the personal safety equipment provided by the employer.
Q7b.Answer:
Article 110 of the Constitution of Nepal 2072 has prescribed following procedure while introducing
any bill into the house of federal parliament:
1) A Bill may, subject to this Constitution, be introduced in any House of the Federal Parliament.
2) Provided that a Money Bill shall be introduced only in the House of Representatives.
3) A Money Bill and a Bill concerning a security body including the Nepal Army, Nepal Police
and Armed Police Force, Nepal shall be introduced only as a Government Bill.
4) "Money Bill" means a Bill concerning any or all of the following subjects:
a) The imposition, collection, abolition, remission, alteration or regulation of taxes,
b) The preservation of the Federal Consolidated Fund or any other Federal Government Fund,
the deposit of moneys into and the appropriation or the withdrawal of moneys from such
Funds, or the reduction, increment or cancellation of appropriations or of proposed expendi-
tures from such Funds,
c) The regulation of matters relating to the borrowing of money or the giving of guarantee by
the Government of Nepal, or any matter pertaining to the amendment of the law with respect
to any financial obligations undertaken orto be undertaken by the Government of Nepal,
d) The custody and investment of all revenues received by any Federal Government Fund, mon-
eys acquired through the repayment of loans, and grant moneys, or accounts or audits of the
accounts of the Government of Nepal, or
e) Other matters directly related to any of the subjects specified in clause (a), (b), (c) or (d).
Provided that any Bill shall not be deemed to be a Money Bill by the reason only that it pro-
vides for the levying of any charges and fees such as license fee, application fee, renewal fee
or for the imposition of fines or penalty of imprisonment.
5) If any question arises whether a Bill is a Money Bill or not, the decision of the Speaker thereon
shall be final.

The Institute of Chartered Accountants of Nepal | 47

g]kfn rf6{8{ PsfpG6]G6\; ;++:yf
Established under the Nepal Chartered Accountants Act, 1997
ICAN Marg, Satdobato, Lalitpur
P O Box 5289, Ph.: 5430832, 5430730
Web: http://www.ican.org.np
E-mail: [email protected]