CA IPCC RTP Nov 2017 - Revision Test Paper - Single File - CACMACSGuru

CA IPCC
RTP
November 2017
( Revision Test Papers )
PAPER 1: ACCOUNTING
PART I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY
FOR NOVEMBER, 2017 EXAMINATION
A. Applicable for November, 2017 examination
I. Companies Act, 2013
Relevant Sections of the Companies Act, 2013 notified up to 30 th April, 2017 will be
applicable for November, 2017 Examination.
II. Amendments made by MCA in the Companies (Accounting Standards) Rules,
2006
Amendments made by MCA on 30.3.2016 in the Companies (Accounting Standards)
Rules, 2006 have been made applicable for November, 2017examination.
MCA has issued Companies (Accounting Standards) Amendment Rules, 2016 to
amend Companies (Accounting Standards) Rules, 2006 by incorporating the
references of the Companies Act, 2013, wherever applicable. Also, the Accou nting
Standard (AS) 2, AS 4, AS 10, AS 13, AS 14, AS 21 and AS 29 as specified in these
Rules will substitute the corresponding Accounting Standards with the same number
as specified in Companies (Accounting Standards) Rules, 2006.
Following table summarises the changes made by the Companies (Accounting
Standards) Amendment Rules, 2016 vis a vis the Companies (Accounting
Standards) Rules, 2006 in the Accounting Standards relevant for Paper 1:
Name of Para no. As per the As per the Implication
the Companies Companies
standard (Accounting (Accounting
Standards) Standards)
Rules, 2006 Amendment
Rules, 2016
AS 2 4 (an Inventories do not Inventories do Now, inventories
extract) include machinery not include also do not
spares which can spare parts, include servicing
be used only in servicing equipment and
connection with equipment and standby
an item of fixed standby equipment other
asset and whose equipment than spare parts
use is expected to which meet the if they meet the
be irregular; such definition of definition of
machinery spares property, plant property, plant
are accounted for and equipment and equipment
in accordance as per AS 10, as per AS 10,
with Accounting Property, Plant Property, Plant
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2 INTERMEDIATE (IPC) EXAMINATION: NOVEMBER, 2017
Standard (AS) 10, and Equipment. and Equipment.

Accounting for Such items are
Fixed Assets. accounted for in
accordance with
Accounting
Standard (AS)
10, Property,
Plant and
Equipment.
27 Common Common Para 27 of AS 2
classifications of classifications of requires
inventories are inventories are: disclosure of
raw materials and (a) Raw inventories under
components, work materials and different
in progress, components classifications.
finished goods, (b) Work-in- One residual
stores and progress category has
spares, and loose (c) Finished been added to
tools. goods the said
(d) Stock-in- paragraph i.e.
trade (in respect Others.
of goods
acquired for
trading)
(e) Stores and
spares
(f) Loose tools
(g) Others
(specify
nature).
AS 10 All Fixed Assets Property, Plant Entire standard
and Equipment has been revised
with the title AS
10: Property,
Plant and
Equipment by
replacing the
existing AS 6 and
AS 10. The
students are
advised to refer
the explanation
PAPER 1 : ACCOUNTING 3
of AS 10
Property, Plant
and equipment
(2016) given in
the Annexure.
The Annexure is
given at the end
of Accounting
Part II Suggested
Answers
AS 13 20 The cost of any An investment Accounting of
shares in a co- property is investment
operative society accounted for in property was not
or a company, the accordance with stated in this
holding of which is cost model as para but now
directly related to prescribed in incorporated i.e.
the right to hold Accounting at cost model.
the investment Standard (AS)
property, is added 10, Property,
to the carrying Plant and
amount of the Equipment. The
investment cost of any
property. shares in a co-
operative
society or a
company, the
holding of which
is directly
related to the
right to hold the
investment
property, is
added to the
carrying amount
of the
investment
property.
30 An enterprise An enterprise Accounting of
holding holding investment
investment investment property shall
properties should properties now be in
account for them should account accordance with
as long term for them in AS 10 i.e. at cost
investments. accordance with model

cost model as
prescribed in AS
10, Property,
Plant and
Equipment.
AS 14 3(a) Amalgamation Amalgamation Definition of
means an means an Amalgamation
amalgamation amalgamation has been made
pursuant to the pursuant to the broader by
provisions of the provisions of the specifically
Companies Act, Companies Act, including
1956 or any other 2013 or any merger.
statute which may other statute
be applicable to which may be
companies. applicable to
companies and
includes
merger.
18 and In such cases the In such cases Corresponding
39 statutory reserves the statutory debit on account
are recorded in reserves are of statutory
the financial recorded in the reserve in case
statements of the financial of amalgamation
transferee statements of in the nature of
company by a the transferee purchase is
corresponding company by a termed as
debit to a suitable corresponding Amalgamation
account head debit to a Adjustment
(e.g., suitable account Reserve and is
Amalgamation head (e.g., now to be
Adjustment Amalgamation presented as a
Account) which is Adjustment separate line item
disclosed as a Reserve) which since there is not
part of is presented as sub-heading like
miscellaneous a separate line miscellaneous
expenditure or item. When the expenditure in
other similar identity of the Schedule III to the
category in the statutory Companies Act,
balance sheet. reserves is no 2013
When the identity longer required
of the statutory to be
reserves is no maintained, both
longer required to the reserves

be maintained, and the
both the reserves aforesaid
and the aforesaid account are
account are reversed.
reversed.
III Amendment in Schedule V
The Ministry of Corporate Affairs vide Notification S.O. 2922(E) dated 12 th September 2016
has amended Schedule V of the Companies Act, 2013. According to the noti fication in part II,
for Section II, the following section shall be substituted with effect from the date of its
publication in the official gazette-
Section II
Remuneration payable by companies having no profit or inadequate profit without
Central Government approval
Where in any financial year during the currency of tenure of a managerial person, a company
has no profits or its profits are inadequate, it may, without Central Government approval, pay
remuneration to the managerial person not exceeding, the limits under (A) and (B) given below:-
(A)
(1) Limits as per new amendment Limits before
amendment (Earlier
limits)
Where the effective capital Limit of yearly remuneration Limit of yearly
is payable shall not exceed remuneration payable
(Rupees) shall not exceed
(Rupees)
(i) Negative or less than 5 60 Lakhs 30 lakhs
crores
(ii) 5 crores and above but 84 Lakhs 42 lakhs
less than100 crores
(iii) 100 crores and above 60 lakhs
but less than 250 120 Lakhs
crores
60 lakhs plus 0.01% of
120 lakhs plus 0.01% of the
the effective capital in
(iv) 250 crores and above effective capital in excess of
excess of ` 250
Rs. 250 crores:
crores.
Provided that the above limits shall be doubled if the resolution passed by the
shareholders is a special resolution.
Explanation.- It is hereby clarified that for a period less than one year, the limits shall be
pro-rated.
(B) In case of a managerial person who is functioning in a professional capacity, no approval
of Central Government is required, if such managerial person is not having any interest in
the capital of the company or its holding company or any of its subsidiaries directly or
indirectly or through any other statutory structures and not having any, direct or indirect
interest or related to the directors or promoters of the company or its holding company or
any of its subsidiaries at any time during the last two years before or on or after the date
of appointment and possesses graduate level qualification with expertise and specialised
knowledge in the field in which the company operates:
Provided that any employee of a company holding shares of the company not exceeding
0.5% of its paid up share capital under any scheme formulated for allotment of shares to such
employees including Employees Stock Option Plan or by way of qualification shall be deemed
to be a person not having any interest in the capital of the company;
Provided further that the limits specified under items (A) ant (B) of this section shall apply, if-
(i) payment of remuneration is approved by a resolution passed by the Board and, in
the case of a company covered under sub-section (1) of section 178 also by the
Nomination and Remuneration Committee;
(ii) the company has not committed any default in repayment of any of its debts
(including public deposits) or debentures or interest payable thereon for a
continuous period of thirty days in the preceding financial year before the date of
appointment of such managerial person and in case of a default, the company
obtains prior approval from secured creditors for the proposed remuneration and the
fact of such prior approval having been obtained is mentioned in the explanatory
statement to the notice convening the general meeting;
(iii) an ordinary resolution or a special resolution, as the case may be, has been passed
for payment of Remuneration as per the limits laid down in item (A) or a special
resolution has been passed for payment of remuneration as per item (B), at the
general meeting of the company for a period not exceeding three years.
Note: Those students who have July 2015 Edition of Paper 1 Accounting Study Material are
advised to ignore the contents i.e. table stating limits for yearly remuneration (given on page
no. 2.9) and points (i), (ii) and (iii) given on page no. 2.10 under th e heading Section II -
Remuneration payable by companies having no profit or inadequate profit without Central
Government approval. It may be noted that there is no change in point (iv) given on page no.
2.10 consequent to the amendment.
The students are also advised to refer the above-mentioned amendment and consider these
new limits prescribed under Section II while solving the problems based on managerial
remuneration for the companies having no profit or inadequate profit.
B. Not applicable for November, 2017 examination

Non-Applicability of Ind ASs for November, 2017 Examination
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards)
Rules, 2015 on 16 th February, 2015, for compliance by certain class of companies.
These Ind AS have not been made applicable for November, 2017 Examination.
PART II: QUESTIONS AND ANSWERS

QUESTIONS
Financial Statements of Companies
1. (a) From the following particulars furnished by Alpha Ltd., prepare the Balance Sheet
as on 31 st March 20X1 as required by Part I, Schedule III of the Companies Act,
2013.
Particulars Debit ` Credit `
Equity Share Capital (Face value of ` 100 50,00,000
each)
Call in Arrears 5,000
Land & Building 27,50,000
Plant & Machinery 26,25,000
Furniture 2,50,000
General Reserve 10,50,000
Loan from State Financial Corporation 7,50,000
Inventory:
Raw Materials 2,50,000
Finished Goods 10,00,000 12,50,000
Provision for Taxation 6,40,000
Trade receivables 10,00,000
Short term Advances 2,13,500
Profit & Loss Account 4,33,500
Cash in Hand 1,50,000
Cash at Bank 12,35,000
Unsecured Loan 6,05,000
Trade payables (for Goods and Expenses) 8,00,000
Loans & advances from related parties 2,00,000
The following additional information is also provided:

(i) 10,000 Equity shares were issued for consideration other than cash.
(ii) Trade receivables of ` 2,60,000 are due for more than 6 months.
(iii) The cost of the Assets were:
Building ` 30,00,000, Plant & Machinery ` 35,00,000 and Furniture ` 3,12,500
(iv) The balance of ` 7,50,000 in the Loan Account with State Finance Corporation
is inclusive of ` 37,500 for Interest Accrued but not Due. The loan is secured
by hypothecation of Plant & Machinery.
(v) Balance at Bank includes ` 10,000 with Omega Bank Ltd., which is not a
Scheduled Bank.
(vi) Transfer ` 20,000 to general reserve is proposed by Board of directors
(vii) Board of directors has declared dividend of 5% on the paid up capital.
(b) Kumar Ltd., a non-investment company has been incurring losses for the past few
years. The company provides the following information for the current year:
(` in lakhs)
Paid up equity share capital 120
Paid up Preference share capital 20
Reserves (including Revaluation reserve ` 10 lakhs) 150
Securities premium 40
Long term loans 40
Deposits repayable after one year 20
Application money pending allotment 720
Accumulated losses not written off 20
Investments 180
Kumar Ltd. has only one whole-time director, Mr. X. You are required to calculate the
amount of maximum remuneration that can be paid to him as per provisions of Part II of
Schedule XIII, if no special resolution is passed at the general meeting of the company
in respect of payment of remuneration for a period not exceeding three years.
Cash Flow Statements
2. Preet Ltd. presents you the following information for the year ended 31 st March, 2017:
(` in lacs)
(i) Net profit before tax provision 72,000
(ii) Dividend paid 20,404
(iii) Income-tax paid 10,200

(iv) Book value of assets sold 444
Loss on sale of asset 96
(v) Depreciation debited to P & L account 48,000
(vi) Capital grant received - amortized to P & L A/c 20
(vii) Book value of investment sold 66,636
Profit on sale of investment 240
(viii) Interest income from investment credited to P & L A/c 6,000
(ix) Interest expenditure debited to P & L A/c 24,000
(x) Interest actually paid (Financing activity) 26,084
(xi) Increase in working capital 1,34,580
[Excluding cash and bank balance]
(xii) Purchase of fixed assets 44,184
(xiii) Expenditure on construction work 83,376
(xiv) Grant received for capital projects 36
(xv) Long term borrowings from banks 1,11,732
(xvi) Provision for Income-tax debited to P & L A/c 12,000
Cash and bank balance on 1.4.2016 12,000
Cash and bank balance on 31.3.2017 16,000
You are required to prepare a cash flow statement as per AS-3 (Revised).
Profit/Loss prior to Incorporation
3. From the following information, calculate the Ratio of Sales in each case s eparately.
(a) (i) Date of acquisition 1st April, 2015; date of incorporation 1st July, 2015 and
date of closing the books of accounts 31st March, every year.
(ii) The sales for the year ending on 31st March, 2016 were ` 24,00,000 of which
` 4,80,000 goods were sold during the first six months of the accounting period.
(b) (i) The accounts were made up to 31 st December, 2015. The company was
incorporated on 1 st May, 2015 to take over a business from the preceding
1st January.
(ii) Total sales for the year were ` 12,00,000. It is ascertained that the sales for
November and December are one and half times the average of those for the
year, whilst those for February and April are only half the average.
(c) (i) Fema Ltd. was incorporated on 1st July, 2015 to take the existing business of X
from 1 stApril, 2015. Date of closing the books of account 31st March, 2016.
(ii) Monthly sales in April 2015, February 2016 and March 2016 are double the
average monthly sales for remaining months of the year.
Accounting for Bonus Issue
4. Following items appear in the Trial Balance of Hello Ltd. as on 31st March, 2017:
Particulars Amount
9,000 Equity Shares of `100 each 9,00,000
Securities Premium 80,000
Capital Redemption Reserve 1,40,000
Profit and Loss Account (Cr. Balance) 90,000
The company decided to issue to equity shareholders bonus shares at the rate of 1 share
for every 3 shares held. Company decided that there should be the minimum reduction in
free reserves. Pass necessary Journal Entries in the books Hello Ltd.
Internal Reconstruction of Companies
5. The following is the summarised Balance Sheet of Weak Ltd. as on 31.3.20X1:
Liabilities ` Assets `
Equity shares of ` 100 1,00,00,000 Fixed assets 1,25,00,000
each
12% Cumulative Preference 50,00,000 Investments (Market 10,00,000
shares of ` 100 each value ` 9,50,000)
10% debentures of ` 100 40,00,000 Current assets 1,00,00,000
each
Trade payables 50,00,000 P & L A/c 6,00,000
Provision for taxation 1,00,000
2,41,00,000 2,41,00,000
The following scheme of reorganization is sanctioned:
(i) All the existing equity shares are reduced to ` 40 each.
(ii) All preference shares are reduced to ` 60 each.
(iii) The rate of interest on debentures is increased to 12%. The debenture holders
surrender their existing debentures of ` 100 each and exchange the same for fresh
debentures of ` 70 each for every debenture held by them.
(iv) One of the creditors of the company to whom the company owes ` 20,00,000
decides to forgo 40% of his claim. He is allotted 30,000 equity shares of ` 40 each
in full satisfaction of his claim.
(v) Fixed assets are to be written down by 30%.
(vi) Current assets are to be revalued at ` 45,00,000.
(vii) The taxation liability of the company is settled at ` 1,50,000.
(viii) Investments to be brought to their market value.
(ix) It is decided to write off the debit balance of Profit and Loss account.
Pass Journal entries and show the Balance sheet of the company after giving effect to
the above.
Amalgamation of Companies
6. Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to
form a new company named Super Fast Express Ltd. The summarized balance sheets of
both the companies were as under:
Super Express Ltd.
Balance Sheet as at 31st December, 20X1
` `
20,000 Equity shares of `100 20,00,000 Buildings 10,00,000
each
Provident fund 1,00,000 Machinery 4,00,000
Trade Payables 60,000 Inventory 3,00,000
Insurance reserve 1,00,000 Trade receivables 2,40,000
Cash at bank 2,20,000
Cash in hand 1,00,000
22,60,000 22,60,000
Fast Express Ltd.
Balance Sheet as at 31st December, 20X1
` `
10,000 Equity shares of `100 10,00,000 Goodwill 1,00,000
each
Employees profit sharing Buildings 6,00,000
account 60,000 Machinery 5,00,000
Trade Payables 40,000 Inventory 40,000
Reserve account 1,00,000 Trade receivables 40,000

Surplus 1,00,000 Cash at bank 10,000
Cash in hand 10,000
13,00,000 13,00,000
The assets and liabilities of both the companies were taken over by the new company at
their book values. The companies were allotted equity shares of ` 100 each in lieu of
purchase consideration amounting to ` 30,000 (20,000 for Super Fast Express Ltd and
10,000 for Fast Express Ltd.).
Prepare opening balance sheet of Super Fast Express Ltd considering pooling method.
Average Due Date
7. Harish has the following bills due on different dates. It was agreed to settle the total
amount due by a single cheque payment. Find the date of the cheque.
(i) ` 5,000 due on 5.3.2017
(ii) ` 7,500 due on 7.4.2017
(iii) ` 6,000 due on 17.7.2017
(iv) ` 8,000 due on 14.9.2017
Account Current
8. The following are the transactions that took place between Rohan & Sunil during the half
year ended 30 th June, 2017:
`
I Balance due to Rohan by Sunil on 1 January, 2017 3,010
ii Goods sold by Rohan to Sunil on 7 January, 2017 4,430
iii Goods purchased by Rohan from Sunil on 16 February, 2017 6,480
iv Goods returned by Rohan to Sunil on 18 February, 2017 (out of 560
the purchases of 16 February, 2017)
v Goods sold by Sunil to Rohan on 24 th March, 2017 3,560
vi Bill accepted by Rohan at 3 months on 22 nd April, 2017 1,500
Cash paid by Rohan to Sunil on 29 th April, 2017 2,500
vii Goods sold by Rohan to Sunil on 17 th May, 2017 2,710
viii Goods sold by Sunil to Rohan on 22 nd June, 2017 2,280
Draw up an account current to be rendered by Sunil to Rohan charging interest @ 10%
per annum.
Hire Purchase Transactions

9. On 1st April, 2012, X Ltd. sells a Trucks on hire purchase basis to X Transporters & Co.
for a total purchase price of ` 18,00,000 payable as to ` 4,80,000 as down payment and
the balance in three equal annual instalments of ` 4,40,000 each payable on 31st March
2013, 2014 and 2015.
The hire vendor charges interest @ 10% per annum.
You are required to ascertain the cash price of the truck for X Transporters & Co.
Calculations may be made to the nearest rupee.
Self Balancing Ledgers
10. How will you show the following items in General Ledger Adjustment Account in Debtors
Ledger and General Ledger Adjustment Account in Creditors Ledger:
`
Opening Balance of debtors ledger 40,000
Opening Balance of creditors ledger 20,000
Credit sales 92,000
Credit purchases 59,600
Transfer from Debtors' Ledger to Creditors' Ledger 6,000
Bill receivable endorsed to Creditors 8,000
Endorsed Bills dishonoured 2,000
Bad Debts written off (after deducting bad debts recovered ` 600) 4,400
Provision for Doubtful Debts 1,100
Provision for Discount on Debtors 2,000
Reserve for Discount on Creditors 4,000
Cash Sales 6,000
Cash Purchases 8,000
Bill Receivable Collected on maturity 10,000
Bills Receivable discounted 12,000
Bills Payable matured 14,000
Discount allowed 3,000
Discount received 1,200
Allowances from Creditors 6,400
Discount allowed to debtors ` 1,000 was recorded as discount
received from creditors

Closing Debtors Balance (As per General Ledger Adjustment 1,20,000(Cr.)
Account)
Closing Creditors Balance (As per General Ledger Adjustment 60,000 (Dr)
Account)
Financial Statements of Not for Profit Organizations
11. (a) Elite Club (not registered under the Companies Act, 2013) has 200 members with
an annual subscription of ` 3,600 payable by every member. An analysis of
subscriptions received by the club during the accounting year ended on 31 st March,
2015 revealed the following:
`
For the year 2013-14 25,200
For the year 2014-15 6,98,400
For the year 2015-16 7,200
7,30,800
On 31st March, 2015 it was noted that a sum of ` 3,600 was still in arrears for the
year ended 31 st March, 2014. Calculate the amount of subscriptions that will appear
on the credit side of the Clubs Income and Expenditure Account for the year ended
31st March, 2015. Also show how items relating to subscriptions will appear in the
Balance Sheet dated 31 st March, 2015.
(b) The following is the Income and Expenditure Account of Gama Club for the year
ended 31st March, 2017:
Income and Expenditure Account for the year ended 31 st March, 2017
` `
To Salaries 19,500 By Subscription 68,000
To Rent 4,500 By Donation 5,000
To Printing 750
To Insurance 500
To Audit Fees 750
To Games & Sports 3,500
To Subscriptions written off 350
To Miscellaneous Expenses 14,500
To Loss on sale of furniture 2,500
To Depreciation:
Sports Equipment 6,000
Furniture 3,100
To Excess of income over
expenditure 17,050
73,000 73,000
Additional information:
31-3-2016 31-3-2017
` `
Subscriptions in arrears 2,600 3,700
Advance Subscriptions 1,000 1,500
Outstanding expenses:
Rent 500 800
Salaries 1,200 350
Audit Fee 500 750
Sports Equipment less depreciation 25,000 24,000
Furniture less depreciation 30,000 27,900
Prepaid Insurance - 150
Book value of furniture sold is ` 7,000. Entrance fees capitalized ` 4,000. On

1st April, 2016 there was no cash in hand but Bank Overdraft was for ` 15,000. On
31st March, 2017. Cash in hand amounted to ` 850 and the rest was Bank balance.
Prepare the Receipts and Payments Account of the Club for the year ended
31st March, 2017.
Accounts from Incomplete Records
12. The following is the Balance Sheet of Chirag as on 31 st March, 2015:
Capital Account 48,000 Building 32,500
Loan 15,000 Furniture 5,000
Creditor 31,000 Motor car 9,000
Stock 20,000
Debtors 17,000
Cash in hand 2,000
Cash at bank 8,500

94,000 94,000
A riot occurred on the night of 31 st March, 2016 in which all books and records were lost.
The cashier had absconded with the available cash. He gives you the following
information:
(a) His sales for the year ended 31 st March, 2016 were 20% higher than the previous
years. He always sells his goods at cost plus 25%; 20% of the total sales for the
year ended 31 st March, 2016 were for cash. There were no cash purchases
(b) On 1st April, 2015 the stock level was raised to ` 30,000 and stock was maintained
at this new level all throughout the year.
(c) Collection from debtors amounted to ` 1,40,000 of which ` 35,000 was received in
cash, Business expenses amounted to ` 20,000 of which ` 5,000 was outstanding
on 31st March, 2016 and ` 6,000 was paid by cheques.
(d) Analysis of the Pass Book revealed the Payment to Creditors ` 1,37,500, Personal
Drawing ` 7,500, Cash deposited in Bank ` 71,500, and Cash withdrawn from Bank
` 12,000.
(e) Gross profit as per last years audited accounts was ` 30,000.
(f) Provide depreciation on Building and Furniture at 5% and Motor Car at 20%.
(g) The amount defalcated by the cashier may be treated as recoverable from him.
You are required to prepare the Trading and Profit and Loss Account for the year ended
31st March, 2016 and Balance Sheet as on that date.
Investment Accounts
13. A Pvt. Ltd. follows the calendar year for accounting purposes. The company purchased
5,000 nos. of 13.5% Convertible Debentures of Face Value of ` 100 each of P Ltd. on
1st May 2016 @ ` 105 on cum interest basis. The interest on these instruments is
payable on 31st March & 30 th September respectively. On August 1 st 2016 the company
again purchased 2,500 of such debentures @ ` 102.50 each on cum interest basis. On
October 1 st, 2016 the company sold 2,000 Debentures @ ` 103 each. On 31 st
December, 2016 the company received 10,000 equity shares of ` 10 each in P Ltd. on
conversion of 20% of its holdings. The market value of the debentures and equity shares
as at the close of the year were ` 106 and ` 9 respectively. Prepare the Debenture
Investment Account & Equity Shares Investment Account in the books of A Pvt. Ltd. for
the year 2016 on Average Cost Basis.
Insurance claim for loss of stock
14. On 13th September, 2016 fire occurred in the premises of M/s DEF & Co. Most of the
stocks were destroyed. Cost of stock salvaged being ` 40,000. In addition some stock
was salvaged in damaged condition and its value in that condition agreed at ` 20,000.
From the salvaged accounting records, the following information is available:
`
Stock of goods @ 10% lower than cost as on 31 st March, 2016 8,64,000
Purchases (1.4.16 to 13.09.16) 35,29,900
Sales (1.4.16 to 13.09.2016) 46,93,200
(1) Sales upto 13 th September, 2016, includes ` 70,000 for which goods had not been
dispatched and ` 25,000 of goods sent on approval basis but approval for which not
received.
(2) Purchases upto 13 th September, 2016 did not include ` 60,000 for which purchase
invoices had not been received from suppliers, though goods have been received in
Godown. Further purchases include purchase of machinery costing ` 40,000.
(3) Past records show the gross profit rate of 25%.
(4) M/s DEF & Co. has insured their stock for ` 9,00,000.
Find out the value of loss of stock by applying the above points.
Issues in Partnership Accounts
15. Laurel and Hardy are partners of the firm LH & Co., from 1.4.2013. Initially both of them
contributed ` 1,00,000 each as capital. They did not contribute any capital thereafter.
They maintain accounts of the firm on mercantile basis. They were sharing profits and
losses in the ratio of 5:4. After the accounts for the year ended 31.3.2017 were finalized,
the partners decided to share profits and losses equally with effect from 1.4.201 3.
It was also discovered that in ascertaining the results in the earlier years certain
adjustments, details of which are given below, had not been noted.
2014 2015 2016 2017
Year ended 31st March
` ` ` `
Profit as per accounts prepared and 1,40,000 2,60,000 3,20,000 3,60,000
finalized
Expenses not provided for (as at 31 st 30,000 20,000 36,000 24,000
March)
Incomes not taken into account (as at 18,000 15,000 12,000 21,000
31st March)
The partners decided to admit Chaplin as a partner with effect from 1.4.201 7. It was
decided that Chaplin would be allotted 20% share in the firm and he must bring 20% of
the combined capital of Laurel and Hardy.
Following is the Balance sheet of the firm as on 31.3.2017 before admission of Chaplin
and before adjustment of revised profits between Laurel and Hardy.
Balance Sheet of LH & Co. as at 31.3.2017
Capital Accounts: Plant and machinery 60,000
Laurel 2,11,500 Cash on hand 10,000
Hardy 1,51,500 Cash at bank 5,000
Trade Payables 2,27,000 Stock in trade 3,10,000
Trade Receivables 2,05,000
5,90,000 5,90,000
You are required to prepare:
(i) Profit and Loss Adjustment account;
(ii) Capital accounts of the partners; and
(iii) Balance Sheet of the firm after the admission of Chaplin.
Accounting in Computerized Environment
16. A large size hospital decided to outsource the accounting functions. Hospital invited
proposals from vendors through open tender and received three proposals. How will you
select the vendor?
AS 1 Disclosure of Accounting Policies
17. (a) A limited has sold its building for ` 50 lakhs and the purchaser has paid the full
price. The Company has given possession to the purchaser. The book value of the
building is ` 35 lakhs. As at 31 st March 2017, documentation and legal formalities
are pending. The company has not recorded the sale. It has shown the amount
received as advance. Do you agree with this treatment?
What accounting treatment should the buyer give in its financial statements?
AS 2 Valuation of Inventories
(b) Hello Ltd. purchased goods at the cost of ` 20 lakhs in October. Till the end of the
financial year, 75% of the stocks were sold. The Company wants to disclose closing
stock at ` 5 lakhs. The expected sale value is ` 5.5 lakhs and a commission at 10%
on sale is payable to the agent. What is the correct value of closing stock?
AS 3 Cash flow Statements

18 Classify the following activities as (i) Operating Activities, (ii) Investing Activities,
(iii) Financing Activities (iv) Cash Equivalents.
a. Purchase of Machinery.
b. Proceeds from issuance of equity share capital
c. Cash Sales.
d. Proceeds from long-term borrowings.
e. Proceeds from Trade receivables.
f. Cash receipts from Trade receivables.
g. Trading Commission received.
h. Purchase of investment.
i. Redemption of Preference Shares.
j. Cash Purchases.
k. Proceeds from sale of investment
l. Purchase of fixed asset.
m. Cash paid to suppliers.
n. Interim Dividend paid on equity shares.
o. Wages and salaries paid.
p. Proceed from sale of patents.
q. Interest received on debentures held as investment.
r. Interest paid on Long-term borrowings.
s. Office and Administration Expenses paid
t. Manufacturing Overheads paid.
u. Dividend received on shares held as investments.
v. Rent received on property held as investment.
w. Selling and distribution expense paid.
x. Income tax paid
y. Dividend paid on Preference shares.
z. Underwritings Commission paid.
aa. Rent paid.
bb. Brokerage paid on purchase of investments.
cc. Bank Overdraft

dd. Cash Credit
ee. Short-term Deposits
ff. Marketable Securities
gg. Refund of Income Tax received.
Depreciation Accounting as per AS 10 Property, Plant and Equipment
19. (a) A property costing ` 10,00,000 is bought in 2016. Its estimated total physical life is
50 years. However, the company considers it likely that it will sell the property after
20 years.
The estimated residual value in 20 years' time, based on 2016 prices, is ` 9,00,000
You are required to compute the amount of depreciation charged for the year 2016.
AS 7 Construction Contracts
(b) On 1st December, 2016, Vishwakarma Construction Co. Ltd. undertook a contract
to construct a building for ` 85 lakhs. On 31st March, 2017, the company found
that it had already spent ` 64,99,000 on the construction. Prudent estimate of
additional cost for completion was ` 32,01,000. What amount should be charged to
revenue in the final accounts for the year ended 31st March, 2017 as per provisions
of Accounting Standard 7 (Revised)?
AS 9 Revenue Recognition
(c) X Limited sold goods worth ` 13 Lakhs to Mr. Y. Mr. Y asked for a Trade Discount
amounting to ` 1,06,000 and the same was agreed to by X Limited. Such discount
was allowed in the ordinary course of business. The sale was effected and goods
were dispatched. On receipt of goods, Mr. Y has found that goods worth ` 1,34,000
are defective. Mr. Y returned defective goods to X Limited and made payment
amount to ` 10,60,000. The Accountant of X Limited booked the sale for
` 10,60,000. Discuss the contention of the Accountant with reference to relevant
Accounting Standard.
AS 10 Property, Plant and Equipment
20. (a) ABC Ltd. is installing a new plant at its production facility. It has incurred these
costs:
Cost of the plant (cost per suppliers invoice plus taxes) ` 25,00,000
Initial delivery and handling costs ` 2,00,000
Cost of site preparation ` 6,00,000
Consultants used for advice on the acquisition of the plant ` 7,00,000
Interest charges paid to supplier of plant for deferred credit ` 2,00,000

Estimated dismantling costs to be incurred after 7 years ` 3,00,000
Operating losses before commercial production ` 4,00,000
Please advise ABC Ltd. on the costs that can be capitalised in accordance with AS
10 (Revised).
AS 13 Accounting for Investments
(b) Give your comments on the following situations, each being independent of the
other.
1. Current Investments are valued at ` 60 Lakhs, being the cost of acquisition,
fair value of these investments on the Balance Sheet date is ` 48 Lakhs.
2. Current investments were acquired at a cost of ` 86 lakhs whereas their fair
market value as on the Balance Sheet Date was ` 90 lakhs. Due to
insufficiency of profits from operations, the Company would like to recognize
the profit on these investments for improving its Financial Statements.
SUGGESTED ANSWERS / HINTS
1. (a) Alpha Ltd.

Balance Sheet as on 31st March, 20X1
Particulars Notes `
Equity and Liabilities
1 Shareholders' funds
a Share capital 1 49,95,000
b Reserves and Surplus 2 11,82,907
2 Non-current liabilities
Long-term borrowings 3 13,17,500
3 Current liabilities
a Trade Payables 8,00,000
b Other current liabilities 4 3,38,093
c Short-term provisions 5 6,40,000
d Short-term borrowings 2,00,000
Total 94,73,500
Assets
1 Non-current assets
Fixed assets
Tangible assets 6 56,25,000

2 Current assets
a Inventories 7 12,50,000
b Trade receivables 8 10,00,000
c Cash and bank balances 9 13,85,000
d Short-term loans and advances 2,13,500
Total 94,73,500
Notes to accounts
`
1 Share Capital
Equity share capital
Issued & subscribed & called up
50,000 Equity Shares of ` 100 each
(of the above 10,000 shares have been
issued for consideration other than cash) 50,00,000
Less: Calls in arrears (5,000) 49,95,000
Total 49,95,000
2 Reserves and Surplus
Add: current year transfer 20,000 10,70,000
Profit & Loss balance
Profit for the year 4,33,500
Less: Appropriations:
Transfer to General reserve (20,000)
Dividend Payable (Refer W N) (2,49,750)
DDT on dividend (Refer W N) (50,843) 1,12,907
Total 11,82,907
3 Long-term borrowings
Secured Term Loan
State Financial Corporation Loan (7,50,000-37,500)
(Secured by hypothecation of Plant and Machinery) 7,12,500
Unsecured Loan 6,05,000
Total 13,17,500
4 Other current liabilities

Interest accrued but not due on loans 37,500
(SFC)
Dividend (Refer W N) 2,49,750
DDT on dividend (Refer W N) 50,843 3,00,593
3,38,093
5 Short-term provisions
Provision for taxation 6,40,000
6 Tangible assets
Land and Building 30,00,000
Less: Depreciation (2,50,000) (b.f.) 27,50,000
Plant & Machinery 35,00,000
Less: Depreciation (8,75,000) (b.f.) 26,25,000
Furniture & Fittings 3,12,500
Less: Depreciation (62,500) (b.f.) 2,50,000
Total 56,25,000
7 Inventories
Raw Materials 2,50,000
Finished goods 10,00,000
Total 12,50,000
8 Trade receivables
Outstanding for a period exceeding six 2,60,000
months
Other Amounts 7,40,000
Total 10,00,000
9 Cash and bank balances
Cash and cash equivalents
Cash at bank
with Scheduled Banks 12,25,000
with others (Omega Bank Ltd.) 10,000 12,35,000
Cash in hand 1,50,000
Other bank balances Nil
Total 13,85,000
Working Note:
Calculation of grossing-up of dividend
Particulars `
Dividend distributed by Alpha Ltd. (5% of 49,95,000) 2,49,750
Add: Increase for the purpose of grossing up of dividend 44,074
15
100 - 15 2,49,750

Gross dividend 2,93,824
Dividend distribution tax @ 17.304% 50,843
(b) Calculation of effective capital and maximum amount of monthly remuneration

(` in lakhs)
Paid up equity share capital 120
Paid up Preference share capital 20
Reserve excluding Revaluation reserve (150- 10) 140
Long term loans 40
Deposits repayable after one year 20
380
Less: Accumulated losses not written off (20)
Investments (180)
Effective capital for the purpose of managerial remuneration 180
Since Kumar Ltd. is incurring losses and no special resolution has been passed
by the company for payment of remuneration, managerial remuneration will be
calculated on the basis of effective capital of the company, therefore maximum
remuneration payable to the Managing Director should be @ ` 60,00,000 per
annum.
Note: Revaluation reserve, and application money pending allotment are not
included while computing effective capital of Kumar Ltd.
2. Cash Flow Statement as per AS 3
Cash flows from operating activities: ` in lacs
Net profit before tax provision 72,000
Add: Non cash expenditures:

Depreciation 48,000
Loss on sale of assets 96
Interest expenditure (non-operating activity) 24,000 72,096
1,44,096
Less: Non cash income
Amortisation of capital grant received (20)
Profit on sale of investments (non-operating income) (240)
Interest income from investments (non-operating income) (6,000) 6,260
Operating profit 1,37,836
Less: Increase in working capital (1,34,580)
Cash from operations 3,256
Less: Income tax paid (10,200)
Net cash generated from operating activities (6,944)
Cash flows from investing activities:
Sale of assets (444 96) 348
Sale of investments (66,636+240) 66,876
Interest income from investments 6,000
Purchase of fixed assets (44,184)
Expenditure on construction work (83,376)
Net cash used in investing activities (54,336)
Cash flows from financing activities:
Grants for capital projects 36
Long term borrowings 1,11,732
Interest paid (26,084)
Dividend paid (20,404)
Net cash from financing activities 65,280
Net increase in cash 4,000
Add: Cash and bank balance as on 1.4.2016 12,000
Cash and bank balance as on 31.3.2017 16,000
3. (a) Sales of first 6 months = ` 4,80,000. Average sale of first 6 months = ` 4,80,000/6
= ` 80,000 per month. Pre-incorporation period consist of 3 months (i.e., April, May
and June). The sales of those 3 months = ` 80,000 x 3 = ` 2,40,000. Sales of
remaining 9 months = ` 24,00,000 ` 2,40,000 = ` 21,60,000.

Therefore, the ratio of sales = ` 2,40,000 : ` 21,60,000 or 1: 9.
(b) Let the average of monthly sales = X. The sales of different months can be show n
as follows:
Month Jan Feb Mar. April May June July Aug Sept Oct Nov Dec
Sales 1x 0.5x 1x 0.5x 1x 1x 1x 1x 1x 1x 1.5x 1.5x
Date of incorporation is May, 2015
Pre incorporation period is from January to April i.e. 3 x
Post - incorporation period is from May to December i.e. 9x
The ratio of Sales = 3x : 9x or 1:3.
(c) Let the average monthly sales be x. The sales of different months can be shown as
follows:
Month April May June July Aug. Sept Oct Nov Dec Jan Feb March
Sales 2x 1x 1x 1x 1x 1x 1x 1x 1x 1x 2x 2x
Date of incorporation is 1 July, 2015
Pre incorporation period is from April to June i.e. 4 x
Post - incorporation period is from July to March i.e 11x
The ratio of Sales = 4x : 11x or 4:11
4. Journal Entries in the books of Hello Ltd.
Capital Redemption Reserve A/c Dr. 1,40,000
Securities Premium A/c Dr. 80,000
General Reserve A/c Dr. 80,000
To Bonus to Shareholders 3,00,000
(Being issue of bonus shares by utilization of various
Reserves, as per resolution dated .)
Bonus to Shareholders A/c Dr. 3,00,000
To Equity Share Capital 3,00,000
(Being capitalization of Profit)
5. Journal Entries in the books of Weak Ltd.

` `
(i) Equity share capital (` 100) A/c Dr. 1,00,00,000
To Equity Share Capital (` 40) A/c 40,00,000
To Capital Reduction A/c 60,00,000
(Being conversion of equity share capital of
` 100 each into ` 40 each as per reconstruction
scheme)
(ii) 12% Cumulative Preference Share capital 50,00,000
(` 100) A/c Dr.
To 12% Cumulative Preference Share 30,00,000
Capital (` 60) A/c
(Being conversion of 12% cumulative preference
share capital of ` 100 each into ` 60 each as per
reconstruction scheme)
(iii) 10% Debentures A/c Dr. 40,00,000
To 12% Debentures A/c 28,00,000
(Being 12% debentures issued to 10% debenture-
holders for 70% of their claims. The balance
transferred to capital reduction account as per
reconstruction scheme)
(iv) Trade payables A/c Dr. 20,00,000
To Equity Share Capital A/c 12,00,000
(Being a creditor of ` 20,00,000 agreed to surrender
his claim by 40% and was allotted 30,000 equity
shares of ` 40 each in full settlement of his dues as
per reconstruction scheme)
(v) Provision for Taxation A/c Dr. 1,00,000
Capital Reduction A/c Dr. 50,000
To current assets (bank A/c) A/c 1,50,000
(Being liability for taxation settled)
(vi) Capital Reduction A/c Dr. 99,00,000
To P & L A/c 6,00,000

To Fixed Assets A/c 37,50,000
To Current Assets A/c 55,00,000
To Investments A/c 50,000
(Being amount of Capital Reduction utilized in writing
off P & L A/c (Dr.) Balance, Fixed Assets, Current
Assets, Investments through capital reduction
account)
(vii) Capital Reduction A/c Dr. 50,000
To capital Reserve A/c 50,000
(Being balance in capital reduction account
transferred to capital reserve account)
Balance Sheet of Weak Ltd. (and reduced) as on 31.3.20X1
Particulars Notes `
b Reserves and Surplus 2 50,000
a Long-term borrowings 3 28,00,000
Total 1,40,50,000
Assets
a Fixed assets
b Investments 5 9,50,000
2 Current assets 6 43,50,000
Total 1,40,50,000
Notes to accounts
`
1. Share Capital
Issued, subscribed and paid up
1,30,000 equity shares of ` 40 each 52,00,000

Preference share capital
50,000 12% Cumulative Preference shares of
30,00,000
` 60 each
Total 82,00,000
2. Reserves and Surplus
Capital Reserve 50,000
3. Long-term borrowings
Secured
12% Debentures 28,00,000
4. Tangible assets
Fixed Assets 1,25,00,000
Adjustment under scheme of reconstruction (37,50,000) 87,50,000
5. Investments 10,00,000
Adjustment under scheme of reconstruction (50,000) 9,50,000
6. Current assets 45,00,000
Adjustment under scheme of reconstruction (1,50,000) 43,50,000
Working Note:
Capital Reduction Account
` `
To Current Asset 50,000 By Equity share capital 60,00,000
To P & L A/c 6,00,000 By 12% Cumulative 20,00,000
preference share
capital
To Fixed assets 37,50,000 By 10% Debentures 12,00,000
To Current assets 55,00,000 By Trade payables 8,00,000
To Investment 50,000
To Capital Reserve (bal. fig.) 50,000
1,00,00,000 1,00,00,000
6. Balance Sheet of Super Fast Express Ltd

as at 1st Jan., 20X2
Particulars Notes `
b Reserves and Surplus 2 3,60,000
a Long-term provisions 3 1,00,000
Total- 35,60,000
Assets
a Fixed assets
Intangible assets 5 1,00,000
2 Current assets
Inventories 3,40,000
Trade receivables 2,80,000
Cash and cash equivalents 6 3,40,000
Total 35,60,000
Notes to accounts
`
1 Share Capital
30,000 Equity shares of ` 100 each 30,00,000
Total 30,00,000
2 Reserves and Surplus
Reserve account 1,00,000
Surplus 1,00,000
Insurance reserve 1,00,000

Employees profit sharing account 60,000
Total 3,60,000
3 Long-term provisions
Provident fund 1,00,000
Total 1,00,000
4 Tangible assets
Buildings 16,00,000
Machinery 9,00,000
Total 25,00,000
5 Intangible assets
Goodwill 1,00,000
Total 1,00,000
6 Cash and cash equivalents
Balances with banks 2,30,000
Cash on hand 1,10,000
Total 3,40,000
7. Calculation of number of days from the base date
Due date Amount (`) No. of days from 5.3.17 Product
5.3.2017 5,000 0 0
7.4.2017 7,500 33 2,47,500
17.7.2017 6,000 134 8,04,000
14.9.2017 8,000 193 15,44,000
26,500 25,95,500
Sum of Product
Average due date = Base date +
Sum of Amount
25,95,500
= 5.3.2017 + = 98 days (round off)
26,500
The date of the cheque will be 98 days from the base date i.e.11.6.201 7. So on
11th June, 2017, all bills will be settled by a single cheque payment.
8. In the books of Sunil

Rohan in Account Current with Sunil
as on 30th June, 2017
Date Particulars Amount Days Interest Date Particulars Amount Days Interest
2017 ` ` 2017 ` `
Feb. To Sales 6,480.00 134 237.90 Jan. 1 By Balance b/d 3,010.00 181 149.26
16
Mar. To Sales 3,560.00 98 95.58 Jan. 7 By Purchases 4,430.00 174 211.18
24
June To Sales 2,280.00 8 5.00 Feb By Returns 560.00 132 20.25
22 18 inward
June To Balance 107.08 Apr. By B/R 1,500.00 (25) (10.27)*
30 of interest 22 (maturing on
25 July, 2017)
June To Balance 2,497.08 Apr. By Cash 2,500.00 62 42.47
30 c/d 29
May By Purchases 2,710.00 44 32.67
17
June By Interest 107.08
30
14,817.08 445.56 14,817.0 445.56
8
July 1 By Balance b/d 2,497.08
* Interest on amount of Bill receivable maturing on 25 th July, 2017 is a red ink interest.
Credit for the B/R is given on the date when it is received, but the amount will be
received only on its maturity. Hence, the interest for the period for which the bill is to run
after accounting period is shown as negative figure.
Rateof int erest 10 1
9. Ratio of interest and amount due =
100 Rateof int erest 110 11
There is no interest element in the down payment as it is paid on the date of the
transaction. Instalments paid after certain period includes interest portion also.
Therefore, to ascertain cash price, interest will be calculated from last instalment to first
instalment as follows:
Calculation of Interest and Cash Price

No. of Amount due at the Interest Cumulative
instalments time of instalment Cash price
[1] [2] [3] (2-3) = [4]
3rd 4,40,000 1/11 of ` 4,40,000 =` 40,000 4,00,000

2nd 8,40,000 1/11 of ` 8,40,000= ` 76,364 7,63,636
1st 12,03,636 1/11of ` 12,03,636= ` 1,09,421 10,94,215
Total cash price = ` 10,94,215 + 4,80,000 (down payment) =` 15,74,215.
10. In Debtors Ledger
General Ledger Adjustment Account
Particulars ` Particulars `
To Debtors Ledger By Balance b/d 40,000
Adjustment A/c: By Debtors Ledger
Discount Allowed (` 3,000+ ` 1,000) 4,000 Adjustment A/c:
Bad Debts (4,400+600) 5,000 Sales 92,000
Transfer to creditor ledger 6,000 Endorsed Bills
To Balance c/d (1,20,000 1,000) 1,19,000 receivable
dishonoured 2,000
1,34,000 1,34,000
In Creditors Ledger
General Ledger Adjustment Account
To Balance b/d 20,000 By Creditors Ledger Adjustment A/c
To Creditors Leger Transfer from Debtors ledger 6,000
Adjustment A/c: Bill receivable endorsed to creditors 8,000
Purchases 59,600 Discount received 200
Endorsed Bills (` 1,200 `1,000)
receivable dishonoured 2,000 Allowances 6,400
By Balance c/d (60,000+1,000) 61,000
81,600 81,600
Notes:
(i) The following items do not appear in GLA Account in Debtors ledger:
1. Cash Sales
2. Provision for Doubtful Debts
3. Provision for Discount on Debtors
4. Bad Debts Recovered
5. Bills Receivable matured/collected on maturity
6. Bills Receivable discounted
7. Bills Receivable endorsed
(ii) The following items do not appear in GLA Account in Creditors ledger:
1. Cash Purchases
2. Reserve for Discount on Creditors
3. Bills Payable matured
11. (a) Income and Expenditure Account
for the year ended 31 st March, 2015 (An Extract)
Income `
Subscriptions
(` 3,600 x 200 members) 7,20,000
Balance Sheet as on 31st March, 2015 (An Extract)

Subscription received in 7,200 Subscription in arrear:
advance For 2013-14 3,600
For 2014-15 21,600 25,200
Working Note:
Subscription due for 2014-15 (` 3,600 x 200) ` 7,20,000
Subscription received for 2014-15 ` 6,98,400
Subscription in arrear for 2014-15 21,600
(b) Receipts and Payments Account

For the year ended 31-3-2017
To Subscription A/c 67,050 By Balance b/d

(W.N.1)
To Donation A/c 5,000 (Bank overdraft) 15,000
To Entrance Fees A/c 4,000 By Salary 19,500
To Furniture A/c (Sale of Add: Outstanding of last 1,200
furniture) (7,000 4,500 year (350) 20,350
2,500) Less: Outstanding of this
year
By Rent 4,500
Add: Outstanding of last 500
year
Less: Outstanding of this (800) 4,200
year
By Printing 750
By Insurance 500
Add: Prepaid in this year 150 650
By Audit Fees 750
Add: Outstanding of last 500
year
Less: Outstanding of this (750) 500
year
By Games & Sports 3,500
By Miscellaneous Expenses 14,500
By Sports Equipment
(Purchased) (W.N. 2) 5,000
By Furniture (Purchased) 8,000
(W.N.3)
By Balance c/d
Cash 850
Bank (bal. fig.) 7,250
80,550 80,550
Working Notes:
1. Calculation of subscription received during the year 2016-2017
` `
Subscription as per Income & Expenditure A/c 68,000
Less: Arrears of 2016-2017 3,700
Advance in 2015-2016 1,000 (4,700)
63,300
Add: Arrears of 2015-2016 2,600
Advance for 2017-2018 1,500 4,100
67,400
Less: Written off during 2016-2017 (350)
67,050
2. Calculation of Sports Equipment purchased during 2016-2017
Sports Equipment A/c
` `
To Balance b/d 25,000 By Income & Expenditure A/c 6,000
To Receipts & Payments A/c 5,000 (Depreciation)
(Purchases) (bal. fig.) By Balance c/d 24,000
30,000 30,000
3. Calculation of Furniture purchased during 2016-2017

Furniture A/c
` `
To Balance b/d 30,000 By Receipts & Payments A/c 4,500
To Receipts & Payments A/c 8,000 By Income & Expenditure A/c 2,500
(Purchases)(Bal.fig.) (Loss on sale)
By Income & Expenditure A/c
(Depreciation) 3,100
By Balance c/d 27,900
38,000 38,000
12. Trading and Profit and Loss Account

For the year ending on 31 st March, 2016
To Opening Stock 20,000 By Sales 1,80,000
To Purchases (bal.fig.); 1,54,000 By Closing Stock 30,000
To Gross Profit c/d (@20% on 2,10,000

sales) 36,000
2,10,000
To Sundry Business Expenses 20,000 By Gross Profit b/d 36,000
To Depreciation on Building 1,625
Furniture 250
Motor 1,800 3,675
To Net profit transferred to
Capital A/c 12,325
36,000 36,000
Balance Sheet as at 31 st March, 2016
Capital Account: Building 32,500
Opening Balance 48,000 Less: Depreciation (1,625) 30,875
Add: Net profit 12,325 Furniture 5,000
60,325 Less: Depreciation (250) 4,750
Less: Drawings (7,500) 52,825 Motor Car 9,000
Loan 15,000 Less: Depreciation (1,800) 7,200
Sundry Creditors 47,500 Stock in trade 30,000
Outstanding 5,000 Sundry Debtors 21,000
Expenses
Cash at Bank 22,000
Sundry Advances
(Amount recoverable
from Cashier) 4,500
1,20,325 1,20,325
Working Notes:
(i) Total Debtors Account
To Balance b/d 17,000 By Bank (` 1,40,000 ` 35,000) 1,05,000
To Sales (80% of 1,44,000 By Cash A/c 35,000
` 1,80,000)
By Balance c/d 21,000
1,61,000 1,61,000
(ii) Total Creditors Account

To Bank 1,37,500 By Balance b/d 31,000
To Balance c/d 47,500 By Purchases 1,54,000
1,85,000 1,85,000
(iii) Cash Book
Particulars Cash ` Bank ` Particulars Cash ` Bank `
To Balance b/d 2,000 8,500 By Business 9,000 6,000
Expenses
To Sales 36,000 - By Drawings - 7,500
To Sundry Debtors 35,000 1,05,000 By Sundry - 1,37,500
Creditors
To Cash (Contra) - 71,500 By Bank (Contra) 71,500 -
To Bank (Contra) 12,000 By Cash (Contra) - 12,000
By Defalcation 4,500 -
(Bal fig.)
By Balance c/d
(Bal fig.) 22,000
85,000 1,85,000 85,000 1,85,000
(iv) Last years Total Sales = Gross Profit x 100/20 = ` 30,000 x 100/20 = ` 1,50,000
(v) Current years Total Sales = ` 1,50,000+ 20% of ` 1,50,000= ` 1,80,000
(vi) Current years Credit Sales = ` 1,80,000 x 80%= ` 1,44,000
(vii) Cost of Goods Sold = Sales G.P. = `1,80,000 ` 36,000 = ` 1,44,000
(viii) Purchases = Cost of Goods Sold + Closing Stock Opening Stock
= ` 1,44,000 + ` 30,000 ` 20,000 = ` 1,54,000
13. Books of A Pvt. Ltd.
Investment in 13.5% Convertible Debentures in P Ltd. Account
(Interest payable 31st March & 30th September)
Date Particulars Nominal Interest Amount Date Particulars Nominal Interest Amount
` ` ` ` ` `
2016 2016
May 1 To Bank 5,00,000 5,625 5,19,375 Sept.3 By Bank 50,625
0
(6 months
Int)
Aug.1 To Bank 2,50,000 11,250 2,45,000 Oct.1 By Bank 2,00,000 2,06,000
Oct.1 To P&L A/c 2,167
Dec. To P&L A/c 52,313 Dec. By Equity 1,10,000 1,12,108
31 31 share
Dec. By Bank
31
(See note1) 3,713
Dec. By Balance
31 c/d 4,40,000 14,850 4,48,434
7,50,000 69,188 7,66,542 7,50,000 69,188 7,66,542
Note 1: ` 3,713 received on 31.12.2016 represents interest on the debentures

converted till date of conversion.
Note 2: Cost being lower than Market Value the debentures are carried forward at Cost.
Investment in Equity shares in P Ltd. Account
Date Particulars Nominal Amount Date Particulars Nominal Amount
` ` ` `
2016 2016
Dec 31 To 13.5% 1,00,000 1,12,108 Dec.31 By P&L A/c 22,108
Deb.
Dec.31 By Bal. c/d 1,00,000 90,000
1,00,000 1,12,108 1,00,000 1,12,108
Note 1: Cost being higher than Market Value the shares are carried forward at Market
Value.
Working Notes:
1. Interest paid on ` 5,00,000 purchased on May 1 st, 2016 for the month of April 2016,
as part of purchase price: 5,00,000 x 13.5% x 1/12 = ` 5,625
2. Interest received on 30 th Sept. 2016
On ` 5,00,000 = 5,00,000 x 13.5% x = 33,750
On ` 2,50,000 = 2,50,000 x 13.5% x = 16,875
Total ` 50,625
3. Interest paid on ` 2,50,000 purchased on Aug. 1 st 2016 for April 2016 to July 2016
as part of purchase price:
2,50,000 x 13.5% x 4/12 = ` 11,250
4. Loss on Sale of Debentures

Cost of acquisition
(` 5,19,375 + ` 2,45,000) x ` 2,00,000/` 7,50,000 = 2,03,833
Less: Sale Price (2000 x 103) = 2,06,000
Profit on sale = ` 2,167
5. Interest on 1,100 Debentures (being those converted) for 3 months i.e. Oct -Dec.
2016
1,10,000 x 13.5% x 3/12 = ` 3,713
6. Cost of Debentures converted to Equity Shares
(` 5,19,375 + ` 2,45,000) x 1,10,000/7,50,000= ` 1,12,108
7. Cost of Balance Debentures
(` 5,19,375 + ` 2,45,000) x ` 4,40,000/` 7,50,000 = ` 4,48,434
8. Interest on Closing Debentures for period Oct.-Dec. 2016 carried forward (accrued
interest)
` 4,40,000 x 13.5% x 3/12 = ` 14,850
14. M/s DEF & CO.
Memorandum Trading A/c
(1.4.16 to 13.9.16)
Particulars (`) Particulars (`)
To Opening stock (Refer W.N.) 9,60,000 By Sales 45,98,200
To Purchases 35,49,900 By goods with customer 18,750
To Gross profit (25% of sales) 11,49,550 By Closing stock (bal. fig.) 10,42,500
56,59,450 56,59,450
Computation of insurance claim
`
Stock on the date of fire (i.e. on 13.09.2016) 10,42,500
Less: Stock salvaged 40,000
Agreed value of damaged stock 20,000 (60,000)
Loss of stock 9,82,500
Claim subject to average clause:
Loss of stock
Insurance claim = Amount of policy
Value of stock on the date of fire
= 9,00,000/10,42,500 9,82,500 = ` 8,48,201

Working Notes:
1. Calculation of original cost of the stock as on 31 st March, 2016
Stock as on 31st March, 2016 was valued at 10% lower than cost.
Hence, original cost of the stock would be ` 9,60,000 (8,64,000/90 100)
2. Purchases for the period of 1.4.16 to 13.9.16
`
Purchases 35,29,900
Add: purchases where goods have been received in godown although
purchase invoice had not been received 60,000
Less: Purchase of machinery included in purchases 40,000
35,49,900
3. Sales for the period of 1.4.16 to 13.9.16
`
Sales 46,93,200
Less: goods not been dispatched 70,000
Less: goods sent on approval basis but not yet confirmed 25,000
45,98,200
4. Goods with customer on 13.9.16
Since no approval for sale has been received for the goods for ` 25,000
These should be valued at cost i.e. 25,000 (25,000 x 25/100) = 18,750
15. (i) Profit and Loss Adjustment Account
` `
To Expenses not provided By Income not considered
for (years 2014-2017) 1,10,000 (for years 2014-2017) 66,000
By Partners capital
accounts (loss)
Laurel 22,000
Hardy 22,000
1,10,000 1,10,000
It is assumed that expenses and incomes not taken into account in earlier years were fully ignored.
(ii) Partners Capital Accounts

Laurel Hardy Chaplin Laurel Hardy Chaplin
` ` ` ` ` `
To P & L 22,000 22,000 - By Balance 2,11,500 1,51,500 -
Adjustment b/d
A/c
To Hardy 60,000 By Laurel - 60,000 -
To Balance By Cash - - 63,800
c/d 1,29,500 1,89,500 63,800
2,11,500 2,11,500 63,800 2,11,500 2,11,500 63,800
By Balance 1,29,500 1,89,500 63,800
b/d
(iii) Balance Sheet of LH & Co.

as on 1.4.2017
(After admission of Chaplin)
Capital accounts: Plant and machinery 60,000
Laurel 1,29,500 Trade receivables 2,05,000
Hardy 1,89,500 Stock in trade 3,10,000
Chaplin 63,800 Accrued income 66,000
Trade payables 2,27,000 Cash on hand (10,000 + 63,800) 73,800
Outstanding expenses 1,10,000 Cash at bank 5,000
7,19,800 7,19,800
Working Notes:
1. Computation of Profit and Loss distributed among partners
`
Profit for the year ended 31.3.2014 1,40,000
31.3.2015 2,60,000
31.3.2016 3,20,000
31.3.2017 3,60,000
Total Profit 10,80,000
Laurel Hardy Total
` ` `
Profit shared in old ratio i.e 5:4 6,00,000 4,80,000 10,80,000
Profit to be shared as per new ratio i.e. 1:1 5,40,000 5,40,000 10,80,000
Excess share 60,000
Deficit share (60,000)
Laurel to be debited by ` 60,000 and Hardy to be credited by ` 60,000.
2. Capital brought in by Chaplin
`
Capital to be brought in by Chaplin must be equal to 20% of
the combined capital of Laurel and Hardy
Capital of Laurel (2,11,500 22,000 60,000) 1,29,500
Capital of Hardy (1,51,500 22,000 + 60,000) 1,89,500
Combined Capital 3,19,000
20% of the combined capital brought in by Chaplin 63,800
(20% of ` 3,19,000)
16. The proposals will be evaluated and vendor will be selected considering the following
criteria:
1. Quantum of services provided and whether the same matches with the requirements
of the hospital.
2. Reputation and background of the vendor.
3. Comparative costs of the various propositions.
4. Organizational set up of the vendor particularly technical staffing to obtain services
without inordinate delay.
5. Assurance of quality, confidentiality and secrecy.
6. Data storage and processing facilities.
17. (a) Although legal title has not been transferred, the economic reality and substance is
that the rights and beneficial interest in the immovable property have been
transferred. Therefore, recording of acquisition/disposal (by the transferee and
transferor respectively) would, in substance, represent the purchase/sale. In view of
this A Ltd., should record the sales and recognize the profit of `15 lakhs in its profit
and loss account. It should eliminate building from its balance sheet. In notes to
accounts, it should disclose that building has been sold, full consideration has been
received, possession has been handed over to the buyer and documentation and
legal formalities are pending.
The buyer should recognize the building as an asset in his balance sheet and
charge depreciation on it. The buyer should disclose in his notes to account that
possession has been received however documentation and legal formalities are
pending.
(b) As per para 5 of AS 2 Valuation of Inventories, the inventories are to be valued at
lower of cost or net realizable value.
In this case, the cost of inventory is ` 5 lakhs. The net realizable value is ` 4.95
lakhs (` 5.5 lakhs less cost to make the sale @ 10% of ` 5.5 lakhs). So, the
closing stock should be valued at ` 4.95 lakhs.
18. (i) Operating Activities: c, e, f, g, j, m, o, s, t, w, x, aa & gg.
(ii) Investing Activities: a, h, k, l, p, q, u, v, bb & ee.
(iii) Financing Activities: b, d, i, n, r, y, z, cc & dd.
(iv) Cash Equivalent: ff.
19. (a) The company considers that the residual value, based on prices prevailing at the
balance sheet date, will be ` 9,00,000 and the depreciable amount is, therefore,
` 1,00,000.
Annual depreciation (on a straight line basis) will be ` 5,000 [{10,00,000 9,00,000}
20].
(b)
`
Cost incurred till 31 st March, 2017 64,99,000
Prudent estimate of additional cost for completion 32,01,000
Total cost of construction 97,00,000
Less: Contract price (85,00,000)
Total foreseeable loss 12,00,000
According to AS 7, the amount of ` 12,00,000 is required to be recognised as an
expense.
` 64,99,000 100
Contract work in progress = = 67%
97,00,000
Proportion of total contract value recognised as turnover:

= 67% of ` 85,00,000 = ` 56,95,000.
(c) As per AS 9, "Revenue Recognition" is the inflow of cash, receivable or other
consideration arising in the course of ordinary activities of an enterprise from the
sale of Goods. However, the above is subject to trade discount and volume rebates
received in the course of carrying on business which shall be deducted in
ascertaining revenue since they represent a reduction of cost. Revenue is al so

subject to certain risks like damages on transfer of goods to the buyers' end.
In the given case, trade discount is to be deducted from ` 13,00,000 and gross sale
shall be recognized at (` 13,00,000 - ` 1,06,000) = ` 11,94,000 and goods returned
` 1,34,000 are to be recorded in the form of sales return.
Thus the contention of the Accountant to book sale of ` 10,60,000 is not correct.
20. (a) According to AS 10 (Revised), these costs can be capitalized:
Cost of the plant ` 25,00,000
Initial delivery and handling costs ` 2,00,000
Cost of site preparation ` 6,00,000
Consultants fees ` 7,00,000
Estimated dismantling costs to be incurred after 7 years ` 3,00,000
` 43,00,000
Note: Interest charges paid on Deferred credit terms to the supplier of the plant
(not a qualifying asset) of ` 2,00,000 and operating losses before commercial
production amounting to ` 4,00,000 are not regarded as directly attributable costs
and thus cannot be capitalised. They should be written off to the Statement of Pr ofit
and Loss in the period they are incurred.
(b) 1. As per AS 13 Accounting for Investments, current investments should be
carried at cost or fair value, whichever is lower. Here, the current Investment
should be carried at fair value of ` 48 Lakhs, being the lower of ` 60 Lakhs
(cost) or ` 48 Lakhs (fair value). The difference of ` 12 Lakhs should be
charged to profit and loss account.
2. Current investment should be carried at cost or fair value, whichever is lower.
In the given case, the current investments should be carried at cost of ` 86
Lakhs, being the lower of ` 86 Lakhs (cost) or ` 90 Lakhs (fair value).
ANNEXURE
AS 10: PROPERTY, PLANT AND EQUIPMENT
1. Introduction
The objective of this Standard is to prescribe Accounting treatment for Prop erty, Plant
and Equipment (PPE). The principal issues in accounting for property, plant and
equipment are the recognition of the assets, the determination of their carrying amounts
and the depreciation charges and impairment losses to be recognised in rel ation to them.
2. Scope of the Standard
As a general principle, AS 10 should be applied in accounting for PPE.
Exception:
When another Accounting Standard requires or permits a different accounting treatment.
This Standard does not apply to:
Note: AS 10 applies to Bearer Plants but it does not apply to the produce on Bearer
Plants.
Clarifications:
1. AS 10 applies to PPE used to develop or maintain the assets described above.
2. Investment property (defined in AS 13), should be accounted for only in accordance
with the Cost model prescribed in this standard.
3. Definition of Property, Plant and Equipment (PPE)
There are 2 conditions to be satisfied for a TANGIBLE item to be called PPE. PPE are
tangible items that:
The Institute of Chartered Accountants of India

ANNEXURE
AS 10: PROPERTY, PLANT AND EQUIPMENT
1. Introduction
The objective of this Standard is to prescribe Accounting treatment for Prop erty, Plant
and Equipment (PPE). The principal issues in accounting for property, plant and
equipment are the recognition of the assets, the determination of their carrying amounts
and the depreciation charges and impairment losses to be recognised in rel ation to them.
2. Scope of the Standard
As a general principle, AS 10 should be applied in accounting for PPE.
Exception:
When another Accounting Standard requires or permits a different accounting treatment.
This Standard does not apply to:
Note: AS 10 applies to Bearer Plants but it does not apply to the produce on Bearer
Plants.
Clarifications:
1. AS 10 applies to PPE used to develop or maintain the assets described above.
2. Investment property (defined in AS 13), should be accounted for only in accordance
with the Cost model prescribed in this standard.
3. Definition of Property, Plant and Equipment (PPE)
There are 2 conditions to be satisfied for a TANGIBLE item to be called PPE. PPE are
tangible items that:

Note: Intangible items are covered under AS 26 which is not covered in syllabus of
Paper 1.
Administrative purposes: The term Administrative purposes has been used in wider
sense to include all business purposes. Thus, PPE would include assets used for:
Selling and distribution
Finance and accounting
Personnel and other functions
of an Enterprise.
Items of PPE may also be acquired for safety or environmental reasons.
The acquisition of such PPE, although not directly increasing the future economic
benefits of any particular existing item of PPE, may be necessary for an enterprise to
obtain the future economic benefits from its other assets.
Such items of PPE qualify for recognition as assets because they enable an enterprise to
derive future economic benefits from related assets in excess of what could be derived
had those items not been acquired.
Example: A chemical manufacturer may install new chemical handling processes to
comply with environmental requirements for the production and storage of dangerous
chemicals; related plant enhancements are recognised as an asset because without
them the enterprise is unable to manufacture and sell chemicals.
4. Other Definitions
1. Biological Asset: An Accounting Standard on Agriculture is under formulation,
which will, inter alia, cover accounting for livestock. Till the time, the Accounting
Standard on Agriculture is issued, accounting for livestock meeting the definition
of PPE, will be covered as per AS 10 (Revised).

2. Bearer Plant:Is a plant that (satisfies all 3 conditions):
Note: When bearer plants are no longer used to bear produce they might be cut down
and sold as scrap. For example - use as firewood. Such incidental scrap sales would
not prevent the plant from satisfying the definition of a Bearer Plant.
The following are not Bearer Plants:
(a) Plants cultivated to be harvested as Agricultural produce
Example: Trees grown for use as lumber
(b) Plants cultivated to produce Agricultural produce when there is more than a remote
likelihood that the entity will also harvest and sell the plant as agricultural produce,
other than as incidental scrap sales
Example: Trees which are cultivated both for their fruit and their lumber
(c) Annual crops
Example: Maize and wheat
Agricultural Produce is the harvested product of Biological Assets of the enterprise.
3. Agricultural Activity: Is the management by an Enterprise of:
Biological transformation; and
Harvest of Biological Assets
For sale, Or
For conversion into Agricultural Produce, Or
Into additional Biological Assets
5. Recognition Criteria for PPE
The cost of an item of PPE should be recognised as an asset if, and only if:
(a) It is probable that future economic benefits associated with the item will flow to the
enterprise, and

(b) The cost of the item can be measured reliably.

Notes:
1. It may be appropriate to aggregate individually insignificant items, such as
moulds, tools and dies and to apply the criteria to the aggregate value.
2. An enterprise may decide to expense an item which could otherwise have been
included as PPE, because the amount of the expenditure is not material.
When do we apply the above criteria for Recognition?
An enterprise evaluates under this recognition principle all its costs on PPE at the time
they are incurred.
6. Treatment of Spare Parts, Stand by Equipment and Servicing
Equipment
Case I If they meet the definition of PPE as per AS 10:
Recognised as PPE as per AS 10
Case II If they do not meet the definition of PPE as per AS 10:
Such items are classified as Inventory as per AS 2
7. Treatment of Subsequent Costs
Cost of day-to-day servicing
Meaning:
Costs of day-to-day servicing are primarily the costs of labour and consumables, and
may include the cost of small parts. The purpose of such expenditures is often described
as for the Repairs and Maintenance of the item of PPE.
Accounting Treatment:
An enterprise does not recognise in the carrying amount of an item of PPE the costs of
the day-to-day servicing of the item. Rather, these costs are recognised in the Statement
of Profit and Loss as incurred.
Replacement of Parts of PPE
Parts of some items of PPE may require replacement at regular intervals.
Examples:
1. A furnace may require relining after a specified number of hours of use.
2. Aircraft interiors such as seats and galleys may require replacement several times
during the life of the airframe.
3. Major parts of conveyor system, such as, conveyor belts, wire ropes, etc., may
require replacement several times during the life of the conveyor system.
4. Replacing the interior walls of a building, or to make a non-recurring replacement.
An enterprise recognises in the carrying amount of an item of PPE the cost of replacing
part of such an item when that cost is incurred if the recognition criteria are met.
Note: The carrying amount of those parts that are replaced is derecognised in
accordance with the de-recognition provisions of this Standard.
Regular Major Inspections - Accounting Treatment
When each major inspection is performed, its cost is recognised in the carrying amount
of the item of PPE as a replacement, if the recognition criteria are satisfied.
Any remaining carrying amount of the cost of the previous inspection (as distinct from
physical parts) is derecognised.
8. Measurement of PPE
9. Measurement at Recognition
An item of PPE that qualifies for recognition as an asset should be measured at its cost.
What are the elements of Cost?
Cost of an item of PPE comprises:

Examples of directly attributable costs are:

1. Costs of employee benefits (as defined in AS 15) arising directly from the
construction or acquisition of the item of PPE
2. Costs of site preparation
3. Initial delivery and handling costs
4. Installation and assembly costs
5. Costs of testing whether the asset is functioning properly, after deducting the net
proceeds from selling any items produced while bringing the asset to that location
and condition (such as samples produced when testing equipment)
6. Professional fees
The following costs are not included in the carrying amount of an item of PP E:
1. Costs incurred while an item capable of operating in the manner intended by
management has yet to be brought into use or is operated at less than full capacity.
2. Initial operating losses, such as those incurred while demand for the output of an
item builds up. And
3. Costs of relocating or reorganising part or all of the operations of an enterprise.
Example: Income may be earned through using a building site as a car park until
construction starts because incidental operations are not necessary to bring an i tem to
the location and condition necessary for it to be capable of operating in the manner
intended by management, the income and related expenses of incidental operations are
recognised in the Statement of Profit and Loss and included in their respective
classifications of income and expense.
C. Decommissioning, Restoration and similar Liabilities:
Initial estimate of the costs of dismantling, removing the item and restoring the site on
which it is located, referred to as Decommissioning, Restoration and similar Liabilities,
the obligation for which an enterprise incurs either when the item is acquired or as a
consequence of having used the item during a particular period for purposes other than
to produce inventories during that period.
Exception: An enterprise applies AS 2 Valuation of Inventories, to the costs of
obligations for dismantling, removing and restoring the site on which an item is located
that are incurred during a particular period as a consequence of having used the item to
produce inventories during that period.
Note: The obligations for costs accounted for in accordance with AS 2 or AS 10 are
recognised and measured in accordance with AS 29 Provisions, Contingent Liabilities
and Contingent Assets.
10. Cost of a Self-constructed Asset
Cost of a self-constructed asset is determined using the same principles as for an
acquired asset.
1. If an enterprise makes similar assets for sale in the normal course of business, the
cost of the asset is usually the same as the cost of constructing an asset for sale (see
AS 2). Therefore, any internal profits are eliminated in arriving at such costs.
2. Cost of abnormal amounts of wasted material, labour, or other resources incurred
in self constructing an asset is not included in the cost of the asset.
3. AS 16 on Borrowing Costs, establishes criteria for the recognition of interest as a
component of the carrying amount of a self-constructed item of PPE.
4. Bearer plants are accounted for in the same way as self-constructed items of PPE
before they are in the location and condition necessary to be capable of operating in
the manner intended by management.
11. Measurement of Cost
Cost of an item of PPE is the cash price equivalent at the recognition date.
A. If payment is deferred beyond normal credit terms:
Total payment - Cash price equivalent
Is recognised as Interest over the period of credit
unless such interest is capitalised in accordance with AS 16 *
B. PPE acquired in Exchange for a Non-monetary Asset or Assets Or A
combination of Monetary and Non-monetary Assets:
Cost of such an item of PPE is measured at fair value unless:
(a) Exchange transaction lacks commercial substance; Or
(b) Fair value of neither the asset(s) received nor the asset(s) given up is reliably
measurable.
Note:
1. The acquired item(s) is/are measured in this manner even if an enterprise
cannot immediately derecognise the asset given up.
2. If the acquired item(s) is/are not measured at fair value, its/their cost is
measured at the carrying amount of the asset(s) given up.
AS 29 is not covered in syllabus of paper-1
AS 16 is not covered in syllabus of paper-1
C. PPE purchased for a Consolidated Price:

Where several items of PPE are purchased for a consolidated price, the
consideration is apportioned to the various items on the basis of their respective fair
values at the date of acquisition.
Note: In case the fair values of the items acquired cannot be measured reliably, these
values are estimated on a fair basis as determined by competent valuers.
12. Measurement after Recognition
An enterprise should choose
Either Cost model,
Or Revaluation model
as its accounting policy and should apply that policy to an entire class of PPE.
Class of PPE: A class of PPE is a grouping of assets of a similar nature and use in
operations of an enterprise.
Examples of separate classes:
(a) Land
(b) Land and Buildings
(c) Machinery
(d) Ships
(e) Aircraft
(f) Motor Vehicles
(g) Furniture and Fixtures
(h) Office Equipment
(i) Bearer plants
Cost Model
After recognition as an asset, an item of PPE should be carried at:
Cost - Any Accumulated Depreciation - Any Accumulated Impairment losses
Revaluation Model
After recognition as an asset, an item of PPE whose fair value can be measured reliably
should be carried at a revalued amount.
Fair value at the date of the revaluation -
Less: Any subsequent accumulated depreciation (-)
Less: Any subsequent accumulated impairment losses (-)
Carrying value =
Revaluation for entire class of PPE

If an item of PPE is revalued, the entire class of PPE to which that asset belongs should
be revalued.
Frequency of Revaluations
Revaluations should be made with sufficient regularity to ensure that the carrying
amount does not differ materially from that which would be determined using Fair value
at the Balance Sheet date.
The frequency of revaluations depends upon the changes in fair values of the items of
PPE being revalued.
When the fair value of a revalued asset differs materially from its carrying amount, a
further revaluation is required.
A. Items of PPE experience significant and volatile changes in Fair value
Annual revaluation shall be done.
B. Items of PPE with only insignificant changes in Fair value
Revaluation shall be done at an interval of 3 or 5 years.
Determination of Fair Value
Fair value of items of PPE is usually determined from market-based evidence by
appraisal that is normally undertaken by professionally qualified valuers.
If there is no market-based evidence of fair value because of the specialised nature of
the item of PPE and the item is rarely sold, except as part of a continuing business, an
enterprise may need to estimate fair value using an income approach.
Example:
Based on
Discounted cash flow projections, Or
A depreciated replacement cost approach
Which aims at making a realistic estimate of the current cost of acquiring or
constructing an item that has the same service potential as the existing item.
13. Accounting Treatment of Revaluations
When an item of PPE is revalued, the carrying amount of that asset is adjusted to the
revalued amount.
At the date of the revaluation, the asset is treated in one of the following ways:
A. Technique 1: Gross carrying amount is adjusted in a manner that is consistent with
the revaluation of the carrying amount of the asset.
Gross carrying amount
May be restated by reference to observable market data, or
May be restated proportionately to the change in the carrying amount.

Accumulated depreciation at the date of the revaluation is
Adjusted to equal the difference between the gross carrying amount and the
carrying amount of the asset after taking into account accumulated impairment
losses
B. Technique 2: Accumulated depreciation Is eliminated against the Gross Carrying
amount of the asset
Revaluation - Increase or Decrease
Treatment of Revaluation Surplus

The revaluation surplus included in owners interests in respect of an item of PPE may be
transferred to the Revenue Reserves when the asset is derecognised.
Case I : When whole surplus is transferred:
When the asset is:
Retired; Or
Disposed of
Case II : Some of the surplus may be transferred as the asset is used by an
enterprise:
In such a case, the amount of the surplus transferred would be:
Depreciation (based on Revalued Carrying amount) Depreciation (based on Original
Cost)

Transfers from Revaluation Surplus to the Revenue Reserves are not made through the
Statement of Profit and Loss.
14. Depreciation
Component Method of Depreciation:
Each part of an item of PPE with a cost that is significant in relation to the total cost of
the item should be depreciated separately.
Depreciable Amount and Depreciation Period
What is Depreciable Amount?
Depreciable amount is:
Cost of an asset (or other amount substituted for cost i.e. revalued amount) - Residual
value
The depreciable amount of an asset should be allocated on a systematic basis over its
useful life.
Review of Residual Value and Useful Life of an Asset
Residual value and the useful life of an asset should be reviewed at least at each
financial year-end and, if expectations differ from previous estimates, the change(s)
should be accounted for as a change in an accounting estimate.
Note: Depreciation is recognised even if the Fair value of the Asset exceeds its Carrying
Amount. Repair and maintenance of an asset do not negate the need to depreciate it.
Commencement of period for charging Depreciation
Depreciation of an asset begins when it is available for use, i.e., when it is in the
location and condition necessary for it to be capable of operating in the manner intended
by the management.
Cessesation of Depreciation
I. Depreciation ceases to be charged when assets residual value exceeds its
carrying amount
The residual value of an asset may increase to an amount equal to or greater than its
carrying amount. If it does, depreciation charge of the asset is zero unless and until its
residual value subsequently decreases to an amount below its carrying amount.
II. Depreciation of an asset ceases at the earlier of:
The date that the asset is retired from active use and is held for disposal, and
The date that the asset is derecognised
Therefore, depreciation does not cease when the asset becomes idle or is retired from
active use (but not held for disposal) unless the asset is fully depreciated.
However, under usage methods of depreciation, the depreciation charge can be zero
while there is no production.
Land and Buildings

Land and buildings are separable assets and are accounted for separately, even when
they are acquired together.
A. Land: Land has an unlimited useful life and therefore is not depreciated.
Exceptions: Quarries and sites used for landfill.
Depreciation on Land:
I. If land itself has a limited useful life:
It is depreciated in a manner that reflects the benefits to be derived from it.
II. If the cost of land includes the costs of site dismantlement, removal and
restoration:
That portion of the land asset is depreciated over the period of benefits
obtained by incurring those costs.
B. Buildings: Buildings have a limited useful life and therefore are depreciable assets.
An increase in the value of the land on which a building stands does not affect the
determination of the depreciable amount of the building.
15. Depreciation Method
The depreciation method used should reflect the pattern in which the future economic
benefits of the asset are expected to be consumed by the enterprise.
The method selected is applied consistently from period to period unless:
There is a change in the expected pattern of consumption of those future economic
benefits; Or
That the method is changed in accordance with the statute to best reflect the way
the asset is consumed.

Review of Depreciation Method:

The depreciation method applied to an asset should be reviewed at least at each
financial year-end and, if there has been a significant change in the expected pattern of
consumption of the future economic benefits embodied in the asset, the method should
be changed to reflect the changed pattern.
Such a change should be accounted for as a change in an accounting estimate .
Depreciation Method based on Revenue:
A depreciation method that is based on revenue that is generated by an activity that
includes the use of an asset is not appropriate.
16. Changes in Existing Decommissioning, Restoration and other Liabilities
The cost of PPE may undergo changes subsequent to its acquisition or construction on
account of:
Changes in Liabilities
Price Adjustments
Changes in Duties
Changes in initial estimates of amounts provided for Dismantling, Removing,
Restoration, and
Similar factors
The above are included in the cost of the asset.
17. Retirements
Items of PPE retired from active use and held for disposal should be stated at the lower
of:
Carrying Amount, and
Net Realisable Value
Note: Any write-down in this regard should be recognised immediately in the Statement
of Profit and Loss.
18. De-recognition
The carrying amount of an item of PPE should be derecognised:
On disposal
o By sale
o By entering into a finance lease, or
o By donation, Or
When no future economic benefits are expected from its use or disposal
19. Disclosure
General Disclosures:
The financial statements should disclose, for each class of PPE:
(a) The measurement bases (i.e., cost model or revaluation model) used for
determining the gross carrying amount;
(b) The depreciation methods used;
(c) The useful lives or the depreciation rates used.
In case the useful lives or the depreciation rates used are different from those
specified in the statute governing the enterprise, it should make a specific mention
of that fact;
(d) The gross carrying amount and the accumulated depreciation (aggregated with
accumulated impairment losses) at the beginning and end of the period; and
(e) A reconciliation of the carrying amount at the beginning and end of the period
showing:
Additional Disclosures:
The financial statements should also disclose:
(a) The existence and amounts of restrictions on title, and property, plant and
equipment pledged as security for liabilities;
(b) The amount of expenditure recognised in the carrying amount of an item of
property, plant and equipment in the course of its construction;
(c) The amount of contractual commitments for the acquisition of property, plant and
equipment;
(d) If it is not disclosed separately on the face of the statement of profit and loss, the
amount of compensation from third parties for items of property, plant and
equipment that were impaired, lost or given up that is included in the statement of
profit and loss; and
(e) The amount of assets retired from active use and held for disposal.
Disclosures related to Revalued Assets:
If items of property, plant and equipment are stated at revalued amounts, the follo wing
should be disclosed:
(a) The effective date of the revaluation;
(b) Whether an independent valuer was involved;
(c) The methods and significant assumptions applied in estimating fair values of the
items;
(d) The extent to which fair values of the items were determined directly by reference to
observable prices in an active market or recent market transactions on arms length
terms or were estimated using other valuation techniques; and
(e) The revaluation surplus, indicating the change for the period and any restrictions on
the distribution of the balance to shareholders.
20. Transitional Provisions
Previously Recognised Revenue Expenditure
Where an entity has in past recognized an expenditure in the Statement of Profit and
Loss which is eligible to be included as a part of the cost of a project for construction of
PPE in accordance with the requirements of this standard:
It may do so retrospectively for such a project.
Note: The effect of such retrospective application, should be recognised net-of-tax in
Revenue reserves.
PPE acquired in Exchange of Assets
The requirements of AS 10 regarding the initial measurement of an item of PPE acquired
in an exchange of assets transaction should be applied prospectively only to
transactions entered into after this Standard becomes mandatory.
Spare parts
On the date of this Standard becoming mandatory, the spare parts, which hitherto were
being treated as inventory under AS 2, and are now required to be capitalised in
accordance with the requirements of this Standard, should be capitalised at their
respective carrying amounts.
Note: The spare parts so capitalised should be depreciated over their remaining useful
lives prospectively as per the requirements of this Standard.
Revaluations
The requirements of AS 10 regarding the revaluation model should be applied
prospectively.
In case, on the date of this Standard becoming mandatory, an enterprise does not adopt
the revaluation model as its accounting policy but the carrying amount of item(s) of PPE
reflects any previous revaluation it should adjust the amount outstanding in the
Revaluation reserve against the carrying amount of that item.
Note: The carrying amount of that item should never be less than residual value. Any
excess of the amount outstanding as Revaluation reserve over the carrying amount of
that item should be adjusted in Revenue reserves.
Note: Intangible items are covered under AS 26 which is not covered in syllabus of
Paper 1.
Administrative purposes: The term Administrative purposes has been used in wider
sense to include all business purposes. Thus, PPE would include assets used for:
Selling and distribution
Finance and accounting
Personnel and other functions
of an Enterprise.
Items of PPE may also be acquired for safety or environmental reasons.
The acquisition of such PPE, although not directly increasing the future economic
benefits of any particular existing item of PPE, may be necessary for an enterprise to
obtain the future economic benefits from its other assets.
Such items of PPE qualify for recognition as assets because they enable an enterprise to
derive future economic benefits from related assets in excess of what could be derived
had those items not been acquired.
Example: A chemical manufacturer may install new chemical handling processes to
comply with environmental requirements for the production and storage of dangerous
chemicals; related plant enhancements are recognised as an asset because without
them the enterprise is unable to manufacture and sell chemicals.
4. Other Definitions
1. Biological Asset: An Accounting Standard on Agriculture is under formulation,
which will, inter alia, cover accounting for livestock. Till the time, the Accounting
Standard on Agriculture is issued, accounting for livestock meeting the definition
of PPE, will be covered as per AS 10 (Revised).

2. Bearer Plant:Is a plant that (satisfies all 3 conditions):
Note: When bearer plants are no longer used to bear produce they might be cut down
and sold as scrap. For example - use as firewood. Such incidental scrap sales would
not prevent the plant from satisfying the definition of a Bearer Plant.
The following are not Bearer Plants:
(a) Plants cultivated to be harvested as Agricultural produce
Example: Trees grown for use as lumber
(b) Plants cultivated to produce Agricultural produce when there is more than a remote
likelihood that the entity will also harvest and sell the plant as agricultural produce,
other than as incidental scrap sales
Example: Trees which are cultivated both for their fruit and their lumber
(c) Annual crops
Example: Maize and wheat
Agricultural Produce is the harvested product of Biological Assets of the enterprise.
3. Agricultural Activity: Is the management by an Enterprise of:
Biological transformation; and
Harvest of Biological Assets
For sale, Or
For conversion into Agricultural Produce, Or
Into additional Biological Assets
5. Recognition Criteria for PPE
The cost of an item of PPE should be recognised as an asset if, and only if:
(a) It is probable that future economic benefits associated with the item will flow to the
enterprise, and

An enterprise recognises in the carrying amount of an item of PPE the cost of replacing
part of such an item when that cost is incurred if the recognition criteria are met.
Note: The carrying amount of those parts that are replaced is derecognised in
accordance with the de-recognition provisions of this Standard.
Regular Major Inspections - Accounting Treatment
When each major inspection is performed, its cost is recognised in the carrying amount
of the item of PPE as a replacement, if the recognition criteria are satisfied.
Any remaining carrying amount of the cost of the previous inspection (as distinct from
physical parts) is derecognised.
8. Measurement of PPE
9. Measurement at Recognition
An item of PPE that qualifies for recognition as an asset should be measured at its cost.
What are the elements of Cost?
Cost of an item of PPE comprises:

May be restated proportionately to the change in the carrying amount.

Accumulated depreciation at the date of the revaluation is
Adjusted to equal the difference between the gross carrying amount and the
carrying amount of the asset after taking into account accumulated impairment
losses
B. Technique 2: Accumulated depreciation Is eliminated against the Gross Carrying
amount of the asset
Revaluation - Increase or Decrease
Treatment of Revaluation Surplus

The revaluation surplus included in owners interests in respect of an item of PPE may be
transferred to the Revenue Reserves when the asset is derecognised.
Case I : When whole surplus is transferred:
When the asset is:
Retired; Or
Disposed of
Case II : Some of the surplus may be transferred as the asset is used by an
enterprise:
In such a case, the amount of the surplus transferred would be:
Depreciation (based on Revalued Carrying amount) Depreciation (based on Original
Cost)

Land and Buildings

Land and buildings are separable assets and are accounted for separately, even when
they are acquired together.
A. Land: Land has an unlimited useful life and therefore is not depreciated.
Exceptions: Quarries and sites used for landfill.
Depreciation on Land:
I. If land itself has a limited useful life:
It is depreciated in a manner that reflects the benefits to be derived from it.
II. If the cost of land includes the costs of site dismantlement, removal and
restoration:
That portion of the land asset is depreciated over the period of benefits
obtained by incurring those costs.
B. Buildings: Buildings have a limited useful life and therefore are depreciable assets.
An increase in the value of the land on which a building stands does not affect the
determination of the depreciable amount of the building.
15. Depreciation Method
The depreciation method used should reflect the pattern in which the future economic
benefits of the asset are expected to be consumed by the enterprise.
The method selected is applied consistently from period to period unless:
There is a change in the expected pattern of consumption of those future economic
benefits; Or
That the method is changed in accordance with the statute to best reflect the way
the asset is consumed.

PAPER 2: BUSINESS LAW, ETHICS & COMMUNICATION
PART I: ANNOUNCEMENTS STATING APPLICABILITY

FOR NOVEMBER, 2017 EXAMINATIONS
Applicability for November 2017 examinations
The Study Material (July 2015 edition), Practice Manual (April 2016 edition) along with the
Supplementary Study Paper for November 2017 examinations and onwards is relevant
for November 2017 examinations. Supplementary Study Paper 2017 contains all relevant
amendments/ circulars/ notifications etc. in the Business and the Company law part made
from 1st May 2015 to 30th April, 2017. Further, all relevant amendments/ circulars/
notifications etc. in the Company law part for the period 1 st November 2016 to 30th April,
2017 are mentioned below:
The Companies Act, 2013
The Central Government vide Notification S.O. 3677(E) dated 7th December, 2016, has
notified following sections with effect from 15th December 2016-
(I) Clause (23) of section 2- Company Liquidator means a person appointed by the
Tribunal as the Company Liquidator in accordance with the provisions of section 275
for the winding up of a company under this Act;"
The above definition is the amended definition. The definition of company liquidator
given in the principle Act had been substituted vide Ministry of Corporate Affairs
(MCA) Notification number F.O. 3453 (E) Dated 15th November, 2016.
[Refer page no. 6.75, Point no. (XX) of the Study Material of July 2015 edition]
(II) Clause (c) and (d) of Sub-section (7) of section (7)- Incorporation of company
Sub-section (7) of section 7 [except Clauses (c) and (d) of the Principle Act have been
notified on 1 st June 2016. Further Clauses (c) and (d) of Sub-section (7) of section 7
have been notified through above notification. Following is the Notified Section 7(7) -
(7) Incorporation by furnishing of incorrect information: Without prejudice to
the provisions of sub-section (6), where a company has got incorporated by furnishing
any false or incorrect information or representation or by suppressing any material
fact or information in any of the documents or declaration filed or made for
incorporating such company or by any fraudulent action, the Tribunal may, on an
application made to it, on being satisfied that the situation so warrants,
(a) pass such orders, as it may think fit, for regulation of the management of the
company including changes, if any, in its memorandum and articles, in public
interest or in the interest of the company and its members and creditors; or
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company; or

(e) pass such other orders as it may deem fit:
Provided that before making any order under this sub-section,
(i) the company shall be given a reasonable opportunity of being heard in the
matter; and
(ii) the Tribunal shall take into consideration the transactions entered into by the
company, including the obligations, if any, contracted or payment of any liability.
[Refer page no. 6.19, Point no. (7) of the Study Material of July 2015 edition]
(III) Sub-section 9 of Section 8- Formation of Companies with Charitable Objects,
etc.-
(9) Transfer of remaining asset of company on dissolution to another
company registered under section 8: If on the winding up or dissolution of a
company registered under this section, there remains, after the satisfaction of its
debts and liabilities, any asset, they may be transferred to another company
registered under this section and having similar objects, subject to such conditions
as the Tribunal may impose, or may be sold and proceeds thereof credited
to Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and
Bankruptcy Code, 2016.
This sub-section 9 of section 8 (as stated above) is an amended sub-section. Sub-
section 9 of Section 8 of the principle Act, have been substituted vide MCA
Notification number F.O. 3453(E) dated 15th November, 2016.
[Refer page no. 6.14, Point no. (c) of Para 1.3 for the relevant provision in the
Study Material of July 2015 edition]
(IV) Section 48- Variation of Shareholders' Rights-
(1) Variation in rights of shareholders with consent: Where a share capital of
the company is divided into different classes of shares, the rights attached to the
shares of any class may be varied with the consent in writing of the holders of not
less than three-fourths of the issued shares of that class or by means of a special
resolution passed at a separate meeting of the holders of the issued shares of that
class,
(a) if provision with respect to such variation is contained in the memorandum or
articles of the company; or
(b) in the absence of any such provision in the memorandum or articles, if such
variation is not prohibited by the terms of issue of the shares of that class:
Provided that if variation by one class of shareholders affects the rights of any other
class of shareholders, the consent of three-fourths of such other class of shareholders
shall also be obtained and the provisions of this section shall apply to such variation.
PAPER 2: BUSINESS LAW, ETHICS AND COMMUNICATION 63
(2) No consent for variation: Where the holders of not less than ten per cent of
the issued shares of a class did not consent to such variation or vote in favour of the
special resolution for the variation, they may apply to the Tribunal to have the variation
cancelled, and where any such application is made, the variation shall not have effect
unless and until it is confirmed by the Tribunal:
Provided that an application under this section shall be made within twenty-one days
after the date on which the consent was given or the resolution was passed, as the
case may be, and may be made on behalf of the shareholders entitled to make the
application by such one or more of their number as they may appoint in writing for the
purpose.
(3) Binding decision of tribunal: The decision of the Tribunal on any application
under sub-section (2) shall be binding on the shareholders.
(4) Filing copy of order with the Registrar: The Company shall, within thirty days
of the date of the order of the Tribunal, file a copy thereof with the Registrar.
(5) Default in compliance with the provision: Where any default is made in
complying with the provisions of this section, the company shall be punishable with
fine which shall not be less than twenty-five thousand rupees but which may extend
to five lakh rupees and every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to six months or with fine
which shall not be less than twenty-five thousand rupees but which may extend to
five lakh rupees, or with both.
[Refer page no. 6.82, Para 3.3 for the relevant provision in the Study Material of
July 2015 edition]
(V) Section 66 - Reduction of Share Capital.
(1) Manner of reduction of share capital on an application by the company:
Subject to confirmation by the Tribunal on an application by the company, a company
limited by shares or limited by guarantee and having a share capital may, by a special
resolution, reduce the share capital in any manner and in, particular, may
(a) extinguish or reduce the liability on any of its shares in respect of the share
capital not paid-up; or
(b) either with or without extinguishing or reducing liability on any of its shares,
(i) cancel any paid-up share capital which is lost or is unrepresented by
available assets; or
(ii) pay off any paid-up share capital which is in excess of the wants of the
company,
alter its memorandum by reducing the amount of its share capital and of its shares
accordingly:
Provided that no such reduction shall be made if the company is in arrears in the
repayment of any deposits accepted by it, either before or after the commencement
of this Act, or the interest payable thereon.
(2) Tribunal to give notice of every application: The Tribunal shall give notice of
every application made to it under sub-section (1) to the Central Government,
Registrar and to the Securities and Exchange Board, in the case of listed companies,
and the creditors of the company and shall take into consideration the
representations, if any, made to it by that Government, Registrar, the Securities and
Exchange Board and the creditors within a period of three months from the date of
receipt of the notice:
Provided that where no representation has been received from the Central
Government, Registrar, the Securities and Exchange Board or the creditors within the
said period, it shall be presumed that they have no objection to the reduction.
(3) Order of Tribunal confirming the reduction of share capital: The Tribunal
may, if it is satisfied that the debt or claim of every creditor of the company has been
discharged or determined or has been secured or his consent is obtained, make an
order confirming the reduction of share capital on such terms and conditions as it
deems fit:
Provided that no application for reduction of share capital shall be sanctioned by the
Tribunal unless the accounting treatment, proposed by the company for such
reduction is in conformity with the accounting standards specified in section 133 or
any other provision of this Act and a certificate to that effect by the company's auditor
has been filed with the Tribunal.
(4) Publication of order of reduction of share capital: The order of confirmation
of the reduction of share capital by the Tribunal under sub-section (3) shall be
published by the company in such manner as the Tribunal may direct.
(5) Delivery of certified order of tribunal to Registrar: The Company shall deliver
a certified copy of the order of the Tribunal under sub-section (3) and of a minute
approved by the Tribunal showing
(a) the amount of share capital;
(b) the number of shares into which it is to be divided;
(c) the amount of each share; and
(d) the amount, if any, at the date of registration deemed to be paid-up on each
share, to the Registrar within thirty days of the receipt of the copy of the order,
who shall register the same and issue a certificate to that effect.
(6) Non- applicability of this section: Nothing in this section shall apply to buy-
back of its own securities by a company under section 68.
(7) No liability of a member of a company: A member of the company, past or

present, shall not be liable to any call or contribution in respect of any share held by
him exceeding the amount of difference, if any, between the amount paid on the
share, or reduced amount, if any, which is to be deemed to have been paid thereon,
as the case may be, and the amount of the share as fixed by the order of reducti on.
(8) No name of creditor in list of creditors: Where the name of any creditor entitled
to object to the reduction of share capital under this section is, by reason of his
ignorance of the proceedings for reduction or of their nature and effect with respect to
his debt or claim, not entered on the list of creditors, and after such reduction, the
company* "commits a default, within the meaning of section 6 of the Insolvency and
Bankruptcy Code, 2016, in respect of the amount of his debt or claim,"-
(a) Liable to contribute to the payment of debt- Every person, who was a member
of the company on the date of the registration of the order for reduction by the
Registrar, shall be liable to contribute to the payment of that debt or claim, an
amount not exceeding the amount which he would have been liable to contribute
if the company had commenced winding up on the day immediately before the
said date; and
(b) Preparation of list of persons liable to contribute: if the company is wound
up, the Tribunal may, on the application of any such creditor and proof of his
ignorance as aforesaid, if it thinks fit, settle a list of persons so liable to
contribute, and make and enforce calls and orders on the contributories settled
on the list, as if they were ordinary contributories in a winding up.
(9) Non applicability of sub-section 8: Nothing in sub-section (8) shall affect the
rights of the contributories among themselves.
(10) Liability under section 447: If any officer of the company
(a) knowingly conceals the name of any creditor entitled to object to the reduction;
(b) knowingly misrepresents the nature or amount of the debt or claim of any
creditor; or
(c) abets or is privy to any such concealment or misrepresentation as aforesaid,
he shall be liable under section 447.
(11) Failure in compliance: If a company fails to comply with the provisions of sub-
section (4), it shall be punishable with fine which shall not be less than five lakh
rupees but which may extend to twenty-five lakh rupees.
*This amendment was made in Sub-section (8) of Section 66 of the Principle Act
through the MCA Notification number F.O. 3453(E) Dated 15th November, 2016.
[Refer page no. 6.87, Para 3.8 for the relevant provision in the Study Material of
July 2015 edition]
PART II : QUESTIONS AND ANSWERS

QUESTIONS
PART A: BUSINESS LAWS

The Indian Contract Act,1872
1. (a) Examine what is the legal position, as to the following:
(i) Mr. Singhla, an old man, by a registered deed of gift, granted certain property to
Amruta, his daughter. By the terms of the deed, it was stipulated that an annuity
of ` 90, 000 should be paid every year to Baldev, who is the brother of Mr.
Singhla. On the same day Amruta made a promise to Baldev and executed in
his favour an agreement to give effect to the stipulation. Amruta failed to pay the
stipulated sum. In an action against her by Baldev, she contended that since
Baldev had not furnished any consideration, he has no right of action.
(ii) Rohit, aged 16 years, was studying in an engineering college. On 1 March, 2016
he took a loan of ` 1 lakh from Suresh for the payment of his college fees and
agreed to pay by 30th May, 2017. Rohit possesses assets worth ` 10 lakhs. On
due date Rohit fails to pay back the loan to Suresh. Suresh now wants to recover
the loan from Rohit out of his assets. Whether Suresh would succeed? Decide,
referring to the provisions of the Indian Contract Act, 1872.
(b) What is meant by Undue Influence? Aakash applies to a banker for a loan at a time
when there is stringency in the money market. The banker declines to make the loan
except at an unusually high rate of interest. Aakash accepts the loan on these terms.
Whether the contract is induced by undue influence? Decide.
2. (a) Ajay, Vijay and Dyna jointly borrowed ` 50,000 from Jacob. The whole amount was
repaid to Jacob by Vijay. Decide in the light of the Indian Contract Act, 1872 whether:
(i) Vijay can recover the contribution from Ajay and Dyna,
(ii) Legal representatives of Ajay are liable in case of death of Ajay,
(iii) Vijay can recover the contribution from the assets, in case Dyna becomes insolvent.
(b) X entered into a contract with Y to supply him 1,000 water bottles @ ` 5.00 per
water bottle, to be delivered at a specified time. Thereafter, X contracts with Z for
the purchase of 1,000 water bottles @ ` 4.50 per water bottle, and at the same time
told Z that he did so for the purpose of performing his contract entered into with Y.
Z failed to perform his contract in due course and market price of each water bottle
on that day was ` 5.25 per water bottle. Consequently, X could not procure any
water bottle and Y rescinded the contract. What would be the amount of damages
which X could claim from Z in the circumstances? What would be your answer if
Z had not informed about the Ys contract? Explain with reference to the provisions
of the Indian Contract Act, 1872.
The Negotiable Instruments Act, 1881

3. Referring to the provisions of the Negotiable Instruments Act, 1881, examine the validity
of the following:
(i) A Bill of Exchange originally drawn by Mukesh for a sum of ` 10,000, but accepted
by Deepa only for ` 7,000.
(ii) A cheque marked Not Negotiable is not transferable.
4. (a) Harish executed a promissory note in favour of Sejal for ` 5 crores. The said amount
was payable three days after sight. Sejal, on maturity, presented the promissory note
on 1st January, 2016 to Harish. Harish made the payments on 4 th January, 2016. Sejal
wants to recover interest for one day from Harish. Advise Harish, in the light of
provisions of the Negotiable Instruments Act, 1881, whether he is liable to pay the
interest for one day.
(b) Jagdish, a shareholder of a company purchased for his personal use certain goods
from a Mall (Departmental Store) on credit. He sent a cheque drawn on the
Companys account to the Mall (Departmental Store) towards the full payment of the
bills. The cheque was dishonoured by the Companys Bank. Jagdish, the shareholder
of the company was neither a Director nor a person in-charge of the company.
Examining the provisions of the Negotiable Instruments Act, 1881 state whether
Jagdish has committed an offence under Section 138 of the Act and decide whether
he (Jagdish) can be held liable for the payment, for the goods purchased from the
Mall (Departmental Store).
The Payment of Bonus Act, 1965
5. Referring the provisions of the Payment of Bonus Act, 1965, state whether the following
persons are entitled to bonus under the Act:
(i) An apprentice;
(ii) An employee dismissed on the ground of misconduct;
(iii) A temporary workman;
(iv) A piece-rated worker.
(v) An employee getting a salary of ` 22,000 per month.
6. Ambay Textiles Ltd. employed 20 fulltime and 5 part-time employees who were drawing
salary of less than ` 21,000 per month. After completing service of 28 days, in an
accounting year, 10 full-time employees submitted their resignations and left the service
of the company. The Board of directors of this company decided not to give the bonus to
the employees, who resigned, to the remaining full-time employees and to the part-time
employees. Against the decision, all the employees applied to the authorities for relief.
Decide, stating the provisions of the Payment of Bonus Act, 1956, whether the employees,
who resigned, the remaining full-time employees and part-time employees will get relief.
The Employees Provident Funds and Miscellaneous Provisions Act, 1952
7. Ritesh, a 57 years old district judge was appointed by the Central Government as Presiding
Officer of the Employee's Provident Funds Appellate Tribunal for a period of five years.
After three years, he (Ritesh) resigns from his office and ceases to work with immediate
effect without handing over the charge to his successor, who was not appointed by the
Government till that date. Examine the validity of Riteshs action to cease work under the
provisions of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 .
8. Primitive Ltd., which is covered by the Employees Provident Fund and Miscellaneous
Provisions Act, 1952 was adjudged insolvent and an order for winding up was made. State,
in this connection, whether the Provident Fund is attachable and whether the payment of
Provident Fund contribution be considered as priority over other Debts of the Company
The Payment of Gratuity Act, 1972
9. When an employee becomes disabled due to any accident or disease and is unable to do
the same work and re-employed on the reduced wages, how the gratuity of such employee
shall be, computed under the provisions of the Payment of Gratuity Act, 1972?
10. Mr. Alexender was an employee of Mutual Developers Limited. He retired from the
company after completing 30 years of continuous service. He applied to the company for
the payment of gratuity within the prescribed time. The company refused to pay the gratuity
and contended that due to stringent financial condition the company is unable to pay the
gratuity. Mr. Alexender applied to the Appropriate Authority for the recovery of the amount
of gratuity.
Examine the validity of the contention of the company and also state the provisions of law
to recover the gratuity under the Payment of Gratuity Act, 1972.
The Companies Act, 2013
11. Republic Limited was incorporated by furnishing false informations. As per the Companied
Act, 2013, state the power of the Tribunal in this regard.
12. (a) Prem, a director in a public company, gave in writing to the company that notice for
any General Meeting and the Board of Directors Meeting be sent to him at his
address in India only by Registered Mail and for which he paid sufficient money. The
company sent two notices to him, of such meetings, by ordinary mail, and under
certificate of posting. Prem did not receive the said notices and could not attend the
meetings and the proceedings thereof on the ground of improper notice. Decide in
the light of the provisions of the Companies Act, 2013:
(i) Whether the contention of Prem is valid?
(ii) Would you answer be still the same in case Prem remained outside India for two
months (when such notices were given and meetings held).
(b) Poorva Limited refuses to register transfer of shares made by Mr. Akbar to Mr. Amar.
The company does not even send a notice of refusal to Mr. Akbar or Mr. Amar
respectively within the prescribed period. Has the aggrieved party any right(s) against
the company for such refusal? Advise as per the provisions of the Companies Act,
2013.
13. Rishi Limiteds share capital is divided into different classes. Now, Rishi Limited intends to
vary the rights attached to a particular class of shares. Advice Rishi Limited as to obtaining
consent from the shareholders in relation to variation of rights.
14. Param Ltd. issued and published its prospectus to invite the investors to purchase its
shares. The said prospectus contained a false statement.
Mr. Prakash purchased some partly paid shares of the company in good faith from the
Stock Exchange. Subsequently, the company was wound up and the name of Mr. Prakash
was included in the list of contributories. Decide:
(i) Whether Mr. Prakash is liable to pay the unpaid amount?
(ii) Can Mr. Prakash sue the directors of the company to recover damages?
15. Mr. Pink held 100 partly paid up shares of Red Limited. The company asked him to pay
the final call money on the shares. Due to some unavoidable circumstances he was unable
to pay the amount of call money to the company. At a general meeting of the shareholders,
the chairman disallowed him to cast his vote on the ground that the articles do not permit
a shareholder to vote if he has not paid the calls on the shares held by him. Mr. Pink
contested the decision of the Chairman. Referring to the provisions of the Companies Act,
2013 decide whether the contention of Mr. Pink is valid.
PART B: ETHICS
16. Finance and accounting professionals working as employees in an organisation have to
face various threats which make it difficult for them to comply with fundamental princip les
relating to ethics. Explain the safeguards in the work environment which may be created
by a business enterprise to overcome such threats.
17. What is meant by Environmental ethics? How does its non-adoption lead to 3 Ps Viz.,
Polluter Pays and Principles? Explain.
18. What problems may arise at work place when ethical behaviour is not adopted?
19. What is meant by 'Corporate Governance'? State the major 'characteristics' of good
corporate governance.
20. What is the difference between Morals and Ethics?
PART C: COMMUNICATION
21. What do you understand by 'Group conflicts'? How shall these be managed effectively?
Explain.
22. Suggest guidelines to handle communication ethics dilemmas.
23. State the reasons for acceptance of change in an organization.
24. Draft a notice for Arden Limiteds Annual General Meeting with four ordinary business.
25. Draft a 'Power of Attorney' by an assessee authorizing a professional to appear before the
Income Tax Authorities in respect of the pending taxation matter.
SUGGESTED ANSWERS/HINTS
1. (a) (i) Problem as asked in the question is based on the provisions of the Indian
Contract Act, 1872 as contained in section 2(d) and on the principle privity of
consideration. Consideration is one of the essential elements to make a contract
valid and it can flow from the promisee or any other person. In view of the clear
language used in definition of consideration in Section 2(d) . the promisee
or any other person.., it is not necessary that consideration should be
furnished by the promisee only. A promise is enforceable if there is some
consideration for it and it is quite immaterial whether it moves from the promisee
or any other person. The leading authority in the decision of the Chinnaya Vs.
Ramayya (1882) 4 Mad 137., held that the consideration can legitimately move
from a third party and it is an accepted principle of law in India.
In the given problem, Mr. Singhla has entered into a contract with Amruta, but
Mr. Baldev has not given any consideration to Amruta but the consideration did
flow from Mr. Singhla to Amruta and such consideration from third party is
sufficient to the enforce the promise of Amruta, the daughter, to pay an annuity
to Baldev. Further, the deed of gift and the promise made by Amruta to Baldev
to pay the annuity were executed simultaneously and therefore they should be
regarded as one transaction and there was sufficient consideration for it.
Thus, a stranger to the contract cannot enforce the contract but a stranger to
the consideration may enforce it.
(ii) According to Section 11 of the Indian Contract Act, 1872, a person who is of the
age of majority to the law to which he is subject is competent to enter into any
contract. A person who has completed the age of 18 years is a major and
otherwise he will be treated as minor. Thus, Rohit who is a minor is incompetent
to contract and any agreement with him is void [Mohori Bibi Vs Dharmodas
Ghose 1903, 30 Cal, 539 (PC)]. Section 68 of the Indian Contract Act, 1872
however, prescribes the liability of a minor for the supply of the things which are
the necessaries of life to him. It says that though minor is not personally liable
to pay the price of necessaries supplied to him or money lent for the purpose,
the supplier or lender will be entitled to claim the money/price of goods or
services which are necessaries suited to his condition of life provided that the
minor has a property. The liability of minor is only to the extent of the minors
property. This type of contract is called a Quasi-contract and the right of the
supplier/lender is based on the principle of equity. Thus, according to the above
provision, Suresh will be entitled to recover the amount of loan given to Rohit
for payment of the college fees from the property of the minor.
(b) Meaning of Undue Influence: Section 16 of the Indian Contract Act, 1872, states
that a contract is said to be induced by undue influence where the relations subsisting
between the parties are such that the parties are in a position to dominate the will of
the other and used that position to obtain an unfair advantage over the other.
A person is deemed to be in that position:
(a) where he holds real or apparent authority over the other or stands in a fiduciary
relation to him;
(b) where he makes a contract with a person whose mental capacity is temporarily
or permanently affected by reason of old age, illness or mental or bodily distress.
(c) where a man who is in position to dominate the will of the other enters into
contract with him and the transaction appears to be unconscionable, the burden
of proving that it is fair, is on him, who is in such a position.
When one of the parties who has obtained the benefits of a transaction is in a
position to dominate the will of the other, and the transaction between the parties
appears to be unconscionable, the law raises a presumption of undue influence
[section 16(3)]. Every transaction where the terms are to the disadvantage of
one of the parties need not necessarily be considered to be unconscionable. If
the contract is to the advantage of one of the parties but the same has been
made in the ordinary course of business the presumption of under influence
would not be raised.
In the given problem, Aakash applies to the banker for a loan at a time when
there is stringency in the money market. The banker declines to make the loan
except at an unusually high rate of interest. Aakash accepts the loan on these
terms. This is a transaction in the ordinary course of business, and the contract
is not induced by undue influence. As between parties on an equal footing, the
court will not hold a bargain to be unconscionable merely on the ground of high
interest. Only where the lender is in a position to dominate the will of the
borrower, the relief is granted on the ground of undue influence. But this is not
the situation in this problem, and therefore, there is no undue influence .
2. (a) Section 42 of the Indian Contract Act, 1872 requires that when two or more persons
have made a joint promise, then, unless a contrary intention appears from the
contract, all such persons jointly must fulfill the promise. In the event of the death of
any of them, his representative jointly with the survivors and in case of the death of
all promisors, the representatives of all jointly must fulfill the promise.
Section 43 allows the promisee to seek performance from any of the joint promisors.
The liability of the joint promisors has thus been made not only joint but "joint and
several". Section 43 provides that in the absence of express agreement to the
contrary, the promisee may compel any one or more of the joint promisors to perform
the whole of the promise.
Section 43 deals with the contribution among joint promisors. The promisors, may
compel every joint promisor to contribute equally to the performance of the promise
(unless a contrary intention appears from the contract). If any one of the joint
promisors makes default in such contribution the remaining joint promisors must bear
the loss arising from such default in equal shares.
As per the provisions of above sections,
(i) Vijay can recover the contribution from Ajay and Dyna because Ajay, Vijay and
Dyna are joint promisors.
(ii) Legal representative of Ajay are liable to pay the contribution to Vijay. However,
a legal representative is liable only to the extent of property of the deceased
received by him.
(iii) Vijay also can recover the contribution from Dynas assets, in case Dyna
becomes insolvent.
(b) Breach of Contract: Damages- Section 73 of the Indian Contract Act, 1872 lays down
that when a contract has been broken the party who suffers by such breach is entitled
to receive from the party who has broken the contract compensation for any loss or
damage caused to him thereby which naturally arose in the usual course of things
from such breach or which the parties knew when they made the contract to be likely
to result from the breach of it.
The leading case on this point is Hadley v. Baxendale in which it was decided by
the Court that the special circumstances under which the contract was actually made
were communicated by the plaintiff to the defendant, and thus known to both the
parties to the contract, the damages resulting from the breach of such contract which
they would reasonably contemplate, would be the amount of injury which would
ordinarily follow from the breach of contract under these special circumstances so
known and communicated.
The problem asked in this question is based on the provisions of Section 73 of the
Indian Contract Act, 1872. In the instant case X had intimated to Z that he was
purchasing water bottles from him for the purpose of performing his contract with Y.
Thus, Z had the knowledge of the special circumstances. Therefore, X is entitled to

claim from Z for 500 rupees at the rate of 0.50 paise i.e. 1000 water bottles x 0.50
paise (difference between the procuring price of water bottles and contracted selli ng
price to Y) being the amount of profit X would have made by the performance of his
contract with Y.
If X had not informed Z of Ys contract then the amount of damages would have
been the difference between the contract price and the market price on the day of
default. In other words, the amount of damages would be ` 750/- (i.e. 1000 water
bottles x 0.75 paise).
3. (i) As per the provisions of the Negotiable Instruments Act 1881, acceptance may be
either general or qualified. It is qualified when the drawee does not accept the bill
according to the apparent tenor of the bill but attaches some condition or qualification
which have the effect of either reducing his (acceptors) liability or acceptance of his
liability is subject to certain condition. The holder of the bill is entitled to require an
absolute and unconditional acceptance, otherwise he will treat it as dishonoured.
However, he may agree to qualified acceptance but he does so at his own peril, since
he discharges all parties prior to himself, unless he has obtained their consent.
Thus, in this given case in accordance with the Explanation to Section 86 of the Act,
when the drawee undertakes the payment of part only of the sum ordered to be paid,
it is a qualified acceptance and the drawer may treat it as dishonoured unless agreed
by him. If the Drawer (Mukesh) agrees to acceptance, the drawee (Deepa) is
responsible for a sum of ` 7000 only.
(ii) The given statement is not correct. A cheque marked not negotiable is a transferable
instrument. The inclusion of the words not negotiable however makes a significant
difference in the transferability of the cheques. The holder of such a cheque cannot
acquire title better than that of the transferor.
4. (a) Claim of Interest: Section 24 of the Negotiable Instruments Act, 1881 states that
where a bill or note is payable after date or after sight or after happening of a specified
event, the time of payment is determined by excluding the day from which the time
begins to run.
Therefore, in the given case, Harish will succeed in objecting to Sejals claim. Harish
paid rightly three days after sight. Since, the bill was presented on 1 st January,
Harish was required to pay only on the 4 th and not on 3rd January, 2016.
(b) The facts of the problem are identical with the facts of a case known as H.N.D. Mulla
Feroze Vs. C.Y. Somaya Julu, J(2004) 55 SCL (AP) wherein the Andhra Pradesh
High Court held that although the petitioner has a legal liability to refund the amount
to the appellant, petitioner is not the drawer of the cheque, which was dishonoured
and the cheque was also not drawn on an account maintained by him but was drawn
on an account maintained by the company. Hence, it was held that the petitioner J
could not be said to have committed the offence under Section 138 of the Negotiable
Instruments Act, 1881. Therefore, Jagdish also is not liable for the cheque but legally
liable for the payments for the goods.
5. (i) An Apprentice is not entitled to bonus within the meaning of Employee under section
2(13) of the Payment of Bonus Act, 1965 and as also decided in the case [Wheel RIM
Co. Vs. Govt. of Tamil Nadu (1971)]
(ii) An employee dismissed on the ground of misconduct shall be disqualified for any
bonus under section 9 of the Payment of Bonus Act, 1965 only if the misconduct falls
within the meaning of:
a. Fraud; or
b. Riotous or violent behaviour while on the premises of the establishment; or
c. Theft, misappropriation or sabotage of any property of the establishment .
It may be noted from the above grounds of disqualification, that misconduct is not
mentioned. Misconduct is a broad term and can be interpreted to mean many things
such as insubordination, misbehavior or even deliberate sub standard
performance or negligence, but none of these will disqualify an employee from
receiving bonus. Therefore, an employee dismissed on the ground of misconduct will
be disqualified only if the conditions in a, b or c above can be established. [Pandian
Roadways Corporation Ltd. Vs. Presiding Officer (1996)]
(iii) A temporary workman is entitled to bonus on the basis of the total number of days
worked by him.
(iv) A piece-rated worker is entitled to bonus. [Mathuradas Kanji Vs. L.A. Tribunal (1958)]
(v) Under section 2 (13) of the Payment of Bonus Act, 1965 a person drawing a monthly
salary of an amount in excess of ` 21,000, shall not fall within the meaning of an
employee and consequently not eligible to receive bonus under the Act. Thus,
employee getting a salary of ` 22,000 per month is not entitled to bonus.
6. In accordance with the provisions of Section 2(13) of the Payment of Bonus Act, 1965 any
person other than an apprentice employed on a salary or wage not exceeding ` 21,000
per month in any industry to do any skilled or unskilled, manual, supervisory, managerial,
administrative, technical or clerical work for hire or reward whether the terms of
employment be express or implied is eligible for bonus.
Further, in accordance with the provisions of Section 8 of the Payment of Bonus Act, 1965
every employee of an establishment covered under the Act is entitled to bonus from his
employer in an accounting year provided he has worked in that establishment for not less
than thirty working days in the year.
The problem as asked is based on the above provisions of the Act and the answer may be
given as follows:
(a) As regards the employees who resigned: The employees who have resigned are
not entitled to bonus because they worked only for 28 days in an accounting year
although they are drawing salary less than ` 21,000 per month.
(b) As regards full time remaining employees: These employees are entitled to get
the bonus as they fulfil both the requirements as stated under Sections 2 (13) and 8
of the Act. Although the employees in this case have been reduced to 10, once the
Act is applicable, it continues to apply even if number of employees fall below 20.
(c) As regards part time employees: Even a part time employee is entitled to bonus
on the basis of total number of days worked by him in an accounting year. The
definition of an employee under the Act does not exclude part time employees from
the definition of employee. Therefore, if such employees work for over 30 days in the
accounting year and have drawn salary of less than ` 21,000 per month, they shall
be entitled to receive bonus for that accounting year. The Payment of Bonus Act,
1965 does not prohibit such employees as long as they fulfill all the requirements
stated above [Automobile Karmachari Sangh vs. Industrial Tribunal (1971)].
7. Section 7 F (1) of the Employees Provident Funds and Miscellaneous Provisions Act, 1952
provides that the Presiding Officer of a Employees Provident Funds Appellate Tribunal
may by notice in writing under his hand addressed to the Central Government, resign his
office provided that the Presiding Officer shall, unless he is permitted by the Central
Government to relinquish his office sooner, continue to hold office until the expiry of three
months from the date of receipt of such notice or until a person duly appointed as his
successor enters upon his office or until the expiry of his term of office, whichever is the
earliest.
Hence, Ritesh's action is invalid as per above provisions. He is supposed to continue for
three months unless he is relieved earlier by the Central Government or his successor
appointed by the Central Government has taken up the office, whichever is earlier.
8. Protection against attachment: According to section 10 of the Employees Provident
Fund and Miscellaneous Provisions Act, 1952, the amount standing to the credit of any
member or of any exempted employee in the Provident Fund shall not in any way be
capable of, being assigned or charged and shall not be liable to attachments under any
decrees order of any court in respect of any debt or liability, incurred by the member or the
exempted employee. Neither the official assignee appointed under the Presidency town
Insolvency Act, 1909 nor any Receiver appointed under the Provincial Insolvency Act 1920
shall be entitled to have any claim on any such amount. Such amount shall also not be
liable to attachment under any degree or order of any court.
Priority of Payment of Contribution over other debts (Section 11): If the employer is
adjudged an insolvent or if the employer is a company and an order for winding thereof
has been made, the amount due from the employer whether in respect of the employees
contribution or the employers contribution must be included among the debts which are to
be paid in priority to all other debts under Section 49 of the Presidency -Towns Insolvency
Act, Section 61 of the Provincial Insolvency Act, Section 327 of the Compani es Act,
2013(i.e., section 530 of the Companies Act, 1956), in the distribution of the property of
the insolvent or the assets of the company. In other words, this payment will be a
preferential payment provided the liability therefor has accrued before this order of
adjudication or winding up is made.
9. Computation of Gratuity of a disabled employee: According to Section 4 (4) of the
Payment of Gratuity Act, 1972, when an employee becomes disabled due to any accident
or disease and is not in a position to do the same work and re-employed on reduced wages
on some other job, the gratuity will be calculated in two parts:-
For the period preceding the disablement: on the basis of wages last drawn by the
employee at the time of his disablement.
For the period subsequent to the disablement: On the basis of the reduced wages as
drawn by him at the time of the termination of services.
In the case of Bharat Commerce and Industries Vs. Ram Prasad, it was decided that if for
the purposes of computation of quantum of the amount of gratuity the terms of agreement
or settlement are better than the Act, the employee is entitled for that benefit.
However, the maximum statutory ceiling limit as providing under Sub-Section 3 of Section
4 of the Act which is ` 10 Lakhs , cannot be reduced by mutual settlement or agreement.
10. (i) Gratuity shall be payable to an employee on the termination of his employment after
he has rendered continuous service for not less than five years on his superannuation
or on his retirement or resignation or on his death or disablement due to accident or
disease under Section 4(1) of the Payment of Gratuity Act,1972. Further, section 7(2)
provides that as soon as gratuity becomes payable, the employer shall, whether the
application for the payment of gratuity has been given or not by the employee,
determine the amount of gratuity and give notice in writing to the person to whom the
gratuity is payable and also to the controlling authority specifying the amount of
gratuity so determined.
The employer shall arrange to pay the amount of gratuity within 30 days for the date
of its becoming due/payable to the person to whom it is payable [Section 7(3)], along
with simple interest (at rates specified) if it is not paid within the period specified
except where the delay in the payment is due to the fault of the employee and the
employer has obtained permission thereon from the Controlling Authority [Section
7(3A)].
(ii) If the gratuity payable under the Act is not paid by the employer within the prescribed
time to the person entitled thereto, the Controlling Authority shall issue a certificate
for the amount to the Collector to recover the same along with compound interest at
such rate as prescribed by the Central Government from the date of expiry of the
prescribed time as land revenue arrears, to enable the person entitled to get the
amount, after receiving the application from the aggrieved person (Section 8).
Before issuing the certificate for such recovery the Controlling Authority shall give the
employer a reasonable opportunity of showing cause against the issue of such
certificate. The amount of interest payable under the Section shall not exceed the
amount of gratuity payable under this Act in no case (Section 8).
In the given case the facts are commensurate with provisions of law as stated above
under Sections 7 and 8 of the Payment of Gratuity Act, 1972. Therefore, Mr.
Alexender is entitled to recover gratuity as he has completed the service of 30 years.
The company cannot take the plea of stringent financial conditions for not paying the
gratuity to Mr. Alexender. On the refusal by the company, Mr. Alexender can apply to
the appropriate authority and the company will be liable to pay the gratuity along with
interest as decided by such authority.
11. According to section 7(7) of the Companies Act, 2013:
Incorporation by furnishing of incorrect information: Without prejudice to the
provisions of sub-section (6), where a company has got incorporated by furnishing any
false or incorrect information or representation or by suppressing any material fact or
information in any of the documents or declaration filed or made for incorporating such
company or by any fraudulent action, the Tribunal may, on an application made to it, on
being satisfied that the situation so warrants,
(a) pass such orders, as it may think fit, for regulation of the management of the company
including changes, if any, in its memorandum and articles, in public interest or in the
interest of the company and its members and creditors; or
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies; or
(d) pass an order for the winding up of the company; or
(e) pass such other orders as it may deem fit:
Provided that before making any order under this sub-section,
(i) the company shall be given a reasonable opportunity of being heard in the matter;
and
(ii) the Tribunal shall take into consideration the transactions entered into by the
company, including the obligations, if any, contracted or payment of any liability.
12. (a) The problem as asked in the question is based on the provisions of the Companies
Act, 2013 as contained in Section 101. Accordingly, the notice may be served
personally or sent through post to the registered address of the members and, in the
absence of any registered office in India, to the address, if there be any within India
furnished by him to the company for the purpose of servicing notice to him. Service
through post shall be deemed to have effected by correctly addressing, preparing and
posting the notice. If, however, a member wants the notice to be served on him under
a certificate or by registered post with or with acknowledgement due and has

deposited money with the company to defray the incidental expenditure thereof, the
notice must be served accordingly, otherwise service will not be deemed to have been
effected.
Accordingly, the questions as asked may be answered as under:
(i) The contention of Prem shall be tenable, for the reason that the notice was not
properly served and meetings held by the company shall be invalid.
(ii) In view of the provisions of the Companies Act, 2013, the company is not bound
to send notice to Prem at the address outside India. Therefore, answer in the
second case shall differ from the first one.
(b) Refusal of registration and appeal against refusal: The problem as asked in the
question is governed by Section 58 of the Companies Act, 2013 dealing with the
refusal to register transfer and appeal against refusal.
In the present case the company has committed the wrongful act of not sending the
notice of refusal of registering the transfer of shares.
Under section 58 (4), if a public company without sufficient cause refuses to re gister
the transfer of securities within a period of 30 days from the date on which the
instrument of transfer is delivered to the company, the transferee may, within a period
of 60 days of such refusal or where no intimation has been received from the
company, within 90 days of the delivery of the instrument of transfer, appeal to the
Tribunal.
Section 58 (5) further provides that the Tribunal, while dealing with an appeal made
under sub-section (4), may, after hearing the parties, either dismiss the appeal, or by
order
(a) direct that the transfer or transmission shall be registered by the company and
the company shall comply with such order within a period of 10 days of the
receipt of the order; or
(b) direct rectification of the register and also direct the company to pay damages,
if any, sustained by any party aggrieved.
In the present case Mr. Amar can make an appeal before the tribunal.
13. According to section 48 of the Companies Act, 2013-
(1) Variation in rights of shareholders with consent: Where a share capital of the
company is divided into different classes of shares, the rights attached to the shares
of any class may be varied with the consent in writing of the holders of not less than
three-fourths of the issued shares of that class or by means of a special resolution
passed at a separate meeting of the holders of the issued shares of that class,
(a) if provision with respect to such variation is contained in the memorandum or

articles of the company; or
(b) in the absence of any such provision in the memorandum or articles, if such
variation is not prohibited by the terms of issue of the shares of that class:
Provided that if variation by one class of shareholders affects the rights of any other
class of shareholders, the consent of three-fourths of such other class of shareholders
shall also be obtained and the provisions of this section shall apply to such variation.
(2) No consent for variation: Where the holders of not less than ten per cent of the
issued shares of a class did not consent to such variation or vote in favour of the
special resolution for the variation, they may apply to the Tribunal to have the variation
cancelled, and where any such application is made, the variation shall not have effect
unless and until it is confirmed by the Tribunal:
Provided that an application under this section shall be made within twenty-one days
after the date on which the consent was given or the resolution was passed, as the
case may be, and may be made on behalf of the shareholders entitled to make the
application by such one or more of their number as they may appoint in writing for the
purpose.
14. False statement in the Prospectus: Liability (Section 35 of the Companies Act, 2013):
(i) Yes, Prakash is liable to pay the unpaid amount on the shares. As Mr. Prakash has
purchased partly paid shares, so he is liable for the remaining value of the shares. At
the time of winding up he is liable to contribute as a contributory. The related case
law in this subject matter is Peak v. Gurney.
(ii) No, Mr. Prakash cannot sue the directors to recover damages for the misstatement
in the prospectus. The shareholder must have relied on the statement in the
prospectus in applying for shares offered by it to hold the responsible person liable.
If a person purchases shares in the open market, the prospectus is non operative as
far as he is concerned. In the present case, Mr. Prakash purchased shares on the
stock exchange even if he did so in good faith he had not relied on the statement in
the prospectus.
In view of the above, he cannot sue the directors of the company to recover damages .
15. Section 106 (1) of the Companies Act, 2013 states that the articles of a company may
provide that no member shall exercise any voting right in respect of any shares registered
in his name on which any calls or other sums presently payable by him have not been paid,
or in regard to which the company has exercised any right of lien.
In the present case the articles of the company do not permit a shareholder to vote if he
has not paid the calls on the shares held by him. Therefore, the chairman at the meeting
is well within its right to refuse him the right to vote at the meeting and Mr. Pinks contention
is not valid.
16. Safeguards in the work environment: Safeguards against threats faced by professional
shall be to (i) Ensure an ethical environment, (ii) Increase the likelihood of identifying or
deterring unethical behaviour and (iii) Eliminate or reduce threats to acceptable level.
The following safeguards may be created by a business enterprise in the work
environment:
(1) The employing organisations systems or corporate oversight or other oversight
structures.
(2) The employing organisation's ethics and conduct programmes.
(3) Recruitment procedures in the employing organisation emphasizing the importance
of employing high caliber competent staff
(4) Strong internal controls
(5) Appropriate disciplinary process
(6) Leadership that stresses the importance of ethical behaviour and expectation that
employees will act in an ethical manner.
(7) Policies and procedures to implement and monitor the quality of employee
performance.
(8) Timely communication of the employing organisation's policies and procedures,
including any changes to them, to all employees and appropriate training and
education on such policies and procedures.
17. Ecological ethics is based on the idea that the environment should be protected not only
for the sake of human beings but also for its own sake. The issue of environmental ethics
goes beyond the problems relating to protection of environment or nature in terms of
pollution, resource utilization or waste disposal.
Business and Industry are closely linked with environment and resource utilization.
Production process and strategy for eco-friendly technologies throughout the product life
cycle and minimization of waste play major role in protection the environment and
conservation of resources. Business, Industry and multinational corporations have to
recognize environmental management as the priority area and a key determinant to
sustainable development. Sound management of wastes is among the major
environmental issues for maintaining the quality of Earths environment and achieving
sustainable development.
If the environmental costs are properly reflected in the prices paid for goods and services
then companies and ultimately the consumer would adjust market behaviour in a way that
would reduce damage to environment, pollution and waste production. Price signal will
also influence behaviour to avoid exploitation or excessive utilization of natural resources.
Such measures would facilitate the approach of Polluter Pays Principle. Removing
subsidies that encourage environmental damage is another measure.
18. Every organization, whether a business or a government agency, is first and foremost a
human society. In all these setups, ethical behaviour is essential to working environment.
If an employer does not take steps to create a working environment where the employees
have a clear, common understanding of what is right and wrong, and feel free to discuss
and ask questions about ethical issues and report violations, some significant problems
may arise namely:
(i) Increased risk of employees making unethical decisions.
(ii) Increased tendency of employees to report violations to outside regulatory authorities
(whistle blowing) because they lack an adequate internal forum.
(iii) Inability to recruit and retain top people.
(iv) Diminished reputation in the industry and the community.
(v) Significant legal exposure and loss of competitive advantage in the market place.
Therefore, ethical behaviour is essential to working environment at the workplace .
19. Corporate Governance: Simply stated, 'Governance' means the process of decision
making and the process by which decisions are implemented. The term corporate
governance is understood and defined in various ways. Corporate governance can be
defined as the formal system of accountability and control for ethical and socially
responsible organisational decisions and use of resources and accountability relates to
how well the content of workplace decisions is aligned with the organisations strategic
direction. Control involves the process of auditing and improving organisation decisions
and actions. Good corporate governance has the following major characteristics:
(i) Participatory
(ii) Consensus oriented
(iii) Accountable
(iv) Transparent
(v) Responsive
(vi) Effective and efficient
(vii) Equitable and inclusive and
(viii) Follows the rule of law.
20. Moral vs. Ethics: Following are the points of difference between Ethics and Moral :
(i) The word thics is derived from Ancient Greek thikos meaning haracter. The
word moral is derived from Latin mos meaning ustom.
(ii) Character is the essence of values and habits of a person or group. It severs the
analysis and employment of concepts such as right and wrong, good and evil and
acting with responsibility. Moral is defined as relating to principles of right and wrong.
(iii) Character is a personal attitude, while custom is defined by a group over a period of
time. For example, People have character, Societies have custom.
(iv) Morals are accepted from an authority (such as cultural, religious etc.) while ethics
are accepted because they follow from personally accepted principles. An ethical
view might be based on an idea of personal property that should not be taken without
social consent. Moral norms can usually be expressed as general rules and
statements such as always tell the truth.
(v) Morals work on smaller scale than ethics, more reliably, but by addressing human
needs for belonging and emulation, while ethics has a much wider scope.
21. Group conflict: Group conflict is an 'express struggle' between two inter-dependent
parties who perceive incompatible goals, scarce resources and interference from the other
party in achieving their goals. There are two aspects in relation to conflict
1. Expression: The two sides must communicate/express about the problem for there
to be conflict.
2. Perception: Conflict evolves perceptions in the two sides may only perceive that their
goals, resources, and interference are incompatible with each other's.
Managing conflicts: The climate in which conflict is managed is important. It is essential
to plan communications to foster a supportive climate, marked by emphasis on
(i) Presenting ideas or options
(ii) Problem orientation- focusing attention on the task
(iii) Spontaneity - Communicating openly and honestly
(iv) Empathy - understanding another person's thoughts
(v) Equality- asking for opinions
(vi) Willing to listen to the ideas of others.
Successfully managed conflicts can be constructive and can strengthen relationships
in an organisation.
22. Guidelines to handle communication ethics dilemmas:
(a) Maintain candour: Candour refers to truthfulness, honesty, frankness and one should
stick to these elements while communicating with others.
(b) Keep message accurate: At the time of relaying information from one source to
another, communicate the original message as accurately as possible.
(c) Secrecy: One has to maintain secrecy and confidence in communication. So one
should not divulge such information to others
(d) Ensure timeliness of communication: The timing of messages can be critical. Delay
in sending messages can be assumed unethical.
(e) Avoid deception: Ethical communicators are always vigilant in their quest to avoid
deception, fabrication, intentional distortion or withholding of information in their
communication.
(f) Confront unethical behaviour: One must confront an unethical behaviour in order to
ensure a consistent ethical view point.
23. Generally, people resist change in an organization. Even after there are some people who
accept or welcome change due to the following reasons:
1. Personal Gain: People will be more likely to accept change when they see the
possibility that they will gain in some of the following areas:-
Increased security
Money
More authority
Status/Prestige
Better Working Conditions
Self-Satisfaction
Better Personal Contracts
Less time and efforts
2. Other factors:
Provide a new challenge
Respects/like the source
Likes the way change is being communicated
Reduces boredom
Provides opportunity for input
Improve future
Perception, that the change is necessary.
24. Notice is hereby given that the 15 th Annual General Meeting of the members of Arden
Limited will be held on Friday the 15th day of September 2017 at the registered office of
the Company . at 10 a.m. to present the following business:
Ordinary Business:
To
1. Receive, consider and adopt the Audited Balance sheet of the company as on 31 st
March, 2017 and the Profit and Loss account for the year ended on that date and
Audits and directors response thereon.
2. To declare dividend for the year ended 31 st March, 2017
3. To appoint a director in place of Mr...
4. To appoint Statutory Auditors of the Company.
NOTE: A member entitled to attend and vote is entitled to appoint a proxy to attend and
vote instead of himself and proxy need not be a member of the company.
For and on behalf of the Board of Directors
Registered Office.
25. Power of Attorney to appear before Income Tax Authorities
I, .S/o.., R/o.and partner of the firm M/s..with registered office
at, do hereby appoint Mr., S/o., R/oas attorney of the firm
above named and authorize him for the purpose hereinafter mentioned :
1. That the said attorney shall appoint an advocate of his choice and hand him over the
judgement of the tribunal of Income Tax and instruct him to file the appeal against the
order, for the Assessment Year ..
2. That the said attorney shall execute Vakalatnama to the Advocate appointed by him
and shall sign all the related papers under the supervision of the advocate.
3. That specimen signature of the said attorney is given below of this deed.
4. The said attorney shall generally do all other lawful acts necessary for the conduct of
the said case.
I hereby declare that the acts done by the said attorney in connection with the work given
to him shall be deemed to have been done by me and shall be binding on the firm and its
partners.
IN WITNESS WHEREOF I have signed this power of attorney in the presence of the
following witnesses:
Signature
(Holder of Power of Attorney)
WITNESSES:
1
2
PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT
PART I: COST ACCOUNTING
QUESTIONS
Material
1. A Ltd. produces a product Exe using a raw material Dee. To produce one unit of Exe,
2 kg of Dee is required. As per the sales forecast conducted by the company, it will able
to sale 20,000 units of Exe in the coming year. The following is the information regarding
the raw material Dee:
(i) The Re-order quantity is 200 kg. less than the Economic Order Quantity (EOQ).
(ii) Maximum consumption per day is 20 kg. more than the average consumption per
day.
(iii) There is an opening stock of 2,000 kg.
(iv) Time required to get the raw materials from the suppliers is 4 to 8 days.
(v) The purchase price is `125 per kg.
There is an opening stock of 1,800 units of the finished product Exe.
The rate of interest charged by bank on Cash Credit facility is 13.76%.
To place an order company has to incur ` 720 on paper and documentation work.
From the above information find out the followings in relation to raw material Dee:
(a) Re-order Quantity
(b) Maximum Stock level
(c) Minimum Stock level
(d) Calculate the impact on the profitability of the company by not ordering the EOQ.
[Take 364 days for a year]
Labour
2. J Ltd. wants to ascertain the profit lost during the year 2016-17 due to increased labour
turnover. For this purpose, they have given you the following information:
(1) Training period of the new recruits is 50,000 hours. During this period their
productivity is 60% of the experienced workers. Time required by an experienced
worker is 10 hours per unit.
(2) 20% of the output during training period was defective. Cost of rectification of a
defective unit was ` 25.
(3) Potential productive hours lost due to delay in recruitment were 1,00,000 hours.
(4) Selling price per unit is ` 360 and P/V ratio is 20%.
(5) Settlement cost of the workers leaving the organization was ` 3,66,960.
(6) Recruitment cost was `3,12,680
(7) Training cost was `2,26,360
You are required to calculate the profit lost by the company due to increased labour
turnover during the year 2016-17.
Overheads
3. The Union Ltd. has the following account balances and distribution of di rect charges on
31st March, 2017.
Production Depts. Service Depts.
Total Machine Packing General Stores
Shop Plant
Allocated Overheads: (`) (`) (`) (`) (`)
Indirect labour 2,90,000 80,000 60,000 40,000 1,10,000
Maintenance Material 99,000 34,000 16,000 21,000 28,000
Misc. supplies 59,000 15,000 29,000 9,000 6,000
Supervisors salary 1,60,000 -- -- 1,60,000 --
Cost & payroll salary 8,00,000 -- -- 8,00,000 --
Overheads to be apportioned:
Power 7,80,000
Rent 7,20,000
Fuel and Heat 6,00,000
Insurance 1,20,000
Taxes 84,000
Depreciation 12,00,000
The following data were compiled by means of the factory survey made in the previous
year:
Floor Space Radiator No. of Investment H.P.
Section employees hours
Machine Shop 2,000 Sq. ft. 45 20 80,00,000 3,500
Packing 800 Sq. ft. 90 12 24,00,000 500
General Plant 400 Sq. ft. 30 4 8,00,000 -
Stores & 1,600 Sq. ft. 60 8 16,00,000 1,000
maintenance
PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT 87
Expenses charged to the stores departments are to be distributed to the other

departments by the following percentages:
Machine shop 50%; Packing 20%; General Plant 30%;
General Plant overheads is distributed on the basis of number of employees.
(a) Prepare an overhead distribution statement with supporting schedules to show
computations and basis of distribution.
(b) Determine the service department distribution by simultaneous equation method.
Non- Integrated Accounts
4. The financial books of a company reveal the following data for the year ended
31st March, 2017:
(`)
Opening Stock:
Finished goods 875 units 76,525
Work-in-process 33,000
01.04.2016 to 31.3.2017
Raw materials consumed 7,84,000
Direct Labour 4,65,000
Factory overheads 2,65,000
Goodwill written off 95,000
Administration overheads 3,15,000
Interest paid 72,000
Bad Debts 21,000
Selling and Distribution Overheads 65,000
Interest received 18,500
Rent received 72,000
Sales 14,500 units 20,80,000
Closing Stock: Finished goods 375 units 43,250
Work-in-process 48,200
The cost records provide as under:
Factory overheads are absorbed at 60% of direct wages.
Administration overheads are recovered at 20% of factory cost.
Selling and distribution overheads are charged at ` 5 per unit sold.
Opening Stock of finished goods is valued at ` 105 per unit.

The company values work-in-process at factory cost for both Financial and Cost Profit
Reporting.
Required:
(i) Prepare statements for the year ended 31 st March, 2017, show
- the profit as per financial records
- the profit as per costing records.
(ii) Present a statement reconciling the profit as per costing records with the profit as
per Financial Records.
Contract Costing
5. G. Constructions has undertaken three separate building contracts. Information relating
to these contracts for the year 2016-17 are as under:
Contract I Contract II Contract IIII
(Amount in (Amount in (Amount in
`000) `000) `000)
Value of contract 17,500 14,500 24,500
Balance as on 01-04-2016:
Work completed and certified -- 4,100 8,150
Materials at site -- 220 310
Plant & Machinery (WDV) -- 770 3,760
Wages outstanding -- 48 104
Profit transferred to Costing P/L A/c. -- -- 350
Transaction during the year:
Materials issued to the sites 870 2,150 4,020
Wages paid to workers 450 1,160 2,180
Salary to site staffs 90 85 135
Travelling and other expenses 18 24 32
Plants issued to sites 910 240 680
Apportionment of Head office 110 90 126
expenses
Materials at site 215 152 12
Plant & Machinery (WDV) 728 808 3,552
Wages outstanding 52 98 146

Value of work certified 2,000 8,600 24,000
Cost of work not certified 800 452 560
As per the contract agreement 15% of the certified value of the contract is kept by the
contractees as retention money. The Contact-III is scheduled to be completed in the
coming months, however, this contract required a further estimated cost of ` 7,20,000 to
get it completed.
Required:
(a) Prepare Contract Statement for each of the three contracts and calculate the
notional/ estimated profit/ loss
(b) Calculate the profit/ loss to be transferred to Costing Profit & Loss Account for
internal managerial purpose.
Process Costing
6. The following data are available in respect of Process-I for July 2017:
(1) Opening stock of work in process: 600 units at a total cost of `84,000.
(2) Degree of completion of opening work in process:
Material 100%
Labour 60%
Overheads 60%
(3) Input of materials at a total cost of ` 11,04,000 for 9,200 units.
(4) Direct wages incurred ` 3,72,000
(5) Overheads ` 1,72,600.
(6) Units scrapped 200 units. The stage of completion of these units was:
Materials 100%
Labour 80%
Overheads 80%
(7) Closing work in process; 700 units. The stage of completion of these units was:
Material 100%
Labour 70%
Overheads 70%
(8) 8,900 units were completed and transferred to the next process.
(9) Normal loss is 4% of the total input (opening stock plus units put in)
(10) Scrap value is ` 120 per unit.

You are required to:
(a) Compute equivalent production,
(b) Calculate the cost per equivalent unit for each element.
(c) Calculate the cost of abnormal loss (or gain), closing work in process and the units
transferred to the next process using the FIFO method.
Standard Costing
7. The following information has been provided by a company:
Number of units produced and sold 12,000
Standard labour rate per hour ` 16
Standard hours required for 12,000 units -
Actual hours required 34,188 hours
Labour efficiency 105.3%
Labour rate variance ` 1,36,752 (A)
You are required to calculate:
(i) Actual labour rate per hour
(ii) Standard hours required for 12,000 units
(iii) Labour Efficiency variance
(iv) Standard labour cost per unit
(v) Actual labour cost per unit
Marginal Costing
8. Following informations are available for the year 2016 and 2017 of PIX Limited:
Year 2016 2017
Sales ` 32, 00,000 ` 57, 00,000
Profit/ (Loss) (` 3,00,000) ` 7, 00,000
Calculate (a) P/V ratio, (b) Total fixed cost, and (c) Sales required to earn a Profit of
` 12,00,000.
Budget and Budgetary Control
9. G Ltd. manufactures two products called M and N. Both products use a common raw
material Z. The raw material Z is purchased @ `72 per kg from the market. The company
has decided to review inventory management policies for the forthcoming year.
The following forecast information has been extracted from departmental estimates for
the year ended 31 st March 2017 (the budget period):
Product M Product N
Sales (units) 28,000 13,000
Finished goods stock increase by year-end 320 160
Post-production rejection rate (%) 4 6
Material Z usage (per completed unit, net of wastage) 5 kg 6 kg
Material Z wastage (%) 10 5
- Usage of raw material Z is expected to be at a constant rate over the period.
- Annual cost of holding one unit of raw material in stock is 11% of the material cost.
- The cost of placing an orders is `640 per order.
- The management of G Ltd. has decided that there should not be more than 40
orders in a year for the raw material Z.
Required:
(a) Prepare functional budgets for the year ended 31st March 2017 under the following
headings:
(i) Production budget for Products M and N (in units).
(ii) Purchases budget for Material Z (in kgs and value).
(b) Calculate the Economic Order Quantity for Material Z (in kgs).
(c) If there is a sole supplier for the raw material Z in the market and the supplier do not
sale more than 4,000 kg. of material Z at a time. Keeping the management
purchase policy and production quantity mix into consideration, calculate the
maximum number of units of Product M and N that could be produced.
Miscellaneous
10. (a) Define Product costs. Describe three different purposes for computing product
costs.
(b) What do you understand by Operating Costs? Describe its essential features and
state where it can be usefully implemented?
(c) How apportionment of joint costs upto the point of separation amongst the joint
products using market value at the point of separation and net realizable value
method is done? Discuss.
(d) Explain:
(i) Pre-production Costs
(ii) Research and Development Costs
(iii) Training Costs
SUGGESTED ANSWER/HINTS
1. Working Notes:
(i) Computation of Annual consumption & Annual Demand for raw material Dee:
Sales forecast of the product Exe 20,000 units
Less: Opening stock of Exe 1,800 units
Fresh units of Exe to be produced 18,200 units
Raw material required to produce 18,200 units of Exe 36,400 kg.
(18,200 units 2 kg.)
Less: Opening Stock of Dee 2,000 kg.
Annual demand for raw material Dee 34,400 kg.
(ii) Computation of Economic Order Quantity (EOQ):
2 Annualdemandof 'Dee ' Orderingcos t
EOQ =
Carryingcos t per unit per annum
2 34,400kg. ` 720 2 34,400kg. ` 720

= = = 1,697 kg.
` 125 13.76% ` 17.2
(iii) Re- Order level:

= (Maximum consumption per day Maximum lead time)
AnnualConsumptionof 'Dee '

= 20kg. 8 days
364 days
36,400kg.
= 20kg. 8 days = 960 kg.
364 days
(iv) Minimum consumption per day of raw material Dee:
Average Consumption per day = 100 kg.
Hence, Maximum Consumption per day = 100 kg. + 20 kg. = 120 kg.
So, Minimum consumption per day will be
Min.consumption Max.consumption
Average Consumption =
2
Min.consumption 120kg.
Or, 100 kg. =
2
Or, Min. consumption = 200 kg 120 kg. = 80 kg.
(a) Re-order Quantity:
EOQ 200 kg. = 1,697 kg. 200 kg. = 1,497 kg.
(b) Maximum Stock level:
= Re-order level + Re-order Quantity (Min. consumption per day Min. lead
time)
= 960 kg. + 1,497 kg. (80 kg. 4 days)
= 2,457 kg. 320 kg. = 2,137 kg.
(c) Minimum Stock level:
= Re-order level (Average consumption per day Average lead time)
= 960 kg. (100 kg. 6 days) = 360 kg.
(d) Impact on the profitability of the company by not ordering the EOQ.
When purchasing the ROQ When purchasing the EOQ
I Order 1,497 kg. 1,697 kg.
quantity
II No. of 34,400kg. 34,400kg.
orders a 22.9or 23orders 20.27or 21orders
1,497kg. 1,697kg.
year
III Ordering 23 orders ` 720 = `16,560 21 orders ` 720 = `15,120

Cost
IV Average 1,497kg. 1,697kg.
748.5kg. 848.5kg.
Inventory 2 2
V Carrying 748.5 kg. ` 17.2 = `12,874.2 848.5 kg. ` 17.2 =
Cost `14,594.2
VI Total Cost ` 29,434.20 ` 29,714.20
Cost saved by not ordering EOQ = ` 29,714.20 - ` 29,434.20 = `280.
50,000
2. Output by experienced workers in 50,000 hours = = 5,000 units
10
Output by new recruits = 60% of 5,000 = 3,000 units
Loss of output = 5,000 3,000 = 2,000 units
Total loss of output = Due to delay recruitment + Due to inexperience
= 10,000 + 2,000 = 12,000 units
Contribution per unit = 20% of `360 = ` 72
Total contribution lost = `72 12,000 units = ` 8,64,000
Cost of repairing defective units = 3,000 units 0.2 ` 25 = ` 15,000
Profit forgone due to labour turnover
(`)
Loss of Contribution 8,64,000
Cost of repairing defective units 15,000
Recruitment cost 3,12,680
Training cost 2,26,360
Settlement cost of workers leaving 3,66,960
Profit forgone in 2016-17 17,85,000
3. (a) Overhead Distribution Statement
Production Service Departments
Departments
Machine Packing General Stores
Shops Plant
Allocated Overheads: (`) (`) (`) (`)
Indirect labour 80,000 60,000 40,000 1,10,000
Maintenance Material 34,000 16,000 21,000 28,000
Misc. supplies 15,000 29,000 9,000 6,000
Supervisors salary -- -- 1,60,000 --
Cost & payroll salary -- -- 8,00,000 --
Total allocated overheads 1,29,000 1,05,000 10,30,000 1,44,000
Add: Apportioned Overheads 18,43,500 7,01,250 2,27,750 7,31,500
(As per Schedule below)
19,72,500 8,06,250 12,57,750 8,75,500

50,000
2. Output by experienced workers in 50,000 hours = = 5,000 units
10
Output by new recruits = 60% of 5,000 = 3,000 units
Loss of output = 5,000 3,000 = 2,000 units
Total loss of output = Due to delay recruitment + Due to inexperience
= 10,000 + 2,000 = 12,000 units
Contribution per unit = 20% of `360 = ` 72
Total contribution lost = `72 12,000 units = ` 8,64,000
Cost of repairing defective units = 3,000 units 0.2 ` 25 = ` 15,000
Profit forgone due to labour turnover
(`)
Loss of Contribution 8,64,000
Cost of repairing defective units 15,000
Recruitment cost 3,12,680
Training cost 2,26,360
Settlement cost of workers leaving 3,66,960
Profit forgone in 2016-17 17,85,000
3. (a) Overhead Distribution Statement
Departments
Shops Plant
Allocated Overheads: (`) (`) (`) (`)
Indirect labour 80,000 60,000 40,000 1,10,000
Maintenance Material 34,000 16,000 21,000 28,000
Misc. supplies 15,000 29,000 9,000 6,000
Supervisors salary -- -- 1,60,000 --
Cost & payroll salary -- -- 8,00,000 --
Total allocated overheads 1,29,000 1,05,000 10,30,000 1,44,000
Add: Apportioned Overheads 18,43,500 7,01,250 2,27,750 7,31,500
(As per Schedule below)
19,72,500 8,06,250 12,57,750 8,75,500

Schedule of Apportionment of Overheads

Departments
Item of Cost Basis
Shops (`) (`) Plant (`) (`)
Power HP hours 5,46,000 78,000 -- 1,56,000
(7 : 1 : - : 2)
Rent Floor space 3,00,000 1,20,000 60,000 2,40,000
(5 : 2 : 1 : 4)
Fuel & Heat Radiator sec. 1,20,000 2,40,000 80,000 1,60,000
(3 : 6 : 2 : 4)
Insurance Investment 75,000 22,500 7,500 15,000
(10 : 3 : 1 : 2)
Taxes Investment 52,500 15,750 5,250 10,500
(10 : 3 : 1 : 2)
Depreciation Investment 7,50,000 2,25,000 75,000 1,50,000
(10 : 3 : 1 : 2)
18,43,500 7,01,250 2,27,750 7,31,500
(b) Re-distribution of Overheads of Service Departments to Production
Departments:
Let, the total overheads of General Plant = a and the total overheads of Stores = b
a = 12,57,750 + 0.3b ..........................................(i)
b = 8,75,500 + 0.2a ..........................................(ii)
Putting the value of b in equation no. (i)
a = 12,57,750 + 0.3 (8,75,500 + 0.2a)
Or a = 12,57,750 + 2,62,650 + 0.06a
Or 0.94a = 15,20,400 Or a = 16,17,447 (appx.)
Putting the value of a = 16,17,447 in equation no. (ii) to get the value of b
b = 8,75,500 + 0.2 16,17,447 = 11,98,989 (appx.)
Secondary Distribution Summary
Particulars Total (`) Machine Shops Packing
(`) (`)
Allocated and Apportioned 27,78,750 19,72,500.00 8,06,250.00
overheads as per Primary
distribution
- General Plant 16,17,447 8,08,723.50 4,85,234.10

5 3
(16,17,447 ) (16,17,447 )
10 10
- Stores 11,98,989 5,99,494.50 2,39,797.80
(11,98,989 50%) (11,98,989 20%)
33,80,718 15,31,281.9
4. (i) Statement of Profit as per financial records
(for the year ended March 31, 2017)
(`) (`)
To Opening stock: By Sales 20,80,000
Finished Goods 76,525 By Closing stock:
Work-in-process 33,000 Finished Goods 43,250
To Raw materials consumed 7,84,000 Work-in-Process 48,200
To Direct labour 4,65,000 By Rent received 72,000
To Factory overheads 2,65,000 By Interest received 18,500
To Goodwill written off 95,000
To Administration overheads 3,15,000
To Selling & distribution 65,000
overheads
To Interest paid 72,000
To Bad debts 21,000
To Profit 70,425
22,61,950 22,61,950
Statement of Profit as per costing records

(for the year ended March 31,2017)
(`) (`)
Sales revenue (14,500 units) (A) 20,80,000
Cost of Sales:
Opening stock (875 units x ` 105) 91,875
Add: Cost of production of 14,000 units 18,15,360
(Refer to Working Note 1& 2)
` 18,15,360 375 units (48,626)

Less: Closing stock
14,000 units
Production cost of goods sold (14,500 units) 18,58,609
Selling & distribution overheads (14,500 units x ` 5) 72,500
Cost of sales: (B) 19,31,109 19,31,109
Profit: {(A) (B)} 1,48,891
(ii) Statement of Reconciliation
(Reconciling the profit as per costing records with the profit as per financial
records)
(`) (`)
Profit as per Cost Accounts 1,48,891
Add: Factory overheads over absorbed 14,000
(` 2,79,000 ` 2,65,000)
S & D overheads over absorbed (` 72,500 ` 65,000) 7,500
Opening stock overvalued (` 91,875 ` 76,525) 15,350
Interest received 18,500
Rent received 72,000 1,27,350
2,76,241
Less: Administration overheads under recovery 12,440
(` 3,15000 ` 3,02,560)
Closing stock overvalued (` 48,626 ` 43,250) 5,376
Goodwill written off 95,000
Interest paid 72,000
Bad debts 21,000 2,05,816
Profit as per financial accounts 70,425
Working Notes:
1. Number of units produced Units
Sales 14,500
Add: Closing stock 375
Total 14,875
Less: Opening stock 875
Number of units produced 14,000
2. Cost Sheet
(`)
Raw materials consumed 7,84,000
Direct labour 4,65,000
Prime cost 12,49,000
Factory overheads (60% of direct wages) 2,79,000
Factory cost 15,28,000
Add: Opening work-in-process 33,000
Less: Closing work-in-process (48,200)
Factory cost of goods produced 15,12,800
Administration overheads (20% of factory cost) 3,02,560
Cost of production of 14,000 units 18,15,360
TotalCost of Pr oduction ` 18,15,360
Cost of production per unit: `129.67
No.of unitsproduced 14,000units
5. (a) Contract Statement (Amount in `000)
Contract-I Contract-II Contract-III
(`) (`) (`)
- Work completed and certified -- 4,100 8,150
- Materials at site -- 220 310
- Plant & Machinery -- 770 3,760
Transaction during the year:
Materials issued 870 2,150 4,020
Wages paid to workers 450 1,160 2,180
Less: Outstanding at beginning -- (48) (104)
Add: Outstanding at closing 52 98 146
Salary to site staffs 90 85 135
Travelling and other expenses 18 24 32
Plant issued to sites 910 240 680
Apportionment of Head office 110 90 126
expenses
Total (A) 2,500 8,889 19,435
Balance as on 31-03-2017
- Materials at site 215 152 12
- Plant & Machinery 728 808 3,552
- Work in progress:
- Value of work certified 2,000 8,600 24,000
- Cost of work not certified 800 452 560
Estimated additional cost -- -- 720
Total (B) 3,743 10,012 28,844
Notional/ estimated profit {(B) (A)} 1,243 1,123 9,409
(b) Profit to be transferred to Costing Profit and Loss Account for internal
purpose:
Contract-I Contract-II Contract-III
Value of Contract 17,500 14,500 24,500
Value of work certified 2,000 8,600 24,000
Percentage of completion (%) 11.43 59.31 97.96
Work certified
100
Value of contract
Notional/ Estimated profit 1,243 1,123 9,409
Profit to be transferred to Nil 636.37 7,484.50
Costing Profit & loss A/c 2 {(9,409 97.96%
`1,123 85% 85%) - 350}
3
6. (a) Statement of Equivalent Production (FIFO Method)

Input Output Equivalent Production
Materials Labour Overheads
Details Units Details Units % Units % Units % Units
Opening 600 Finished goods
Stock transferred to 600 - - 40 240 40 240
next process:-
from opening
stock
- From fresh 8,300 100 8,300 100 8,300 100 8,300
materials
Closing W-I-P 700 100 700 70 490 70 490
Fresh 9,200 Normal loss 392 - - - - - -

inputs
9,992 9,000 9,030 9,030
Less: Abnormal (192) 100 (192) 100 (192) 100 (192)
Gain
9,800 9,800 8,808 8,838 8,838
(b) Statement of Cost per equivalent units

Elements Cost Equivalent Cost per
units equivalent
(`) (`) Unit (`)
Material Cost 11,04,000
Less: Scrap realisation 392
units @ ` 120/- p.u. 47,040 10,56,960 8,808 120.00
Labour cost 3,72,000 8,838 42.10
Overheads 1,72,600 8,838 19.53
Total Cost 16,01,560 181.63
(c) Cost of Abnormal Gain 192 Units
(`) (`)
Material cost of 192 units @ ` 120.00/- p.u. 23,040.00
Labour cost of 192 units @ ` 42.10/- p.u. 8,083.20
Overheads of 192 units @ ` 19.53/- p.u. 3,749.76 34,872.96
Cost of closing WIP 700 Units
Material cost of 700 equivalent units @ ` 120.00/- p.u. 84,000.00
Labour cost of 490 equivalent units @ `42.10/- p.u. 20,629.00
Overheads of 490 equivalent @ ` 19.53/- p.u. 9,569.70 1,14,198.70
Cost of 8,900 units transferred to next process (`)
(i) Cost of opening W-I-P Stock b/f 600 units 84,000.00
(ii) Cost incurred on opening W-I-P stock
Material cost
Labour cost 240 equivalent units @ ` 42.10 p.u. 10,104.00
Overheads 240 equivalent units @ `19.53/- p.u. 4,687.20 14,791.20
(iii) Cost of 8,300 completed units
8,300 units @ `181.63 p.u. 15,07,529.00

Total cost [(i) + (ii) + (iii))] 16,06,320.20
7. SR Standard labour Rate per Hour
AR Actual labour rate per hour
SH Standard Hours
AH Actual hours
(i) Actual labour rate per hour:
Labour rate Variance = AH (SR AR)
= 34,188 (`16 AR) = 1,36,752 (A)
= `16 AR = - 4
Or, AR = `20
(ii) Standard hour required for 12,000 units:
SH
Labour Efficiency = 100 = 105.3
AH
AH105.3 34,188hours105.3
= SH = =
100 100
= 35,999.982 or, SH = 36,000 hours
(iii) Labour Efficiency Variance = SR (SH AH)
= `16 (36,000 34,188)
= 16 1,812 = ` 28,992 (F)
36,000hours `16
(iv) Standard Labour Cost per Unit = = ` 48
12,000units
34,188hours `20
(v) Actual Labour Cost per Unit = = ` 56.98
12,000units
Changeinprofit
8. (a) P/V Ratio = 100
Changeinsales
`7,00,000 ( `3,00,000) `10,00,000

= 100 = 40%
(`57,00,000 `32,00,000) `25,00,000
(b) Total Fixed cost = Total Contribution - Profit
= (Sales P/V Ratio) Profit

40
= (`57, 00,000 ) = ` 7, 00,000
100
= ` 22, 80,000 ` 7, 00,000 = `15, 80,000
(c) Contribution required to earn a profit of `12, 00,000
= Total fixed cost + Profit required
= `15, 80,000 + `12, 00,000 = `27, 80,000
27,80,000 27,80,000
Required Sales = = ` 69, 50,000
P / VRatio 40%
9. (a) (i) Production Budget (in units) for the year ended 31st March 2017
Product M Product N
Budgeted sales (units) 28,000 13,000
Add: Increase in closing stock 320 160
No. good units to be produced 28,320 13,160
Post production rejection rate 4% 6%
No. of units to be produced 29,500 14,000
28,320 13,160

0.96 0.94
(ii) Purchase budget (in kgs and value) for Material Z
Product M Product N
No. of units to be produced 29,500 14,000
Usage of Material Z per unit of production 5 kg. 6 kg.
Material needed for production 1,47,500 kg. 84,000 kg.
Materials to be purchased 1,63,889 kg. 88,421 kg.
1,47,500 84,000

0.90 0.95
Total quantity to be purchased 2,52,310 kg.
Rate per kg. of Material Z `72
Total purchase price `1,81,66,320
(b) Calculation of Economic Order Quantity for Material Z

2 2,52,310kg. `640 32,29,56,800
EOQ = = = 6,385.72 kg.
`72 11% `7.92
(c) Since, the maximum number of order per year cannot be more than 40 orders and
the maximum quantity per order that can be purchased is 4,000 kg. Hence, the total
quantity of Material Z that can be available for production:
= 4,000 kg. 40 orders = 1,60,000 kg.
Product M Product N
Material needed for 1,03,929 kg. 56,071 kg.
production to maintain the 1,63,889 88,421
same production mix 1,60,000 1,60,000
2,52,310 2,52,310
Less: Process wastage 10,393 kg. 2,804 kg.
Net Material available for 93,536 kg. 53,267 kg.
production
Units to be produced 18,707 units 8,878 units
93,536kg. 53,267kg.

5kg. 6kg.
10. (a) Definition of product costs: Product costs are inventoriable costs. These are the
costs, which are assigned to the product. Under marginal costing variable
manufacturing costs and under absorption costing, total manufacturing costs
constitute product costs.
Purposes for computing product costs:
The three different purposes for computing product costs are as follows:
(i) Preparation of financial statements: Here focus is on inventoriable costs.
(ii) Product pricing: It is an important purpose for which product costs are used.
For this purpose, the cost of the areas along with the value chain should be
included to make the product available to the customer.
(iii) Contracting with government agencies: For this purpose, government agencies
may not allow the contractors to recover research and development and
marketing costs under cost plus contracts.
(b) Operating Costs are the costs incurred by undertakings which do not manufacture
any product but provide a service. Such undertakings for example are Transport
concerns, Gas agencies; Electricity Undertakings; Hospitals; Theatres etc. Because
of the varied nature of activities carried out by the service undertakings, the cost
system used is obviously different from that followed in manufacturing concerns.
The essential features of operating costs are as follows:
(1) The operating costs can be classified under three categories. For exampl e, in
the case of transport undertaking these three categories are as follows:
(a) Operating and running charges: It includes expenses of variable nature.
For example, expenses on petrol, diesel, lubricating oil, and grease etc.
(b) Maintenance charges: These expenses are of semi-variable nature and
includes the cost of tyres and tubes, repairs and maintenance, spares
and accessories, overhaul, etc.
(c) Fixed or standing charges: These includes garage rent, insurance, road
licence, depreciation, interest on capital, salary of operating manager,
etc.
(2) The cost unit used is composite like passenger-mile; Kilowatt-hour, etc.
It can be implemented in all firms of transport, airlines, bus-service, etc., and
by all firms of distribution undertakings.
(c) Apportionment of Joint Cost amongst Joint Products using:
Market value at the point of separation
This method is used for apportionment of joint costs to joint products upto the split
off point. It is difficult to apply if the market value of the product at the point of
separation is not available. It is useful method where further processing costs are
incurred disproportionately.
Net realizable value Method
From the sales value of joint products (at finished stage) the followings are
deducted:
Estimated profit margins
Selling & distribution expenses, if any
Post-split off costs.
The resultant figure so obtained is known as net realizable value of joint products.
Joint costs are apportioned in the ratio of net realizable value.
(d) (i) Pre-production Costs: These costs form the part of development cost, incurred
in making a trial production run, preliminary to formal production. These costs
are incurred when a new factory is in the process of establishment or a new
project is undertaken or a new product line or product is taken up, but there is no
established or formal production to which such costs may be charged.
(ii) Research and Development Costs: Research costs are the costs incurred for
the original and planned investigation undertaken with a prospect of gaining
new scientific or technical knowledge and understanding.
Development costs are the cost incurred in applying research findings or other
knowledge to a plan or design for the production of new or substantially
improved materials, devices, products, processes, systems or services prior to
the commencement of commercial production or use.
(iii) Training Costs: Costs which are incurred in and in relation to providing
training to the workers, apprentices, executives etc. Training cost consists of
wages and salaries paid to new trainees, fees paid to trainers, cost of
materials and properties used to train the trainees, costs associated with
training centre, loss suffered due to lower production and extra spoilage etc.
The total cost of training section is thereafter apportioned to production
centers.
PAPER 3: COST ACCOUNTING AND FINANCIAL MANAGEMENT

PART II: FINANCIAL MANAGEMENT
QUESTIONS
Time Value of Money
1. You need a sum of ` 10,00,000 at the end of 10 years. You know that the best you can
do is to deposit some lump sum amount today at 6% rate of interest or to make equal
payments into a bank account, starting a year from now on which you can earn 6%
interest. Find out
(i) What amount to be deposited today or
(ii) What amount must be deposited annually?
(PVF, 6%, 10 Yrs = 0.558)
Ratio Analysis
2. From the following table of financial ratios of R. Textiles Limited, comment on various
ratios given at the end:
Ratios 2016 2017 Average of Textile
Industry
Liquidity Ratios
Current ratio 2.2 2.5 2.5
Quick ratio 1.5 2 1.5
Receivable turnover ratio 6 6 6
Inventory turnover 9 10 6
Receivables collection period 87 days 86 days 85 days
Operating profitability
Operating income -ROI 25% 22% 15%
Operating profit margin 19% 19% 10%
Financing decisions
Debt ratio 49.00% 48.00% 57%
Return
Return on equity 24% 25% 15%
Comment on the following aspect of R. Textiles Limited
(i) Liquidity
(ii) Operating profits
(iii) Financing
(iv) Return to the shareholders
Fund Flow Analysis
3. Balance Sheets of RST Limited as on March 31, 2016 and March 31, 2017 are as under:
Liabilities 31.3.2016 31.3.2017 Assets 31.3.2016 31.3.2017
(`) (`) (`) (`)
Equity Share Land & Building 6,00,000 7,00,000
Capital (`10 face
value per share) 10,00,000 12,00,000
General Reserve 3,50,000 2,00,000 Plant & Machinery 9,00,000 11,00,000
9% Preference Investments (Long- 2,50,000 2,50,000
Share Capital 3,00,000 5,00,000 term)
Share Premium 25,000 4,000 Stock 3,60,000 3,50,000
A/c
Profit & Loss A/c 2,00,000 3,00,000 Debtors 3,00,000 3,90,000
8% Debentures 3,00,000 1,00,000 Cash & Bank 1,00,000 95,000
Creditors 2,05,000 3,00,000 Prepaid Expenses 15,000 20,000
Bills Payable 45,000 81,000 Advance Tax 80,000 1,05,000
Payment
Provision for Tax 70,000 1,00,000 Preliminary 40,000 35,000
Expenses
Proposed 1,50,000 2,60,000
Dividend
26,45,000 30,45,000 26,45,000 30,45,000
(i) Depreciation charged on building and plant and machinery during the year 2016-17
were ` 50,000 and ` 1,20,000 respectively.
(ii) During the year an old machine costing ` 1,50,000 was sold for ` 32,000. Its written
down value was ` 40,000 on date of sale.
(iii) During the year, income tax for the year 2015-16 was assessed at ` 76,000. A
cheque of ` 4,000 was received along with the assessment order towards refund of
income tax paid in excess, by way of advance tax in earlier years.
(iv) Proposed dividend for 2015-16 was paid during the year 2016-17.
(v) 9% Preference shares of ` 3,00,000, which were due for redemption, were
redeemed during the year 2016-17 at a premium of 5%, out of the proceeds of fresh
issue of 9% Preference shares.
(vi) Bonus shares were issued to the existing equity shareholders at the rate of one
share for every five shares held on 31.3.2017 out of general reserves.
(vii) Debentures were redeemed at the beginning of the year at a premium of 3%.
(viii) Interim dividend paid during the year 2016-17 was ` 50,000.
Required:
(a) Schedule of Changes in Working Capital; and
(b) Fund Flow Statement for the year ended March 31,2017.
Cost of Capital
4. Navya Limited wishes to raise additional capital of ` 10 lakhs for meeting its
modernisation plans. It has ` 3,00,000 in the form of retained earnings available for
investments purposes. The following are the further details:
Debt/equity mix 40%/60%
Cost of debt (before tax)
Upto ` 1,80,000 10%
Beyond ` 1,80,000 16%
Earnings per share `4
Dividend pay out `2
Expected growth rate in dividend 10%
Current market price per share ` 44
Tax rate 50%
You are required:
(a) To ascertain the pattern for raising the additional finance.
(b) To calculate the post-tax average cost of additional debt.
(c) To calculate the cost of retained earnings and cost of equity, and
(d) Find out the overall weighted average cost of capital (after tax)
Capital Structure
5. Akash Limited provides you the following information:
(`)
Profit (EBIT) 2,80,000
Less: Interest on Debenture @ 10% 40,000

EBT 2,40,000
Less Income Tax @ 50% 1,20,000
1,20,000
No. of Equity Shares (` 10 each) 30,000
Earnings per share (EPS) 4
Price /EPS (PE) Ratio 10
The company has reserves and surplus of ` 7,00,000 and required ` 4,00,000 further for
modernisation. Return on Capital Employed (ROCE) is constant. Debt (Debt/ Debt +
Equity) Ratio higher than 40% will bring the P/E Ratio down to 8 and increase the interest
rate on additional debts to 12%. You are required to ascertain the probable price of the
share.
(i) If the additional capital is raised as debt; and
(ii) If the amount is raised by issuing equity shares at ruling market price.
Leverage
6. A firm has sales of ` 75,00,000 variable cost is 56% and fixed cost is ` 6,00,000. It has a
debt of ` 45,00,000 at 9% and equity of ` 55,00,000.
(i) What is the firms ROI?
(ii) Does it have favourable financial leverage?
(iii) If the firm belongs to an industry whose capital turnover is 3, does it have a high or
low capital turnover?
(iv) What are the operating, financial and combined leverages of the firm?
(v) If the sales is increased by 10% by what percentage EBIT will increase?
(vi) At what level of sales the EBT of the firm will be equal to zero?
(vii) If EBIT increases by 20%, by what percentage EBT will increase?
Capital Budgeting
7. Rounak Ltd. is thinking to purchase a Lathe machine costing ` 220 crore. It has an
estimated that after a life of 10 years the salvage value of the machine will be ` 20
Crore. Rounak Ltd. expects a profit before tax (PBT) of ` 30 crore every year for the
entire life of the machine. It pays a tax of 35% and charges depreciation on straight line
basis. Find out whether Rounak Ltd. should buy the lathe machine if the hurdle rate is
10%.
Working Capital Management

8. The following information has been extracted from the records of a Company:
Product Cost Sheet ` / unit
Raw materials 45
Direct labour 20
Overheads 40
Total 105
Profit 15
Selling price 120
Raw materials are in stock on an average of two months.
The materials are in process on an average for 4 weeks. The degree of completion is
50%.
Finished goods stock on an average is for one month.
Time lag in payment of wages and overheads is 1 weeks.
Time lag in receipt of proceeds from debtors is 2 months.
Credit allowed by suppliers is one month.
20% of the output is sold against cash.
The company expects to keep a Cash balance of ` 1,00,000.
Take 52 weeks per annum.
The Company is poised for a manufacture of 1,44,000 units in the year.
You are required to prepare a statement showing the Working Capital requirements of
the Company.
Receivable Management
9. Tony Limited manufacturers of Colour TV sets are considering the liberalization of
existing credit terms to three of their large customers A, B and C. The credit period and
likely quantity of TV sets that will be sold to the customers in addition to the other sales
are as follows:
Quantity sold (No. of TV Sets)
Credit Period A B C
(Days)
0 1,000 1,000 -
30 1,000 1,500 -
60 1,000 2,000 1,000

90 1,000 2,500 1,500
The selling price per TV set is ` 9,000. The expected contribution is 20% of the selling
price. The cost of carrying receivable averages 20% per annum.
You are required:
(a) Determine the credit period to be allowed to each customer.
(Assume 360 days in a year for calculation purposes).
(b) What other problems the company might face in allowing the credit period as
determined in (a) above?
Miscellaneous
10. (a) What is debt securitisation? Explain the basics of debt securitisation process.
(b) The profit maximization is not an operationally feasible criterion. Comment on it.
SUGGESTES ANSWER/HINTS
FV `10,00,000
1. (i) PV = Or, PV =
(1+ k)n (1+ 0.06)10
` 10,00,000 x 0.558 = ` 5,58,410
1+ k n -1
(ii) FVA (k,n) = A
k
FVA (k,n) `10,00,000
A= = = ` 75,867
1+ k -1
n
13.181

k
2.
Ratios Comment
Liquidity It is reasonably good. All the liquidity ratios are either better
or same in both the year compare to the Industry Average.
Receivable turnover and collection period is also good.
Operating Profits Operating Income-ROI and Operating Profit Margin is
favorable compare to the Industry average. Operating
Income-ROI is stable also.
Financing More than 50% of financing is s being done with

shareholders funds. It also signifies that dependency on
debt compared to other industry players (57%) is low.
Return to the Raymonds ROE is 24 per cent in 2016 and 25 per cent
shareholders in 2017 compared to an industry average of 15 per cent.
The ROE is stable and improved over the last year
3. (a) Schedule of Changes in Working Capital

Particulars 31st March Working Capital
2016 2017 Increase Decrease
(`) (`) (`) (`)
A. Current Assets:
Stock 3,60,000 3,50,000 -- 10,000
Sundry Debtors 3,00,000 3,90,000 90,000 --
Prepaid expenses 15,000 20,000 5,000 --
Cash and Bank 1,00,000 95,000 -- 5,000
Total (A) 7,75,000 8,55,000
B. Current Liabilities:
Sundry Creditors 2,05,000 3,00,000 -- 95,000
Bills Payables 45,000 81,000 -- 36,000
Total (B) 2,50,000 3,81,000
Working Capital (A B) 5,25,000 4,74,000
Decrease in Working 51,000 51,000
Capital
Total 5,25,000 5,25,000 1,46,000 1,46,000
(b) Funds Flow Statement for the year ending 31 st March, 2017
(`)
A. Sources of Funds:
(i) Fund from Business Operations 7,49,000
(ii) Proceeds from issue of 9% Preference shares 5,00,000
(iii) Proceeds from sale of Plant & Machinery 32,000
(iv) Income tax refund 4,000
Total sources 12,85,000
B. Application of Funds:
(i) Purchase of Land and Building 1,50,000
(ii) Purchase of Plant and Machinery 3,60,000
(iii) Redemption of 8% Debentures 2,06,000
(iv) Redemption of 9% Preference shares 3,15,000
(v) Payment of income tax assessed 1,05,000
(vi) Payment of Interim dividend 50,000
(vii) Payment of dividend 1,50,000
Total uses 13,36,000
Net Decrease in Working Capital (A B) 51,000
Working Notes:
(1) Computation of Funds from Business Operation
(`)
Profit & Loss as on March 31, 20X9 3,00,000
Add: Depreciation on Land and Building 50,000
Depreciation on Plant and Machinery 1,20,000
Loss on sale of Plant and Machinery 8,000
Preliminary expenses written off 5,000
Transfer to General Reserve 50,000
Proposed dividend 2,60,000
Provision for tax 1,06,000
Interim dividend paid 50,000
9,49,000
Less: Profit and loss as on March 31, 20X8 2,00,000
Fund from Operations 7,49,000
(2) Plant & Machinery A/c
(`) (`)
To Balance b/d 9,00,000 By Depreciation 1,20,000
To Bank [Purchase (Bal. Fig.)] 3,60,000 By Bank (Sale) 32,000
By P/L A/c (Loss on Sale) 8,000
By Balance c/d 11,00,000
12,60,000 12,60,000
(3) Land and Building A/c

(`) (`)
To Balance b/d 6,00,000 By Depreciation 50,000
To Bank (Purchase) (Bal. Fig.) 1,50,000 By Balance c/d 7,00,000
7,50,000 7,50,000
(4) Advance Tax Payment A/c
(`) (`)
To Balance b/d 80,000 By Provision for taxation A/c 76,000
To Bank (paid for 08-09) 1,05,000 By Bank (Refund of tax) 4,000
By Balance c/d 1,05,000
1,85000 1,85,000
(5) Provision for Taxation A/c
(`) (`)
To Advance tax payment A/c 76,000 By Balance b/d 70,000
To Balance c/d 1,00,000 By P/L A/c (additional 6,000
provision for 20X7-X8)
By P/L A/c
(Provision for X8-X9) 1,00,000
1,76,000 1,76,000
(6) 8% Debentures A/c
(`) (`)
To Bank (2,00,000 x 103%) 2,06,000 By Balance b/d 3,00,000
(redemption)
To Balance c/d 1,00,000 By Premium on redemption 6,000
of Debentures A/c
3,06,000 3,06,000
(7) 9% Preference Share Capital A/c
(`) (`)
To Bank A/c (redemption) 3,15,000 By Balance b/d 3,00,000
(3,00,000 105%)
To Balance c/d 5,00,000 By Premium on redemption 15,000
of Preference shares A/c

By Bank (Issue) 5,00,000
8,15,000 8,15,000
(8) Securities Premium A/c
(`) (`)
To Premium on redemption 6,000 By Balance b/d 25,000
of debentures A/c
To Premium on redemption of
preference shares A/c 15,000
To Balance c/d 4,000
25,000 25,000
(9) General Reserve A/c
(`) (`)
To Bonus to Shareholders A/c 2,00,000 By Balance b/d 3,50,000
To Balance c/d 2,00,000 By P/L A/c (transfer) 50,000
4,00,000 4,00,000
Provision for tax and Advance tax may be taken as current liability and current
assets respectively and the effect may be shown in changes of Working Capital.
4. (a) Pattern of Raising Additional Finance

Equity = 10,00,000 60/100 = ` 6,00,000
Debt = 10,00,000 40/100 = ` 4,00,000
Capital structure after Raising Additional Finance
Sources of fund Amount
(`)
Shareholders funds
Equity capital (6,00,000 3,00,000) 3,00,000
Retained earnings 3,00,000
Debt at 10% p.a. 1,80,000
Debt at 16% p.a. (4,00,000 1,80,000) 2,20,000
Total funds 10,00,000
(b) Post-tax Average Cost of Additional Debt

Kd = I(1 t), where Kd is cost of debt, I is interest and t is tax.
On ` 1,80,000 = 10% (1 - 0.5) = 5% or 0.05
On ` 2,20,000 = 16% (1 0.5) = 8% or 0.08
Average Cost of Debt (Post tax ) i.e.
1,80,0000.05 + 2,20,0000.08
Kd = 100 = 6.65% (approx)
4,00,000
(c) Cost of Retained Earnings and Cost of Equity applying Dividend Growth
Model
D1 D0 1+ g
Ke = +g or +g
P0 P0
2 1.1 2.2
Then, Ke = + 0.10 = + 0.10 = 0.15 or 15%
44 44
(d) Overall Weighted Average Cost of Capital (WACC) (After Tax)

Particulars Amount (`) Weights Cost of WACC
Capital
Equity (including 6,00,000 0.60 15% 9.00
retained earnings)
Debt 4,00,000 0.40 6.65% 2.66
Total 10,00,000 1.00 11.66
5. Ascertainment of probable price of shares of Akash limited
Plan-I Plan-II
If ` 4,00,000 is If ` 4,00,000 is
Particulars raised as debt raised by
(`) issuing equity
shares
(`)
Earnings Before Interest and Tax (EBIT)
{20% of new capital i.e. 20% of (`14,00,000 +
3,60,000 3,60,000
`4,00,000)}
(Refer working note1)
Less: Interest on old debentures
(40,000) (40,000)
(10% of `4,00,000)
Less: Interest on new debt

(48,000) --
(12% of `4,00,000)
Earnings Before Tax (EBT) 2,72,000 3,20,000
Less: Tax @ 50% (1,36,000) 1,60,000
Earnings for equity shareholders (EAT) 1,36,000 1,60,000
No. of Equity Shares (refer working note 2) 30,000 40,000
Earnings per Share (EPS) ` 4.53 ` 4.00
Price/ Earnings (P/E) Ratio (refer working note 3) 8 10
Probable Price Per Share (PE Ratio EPS) ` 36.24 ` 40
Working Notes:
1. Calculation of existing Return of Capital Employed (ROCE):
(`)
Equity Share capital (30,000 shares `10) 3,00,000

100
10% Debentures `40,000 4,00,000
10
Reserves and Surplus 7,00,000
Total Capital Employed 14,00,000
Earnings before interest and tax (EBIT) (given) 2,80,000
`2,80,000
ROCE = 100 20%
`14,00,000
2. Number of Equity Shares to be issued in Plan-II:

` 4,00,000
= 10,000shares
` 40
Thus, after the issue total number of shares = 30,000+ 10,000 = 40,000 shares
3. Debt/Equity Ratio if ` 4,00,000 is raised as debt:
`8,00,000
= 100 = 44.44%
`18,00,000
As the debt equity ratio is more than 40% the P/E ratio will be brought down to 8 in
Plan-I.
6. Income Statement
Particulars Amount (`)
Sales 75,00,000
Less: Variable cost (56% of 75,00,000) 42,00,000
Contribution 33,00,000
Less: Fixed costs 6,00,000
Profit/ Earnings before interest and tax (EBIT) 27,00,000
Less: Interest on debt (@ 9% on ` 45 lakhs) 4,05,000
Earnings before tax (EBT) 22,95,000
EBIT EBIT
(i) ROI = 100 = 100
Capital employed Equity + Debt
27,00,000
= 100 = 27%
55,00,000 + 45,00,000
(ROI is calculated on Capital Employed)
(ii) ROI = 27% and Interest on debt is 9%. It shows that ROI is more than interest on
debt, hence, it has a favourable financial leverage.
Net Sales
(iii) Capital Turnover =
Capital
Net Sales 75,00,000
Or = = = 0.75
Capital 1,00,00,000
Which is very low as compared to industry average of 3.
(iv) Calculation of Operating, Financial and Combined leverages
(a) Operating Leverage = = = 1.22 (approx)
EBIT 27,00,000
EBIT 27,00,000
(b) Financial Leverage = = = 1.18 (approx)
EBT 22,95,000
(c) Combined Leverage = = = 1.44 (approx)
EBT 22,95,000
Or, Combined Leverage = Operating Leverage Financial Leverage
= 1.22 1.18 = 1.44 (approx)
(v) Operating leverage is 1.22. So if sales is increased by 10%. EBIT will be increased
by 1.22 10 i.e. 12.20% (approx)
(vi) Since the combined Leverage is 1.44, sales have to drop by 100/1.44 i.e. 69.44%
to bring EBT to Zero
Accordingly, New Sales = ` 75,00,000 (1 - 0.6944)
= ` 75,00,000 0.3056
= ` 22,92,000 (approx)
Hence at ` 22,92,000 sales level EBT of the firm will be equal to Zero.
(vii) Financial leverage is 1.18. So, if EBIT increases by 20% then EBT will increase by
1.18 20 = 23.6% (approx).
7.
Particulars ` (in crore)
Cost of machine 220
Salvage value after 10 years 20
Annual depreciation (220-20)/10 20
Calculation of cash flow and Net Present Value ` (Crore)
Profit before taxes(PBT) 30
Less: Taxes @ 35% 10.5
Profit after tax(PBT-Tax) 19.5
Add: Depreciation 20
Cash flow per year 39.5
A. Present value of cash flows for 10 years 39.5 x PVAF (0.1,10)
= 39.5 x 5.6502 = 223.18
B. Present value of the salvage value 20 x PVF (0.1.10)
= 20 x 0.3220 = 6.44
C. Total present value of cash inflows(A+B) 229.62
D. Initial Investment 220
Net Present Value (NPV) 9.62
From the above calculation, it is clear that Net Present Value is positive and Hence,
Rounak Ltd. should buy the lathe machine.
8. Statement showing the Working Capital Requirement of the Company

A. Current Assets (CA) (`)
Stock of raw materials 10,80,000
[` 64,80,000 / 12 months) 2 months]
Work-in-progress 5,81,538
[(` 1,51,20,000 4) / 52 months] 50%
Finished goods 12,60,000
(` 1,51,20,000 / 12 months)
Debtors 23,04,000
(` 28,80,000 80%) (Refer to Working note 2)
Cash balances 1,00,000
53,25,538
B. Current Liabilities(CL)
Creditors of raw materials 5,40,000
(` 64,80,000 / 12 months)
Creditors for wages & overheads 2,49,231
28,80,000 57,60,000
1.5 weeks
52 weeks
7,89,231
Net Working Capital (CA CL) 45,36,307
Working Notes: (`)

1, Annual raw materials requirements
64,80,000
(1,44,000 units ` 45)
Annual direct labour cost
28,80,000
(1,44,000 units ` 20)
Annual overhead costs
57,60,000
(1,44,000 units ` 40)
Total Cost (` ) 1,51,20,000
2. Total Sales
1,72,80,000
(1,44,000 units ` 120)
Two months sales
28,80,000
(` 1,72,80,000 / 6 months)
9. (a) In case of customer A, there is no increase in sales even if the credit is given.
Hence comparative statement for B & C is given below:
Particulars Customer B Customer C
1. Credit period (days) 0 30 60 90 0 30 60 90
2. Sales Units 1,000 1,500 2,000 2,500 - - 1,000 1,500
` in lakhs `in lakhs
3. Sales Value 90 135 180 225 - - 90 135
4. Contribution at 20% 18 27 36 45 - - 18 27
(A)
5. Receivables:-
Credit Period Sales - 11.25 30 56.25 - - 15 33.75
360
6. Debtors at cost i.e. 9 24 45 - - 12 27
80% of 11.25 -
7. Cost of carrying - 1.8 4.8 9 - - 2.4 5.4
debtors at 20% (B)
8. Excess of 18 25.2 31.2 36 - - 15.6 21.6
contributions over
cost of carrying
debtors (A B)
The excess of contribution over cost of carrying Debtors is highest in case of credit
period of 90 days in respect of both the customers B and C. Hence, credit period of
90 days should be allowed to B and C.
(b) Problem;-
(i) Customer A is taking 1000 TV sets whether credit is given or not. Customer C
is taking 1000 TV sets at credit for 60 days. Hence A also may demand credit
for 60 days compulsorily.
(ii) B will take 2500 TV sets at credit for 90 days whereas C would lift 1500 sets
only. In such case B will demand further relaxation in credit period i.e. B may
ask for 120 days credit.
10. (a) Debt Securitisation: It is a method of recycling of funds. It is especially beneficial
to financial intermediaries to support the lending volumes. Assets generating steady
cash flows are packaged together and against this asset pool, market securities can
be issued, e.g. housing finance, auto loans, and credit card receivables.
Process of Debt Securitisation

(i) The origination function A borrower seeks a loan from a finance company or
bank. The credit worthiness of borrower is evaluated and a contract is entered
into with repayment schedule structure over the life of the loan.
(ii) The pooling function Similar loans on receivables are clubbed together to
create an underlying pool of assets. The pool is transferred in favour of Special
Purpose Vehicle (SPV), which acts as a trustee for investors.
(iii) The securitisation function The SPV structure and issue securities on the
basis of these assets pool. The securities carry a coupon and expected
maturity which can be asset-based/mortgage based. These are generally sold
to investors through merchant bankers. Investors may be a pension funds,
mutual funds, insurance funds.
The process of securitization is generally without recourse i.e. investors bear the
credit risk and issuer is under an obligation to pay to investors only if the cash flows
are received by him from the collateral. The benefits to the originator are that assets
are shifted off the balance sheet, thus giving the originator recourse to off-balance
sheet funding.
(b) The profit maximisation is not an operationally feasible criterion. This statement is
true because profit maximisation can be a short-term objective for any organisation
and cannot be its sole objective. Profit maximization fails to serve as an operational
criterion for maximizing the owner's economic welfare. It fails to provide an
operationally feasible measure for ranking alternative courses of action in terms of
their economic efficiency. It suffers from the following limitations:
(i) Vague term: The definition of the term profit is ambiguous. Does it mean short
term or long term profit? Does it refer to profit before or after tax? Total profit
or profit per share?
(ii) Timing of Return: The profit maximization objective does not make distinction
between returns received in different time periods. It gives no consideration to
the time value of money, and values benefits received today and benefits
received after a period as the same.
(iii) It ignores the risk factor.
(iv) The term maximization is also vague.
PAPER 4: TAXATION
SECTION A: INCOME TAX
PART I: STATUTORY UPDATE

Significant Notifications and Circulars in income-tax and indirect taxes
issued between 1 st May, 2016 and 30th April, 2017
The income-tax law, as amended by the Finance Act, 2016, including significant
notifications/circulars issued up to 30th April, 2017 are applicable for November, 2017
examination. The relevant assessment year for November, 2017 examination is A.Y.2017-18.
The September 2016 edition of the Study Material for Paper 4: Taxation Part I: Income-tax is
based on the provisions of income-tax law as amended by the Finance Act, 2016 and
significant notifications/circulars issued upto 30 th April, 2016. The significant notifications and
circulars issued between 1 st May, 2016 and 30th April 2017, which are also relevant for
November, 2017 examination, are given hereunder:
I. NOTIFICATIONS
1. Method for determining the amount of expenditure in relation to income which
does not form part of the total income under Rule 8D [Notification No 43/2016,
dated 02-06-2016]
As per section 14A(1), for the purposes of computing the total income under Chapter IV
of the Income-tax Act, 1961, no deduction shall be allowed in respect of expenditure
incurred by the assessee in relation to income, which does not form part of total income
under the Income-tax Act, 1961.
Section 14A(2) provides that the Assessing Officer shall determine the amount of
expenditure incurred in relation to such income which does not form part of the total
income under Income-tax Act, 1961 in accordance with such method as may be
prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is
not satisfied with the correctness of the claim of the assessee in respect of such
expenditure.
Rule 8D prescribes the method for determining the amount of expenditure in relation to
income not includible in total income. Since there have been considerable number of
disputes on the application of the formula prescribed therein, the Finance Minister had, in
para 167 of his Budget Speech [Union Budget 2016-17] proposed to amend Rule 8D to
restrict the disallowance to 1% of the average monthly value of investments yielding
exempt income, but not exceeding the actual expenditure claimed.
Accordingly, vide this notification, the Central Government has substituted sub-rule (2)
and omitted sub-rule (3) of the said Rule 8D. New sub-rule (2) provides that the
expenditure in relation to income which does not form part of the total income shall be
the aggregate of following amounts:
(i) the amount of expenditure directly relating to income which does not form part of
total income; and
(ii) an amount equal to 1% of the annual average of the monthly averages of the
opening and closing balances of the value of investment, income which does not or
shall not form part of total income:
However, the amount referred to in clause (i) and clause (ii) shall not exceed the total
expenditure claimed by the assessee.
2. Exemption from TDS on specified payments made to banks etc. [Notification No.
47/2016, dated 17-06-2016]
Section 197A(1F) provides that no deduction of tax shall be made from such specified
payment to such institution, association or body or class of institutions, associations or
bodies as may be notified by the Central Government.
Accordingly, the Central Government has notified that no deduction of tax under Chapter
XVII of the Income-tax Act, 1961 shall be made on specified payments, in case such
payments are made by a person to a bank listed in the Second Schedule to the Reser ve
Bank of India Act, 1934, excluding a foreign bank, or to any payment systems company
authorised by the Reserve Bank of India under section 4(2) of the Payment and
Settlement Systems Act, 2007. The specified payments are:
(i) bank guarantee commission;
(ii) cash management service charges;
(iii) depository charges on maintenance of DEMAT accounts;
(iv) charges for warehousing services for commodities;
(v) underwriting service charges;
(vi) clearing charges (MICR charges) including interchange fee or any other similar
charges, by whatever name called, charged at the time of settlement or for clearing
activities under the Payment and Settlement Systems Act, 2007;
(vii) credit card or debit card commission for transaction between merchant
establishment and acquirer bank.
3. Relaxation from deduction of tax at higher rate under section 206AA [Notification
No 53/2016, dated 24-06-2016]
Under section 206AA, any person who is entitled to receive any sum or income or
amount on which tax is deductible under Chapter XVIIB shall furnish his Permanent
Account Number (PAN) to the person responsible for deducting such tax, failing which
tax shall be deducted at
PAPER 4: TAXATION 125
(1) the rate mentioned in the relevant provisions of the Act or

(2) the rate or rates in force or
(3) the rate of 20%
whichever is higher.
The provisions of section 206AA also apply to non-residents, on account of which they
have to obtain and furnish PAN. Otherwise, higher rate of tax deduction is attracted even
if tax on such income is payable at a lower rate on account of applicability of special
provisions of the Act or the relevant double taxation avoidance agreement.
The benefit of non-applicability of the provisions of section 206AA was so far only in
respect of payment of interest on long-term bonds by an Indian company or a business
trust as referred to in section 194LC to non-corporate non-residents or foreign
companies.
For the purpose of reducing the compliance burden, sub-section (7) of section 206AA
has been substituted with effect from 1 st June, 2016 to provide for non-applicability of the
requirements contained in section 206AA to a non-corporate non-resident or a foreign
company, in respect of any other payment, other than interest on long -term bonds as
referred to in section 194LC, subject to such conditions as may be prescribed.
Accordingly, the CBDT has, vide this notification, inserted Rule 37BC to provide that the
provisions of section 206AA shall not apply to a non-corporate non-resident, or to a
foreign company not having PAN in respect of payments in the nature of interest, royalty,
fees for technical services and payments on transfer of any capital asset on furnishing
the following details and documents to the deductor:
- Name, e-mail id, contact number;
- address in the country or specified territory outside India of which the deductee is a
resident;
- a certificate of his resident in any country or specified territory outside India from the
Government of that country or specified territory, if the law of that country or
specified territory provides for issuance of such certificate;
- Tax Identification Number of the deductee in the country or specified territory of his
residence and in case no such number is available, then a unique number on the
basis of which the deductee is identified by the Government of that country or
specified territory of which he claims to be a resident.
4. Backward districts of states of Telangana, West Bengal, Bihar and Andhra Pradesh
notified for the purposes of eligibility for higher additional depreciation under
section 32(1)(iia) and investment allowance under section 32AD [Notification No.
61/2016, dated 20-07-2016 and Notification No. 85/2016, dated 28-09-2016]
Under section 32, depreciation on assets used for the purposes of business and
profession is allowable as deduction while computing income under the head Profits and
gains of business or profession.
Section 32(1)(iia) provides for additional depreciation @ 20% for new machinery or plant
(other than ships and aircraft), acquired and installed, by an assessee engaged in the
business of manufacture or production of any article or thing or in the business of
generation or generation and distribution of power.
In order to promote economic activities in the backward areas of the states of Andhra
Pradesh, Telangana, West Bengal and Bihar, the Finance Act, 2015 had inserted a
proviso to section 32(1)(iia) to provide an increased rate of additional depreciation
@ 35% to an assessee who sets up an undertaking or enterprise for manufacture or
production of any article or thing, on or after 01.04.2015 in any backward area notified by
the Central Government in this behalf, in such states, and acquires and installs any new
machinery or plant (other than ships and aircraft) for the purposes of the said undertak ing
or enterprise during the period from 01.04.2015 to 31.3.2020 in the said backward area.
Further, section 32AD was inserted by the Finance Act, 2015 to provide incentive in the
form of an additional investment allowance @ 15% of the cost of the new plant and
machinery acquired and installed by an assessee who sets up an undertaking or
enterprise for manufacture or production of any article or thing, on or after 01.04.2015 in
any backward area notified by the Central Government in this behalf, in such st ates, and
acquires and installs any new asset for the purposes of the said undertaking or
enterprise during the period from 1.4.2015 to 31.3.2020 in the said backward area.
Both for the purpose of claim of investment allowance under section 32AD and highe r
additional depreciation under section 32(1)(iia), the Central Government has, vide this
notification, notified the following districts of the states of Telangana, West Bengal, Bihar
and Andhra Pradesh as backward areas:
S.No. Telangana West Bengal Bihar Andhra Pradesh
1. Adilabad South 24Parganas Arwal Anantapur
2. Nizamabad Bankura Banka Chittoor
3. Karimnagar Birbhum Begusarai Cuddapah
4. Warangal Dakshin Dinajpur Bhagalpur Kurnool
5. Medak Uttar Dinajpur Buxar Srikakulam
6. Mahbubnagar Jalpaiguri Gopalganj Vishakhapatnam
7. Rangareddy Malda Khagaria Vizianagaram

8. Nalgoda East Medinipur Kishanganj
9. Khammam West Medinipur Madhepura
10. Murshidabad Munger
11. Purulia West Champaran
12. East Champaran
13. Saharsa
14. Saran
15. Sheikhpura
16. Sitamarhi
17. Siwan.
Note The above list has been given so that the students are aware that backward
areas have been notified in each of the four States for the purpose availing deduction
under section 32AD and higher additional depreciation under section 32(1)(iia).
Students are not expected to rote learn or memorize the names of the backward areas
in each State.
5. Scope of qualifications for e-Return Intermediary extended to include Company
Secretaries, Cost Accountants and Tax Return Preparer [Notification No 66/2016,
dated 09-08-2016]
Section 139(1B) provides for an alternative method to furnish return of income. Vide
Notification No 210/2007, dated 27.07.2007, an Electronic Furnishing of Return of
Income Scheme, 2007 was notified for the said purpose. The scheme, inter alia provides
that an eligible person may, at his option, furnish his return of income which he is
required to furnish under various provisions of the Act, to an e-Return Intermediary who
shall digitize the data of such return and transmit the same electronically to a server
designated for this purpose by the e-Return Administrator, on or before the due date.
Para 5 of the said Notification lays down the qualifications of an e-Return Intermediary. A
firm of Chartered Accountants or Advocates, which has been allotted a Permanent
Account Number, as well as a Chartered Accountant or an Advocate who has been
allotted a Permanent Account Number, inter alia, qualified to be an e-Return
intermediary.
Vide this Notification, a firm of Company Secretaries or Cost Accountants, if the firm has
been allotted PAN as well as a Company Secretary or a Cost Accountant or Tax Return
Preparer, who has been allotted a Permanent Account Number, would also qualify to be
an e-Return intermediary.
6. Rescinding of initially notified Income Computation Disclosure Standards (ICDSs)

[Notification No S.O. 3078(E) dated 29.9.2016] and Notification of new ICDSs to be
applicable from A.Y.2017-18 [Notification No. S.O. 3079(E) dated 29-09-2016]
Section 145 of the Income-tax Act, 1961 provides for the method of accounting. Section
145(1) requires income chargeable under the head Profits and gains of business or
profession or Income from other sources to be computed in accordance with eith er the
cash or mercantile system of accounting regularly employed by the assessee, subject to
the provisions of section 145(2). Under section 145(2), the Central Government is
empowered to notify in the Official Gazette from time to time, income computation and
disclosure standards (ICDSs) to be followed by any class of assessees or in respect of
any class of income.
Accordingly, the Central Government had, vide Notification No.S.O.892(E) dated
31.3.2015, in exercise of the powers conferred by section 145(2), notified ten income
computation and disclosure standards (ICDSs) to be followed by all assessees, following
the mercantile system of accounting, for the purposes of computation of income
chargeable to income-tax under the head Profit and gains of business or profession or
Income from other sources. This notification was to come into force with effect from 1st
April, 2015, to be applicable from A.Y. 2016-17.
However, the Central Government has, vide Notification No.S.O.3078(E) dated
29.9.2016, rescinded Notification No.S.O.892(E) dated 31.3.2015. Simultaneously, vide
Notification No.S.O.3079(E) dated 29.9.2016, the Central Government has notified ten
new ICDSs to be applicable from A.Y.2017-18.
The newly notified ICDSs have to be followed by all assessees (other than an individual
or a Hindu undivided family who is not required to get his accounts of the previous year
audited in accordance with the provisions of section 44AB) following the mercantile
system of accounting, for the purposes of computation of income chargeable to income-
tax under the head Profits and gains of business or profession or Income from other
sources, from A.Y.2017-18.
Note Students are advised to refer to the Annexure to the October 2016 Edition of the
Practice Manual of IIPCC Paper 4: Taxation Part I: Income-tax which explains the
significant changes in the ICDSs notified on 29.9.2016 vis--vis ICDSs initially notified on
31.3.2015 (since rescinded). The Annexure also contains the text of the new ICDSs
notified on 29.9.2016.
7. Expenditure for obtaining right to use spectrum for telecommunication services
[New Rule 6A] [Notification No. 89/2016, dated 04-10-2016]
The Finance Act, 2016 has inserted new section 35ABA to provide for tax treatment of
spectrum fee. Section 35ABA provides that where any capital expenditure has been
incurred for acquisition of any right to use spectrum for telecommunication services either
before the commencement of the business or thereafter, at any time during the previous
year and for which payment has actually been made to obtain a right to use spectrum,
appropriate fraction of the amount of such expenditure (1/total number of relevant

previous years) would be allowed as deduction for the relevant previous years during
which the spectrum, for which the fee is paid, shall be in force.
As per clause (iii) of Explanation to section 35ABA, the phrase "payment has actually
been made" means the actual payment of expenditure irrespective of the previous year in
which the liability for the expenditure was incurred according to the method of accounting
regularly employed by the assessee or payable in such manner as may be prescribed.
Accordingly, the CBDT has, vide this Notification, inserted new Rule 6A which
substantiates the meaning of the phrase payment has actually been made:
(a) In a case where upfront payment of spectrum fee has been made: Where an
assessee has opted and been allowed by the Department of Telecommunications,
Government of India to make full upfront payment of spectrum fee, the actual
payment of expenditure irrespective of the previous year in which the liability for the
expenditure was incurred according to the method of accounting regularly employed
by the assessee;
(b) In a case where deferred payment is made: Where an assessee has opted and
been allowed by the Department of Telecommunications, Government of India to
make deferred payment, the amount which would have been payable by the
assessee had he opted for full upfront payment of spectrum fee irrespective of the
previous year in which the liability for the expenditure was incurred according to the
method of accounting regularly employed by the assessee.
However, in case of deferred payment referred to in (b) above, where there is failure by
the assessee to comply with any of the conditions specified by the scheme of the
Department of Telecommunications, Government of India and Department of
Telecommunications terminates the allotment or assignment of spectrum, the Assessing
Officer shall, in exercise of power vested in him under section 35ABA(3), re-compute the
total income of the assessee for the previous year in which the deduction has been
claimed and granted to him by deeming that,-
(i) the total amount of spectrum fee paid up to the date of termination is t he amount of
payment actually been made;
(ii) the spectrum was in force up to the date of its termination for the purpose of
computing relevant previous year.
8. Quoting of PAN is mandatory in respect of transaction of cash deposit in the
banks/post offices of specified valueduring the period of demonetization
(i.e., 09.11.2016 to 30.12.2016) [Notification No. 104/2016, dated 15-11-2016,
Notification No. 2/2017, dated 6-1-2017and Notification No. 27/2017, dated 5-4-2017]
Section 139A(5)(c) mandates every person to quote permanent account number (PAN)
in all documents pertaining to the prescribed transactions entered into by him, in the
interests of the revenue.
Accordingly, Rule 114B specifies the transactions in respect of which quoting of PAN is
mandatory in all pertinent documents.
The CBDT has, vide this notification, amended Rule 114B to include a transaction in
respect of cash deposit with bank/post office as follows:
Nature of transaction Value of transaction
Deposit with, - Cash deposits, -
(i) a banking company or a co-operative (i) exceeding ` 50,000 during any one
bank to which the Banking day; or
Regulation Act, 1949 applies (ii) aggregating to more than ` 2,50,000
(including any bank or banking during the period 09th November,
institution referred to in section 51 of 2016 to 30th December, 2016.
that Act)
(ii) Post Office.
Fourth proviso has been inserted in Rule 114B to provide that a person who has an
account (other than a time deposit and a Basic Saving Bank Deposit Account)
maintained with a banking company or a co-operative bank to which the Banking
Regulation Act, 1949 applies (including any bank or banking institution referred to in
section 51 of that Act) and has not quoted his permanent account number or
furnished Form No. 60, as the case may be, at the time of opening of such account or
subsequently, he shall furnish his permanent account number or Form No. 60, as the
case may be, to a manager or officer of banking company or co-operative bank, as the
case may be on or before the 30thJune, 2017.
9. Reduction in the existing rate of deemed profit under section 44AD in respect of
amounts/receipts through banking channel/digital means [Press Release, dated 19-
12-2016]1
Under the existing provisions of section 44AD of the Income-tax Act, 1961, in case of
certain assessees (i.e. an individual, HUF or a partnership firm other than LLP) carrying
on any business (other than transportation, agency, brokerage and commission) and
having a turnover of ` 2 crore or less, the profit is deemed to be 8% of the total turnover.
In order to achieve the Governments mission of moving towards a less cash economy
and to incentivise small traders/businesses to proactively accept payments by digital
means, with effect from A.Y. 2017-18 the existing rate of deemed profit of 8% under
section 44AD of the Act has been reduced to 6% in respect of the amount of total
turnover or gross receipts received through banking channel/digital means i.e., by
1TheFinance Act, 2017 has, with effect from A.Y. 2017-18, inserted a proviso to section 44AD(1) to
provide for a presumptive rate of 6% (instead of 8%) in respect of the amount of total turnover or
gross receipts received by an A/c payee cheque/bank draft or use of ECS through a bank account.
an A/c payee cheque/bank draft or use of ECS through a bank A/c during the
previous year or before the due specified in section 139(1) in respect of that previous
year.
However, the existing rate of deemed profit of 8% referred to in section 44AD, shall
continue to apply in respect of total turnover or gross receipts received in cash.
II. CIRCULARS
1. Eligibility for grant of additional depreciation under section 32(1)(iia) in the case of
an assessee engaged in printing or printing and publishing [Circular No. 15/2016,
dated 19-05-2016]
An assessee, engaged in the business of manufacture or production of an article or
thing, is eligible to claim additional depreciation under section 32(1)(iia) in addition to the
normal depreciation under section 32(1).
The CBDT has, vide this Circular, clarified that the business of printing or printing and
publishing amounts to manufacture or production of an article or thing and is, therefore,
eligible for additional depreciation under section 32(1)(iia).
2. Admissibility of claim of deduction of bad debts under section 36(1)(vii) read with
section 36(2) [Circular No. 12/2016, dated 30-05-2016]
The CBDT has clarified, vide this Circular, that claim for any debt or part thereof in any
previous year, shall be admissible under section 36(1)(vii), if it is written off as
irrecoverable in the books of accounts of the assessee for that previous year and it fulfills
the conditions stipulated in section 36(2). There is no requirement in law that the
assessee has to establish that the debt has, in fact, become irrecoverable.
3. Clarification regarding attaining prescribed age of 60 years/80 years on 31st March
itself, in case of senior/very senior citizens whose date of birth falls on 1st April
[Circular No. 28/2016, dated 27-07-2016]
An individual who is resident in India and of the age of 60 years or more (senior citizen)
and 80 years or more (very senior citizen) is eligible for a higher basic exemption limit of
` 3,00,000 and ` 5,00,000, respectively.
The CBDT has, vide this Circular, clarified that a person born on 1st April would be
considered to have attained a particular age on 31st March, the day preceding the
anniversary of his birthday. In particular, the question of attainment of age of eligibility
for being considered a senior/very senior citizen would be decided on the basis of above
criteria.
Therefore, a resident individual whose 60 th birthday falls on 1 st April, 2017, would be
treated as having attained the age of 60 years in the P.Y.2016-17, and would be eligible
for higher basic exemption limit of ` 3 lakh in computing his tax liability for A.Y.2017-18.
Likewise, a resident individual whose 80 th birthday falls on 1 st April, 2017, would be
treated as having attained the age of 80 years in the P.Y.2016-17, and would be eligible
for higher basic exemption limit of ` 5 lakh in computing his tax liability for A.Y.2017-18.
4. Clarification on applicability of TDS provisions of section 194-I on lumpsum lease
premium paid for acquisition of long term lease [Circular No.35/2016, dated
13-10-2016]
Under section 194-I, tax is required to be deducted at source at the prescribed rates from
payment of any income by way of rent. For the purposes of this section, "rent" has been
defined as any payment, by whatever name called, under any lease, sub -lease, tenancy
or any other agreement or arrangement for the use of any land or building or machinery
or plant or equipment or furniture or fittings.
The issue of whether or not TDS under section 194-I is applicable on 'lump sum lease
premium' or 'one-time upfront lease charges" paid by an assessee for acquiring long-
term leasehold rights for land or any other property has been examined by the CBDT.
Accordingly, the CBDT has, vide this Circular, clarified that lump sum lease premium or
one-time upfront lease charges, which are not adjustable against periodic rent, paid or
payable for acquisition of long-term leasehold rights over land or any other property are
not payments in the nature of rent within the meaning of section 194 -I. Therefore, such
payments are not liable for TDS under section 194-I.
5. Clarification on taxability of the compensation received by the land owners for the
land acquired under the Right to Fair Compensation and Transparency in Land
Acquisition, Rehabilitation and Resettlement Act, 2013 (RFCTLARR Act) [Circular
No. 36/2016, dated 25-10-2016]
Under the existing provisions of the Income-tax Act, 1961, an agricultural land which is
not situated in specified urban area, is not regarded as a capital asset. Hence, capital
gains arising from the transfer (including compulsory acquisition) of such agricultural land
is not taxable. The Finance (No.2) Act, 2004 has inserted section 10(37) from 1 -4-2005
to provide specific exemption to the capital gains arising to an Individual or a HUF from
compulsory acquisition of an agricultural land situated in specified urban limit, subject to
fulfilment of certain conditions. Therefore, compensation received from compulsory
acquisition of an agricultural land is not taxable under the Act (subject to fulfilment of
certain conditions for specified urban land).
The RFCTLARR Act which came into effect from 1st January, 2014, in section 96 , inter
alia provides that income-tax shall not be levied on any award or agreement made
(except those made under section 46) under the RFCTLARR Act. Therefore,
compensation received for compulsory acquisition of land under the RFCTLARR Act
(except those made under section 46 of RFCTLARR Act), is exempted from the levy of
income-tax.
As no distinction has been made between compensation received for compulsory
acquisition of agricultural land and non-agricultural land in the matter of providing
exemption from income-tax under the RFCTLARR Act, the exemption provided under
section 96 of the RFCTLARR Act is wider in scope than the tax-exemption provided
under the existing provisions of Income-tax Act, 1961. This has created uncertainty in the
matter of taxability of compensation received on compulsory acquisition of land,
especially those relating to acquisition of non-agricultural land.
The matter has been examined by the CBDT and it has been clarified that compensation
received in respect of award or agreement which has been exempted from levy of
income-tax vide section 96 of the RFCTLARR Act shall also not be taxable under the
provisions of Income-tax Act, 1961 even if there is no specific provision for exemption of
such compensation in the Income-tax Act, 1961.
6. Admissibility of deduction under Chapter VI-A on the profits enhanced due to
disallowance of expenditure related to business activity [Circular No.37/2016,
Dated 02-11-2016]
Chapter VI-A of the Income-tax Act, 1961, provides for deductions in respect of certain
incomes. In computing the profits and gains of a business activity, the Assessing Officer
may make certain disallowances, such as disallowances pertaining to sect ions 32,
40(a)(ia), 40A(3), 43B etc., of the Act. At times disallowance out of specific expenditure
claimed may also be made. The effect of such disallowances is an increase in the profits.
The issue is whether such higher profits would also result in claim for a higher profit-
linked deduction under Chapter VI-A.
The CBDT has, vide this circular, clarified that the disallowances made under sections
32, 40(a)(ia), 40A(3), 43B, etc. and other specific disallowances, related to the business
activity against which the Chapter VI-A deduction has been claimed, result in
enhancement of the profits of the eligible business, and that deduction under Chapter VI -
A is admissible on the profits so enhanced by the disallowance.
7. Admissibility of expenditure incurred by a Firm on Keyman Insurance Policy in the
case of a Partner [Circular No. 38/2016, dated 22-11-2016]
The issue is whether expenditure incurred by a firm on Keyman Insurance Policy
premium in the case of a partner is allowable as business expenditure.
The CBDT has, vide this circular, clarified that in case of a firm, premium paid by the firm
on the Keyman Insurance Policy of a partner, to safeguard the firm against a disruption
of the business, is an admissible expenditure under section 37 of the Act.
8. Transport, Power and Interest subsidies received by an Industrial Undertaking -
Eligibility for deduction under sections 80-IB, 80-IC etc., [Circular No. 39/2016,
dated 29-11-2016]
The issue is whether revenue receipts such as transport, power and interest subsidies
received by an Industrial Undertaking/eligible business are part of profits and gains of
business derived from its business activities within the meaning of sections 80 -IB/80-IC
of the Income-tax Act, 1961 and, thus, eligible for claim of corresponding deduction
under Chapter VI-A of the Act. Such receipts are often treated as 'Income from other
sources' by the Assessing Officers.
The CBDT has, vide this circular, clarified that revenue subsidies received from the
Government towards reimbursement of cost of production/manufacture or for sale of the
manufactured goods are part of profits and gains of business derived from the Industrial
Undertaking /eligible business, and are thus, admissible for applicable deduction under
Chapter VI-A of the Act.
9. Clarification regarding liability to income-tax in India for a non-resident seafarer
receiving remuneration in NRE (Non-Resident External) account maintained with
an Indian Bank [Circular No. 13/2017, dated 11-04-2017 and Circular No. 17/2017,
dated 26-04-2017]
The CBDT noted that section 5(2)(a) of the Income-tax Act, 1961 provides that only such
income of a non-resident shall be subjected to tax in India that is either received or is
deemed to be received in India.
Accordingly, the CBDT has, vide this circular, clarified that the salary accrued to a non-
resident seafarer for services rendered outside India on a foreign going ship (with Indian
flag or foreign flag) shall not be included in the total income merely because the said
salary has been credited in the NRE account maintained with an Indian bank by the
seafarer.
10. Lease rent from letting out buildings/developed space along with other amenities
in an Industrial Park /SEZ - to be treated as business income [Circular No. 16/2017,
dated 25-04-2017]
The issue is whether income arising from letting out of premises/developed space along
with other amenities in an Industrial Park/SEZ is to be charged under head 'Profits and
Gains of Business' or under the head 'Income from House Property'. Assessees claim the
letting out as business activity, the income arising from which to be charged to tax under
the head 'Profits and Gains of Business', whereas the Assessing Officers hold it to be
chargeable under the head 'Income from House Property'.
The CBDT has, vide this circular, clarified that in the case of an undertaking which
develops, develops and operates or maintains and operates an industrial park/SEZ
notified in accordance with the scheme framed and notified by the Government, the
income from letting out of premises/developed space along with other facilities in an
industrial park/SEZ is to be charged to tax under the head 'Profits and Gains of
Business'.
III. Amendments made by the Taxation Laws (Amendment) Act, 2016

(1) Splitting up or reconstruction of an erstwhile public sector company into separate
companies as a result of transfer of its shares by the Central Government deemed
to be a demerger [Section 2(19AA)]
Effective from: A.Y.2017-18
(i) The existing provisions of the Income-tax Act, 1961 provide for tax neutrality in
matters relating to transfer of capital asset, carry forward of loss, claim of certain
deductions, etc., in case of demerger of entities.
(ii) Upto A.Y.2016-17, the definition of the term demerger as per section 2(19AA) o f
the Income-tax Act, 1961, did not include within its scope, the splitting up or the
reconstruction of a company, which ceased to be a public sector company as a
result of transfer of its shares by the Government, into separate companies, even if
such splitting up or reconstruction has been made to give effect to the conditions
attached to the said transfer of shares by the Government.
(iii) With a view to facilitate the splitting up or the reconstruction of erstwhile public
sector companies and to give effect to the conditions attached to the transfer of
shares by the Government, Explanation 5 has been inserted in section 2(19AA) with
effect from A.Y.2017-18 to provide that the reconstruction or splitting up of a
company, which ceased to be a public sector company as a result of transfer of its
shares by the Central Government, into separate companies, shall be deemed to be
a demerger, if such reconstruction or splitting up has been made to give effect to
any condition attached to the said transfer of shares and also fulfils such other
conditions as may be notified by the Central Government in the Official Gazette.
(iv) Consequently, as per section 47, transfer of a capital asset in the scheme of
demerger would not be regarded as a transfer, and hence capital gains tax liability
would not be attracted. Further, the accumulated loss and unabsorbed depreciation
of the demerged public sector company can be carried forward for set -off in the
hands of the resulting company as per the provisions of section 72A(4) . Also, the
profit-linked tax deductions under section 80-IA to 80-IE, which was available to the
erstwhile demerged public sector company, would be available to the resulting
company for the unexpired period. An Indian company incurring expenditure wholl y
and exclusively for the purposes of demerger of the undertaking would be entitled to
deduction under section 35DD of an amount equal to one-fifth of such expenditure
for each of the five successive previous years beginning with the year of demerger.
(2) Relaxation of minimum period of employment of an employee for the purpose of

deduction under section 80JJAA, in case of assessees engaged in apparel
business [Section 80JJAA]
Effective from: A.Y.2017-18
(i) Upto A.Y.2016-17, deduction under section 80JJAA in respect of employment of
new workmen was available to assessees deriving profits and gains from
manufacture of goods in a factory. In order to extend this employment generation
incentive to all sectors, section 80JJAA has been substituted by the Finance Act,
2016 with effect from A.Y.2017-18.
(ii) Under new section 80JJAA, deduction is available in respect of employment of new
employees, where the gross total income of an assessee to whom section 44AB
applies, includes any profits and gains derived from business.
(iii) In case of such assessees, deduction of an amount equal to 30% of additional
employee cost incurred in the course of such business in the previous year, would
be allowed for three assessment years including the assessment year relevant to
the previous year in which such employment is provided, subject to the fulfillment of
certain specified conditions. One of the conditions is that the employee should be
employed for a period of not less than 240 during the previous year.
(iv) Considering the seasonal nature of the business of manufacturing of apparel, the
minimum period of employment of an employee who is employed in this business
has been reduced from 240 days to 150 days during the previous year. Therefore,
in the case of an assessee engaged in the business of manufacturing of apparel,
deduction under section 80JJAA would be allowable in respect of additional
employee cost incurred in respect of employees employed for a period of atleast
150 days during the previous year.
IV. Amendments made by the Taxation Laws (Second Amendment) Act, 2016
Consequent to demonetisation of high value currency, declaring specified bank notes as not
legal tender, the Taxation Laws (Second Amendment) Bill, 2016 was introduced in Lok Sabha
on November 28, 2016. This Bill was passed by the Lok Sabha on November, 29, 2016. It
seeks to amend the Income-tax Act, 1961 and Finance Act, 2016. The Taxation Laws
(Second Amendment) Bill, 2016 received the assent of the President on December 15, 2016.
The following significant amendment has been made in the Income-tax Act, 1961 and the
Finance Act, 2016:
Levy of higher tax under section 115BBE on unexplained money, investment,
expenditure, etc. deemed as income under section 68 or section 69 or section 69A or
section 69B or section 69C or section 69D
Upto A.Y.2016-17, section 115BBE provided for levy of tax @30%, plus surcharge, if
applicable, plus cess@3% on unexplained money, investment, expenditure, etc. deemed as
income under section 68 or section 69 or section 69A or section 69B or section 69C or section
69D.
This section has been amended with effect from A.Y.2017-18 to provide for levy of tax@60%
plus surcharge@25% of tax on income referred to in sections 68, 69 and 69A to 69D and
reflected in the return of income furnished under section 139 or determined by the Assessing
Officer.
Thus, the effective rate of tax (including surcharge@25% of tax and cess@3% of tax and
surcharge) is 77.25%.
The existing restrictions regarding non-allowability of basic exemption or allowance or
expenditure against such income and non-permissibility of set-off of losses against such
income would continue.
QUESTIONS
Residential Status and Scope of total income
1. Mr. Aakash earns the following income during the previous year 2016-17. Compute his
total income for A.Y. 2017-18 if he is (i) resident and ordinarily resident; (ii) resident but
not ordinarily resident; (iii) non-resident.
Sr. No. Particulars (`)
1. Interest on Canada Development Bonds (only 50% of 40,000
interest received in India)
2. Dividend from Malaysian company received in Malaysia 20,000
3. Short term capital gain on sale of shares of an Indian 90,000
company received in India
4. Interest on savings bank deposit in UCO Bank, Delhi 12,000
5. Income from Profession in Malaysia (set up in India), out 15,000
of which ` 10,000 is received in India
6. Agricultural income from a land situated in Gujarat 45,000
7. Rent received in London in respect of house property at 60,000
London
Income which do not form part of total income
2. Examine with brief reasons whether the following statements are true or false with
reference to the provisions of the Income-tax Act, 1961:
(a) Mr. Rahim received a sum of ` 18 lakh on 31.3.2017 from Life Insurance
Corporation of India in respect of a policy, the sum assured of which was ` 13 lakh,
taken on 1.07.2007 and for which a one time premium of ` 10 lakh was paid. The
sum of ` 18 lakhs received by Mr. Rahim is fully exempt under section 10(10D)(c).
(b) Pension of ` 2,20,000 received by Mr. Sinha, a Param Vir Chakra awardee, who
was formerly in the service of the Central Government, is exempt.
(c) Compensation on account of disaster received from a local authority by an
individual or his/her legal heir is taxable.
(d) Mr. Q, a shareholder of a closely held company, holding 15% shares, received
advances from that company which is to be deemed as dividend from an Indian
Company, hence exempted under section 10(34).
Income from Salaries
3. Mr. Narender, employed as Marketing Manager in Gama Ltd., furnishes you the following
information for the year ended 31.03.2017:
(i) Basic salary upto 31.10.2016 ` 50,000 p.m.
Basic salary from 01.11.2016 ` 60,000 p.m.
Note: Salary is due and paid on the last day of every month.
(ii) Dearness allowance @ 40% of basic salary (not forming part of salary for retirement
benefits).
(iii) Bonus equal to one month salary. Paid in October 2016 on basic salary plus
dearness allowance applicable for that month.
(iv) Contribution of employee to recognized provident fund account of the
employee@16% of basic salary. Employer contributed an equivalent amount.
(v) Profession tax paid ` 3,000 of which ` 2,000 was paid by the employer.
(vi) Facility of laptop and computer was provided to Narender for both official and
personal use. Cost of laptop ` 45,000 and computer ` 35,000 were acquired by the
company on 01.12.2016.
(vii) Motor car owned by the employer (cubic capacity of engine exceeds 1.60 litres)
provided to the employee from 01.11.2016 meant for both official and personal use.
Repair and running expenses of ` 45,000 from 01.11.2016 to 31.03.2017, were fully
met by the employer. The motor car was self-driven by the employee.
(viii) Leave travel concession given to employee, his wife and three children (one
daughter aged 6 and twin sons aged 4). Cost of air tickets (economy class)
reimbursed by the employer `20,000 for adults and `30,000 for three children.
Narender is eligible for availing exemption this year to the extent it is permissible in
law.
Mr. Narender made the following payments:

(i) Medical insurance premium paid in cash ` 4,000
(ii) Medical insurance premium paid by account payee crossed cheque ` 25,700
Compute the total income chargeable to tax in the hands of Mr. Narender and tax
thereon for the assessment year 2017-18.
Income from house property
4. Surbhi has two houses, both of which are self-occupied. You are required to compute
Surbhi's income from house property for the Assessment Year 2017-18 and suggest
which house should be opted by Surbhi to be assessed as self-occupied so that her tax
liability is minimum.
The particulars of these are given below:
(Value in `)
Particulars House - I House - II
Municipal Valuation per annum 1,30,000 1,15,000
Fair Rent per annum 1,10,000 1,70,000
Standard rent per annum 1,00,000 1,65,000
Date of completion 31-03-1999 31-03-2001
Municipal taxes payable during the year (paid for House II 12% 8%
only)
Interest on money borrowed for repair of property during - 55,000
current year
Profits and gains of business or profession
5. Mr. Prakash engaged in retail trade, reports a turnover of ` 1,77,50,000 for the financial
year 2016-17. His income from the said business as per books of account is computed at
` 10,20,000. Retail trade is the only source of income for Mr. Prakash.
(i) Is Mr. Prakash eligible to opt for presumptive taxation scheme for the assessment
year 2017-18?
(ii) If so, determine his income from retail trade as per the applicable presumptive
provision.
(iii) In case Mr. Prakash does not opt for presumptive taxation of income from retail
trade, what are his obligations under the Income-tax Act, 1961?
(iv) What is the due date for filing his return of income under both the options?
Capital Gains
6. Mr. Mittal, aged 55 years, is the owner of a residential house which was purchased in
September, 1993 for ` 5,00,000. He sold the said house on 25 th September, 2016 for
` 34,00,000. Valuation as per stamp valuation authority of the said residential house was
` 43,00,000. He invested ` 5,00,000 in NHAI Bonds on 12 th January, 2017. He
purchased a residential house on 15 th July, 2017 for ` 10,00,000. He gives other
particulars as follows:
Interest on Bank Fixed Deposit ` 32,000
Investment in public provident fund ` 50,000
You are requested to calculate the taxable income for the assessment year 2017 -18 and
the tax liability, if any.
Cost inflation index for F.Y. 1993-94 and 2016-17 are 244 and 1125, respectively.
Income from other sources
7. Mr. Krishna, a dealer in shares, received the following without consideration during the
P.Y.2016-17 from his friend Mr. Raju, -
(1) Cash gift of ` 70,000 on his anniversary, 15 th April, 2016.
(2) Bullion, the fair market value of which was ` 51,000, on his birthday, 19 th June,
2016.
(3) A plot of land at Ghaziabad on 1 st July, 2016, the stamp value of which is ` 5 lakh
on that date. Mr. Raju had purchased the land in April, 2008.
Mr. Krishna purchased from his friend Mr. Pankaj, who is also a dealer in shares, 1000
shares of ABC Ltd. @ ` 450 each on 25 th June, 2016, the fair market value of which was
` 650 each on that date. Mr. Krishna sold these shares in the course of his business on
30th June, 2016.
Further, on 21st November, 2016, Mr. Krishna took possession of property (building)
booked by him two years back at ` 20 lakh. The stamp duty value of the property as on
21st November, 2016 was ` 30 lakh and on the date of booking was ` 23 lakh. He had
paid ` 1 lakh by account payee cheque as down payment on the date of booking.
On 11thMarch, 2017, he sold the plot of land at Ghaziabad for ` 7 lakh.
Compute the income of Mr. Krishna chargeable under the head Income from other
sources and Capital Gains for A.Y.2017-18.
Income of Other Persons included in assessees Total Income
8. Mr. Kabir gifted a sum of ` 9 lakhs to his brothers minor son on 20-5-2016. On
25-5-2016, his brother gifted debentures worth `10 lakhs to Mrs. Kabir. Son of
Mr. Kabirs brother invested the amount in fixed deposit with Bank of India @ 9% p.a.
interest and Mrs. Kabir received interest of ` 81,000 on debentures received by her.
Discuss the tax implications under the provisions of the Income-tax Act, 1961.
Set off and Carry Forward of Losses
9. Compute the gross total income of Mr. Virat and show the items eligible for carry forward
from the following information furnished for the year ended 31-03-2017:
Income from salary 2,50,000
Loss from house property 1,50,000
Income from trading business 45,000
Income from speculative business X 5,000
Loss from speculative business Y 25,000
Loss from specified business covered under section 35AD 20,000
Long-term capital gain from sale of urban land 2,00,000
Long-term capital loss on sale of shares (STT not paid) 75,000
Long-term capital loss on sale of listed shares in recognized 82,000
stock exchange (STT paid)
Other brought forward losses:
(i) Losses from owning and maintaining of race horses pertaining to A.Y. 2016 -17
` 2,000.
(ii) Brought forward loss from trading business ` 5,000 relating to A.Y.2013-14.
Deductions from Gross Total Income
10. Mr. Shiva aged 65 years, has gross total income of ` 7,75,000 comprising of income
from salary and house property. He has made the following payments and investments:
(i) Premium paid to insure the life of her major daughter (policy taken on 1.4.2014)
(Assured value ` 1,80,000) ` 20,000.
(ii) Medical Insurance premium paid by cheque for self ` 12,000; Spouse ` 14,000.
(iii) Donation to a public charitable institution registered under 80G ` 1,50,000 by way
of cheque.
(iv) LIC Pension Fund ` 60,000.
(v) Donation to National Childrens Fund - ` 25,000 by way of cheque
(vi) Donation to Jawaharlal Nehru Memorial Fund - ` 25,000 by way of cheque
(vii) Donation to approved institution for promotion of family planning - ` 40,000 by way
of cheque
Compute the total income of Mr. Shiva for A.Y. 2017-18.
Computation of Total Income of an individual

11. Mr. Rajiv, a resident individual, engaged in a wholesale business of health products. He
is also a partner in XYZ & Co., a partnership firm. The following details are made
available for the year ended 31.3.2017:
Sl. Particulars ` `
No.
(i) Interest on capital received from XYZ & Co., at 15% 1,50,000
(ii) Interest from bank on fixed deposit (Net of TDS 13,500
` 1,500)
(iii) Income-tax refund received relating to assessment 34,500
year 2014-15 including interest of ` 2,300
(iv) Net profit from wholesale business 5,60,000
Amounts debited include the following:
Depreciation as per books 34,000
Motor car expenses 40,000
Municipal taxes for the shop 7,000
(For two half years; payment for one half year
made on 12.7.2017 and for the other on
31.12.2017)
Salary to manager by way of a single cash 21,000
payment
(v) The WDV of the assets (as on 1.4.2016) used in above
wholesale business is as under:
Computers 1,20,000
Motor car (20% used for personal use) 3,20,000
(vi) LIP paid for independent son 60,000
PPF of his wife 70,000
You are required to compute the total income of the Mr. Rajiv for the assessment year
2017-18 and the closing WDV of each block of assets.
Provisions concerning Advance Tax and Tax Deducted at source
12. Examine the applicability of TDS provisions and amount of tax, if any, to be deducted in
the following cases:
(a) Payment of fee for technical services of ` 22,000 and royalty of ` 25,000 to
Mr. Ram, who is having PAN.
(b) Payment of ` 2,00,000 made to Mr. X for purchase of diaries made according to
specifications of M/s ABC Ltd. However, no material was supplied for such diaries
to Mr. X by M/s ABC Ltd.
(c) Rent paid for plant and machinery ` 1,50,000 by a partnership firm having sales
turnover of ` 25,00,000 and net loss of ` 15,000.
Provisions for filing of Return of Income
13. Who are the persons authorized to verify return of income in the case of following
persons:
(i) Local authority
(ii) Firm, having no managing partner
(iii) Non-resident Company
(iv) Political party
1. Computation of total income of Mr. Aakash for the A.Y. 2017-18
S. Particulars Resident & Resident but Non-
No. ordinarily not ordinarily Resident
resident resident
(`) (`) (`)
1. Interest on Canada Development Bond 40,000 20,000 20,000
(See Note 1)
2. Dividend from Malaysian Company 20,000 - -
received in Malaysia (See Note 2)
3. Short term capital gain on sale of 90,000 90,000 90,000
shares of an Indian company received
in India
4. Interest on savings bank deposit in 12,000 12,000 12,000
UCO Bank, Delhi
5. Income from profession in Malaysia 15,000 15,000 10,000
(set up in India) out of which ` 10,000
is received in India (See Note 1)
6. Agricultural income from a land in - - -
Gujarat (See Note 3)
7. Income from house property at London 42,000
(See Note 4)
Gross Total income 2,19,000 1,37,000 1,32,000
Less: Deduction under Chapter VI-A

Section 80TTA (See Note 5) 10,000 10,000 10,000
Total Income 2,09,000 1,27,000 1,22,000
Notes:
(1) As per section 5(1), global income is taxable in case of a resident. However, as per
section 5(2), in case of a non-resident, only the following incomes are chargeable to
tax in India:
(i) Income received or deemed to be received in India; and
(ii) Income accruing or arising or deemed to accrue or arise in India.
Further, the income which accrues or arise outside India would be chargeable to tax
in case of resident but not ordinarily resident in India, only if such income is derived
from a profession set up in India.
Accordingly, the entire interest from Canada Development Bonds and income fr om
profession in Malaysia would be chargeable to tax in the hands of Mr. Aakash, if he
is a resident in India.
If he is resident but not ordinarily resident then also entire income from profession in
Malaysia would be chargeable to tax in his hands, since the profession was set up
in India. Interest on Canada Development Bonds would be taxable only to the extent
received in India.
However, if he is non-resident then only that part of interest income and income
from profession which is received in India would be taxable in his hands.
(2) Dividend received in Malaysia from a Malaysian based company would be taxable in
the hands of Mr. Aakash, only if he is resident and ordinarily resident in India. If he
is a resident but not ordinarily resident or a non-resident, the same would not be
taxable in his hands in India since it has neither accrued or arisen in India nor is it
received in India.
(3) Agricultural income from a land situated in India is exempt under section 10(1) in
the case of both non-residents and residents.
(4) Likewise, rental income from property in London would also be taxable only if he is
resident in India. It has been assumed that the rental income is the gross annual
value of the property. Therefore, deduction @30% under section 24, has b een
provided and the net income so computed is taken into account for determining the
gross total income of a resident and ordinarily resident.
`
Rent received (assumed as gross annual value) 60,000
Less: Deduction under section 24 (30% of ` 60,000) 18,000
Income from house property 42,000
(5) In case of an individual, interest upto ` 10,000 from savings account with, inter alia,
a bank is allowable as deduction under section 80TTA, irrespective of the
residential status.
2. (a) False: As per section 10(10D)(c), any sum received under an insurance policy
issued on or after 1.4.2003 but on or before 31.03.2012, in respect of which the
premium payable for any year during the term of the policy exceeds 20% of actual
capital sum assured, shall not be exempt from tax. Since one-time premium of ` 10
lakh paid by him is in excess of 20% of the sum assured (i.e. it exceeds ` 2.6 lakh,
being 20% of ` 13 lakh), the amount of `18 lakh received from LIC is not exempt in
the hands of Mr. Rahim. Further, tax is deductible @1% under section 194DA on
such sum paid to Rahim, since the same is not exempt under section 10(10D) and
the amount exceeds ` 1 lakh.
(b) True: As per section 10(18), pension received by Mr. Sinha, a former Central
Government employee who is a Param Vir Chakra awardee, is exempt.
(c) False: As per section 10(10BC), any amount received or receivable as
compensation by an individual or his/her legal heir on account of any disaster from
the Central Government, State Government or a local authority is exempt from tax.
However, the exemption is not available to the extent such individual or legal heir
has already been allowed a deduction under this Act on account of such loss or
damage caused by such disaster.
(d) False: As per section 10(34), only income by way of dividend referred to in section
115-O shall be exempt in the hands of shareholders. Dividend distribution tax under
section 115-O is not leviable on deemed dividend under section 2(22)(e) and hence,
such deemed dividend is not exempt under section 10(34), in the hands of Mr. Q.
3. Computation of Total Income and tax liability of Mr. Narender for
A.Y. 2017 18
Particulars `
Basic salary [(` 50,000 7) + (` 60,000 5)] 6,50,000
Dearness Allowance (40% of basic salary) 2,60,000
Bonus (` 50,000 + 40% of ` 50,000) (See Note 1) 70,000
Employers contribution to recognised provident fund in excess of 26,000
12% of salary = 4% of ` 6,50,000
Professional tax paid by employer (See Note 5) 2,000
Perquisite of Motor Car (` 2,400 for 5 months) (See Note 3) 12,000
Gross Salary 10,20,000
Less: Deduction under section 16
Professional tax (See Note 5) 3,000
Taxable salary/ Gross Total Income 10,17,000

Deduction under section 80C (own contribution to 1,04,000
recognised provident fund)
Deduction under section 80D in respect of medical
insurance premium paid by cheque amounting to
` 25,700 but restricted to ` 25,000 (See Note-6) 25,000 1,29,000
Total Income 8,88,000
Tax on total income [` 25,000 + (` 8,88,000 - ` 5,00,000) x 20%] 1,02,600
Add: Education cess @ 2% 2,052
Add: Secondary and higher education cess @ 1% 1,026
Total tax liability 1,05,678
Tax Liability (rounded off) 1,05,680
Notes:
1. Since bonus was paid in the month of October, the basic salary of ` 50,000 for the
month of October is considered for its calculation.
2. As per Rule 3(7)(vii), facility of use of laptop and computer is an exempt perquisite,
whether used for official or personal purpose or both.
3. As per the provisions of Rule 3(2), in case a motor car (engine cubic capacity
exceeding 1.60 litres) owned by the employer is provided to the employee without
chauffeur for personal as well as office use, the value of perquisite shall be ` 2,400
per month. The car was provided to the employee from 01.11.2016, therefore the
perquisite value has been calculated for 5 months.
4. Mr. Narender can avail exemption under section 10(5) on the entire amount of
` 50,000 reimbursed by the employer towards Leave Travel Concession since the
same was availed for himself, his wife and three children and the journey was
undertaken by economy class airfare. The restriction imposed for two children is not
applicable in case of multiple births which take place after the first child.
It is assumed that the Leave Travel Concession was availed for journey within India.
5. As per section 17(2)(iv), a perquisite includes any sum paid by the employer in
respect of any obligation which, but for such payment, would have been payab le by
the assessee. Therefore, professional tax of ` 2,000 paid by the employer is taxable
as a perquisite in the hands of Mr. Narender. As per section 16(iii), a deduction from
the salary is allowable on account of tax on employment i.e. professional tax paid
during the year.
Therefore, in the present case, the professional tax paid by the employer on behalf
of the employee ` 2,000 is first included in the salary and deduction of the entire
professional tax of ` 3,000 is provided from salary.
6. Medical insurance premium paid in cash of ` 4,000 is not allowable as deduction
under section 80D. Further, deduction for medical insurance premium paid through
cheque is restricted to ` 25,000, which is the maximum deduction allowable.
4. In this case, Surbhi has more than one house property for self-occupation. As per section
23(4), Surbhi can avail the benefit of self-occupation (i.e., benefit of Nil Annual Value)
only in respect of one of the house properties, at her option. The other house property
would be treated as deemed let-out property, in respect of which the Expected rent
would be the gross annual value. Surbhi should, therefore, consider the most beneficial
option while deciding which house property should be treated by her as self -occupied.
OPTION 1 [House I Self-occupied and House II Deemed to be let out]
If House I is opted to be self-occupied, Surbhis income from house property for
A.Y.2017-18 would be
Particulars Amount in `
House I (Self-occupied) [Annual value is Nil] Nil
House II (Deemed to be let-out) [See Working Note below] 54,060
OPTION 2 [House I Deemed to be let out and House II Self-occupied]
If House II is opted to be self-occupied, Surbhis income from house property for
A.Y.2017-18 would be
Particulars Amount in `
House I (Deemed to be let-out) [See Working Note below] 70,000
House II (Self-occupied) [Annual value is Nil, but interest deduction
would be available, subject to a maximum of ` 30,000. In case of
money borrowed for repair of self-occupied property, the interest (30,000)
deduction would be restricted to ` 30,000, irrespective of the date of
borrowal].
Since Option 2 is more beneficial, Surbhi should opt to treat House - II as Self-
occupied and House I as Deemed to be let out, in which case, her income from
house property would be ` 40,000 for the A.Y. 2017-18.
Working Note:
Computation of income from House I and House II assuming that both are deemed
to be let out
Particulars Amount in Rupees
House I House II
Gross Annual Value (GAV)
Expected rent is the GAV of house property
Expected rent= Higher of Municipal Value and Fair Rent but 1,00,000 1,65,000
restricted to Standard Rent
Less: Municipal taxes (paid by the owner during the Nil 9,200
previous year)
Net Annual Value (NAV) 1,00,000 1,55,800
Less: Deductions under section 24
(a) 30% of NAV 30,000 46,740
(b) Interest on borrowed capital (allowed in full in
case of deemed let out property) - 55,000
Income from deemed to be let-out house property 70,000 54,060
5. (i) Yes. Since his total turnover for the F.Y.2016-17 is below ` 200 lakhs, he is eligible
to opt for presumptive taxation scheme under section 44AD in respect of his retail
trade business.
(ii) His income from retail trade, applying the presumptive tax provisions under section
44AD, would be ` 14,20,000, being 8% of ` 1,77,50,000.
[If it is assumed that Mr. Prakash has received whole of the amount of turnover by
account payee cheque or account payee bank draft or use of electronic clearing
system though a bank account, his income from retail trade, applying the
presumptive taxation provisions, would be ` 10,65,000, being 6% of ` 1,77,50,000].
(iii) Section 44AB makes it obligatory for every person carrying on business to get his
accounts of any previous year audited if his total sales, turnover or gross receipts
exceed ` 1 crore. However, if an eligible person opts for presumptive taxation
scheme as per section 44AD(1), he shall not be required to get his accounts audited
if the total turnover or gross receipts of the relevant previous year does not exceed
` 2 crore. The CBDT, has vide its Press Release dated 20th June, 2016, clarified
that the higher threshold for non-audit of accounts has been given only to
assessees opting for presumptive taxation scheme under section 44AD.
In this case, if Mr. Prakash does not opt for the presumptive taxation scheme under
section 44AD, he has to get his books of accounts audited and furnish a report of
such audit under section 44AB, since his turnover exceeds ` 1 crore during the
P.Y.2016-17.
(iv) In case he opts for the presumptive taxation scheme under section 44AD, the due
date would be 31 st July, 2017.
In case he does not opt for the presumptive taxation scheme, he is required to get
his books of account audited, in which case the due date for filing of return would be
30th September, 2017.
6. Computation of total income of Mr. Mittal for the A.Y.2017-18
Particulars ` `
Capital Gains:
Sale price of the residential house 34,00,000
Valuation as per Stamp Valuation authority 43,00,000
(Value to be taken is the higher of actual sale price or
valuation adopted for stamp duty purpose as per
section 50C)
Therefore, Consideration for the purpose of Capital 43,00,000
Gains
Less: Indexed Cost of Acquisition
` 5,00,000 x 1125/244 23,05,328
19,94,672
Less: Exemption under section 54 ` 10,00,000
Exemption under section 54EC ` 5,00,000 15,00,000
Long-term capital gains 4,94,672
Income from other sources:
Interest on bank fixed deposits 32,000
Gross Total Income 5,26,672
Section 80C Deposit in PPF (restricted to
` 32,000) [See Note (ii)] 32,000
Computation of Tax liability of Mr. Mittal for A.Y. 2017-18
Particulars `
Tax on ` 2,44,672 @ 20% [i.e. long term capital gain less basic exemption 48,934
limit (` 4,94,672- ` 2,50,000)] [See Note (i)]
Less: Rebate u/s 87A 5,000

43,934
Add: Education Cess@2% & SHEC @ 1% 1,318
Tax Payable 45,252
Tax Payable (Rounded off) 45,250
Notes:
(i) The basic exemption limit of ` 2,50,000 can be adjusted against long term capital
gains.
(ii) Deduction under section 80C should be restricted to gross total income excluding
long term capital gain.
7. Computation of Income from other sources of Mr. Krishna for theA.Y.2017 -18
Particulars `
(1) Cash gift is taxable under section 56(2)(vii), since it exceeds 70,000
` 50,000
(2) Since bullion is included in the definition of property, therefore, 51,000
when bullion is received without consideration, the same is
taxable, since the aggregate fair market value exceeds ` 50,000
(3) Stamp value of plot of land at Ghaziabad, received without 5,00,000
consideration, is taxable under section 56(2)(vii)
(4) Difference of ` 2 lakh in the value of shares of ABC Ltd. -
purchased from Mr. Pankaj, a dealer in shares, is not taxable as it
represents the stock-in-trade of Mr. Krishna. Since Mr. Krishna is
a dealer in shares and it has been mentioned that the shares were
subsequently sold in the course of his business, such shares
represent the stock-in-trade of Mr. Krishna.
(5) Difference between the stamp duty value of ` 23 lakh on the date
of booking and the actual consideration of ` 20 lakh paid is 3,00,000
taxable under section 56(2)(vii) [See Note (i)].
Income from Other Sources 9,21,000
Computation of Capital Gains of Mr. Krishna for the A.Y.2017-18
Particulars `
Sale Consideration 7,00,000
Less: Cost of acquisition [deemed to be the stamp value charged to 5,00,000
tax under section 56(2)(vii) as per section 49(4)] [See Note (ii)]
Short-term capital gains 2,00,000
Notes:
(i) As per the first and second proviso to section 56(2)(vii)(b), the stamp duty value
may be taken as on the date of agreement instead of the date of registration, if the
date of the agreement fixing the amount of consideration for the transfer of the
immovable property and the date of registration are not the same, provided at least
a part of the consideration has been paid by any mode other than cash on or before
the date of agreement.
Since Mr. Krishna had paid ` 1 lakh by account payee cheque, the difference
between the stamp duty value on the date of agreement and the consideration
would be chargeable to tax under the head Income from other sources.
(ii) The resultant capital gains on sale of plot of land at Ghaziabad will be short-term
capital gains, since for calculating the period of holding in a case covered under
section 49(4), the period of holding of previous owner is not to be considered.
8. In the given case, Mr. Kabir gifted a sum of ` 9 lakhs to his brothers minor son on
20.5.2016 and simultaneously, his brother gifted debentures worth ` 10 lakhs to
Mr. Kabirs wife on 25.5.2016. Mr. Kabirs brothers minor son invested the gifted amount
of ` 9 lakhs in fixed deposit with Bank of India.
These transfers are in the nature of cross transfers. Accordingly, the income from the
assets transferred would be assessed in the hands of the deemed transferor because the
transfers are so intimately connected to form part of a single transaction and each
transfer constitutes consideration for the other by being mutual or otherwise.
If two transactions are inter-connected and are part of the same transaction in such a
way that it can be said that the circuitous method was adopted as a device to evade tax,
the implication of clubbing provisions would be attracted 2.
As per section 64(1A), all income of a minor child is includible in the hands of the parent,
whose total income, before including minors income is higher. Accordingly, the interest
income arising to Mr. Kabirs brothers son from fixed deposits would be included in the
total income of Mr. Kabirs brother, assuming that Mr. Kabirs brothers total income is
higher than his wifes total income, before including minors income. Mr. Kabirs brother
can claim exemption of ` 1,500 under section 10(32).
Interest on debentures arising in the hands of Mrs. Kabir would be taxable in the hands
of Mr. Kabir as per section 64(1)(iv).
2 It was so held by the Apex Court in CIT vs. Keshavji Morarji (1967) 66 ITR 142.
This is because both Mr. Kabir and his brother are the indirect transferors of the income to
their spouse and minor son, respectively, with an intention to reduce their burden of taxation.
In the hands of Mr. Kabir, interest received by his spouse on debentures of ` 9 lakhs
alone would be included and not the entire interest income on the debentures of ` 10
lakhs, since the cross transfer is only to the extent of ` 9 lakhs.
Hence, only proportional interest (i.e., 9/10th of interest on debentures received)
` 72,900 would be includible in the hands of Mr. Kabir.
The provisions of section 56(2)(vii) are not attracted in respect of sum of money
transferred or value of debentures transferred, since in both the cases, the transfer is
from a relative.
9. Computation of total income of Mr. Virat for the A.Y.2017-18
Particulars ` `
Salaries
Income from Salary 2,50,000
Less: Loss from house property set-off against salary income
as per section 71(1) 1,50,000 1,00,000
Income from trading business 45,000
Less: Brought forward loss from trading business of A.Y.
2013-14 can be set off against current year income from
trading business as per section 72(1), since the eight year 5,000 40,000
time limit as specified under section 72(3), within which set-off
is permitted, has not expired.
Income from speculative business X 5,000
Less: Loss from speculative business Y set-off as per section 73(1) 25,000
[Loss from speculative business Y to be carried forward to
A.Y.2018-19 as per section 73(2)] 20,000
Loss from specified business covered under section 35AD to
be carried forward for set-off against income from specified 20,000
business as per section 73A.
Capital Gains
Long term capital gain on sale of urban land 2,00,000
Less: Long term capital loss on sale of shares (STT not paid)
set-off as per section 74(1)] 75,000 1,25,000
Long-term capital loss of ` 82,000 on sale of listed shares on
which STT is paid cannot be set-off against long-term capital

gain on sale of urban land since loss from an exempt source
cannot be set-off against profit from a taxable source.
Losses eligible for carried forward to A.Y.2018-19
Particulars `
Loss from speculative business Y 20,000
Loss from speculative business can be set-off only against profits from any
other speculation business. As per section 73(2), balance loss not set -off
can be carried forward to the next year for set-off against speculative
business income of that year. Such loss can be carried forward for a
maximum of four assessment years i.e., upto A.Y.2021-22, in this case, as
specified under section 73(4).
Loss from specified business 20,000
Loss from specified business under section 35AD can be set-off only
against profits of any other specified business. If loss cannot be so set-off,
the same has to be carried forward to the subsequent year for set off
against income from specified business, if any, in that year. As per section
73A(2), such loss can be carried forward indefinitely for set-off against
profits of any specified business .
Loss from the activity of owning and maintaining race horses 2,000
Losses from the activity of owning and maintaining race horses (current
year or brought forward) can be set-off only against income from the
activity of owning and maintaining race horses. If it cannot be so set -off, it
has to be carried forward to the next year for set-off against income from
the activity of owning and maintaining race horses, if any, in that year. It
can be carried forward for a maximum of four assessment years, i.e., upto
A.Y.2020-21, in this case as specified under section 74A(3).
10. Computation of Total Income of Mr. Shiva for A.Y. 2017-18
Particulars ` `
Gross Total Income 7,75,000
Less: Deduction under section 80C
Life insurance premium paid for insurance of major
daughter (Maximum 10% of the assured value ` 1,80,000, as
the policy is taken after 31.3.2012) 18,000
Deduction under section 80CCC
LIC pension fund 60,000
Deduction under section 80D

Medical Insurance premium in respect of self and spouse 26,000
(Since Mr. Shiva is a senior citizen, he is eligible for
deduction of actual premium paid subject to a maximum of
` 30,000)
Deduction under section 80G (See Working Note
below) 91,050 1,95,050
Total income 5,79,950
Working Note:
Computation of deduction under section 80G
Particulars of donation Amount % of deduction Deduction
donated u/s 80G
(`) (`)
(i) National Childrens Fund 25,000 100% 25,000
(ii) Jawaharlal Nehru Memorial 25,000 50% 12,500
Fund
(iii)Approved institution for 40,000 100%, subject to 40,000
promotion of family planning qualifying limit
(iv) Public Charitable Institution 1,50,000 50% subject to
qualifying limit
(See Note below) 13,550
91,050
Note - Adjusted total income = Gross Total Income Amount of deductions under
section 80C to 80U except section 80G i.e., ` 6,71,000 (` 7,75,000 ` 18,000
` 60,000 ` 26,000), in this case.
` 67,100, being 10% of adjusted total income is the qualifying limit, in this case.
Firstly, donation of ` 40,000 to approved institution for family planning qualifying for
100% deduction subject to qualifying limit, has to be adjusted against this a mount.
Thereafter, donation to public charitable trust qualifying for 50% deduction, subject to
qualifying limit is adjusted. Hence, the contribution of ` 1,50,000 to public charitable
trust is restricted to ` 27,100 (being, ` 67,100 - ` 40,000), 50% of which would be
allowed as deduction under section 80G. Therefore, the deduction under section 80G
in respect of donation to public charitable trust would be ` 13,550, which is 50% of
` 27,100.
11. Computation of total income of Mr. Rajiv for the A.Y.2017-18

Particulars ` `
Income from wholesale business
Net profit as per books 5,60,000
Add: Depreciation as per books 34,000
Disallowance of municipal taxes paid for the second half-
year under section 43B, since the same was paid after the
due date of filing of return (` 7,000/2) 3,500
Disallowance under section 40A(3) in respect of salary paid
in cash since the same exceeds ` 20,000 21,000
20% of car expenses for personal use 8,000 66,500
6,26,500
Less: Depreciation allowable (Note 1) 1,10,400
5,16,100
Income from firm

Interest on capital from partnership firm (Note 2) 1,20,000
6,36,100
Income from other sources
Interest on bank fixed deposit (Gross) 15,000
Interest on income-tax refund 2,300 17,300
Gross total income 6,53,400
Less: Deduction under Chapter VIA (Note 3) 1,30,000
Notes:
(1) Depreciation allowable under the Income-tax Rules, 1962
Opening WDV Rate Depre- Closing
ciation WDV
Block 1 Computers 1,20,000 60% 72,000 48,000
Block 2 Motor Car 3,20,000 15% 48,000
Less: 20% disallowance for 9,600 38,400 2,81,600
personal use
1,10,400
(2) Only to the extent the interest is allowed as deduction in the hands of the firm, the
same is includible as business income in the hands of the partner. Maximum
interest allowable as deduction in the hands of the firm is 12% p.a. It is assumed
that the partnership deed provides for the same and hence is allowable to this
extent in the hands of the firm. Therefore, interest @12% p.a. amounting to
` 1,20,000 would be treated as the business income of Mr. Rajiv.
(3) Deduction under Chapter VI-A
Particulars ` `
Under section 80C
LIP for independent son 60,000
PPF paid in wifes name 70,000
1,30,000
Since the maximum deduction under section 80C
and 80CCE is ` 1,50,000, the entire sum of
` 1,30,000 would be allowed as deduction 1,30,000
Total deduction 1,30,000
12. (a) As per section 194J, liability to deduct tax is attracted only in case the payment
made as fees for technical services and royalty, individually, exceeds
` 30,000 during the financial year. In the given case, since, the individual payments
for fee of technical services i.e. ` 22,000 and royalty ` 25,000 is less than ` 30,000
each, there is no liability to deduct tax at source. It is assumed that no other
payment towards fees for technical services and royalty were made during the year
to Mr. Ram.
(b) According to section 194C, the definition of work does not include the
manufacturing or supply of product according to the specification by customer in
case the material is purchased from a person other than the customer.
Therefore, there is no liability to deduct tax at source in respect of payment of
` 2,00,000to Mr. X, since the contract is a contract for sale.
(c) As per section 194-I, tax is to be deducted @ 2% on payment of rent for plant and
machinery, only if the payment exceeds ` 1,80,000 during the financial year. Since
rent of ` 1,50,000 paid by a partnership firm does not exceed ` 1,80,000, tax is not
deductible.
13. Return of income to be verified by whom
Person Return of income to be verified by
(i) Local authority The principal officer
(ii) Firm, having no managing partner Any partner of the firm, not being a minor
(iii) Non-resident Company A person who holds a valid power of
attorney from such company to do so
(iv) Political party Chief executive officer of such party
Section B: Indirect Taxes
QUESTIONS
Computation of excise duty
1. Apni Rasoi is a leading manufacturer of pressure cookers. Legal Metrology Act, 2009
requires declaration of retail sale price on the package of pressure cookers and pressure
cookers are also notified under section 4A of Central Excise Act, 1944 [Retail Sale Price
(RSP) based valuation] with notified rate of abatement of 25%.
Calculate excise duty payable on 50 pieces cleared during April, 2017 using the following
information furnished by Apni Rasoi assuming the rate of excise duty as 12.5%.
No. of Particulars
pieces
sold
10 RSPs printed on the package of pressure cooker are ` 4,500 and
` 3,800.
20 RSP printed on the package of 15 pieces sold in Delhi is ` 3,000 per piece
RSP printed on the package of 5 pieces sold in Haryana is ` 2,800 per
piece
20 RSP printed on the date of removal of package from factory is ` 3500
per unit. However, after removal from factory RSP is increased to
` 4,100 per piece
Would the provisions of section 4A of Central Excise Act, 1944 apply had the goods not
been notified by Central Government and manufacturer voluntarily affixed RSP on the
products?
Computation of customs duty
2. Shiv Importers imports a carton of goods from China on 10.01.2017 containing 10,000
pieces valued at ` 2,00,000 (assessable value in terms of section 14 of the Customs Act,
1962). On the said product, customs duty @ 10% and excise duty @ 12.5% ad valorem
is leviable.
Similar products in India are assessable under section 4A of Central Excise Act 1944, after
allowing an abatement of 30%. MRP printed on package at the time of import is
` 50 per piece. Special CVD under section 3(5) of the Customs Tariff Act, 1975 is also
applicable on such goods. Determine the total customs duties payable on the imported
goods.
Applicability of central sales tax

3. Briefly explain whether central sales tax will be applicable:
(i) when goods are sent by dealer outside the State to his other place of business.
(ii) if at the time of stock transfer outside the State, dealer has an order for such sale in hand.
Computation of VAT liability
4. Mr. Kedar of Kolkata purchased goods from Mr. Badri of Kolkata amounting to
` 8,55,000 including VAT @ 12.50% in the month of January, 2017. He incurred
` 1,00,000 as manufacturing & other expenses and added profit @ 25% on cost.
Mr. Kedar sold 80% of the goods to Mr. Vishal of Kolkata and charged VAT @ 12.50% on
02.02.2017. Remaining 20% of the goods were transferred to his branch in Manipur on
05.02.2017.
Compute the net VAT payable and input tax credit, if any, for the month of February, 2017
by assuming input output ratio to be 1:1.
Basic concepts of service tax
5. Shambhu & Co. is a consultancy firm based in New Delhi. It has two branch offices at
Mumbai and Singapore. Services are provided by Mumbai branch to Head Office at New
Delhi and by Head Office at New Delhi to Singapore branch. Explain which of the activities
will constitute service under service tax law?
Point of taxation
6. Vasudev Ltd. provided business support services to Kailash on 10th March, 2017 for
` 50,000. The invoice for the same was issued on 20 th March, 2017. Vasudev Ltd.
received the payment against the said invoice on 15 th March, 2017 vide cheque dated
12th March, 2017. The entry for the receipt of payment was made in the books of accounts
on 15th March, 2017 itself. However, the amount was credited in the bank A/c on 25 th
March, 2017.
Determine the point of taxation in the given case.
Payment of service tax at special rates
7. Compute the service tax liability of Mr. Govind, an air travel agent, for the quarter ended
March 31, 2017 using the following details:
Particulars `
Basic air fare collected for domestic booking of tickets 40,00,000
Basic air fare collected for international booking of tickets 60,00,000
Commission received from the airlines on the sale of domestic and 5,00,000
international tickets
In the above case, would the service tax liability of Mr. Govind be reduced if he opts for
the special provision for payment of service tax as provided under rule 6 of the Service
Tax Rules, 1994 instead of paying service tax at normal rates?
Notes:
1. Mr. Govind is not eligible for the small service providers exemption under Notification
No. 33/2012 ST dated 20.06.2012.
2. Service tax and cesses have been charged separately.
Computation of service tax liability
8. Compute the service tax including SBC and KKC payable on the services provided in each
of the following independent cases:
Services `
Sale of space for advertisement in a leading newspaper 2,15,000
Services related to preparation of advertisement 60,000
Sale of space for advertisements on internet websites 40,000
Sale of time for advertisement to be broadcast on TV Channel 1,50,000
Advertising in business directories 30,000
Advertising on film screen in theatres 1,00,000
Note: All the amounts stated above are exclusive of service tax and cesses. Ignore
exemption available to small service providers.
Exemptions under service tax
9. Shri Balaji Hospital has received the following amounts in the month of April, 2017 in lieu
of various services rendered by it in the same month. You are required to determine its
service tax liability for April, 2017 from the details furnished below:
S. Particulars `
No. (in lakh)
(i) Services provided by cord blood bank unit of the nursing home by 24
way of preservation of stem cells
(ii) Hair transplant services 100
(iii) Naturopathy treatments. Such treatment is a recognized system of 80
medicine in terms of section 2(h) of the Clinical Establishments Act,
2010
(iv) Plastic surgery to restore anatomy of a child affected due to an 30
accident.
(v) Pranic healing treatments. Such treatment is not a recognized 120

system of medicine in terms of section 2(h) of the Clinical
Establishments Act, 2010
(vi) Mortuary services 10
Shri Balaji Hospital does not have its own ambulances so it avails ambulance services
from Safety Unit, an ambulance service provider, to transport critically ill patients from
various locations to the Hospital. Examine whether Safety Unit would be charging any
service tax from Shri Balaji Hospital on the services provided by them.
Note: All the amounts given above are exclusive of service tax and cesses. Further, Shri
Balaji Hospital is not eligible for the small service providers exemption under Notification
No. 33/2012-ST dated 20.06.2012. Point of taxation for the services rendered by Shri
Balaji Hospital in the month of April, 2017 fall in the month of April itself.
Service Tax Procedures
10. Mr. A, a Delhi resident, submits a cab request to Safe and Swift Cabs for travelling from
Delhi to Noida. Safe and Swift Cabs is a mobile application owned and managed by Safe
and Swift Technologies Ltd. located in India. The application facilitates a potential
customer to connect with persons providing cab service under the brand name of Safe and
Swift Cabs. After Mr. A pays the cab charges using his debit card, he gets details of the
driver, Mr. X and the cabs registration number.
With reference to the Service Tax Rules, 1994, discuss who is liable to pay service tax in
this case. Will your answer be different, if Safe and Swift Technologies Ltd. is located in
London and does not have a representative in India?
Interest on delayed payment of service tax
11. Compute the interest payable on delayed payment of service tax by service provider where
service tax has not been collected from service receivers in following cases:
Name of the service provider LMN Ltd. Hari
Service tax liability ` 1,00,000 ` 2,00,000
Delay in payment of service tax 10 days 20 days
Aggregate value of taxable services rendered in preceding financial year by LMN Ltd. was
` 35,00,000 and by Hari was ` 70,00,000.
CENVAT credit
12. Ram Pvt. Ltd. manufactures rubber slippers. Compute the CENVAT credit available with
Ram Pvt. Ltd. in respect of the following goods/services procured by it:
S. No. Particulars Excise Service tax paid

duty paid (including SBC &
(`) KKC) (`)
(i) Machine for manufacture of rubber soles 10,00,000
(ii) Rubber sheets for manufacture of slippers 5,00,000
(iii) Adhesives 50,000
(iv) Club Membership fee of employees 1,00,000
(v) Expenses incurred on advertising the 6,00,000
slippers on television
Note: Ram Pvt. Ltd. is not entitled to SSI exemption under Notification No. 8/2003 CE dated
01.03.2003.
1. Since Legal Metrology Act, 2009 requires declaration of retail sale price on the package of
pressure cooker and pressure cookers are also notified under section 4A of Central Excise
Act, 1944 (RSP based valuation provisions), excise duty will be payable on the basis of
RSP less abatement.
Particulars ` `
RSP of 10 pieces (10 `4,500) (Note-1) 45,000
Less: Abatement @ 25% 11,250
Assessable value (A) 33,750
RSP of 15 pieces sold in Delhi (15 ` 3,000) (Note-2) 45,000
Assessable value (B) 33,750
RSP of 5 pieces sold in Haryana (5 ` 2,800) (Note 2) 14,000
Assessable value (C) 10,500
RSP of 20 pieces (20 ` 4,100) (Note-3) 82,000
Assessable value (D) 61,500
Total assessable value (A) +(B)+(C)+(D) 1,39,500
Excise duty @ 12.5% [12.5% of ` 1,39,500] 17,437.50
Total excise duty payable (rounded off) 17,438
Notes:
1. Where more than one RSP is declared on the package of excisable goods, the
maximum of such price will be deemed to be the RSP.
2. If different RSPs on different packages are declared for different areas, each such
RSP is deemed to be the RSP.
3. If RSP on the package is increased after removal from factory, increased RSP would
be deemed to be the RSP.
All goods on which RSP has been declared will not be covered under the provisions of
section 4A. Only when the declaration of RSP on the goods is mandatory under the Legal
Metrology Act, 2009 or under any other law and such goods have been notified by the
Central Government for the purpose of section 4A, then the goods be valued under section
4A. Thus, provisions of section 4A of Central Excise Act, 1944 would not apply if the goods
had not been notified by Central Government and manufacturer voluntarily affixed RSP on
the products.
2. Computation of customs duty payable
Particulars `
Assessable value (A) (A) 2,00,000.00
Basic customs duty @ 10% of (A) (B) 20,000.00
CVD [Refer note below] (C) 43,750.00
Education cesses of customs @ 3% on [(B) + (C)] (D) 1,912.50
Value for computing special CVD [(A) + (B) + (C) + (D)] (E) 2,65,662.50
Special CVD @ 4% on (E) (rounded off) (F) 10,626.50
Total custom duty payable [(B) + (C) + (D) + (F)] [Rounded off] 76,289
Note: If imported goods are similar to goods covered under section 4A of the Central
Excise Act, 1944, CVD is payable on basis of MRP printed on the package less abatement,
as permissible. Therefore, CVD is computed as under:
Particulars `
Maximum retail price [10,000 pieces ` 50] 5,00,000
Less: Abatement @ 30% 1,50,000
Assessable value for CVD 3,50,000
CVD @ 12.5% of ` 3,50,000 43,750
3. (i) When the goods are sent by dealer outside the State to his other place of business,
such movement of goods is an inter-State stock transfer and is not liable to central
sales tax. The burden to prove that the inter-State movement of goods is stock
transfer, lies on the dealer and not on the Department. For this purpose, the dealer
has to submit a declaration obtained from his other place of business in Form F.
(ii) If at the time of stock transfer outside the State, the dealer has an order for such sale
in hand; movement of such goods shall be deemed to have been occasioned as a result
of sale. Therefore, such inter-State sale of goods will be liable to central sales tax.
4. Computation of Net VAT payable and input tax credit
Particulars `
Output VAT
Purchases of raw material 7,60,000
[excluding VAT of ` 95,000 (` 8,55,000 12.5/112.5)]
Manufacturing and other expenses 1,00,000
Cost of production 8,60,000
Cost of goods sold [80% of ` 8,60,000] 6,88,000
Add: Profit @ 25% on the cost of goods sold 1,72,000
Sale price 8,60,000
Output VAT payable @ 12.5% (A) 1,07,500
Input VAT
Input tax credit on raw materials used in manufacture of finished goods 76,000
that are sold [` 95,000 x 80%]
Input tax credit on raw materials used in manufacture of finished goods
that are stock transferred to Manipur
[` 7,60,000 20% (12.5 2) %]
(In case of inter-State stock transfer of finished goods, input tax paid on
inputs used in manufacture of such finished goods in excess of 2% is
available as input tax credit.) 15,960
Total input tax credit (B) 91,960
Net VAT payable (A) (B) 15,540
5. As per section 65B(44) of Finance Act, 1994, a service is an activity carried out by one
person for another person in lieu of a consideration. Further, Explanation 3 to section
65B(44) provides inter alia that an establishment of a person located in taxable territory
and another establishment of such person located in non-taxable territory are treated as
establishments of distinct persons. Also, as per explanation 4 to the said section, a person
carrying on a business through a branch in any territory is treated as having an
establishment in that territory.
Therefore, services provided by Mumbai branch to Head Office at New Delhi will not be
service in terms of section 65B(44) since both the establishments namely, Branch office
and Head office are located in the taxable territory and are thus, one and the same person.
However, when services are provided by Head Office at New Delhi to Singapore branch
(located in non-taxable territory), the two establishments are treated as establishments of
distinct persons and thus, the services provided in this case will constitute service under
service tax law.
6. In the given case, since the invoice is issued within the prescribed period of 30 days from
the date of completion of provision of service, the point of taxation, as per rule 3 of the
Point of Taxation Rules, 2011 shall be the:
(a) date of invoice (i.e. 20.03.2017)
or
(b) date of receipt of payment (i.e. 15.03.2017) [Refer note below]
whichever is earlier, i.e. 15.03.2017.
Note: Date of payment is:
(1) date on which the payment is entered in the books of account (i.e. 15.03.2017)
or
(2) date on which the payment is credited to the bank account of the person liable to pay
tax (i.e. 25.03.2017)
whichever is earlier, i.e. 15.03.2017 [Rule 2A of the Point of Taxation Rules, 2011].
7. As per rule 6 of the Service Tax (Determination of Value) Rules, 2006, only the commission
received by the air travel agent from the airlines is included in the value of taxable service.
The air fare collected by the air travel agent in respect of the service provided by him does
not form part of the value of taxable service. Accordingly, the service tax liability of
Mr. Govind would be computed as under:
Particulars `
Basic air fare collected for domestic booking of tickets Nil
Basic air fare collected for international booking of tickets Nil
Commission received from the airlines on the sale of domestic and
international tickets 5,00,000
Value of taxable service 5,00,000
Service tax @ 14% 70,000
Add: Swachh Bharat Cess (SBC) @ 0.5% (` 5,00,000 x 0.5%) 2,500
Add: Krishi Kalyan Cess (KKC) @ 0.5% (` 5,00,000 x 0.5%) 2,500
Service tax payable (including SBC & KKC) 75,000
However, if Mr. Govind opts for the special provision for payment of service tax as provided
under rule 6 of the Service Tax Rules, 1994, service tax liability would be computed as
under:
Particulars `
0.7% of the basic air fare collected for domestic booking of tickets 28,000
[` 40,00,000 0.7%]
1.4% of the basic air fare collected for international booking of tickets
[` 60,00,000 1.4%] 84,000
Service tax 1,12,000
0. 5 4,000
Add: Swachh Bharat Cess (SBC) @ 0.5% (` 1,12,000 x )
14
0. 5 4,000
Add: Krishi Kalyan Cess (KKC) @ 0.5% (` 1,12,000 x )
14
Service tax payable (including SBC & KKC) 1,20,000
Therefore, as can be seen from the above two computations of service tax, the service tax
liability of Mr. Govind would not be reduced in the aforesaid option.
8. As per section 66D(g) of the Finance Act, 1994, selling of space for advertisements in print
media is included in the negative list of services. In other words, advertisement in all media
except print media is liable to service tax. Therefore, sale of space for advertisements on
internet websites, sale of time for advertisement to be broadcast on TV Channel and
advertising on film screen in theatres are liable to service tax.
Further, definition of print media specifically excludes business directories. Therefore,
advertising in business directories attracts service tax.
Services related to preparation of advertisement are liable to service tax as they are not
included in the negative list.
Computation of service tax payable
Services Value of Service tax @
service ` 15% (including
SBC & KKC)
(`)
Sale of space for advertisement in a leading 2,15,000 Nil
newspaper
Services related to preparation of advertisement 60,000 9,000
Sale of space for advertisements on internet 40,000 6,000
websites
Sale of time for advertisement to be broadcast on 1,50,000 22,500

TV Channel
Advertising in business directories 30,000 4,500
Advertising on film screen in theatres 1,00,000 15,000
9. Computation of service tax liability of Shri Balaji Hospital for the month of
April, 2017
Particulars `
(in lakh)
Services provided by cord blood bank by way of preservation of stem -
cells [Note-2]
Hair transplant services [Note-1(a)] 1,00
Naturopathy treatments [Note-1(b)] -
Plastic surgery to restore anatomy of a child affected due to an accident -
[Note-1(c)]
Pranic healing treatments [Note-1(d)] 1,20
Mortuary services [Note 3] -
Value of taxable service 2,20
Service tax @ 14% [ ` 2,20,00,000 14%] 30.8
Add: SBC @ 0.5% (` 2,20,00,000 x 0.5%) 1.1
KKC @ 0.5% (` 2,20,00,000 x 0.5%) 1.1
Service tax liability (including SBC & KKC) 33
Notes:
(1) Health care services provided by, inter alia, a clinical establishment in any recognized
system of medicines in India is exempt from service tax vide Mega Exemption
Notification No. 25/2012 ST dated 20.06.2012.
(a) Hair transplant services are specifically excluded from the health care services,
and thus are not eligible for exemption.
(b) Since naturopathy is a recognized system of medicine in terms of section 2(h)
of the Clinical Establishments Act, 2010, it would be eligible for exemption.
(c) Health care service does not include inter alia cosmetic or plastic surgery,
except when undertaken to restore or to reconstruct anatomy or functions of
body affected due to congenital defects, developmental abnormalities, injury or
trauma. Hence, plastic surgery to restore anatomy of a child affected due to an
accident will be eligible for exemption.
(d) Since pranic healing treatment is not a recognized system of medicine in terms
of section 2(h) of the Clinical Establishments Act, 2010, it would not be eligible
for exemption.
(2) Services provided by cord blood banks by way of preservation of stem cells or any
other service in relation to such preservation are also exempt from service tax vide
Mega Exemption Notification No. 25/2012 ST dated 20.06.2012.
(3) Mortuary services are covered under negative list of services under section 66D of
the Finance Act, 1994. Hence, the same are not liable to service tax.
Services by way of transportation of the patient to and from a clinical establishment are
specifically included in the definition of health care services. Thus, ambulance services to
transport critically ill patients from various locations to Shri Balaji Hospital are eligible for
exemption. Furthermore, ambulance services provided by an entity which is not a clinical
establishment or an authorised medical practitioner or paramedics are also exempt from
service tax vide a separate entry in the Mega Exemption Notification No. 25/2012 ST dated
20.06.2012. Therefore, ambulance services provided by Safety Unit will also be exempt
from service tax. Thus, Safety Unit will not charge any service tax from Shri Balaji Hospital
on the ambulance services rendered by them.
10. Aggregator means a person, who owns and manages a web based software application ,
and by means of the application and a communication device, enables a potential customer
to connect with persons providing service of a particular kind under the brand name or
trade name of the aggregator. In relation to service provided by a person inv olving an
aggregator in any manner, the aggregator of the service is the person liable for paying
service tax.
Since in the given case, Safe and Swift Technologies Ltd. fulfills all the conditions of being
an aggregator, it will be liable to pay service tax under reverse charge.
However, where the aggregator neither has a physical presence nor does it have a
representative for any purpose in the taxable territory, it will have to appoint a person in
the taxable territory for the purpose of paying service tax and such person will be the
person liable for paying service tax. Therefore, Safe and Swift Technologies Ltd. will have
to appoint a person in India for the purpose of paying service tax if Safe and Swift
Technologies Ltd. is located in London and does not have a representative in India.
11. Computation of interest on delayed payment of service tax
Name of the service provider LMN Ltd. Hari
Service tax liability ` 1,00,000 ` 2,00,000
Delay in payment of service tax 10 days 20 days
Value of taxable services in previous ` 35,00,000 ` 70,00,000
financial year
Rate of interest 12% per annum 15% per annum
Interest (rounded off) [` 1,00,000 [` 2,00,000

(12/100) (10/365)] (15/100)
=` 329 (rounded off) (20/365)]
=` 1,644
(rounded off)
Note: As per section 75 of Finance Act, 1994 read with Notification No. 13/2016 ST dated
01.03.2016, in case of collection of any amount as service tax but failing to pay the amount
so collected to the credit of the Central Government on or before the date on which such
payment becomes due, the simple interest @ 24% p.a. is payable.
However, in all other cases, 15% simple interest p.a. is payable. Since in the above case,
service tax has not been collected, so simple interest @ 15% p.a. is payable.
Further, the applicable rate gets reduced by 3% for service providers whose turnover of
services does not exceed ` 60 lakh in the preceding financial year.
12. Computation of CENVAT credit available with Ram Pvt. Ltd.
Particulars `
Machine for manufacture of rubber soles [Note 1] 5,00,000
Rubber sheets for manufacture of slippers [Note 2] 5,00,000
Adhesives [Note 2] 50,000
Club membership fee of employees [Note 3] Nil
Expenses incurred on advertising the slippers on television [Note 4] 5,60,000
Total CENVAT credit available 16,10,000
Notes:
1. Since Ram Pvt. Ltd. is not a SSI unit, CENVAT credit of only upto 50% of the excise
duty paid is available in respect of the eligible capital goods, in the year of purchase
[Rule 4 of CENVAT Credit Rules, 2004 (CCR)].
2. Raw material (rubber sheets) and consumables (adhesives) are eligible inputs.
3. Services used primarily for personal use or consumption of any employee are
excluded from the definition of input service.
4. Advertising service is an eligible input service. Credit of SBC is not available since it
is not CENVATable. Further, since Ram Pvt. Ltd. is a manufacturer, credit of KKC is
also not available. So, credit of only service tax @ 14% is allowed.
PAPER 5: ADVANCED ACCOUNTING
PART I: ANNOUNCEMENTS STATING APPLICABILITY & NON-APPLICABILITY

For NOVEMBER, 2017 EXAMINATION
A. Applicable for November, 2017 Examination

I. Companies Act, 2013
Relevant Sections of the Companies Act, 2013 notified up to 30th April, 2017 will be
applicable for November, 2017 Examination.
II. Amendments made by MCA in the Companies (Accounting Standards) Rules,
2006
Amendments made by MCA on 30.3.2016 in the Companies (Accounting Standards)
Rules, 2006 have been made applicable for November, 2017 examination.
MCA has issued Companies (Accounting Standards) Amendment Rules, 2016 to
amend Companies (Accounting Standards) Rules, 2006 by incorporating the
references of the Companies Act, 2013, wherever applicable. Also, the Accounting
Standard (AS) 2, AS 4, AS 10, AS 13, AS 14, AS 21 and AS 29 as specified in these
Rules will substitute the corresponding Accounting Standards with the same number
as specified in Companies (Accounting Standards) Rules, 2006.
Following table summarizes the changes made by the Companies (Accounting
Standards) Amendment Rules, 2016 vis a vis the Companies (Accounting Standards)
Rules, 2006 in the accounting standards relevant for Paper 5:
Name of Para no. As per the As per the Implication
the Companies Companies
standard (Accounting (Accounting
Standards) Rules, Standards)
2006 Amendment Rules,
2016
AS 4 Footnote Pursuant to AS 29, All paragraphs of this Footnote
to AS 4 Provisions, Standard that deal has been
Contingent Liabilities with contingencies modified.
and Contingent are applicable only
Assets, becoming to the extent not
mandatory in respect covered by other
of accounting Accounting
periods commencing Standards
on or after 1-4-2004, prescribed by the
all paragraphs of this Central Government.
Standard that deal For example, the
with contingencies impairment of

(viz. paragraphs financial assets such
1(a), 2, 3.1, 4 (4.1 to as impairment of
4.4), 5 (5.1 to 5.6), 6, receivables
7 (7.1 to 7.3), 9.1 (commonly known as
(relevant portion), provision for bad and
9.2, 10, 11, 12 and doubtful debts) is
16) stand withdrawn governed by this
except to the extent Standard.
they deal with
impairment of assets
not covered by other
Indian Accounting
Standards. For
example, impairment
of receivables
(commonly referred
to as the provision
for bad and doubtful
debts), would
continue to be
covered by AS 4.
8.5 There are events There are events No liability
which, although they which, although they for
take place after the take place after the proposed
balance sheet date, balance sheet date, dividends
are sometimes are sometimes must be
reflected in the reflected in the created
financial statements financial statements now. Such
because of statutory because of statutory proposed
requirements or requirements or dividends
because of their because of their are to be
special nature. Such special nature. For disclosed in
items include the example, if dividends the notes.
amount of dividend are declared after
proposed or the balance sheet
declared by the date but before the
enterprise after the financial statements
balance sheet date are approved for
in respect of the issue, the dividends
period covered by are not recognized
the financial as a liability at the
statements. balance sheet date
PAPER 5 : ADVANCED ACCOUNTING 3
because no
obligation exists at
that time unless a
statute requires
otherwise. Such
dividends are
disclosed in the
notes.
14 Dividends stated to If an enterprise No liability
be in respect of the declares dividends for
period covered by to shareholders after proposed
the financial the balance sheet dividends
statements, which date, the enterprise should be
are proposed or should not recognise created
declared by the those dividends as a now. Such
enterprise after the liability at the proposed
balance sheet date balance sheet date dividends
but before approval unless a statute are to be
of the financial requires otherwise. disclosed in
statements, should Such dividends the notes.
be adjusted. should be disclosed
in notes.
AS 14 3(a) Amalgamation Amalgamation Definition of
means an means an Amalgamati
amalgamation amalgamation on has been
pursuant to the pursuant to the made
provisions of the provisions of the broader by
Companies Act, Companies Act, specifically
1956 or any other 2013 or any other including
statute which may be statute which may be merger.
applicable to applicable to
companies. companies and
includes merger.
18 and 39 In such cases the In such cases the Correspondi
statutory reserves statutory reserves ng debit on
are recorded in the are recorded in the account of
financial statements financial statements statutory
of the transferee of the transferee reserve in
company by a company by a case of
corresponding debit corresponding debit amalgamati
to a suitable account to a suitable account on in the
head (e.g., head (e.g., nature of
Amalgamation Amalgamation purchase is

Adjustment Adjustment termed as
Account) which is Reserve) which is Amalgamati
disclosed as a part of presented as a on
miscellaneous separate line item. Adjustment
expenditure or other When the identity of Reserve
similar category in the statutory and is now to
the balance sheet. reserves is no longer be
When the identity of required to be presented as
the statutory maintained, both the a separate
reserves is no longer reserves and the line item
required to be aforesaid account since there
maintained, both the are reversed. is not sub-
reserves and the heading like
aforesaid account miscellaneo
are reversed. us
expenditure
in Schedule
III to the
Companies
Act, 2013
AS 29 35 (An The amount of a The amount of a Now
extract) provision should not provision should not discounting
be discounted to its be discounted to its of provision
present value. present value except for
in case of decommissi
decommissioning, oning,
restoration and restoration
similar liabilities that and similar
are recognised as liabilities
cost of Property, should be
Plant and done as per
Equipment. The the pre-tax
discount rate (or discount
rates) should be a rate as
pre-tax rate (or mentioned
rates) that reflect(s) therein.
current market
assessments of the
time value of money
and the risks specific
to the liability. The
discount rate(s)
should not reflect

risks for which future
cash flow estimates
have been adjusted.
Periodic unwinding
of discount should
be recognized in the
statement of profit
and loss.
73 Transitional Discounting
Provisions of above
All the existing existing
provisions for provisions
decommissioning, and similar
restoration and liabilities
similar liabilities (see should be
paragraph 35) prospectivel
should be y, with the
discounted correspondi
prospectively, with ng effect to
the corresponding the related
effect to the related item of
item of property, property,
plant and equipment. plant and
equipment.
III Maintenance of Statutory Liquidity Ratio (SLR)
In exercise of the powers conferred by sub-section (2A) of Section 24 read with
Section 51 and Section 56 of the Banking Regulation Act, 1949 (10 of 1949) and in
partial modification of the Notification DBR.No.Ret.BC.63/12.01.001/2015 -16 dated
December 10, 2015, the Reserve Bank hereby specifies that:
(i) with effect from the dates given below, every scheduled commercial bank, local
area bank, primary co-operative bank, state co-operative bank and central
cooperative bank shall maintain in India assets (hereinafter referred to as SLR
assets) the value of which shall not, at the close of business on any day, be
less than:
(a) 20.75 per cent from October 1, 2016; and
(b) 20.50 per cent from January 7, 2017
of their total net demand and time liabilities in India as on the last Friday of the
second preceding fortnight, valued in accordance with the method of valuation
specified by the Reserve Bank from time to time; and
(ii) such SLR assets shall be maintained by:

A. Scheduled commercial banks and local area banks, as -
(a) cash; or
(b) gold as defined in Section 5(g) of Banking Regulation Act, 1949
valued at a price not exceeding the current market price: or
(c) unencumbered investment in any of the following instruments
[hereinafter referred to as Statutory Liquidity Ratio securities (SLR
securities)], namely:-
(1) Dated securities of the Government of India issued from time to
time under the market borrowing programme and the Market
Stabilization Scheme; or
(2) Treasury Bills of the Government of India; or 3) State
Development Loans (SDLs) of the State Governments issued
from time to time under the market borrowing programme:
(d) the deposit and unencumbered approved securities required, under
sub-section (2) of section 11 of the Banking Regulation Act, 1949(10
of 1949), to be made with the Reserve Bank by a banking company
incorporated outside India;
(e) any balance maintained by a scheduled bank with the Reserve Bank
in excess of the balance required to be maintained by it under section
42 of the Reserve Bank of India Act,1934 (2 of 1934);
Provided that the instruments referred to in items (1) to (3) above that have been
acquired under reverse repo with Reserve Bank of India, shall not be included as SLR
securities for the purpose of maintenance of SLR assets up to October 2, 2016.
IV Maintenance of Cash Reserve Ratio (CRR)
Reserve Bank of India has decided to reduce the Cash Reserve Ratio (CRR) of
Scheduled Commercial Banks by 25 basis points from 4.25 per cent to 4.00 per cent
of their Net Demand and Time Liabilities (NDTL) with effect from the fortnight
beginning February 09, 2013 vide circular DBOD.No.Ret.BC.76/ 12.01.001 /2012-13
dated January 29, 2013. The Local Area Banks shall also maintain CRR at 3.00 per
cent of its net demand and time liabilities up to February 08, 2013 and 4.00 per cent
of its net demand and time liabilities from the fortnight beginning from February 09,
2013.
B. Not applicable for November, 2017examination

Non-Applicability of Ind AS for November, 2017 Examination
The Ministry of Corporate Affairs has notified Companies (Indian Accounting Standards)
Rules, 2015 on 16 th February, 2015, for compliance by certain class of companies. These
Ind AS have not been made applicable for November, 2017 Examination.
PART II : QUESTIONS AND ANSWERS

QUESTIONS
Sale of Partnership firm to Company

1. XYZ & Co. is a partnership firm consisting of Mr. X, Mr. Y and Mr. Z who share profits and
losses in the ratio of 2:2:1 and ABC Ltd. is a company doing similar business.
Following is the summarized Balance Sheet of the firm and that of the company as at
31.3.2017:
Liabilities XYZ & Co. ABC Ltd. XYZ & Co. ABC Ltd.
` ` ` `
Equity share Plant & machinery 5,00,000 16,00,000
capital:
Equity shares of 20,00,000 Furniture & fixture 50,000 2,25,000
` 10 each
Partners capital: Inventories 2,00,000 8,50,000
X 2,00,000 Trade receivables 2,00,000 8,25,000
Y 3,00,000 Cash at bank 10,000 4,00,000
Z 1,00,000 Cash in hand 40,000 1,00,000
General reserve 1,00,000 7,00,000
Trade payables 3,00,000 13,00,000
10,00,000 40,00,000 10,00,000 40,00,000
It was decided that the firm XYZ & Co. be dissolved and all the assets (except cash in hand
and cash at bank) and all the liabilities of the firm be taken over by ABC Ltd. by issuing
50,000 shares of ` 10 each at a premium of ` 2 per share.
Partners of XYZ & Co. agreed to divide the shares issued by ABC Ltd. in the profit sharing
ratio and bring necessary cash for settlement of their capital.
The trade payables of XYZ & Co. includes ` 1,00,000 payable to ABC Ltd. An unrecorded
liability of ` 25,000 of XYZ & Co. must also be taken over by ABC Ltd.
Prepare:
(i) Realisation account, Partners capital accounts and Cash in hand/Bank account in
the books of XYZ & Co.
(ii) Pass journal entries in the books of ABC Ltd. for acquisition of XYZ & Co. and draw
the Balance Sheet after the takeover.
Conversion of Partnership Firm to Company
2. A and V, sharing profits and losses equally, desired to convert their business into a limited
company on 31st December, 2016 when their balance sheet stood as follows:
Liabilities ` ` Assets `
Sundry creditors 1,92,000 Sundry debtors 2,40,000
Loan creditors 1,60,000 Bills receivable 40,000
Bank overdraft 64,000 Stock in trade 1,44,000
Reserve fund 24,000 Patents 32,000
Capital accounts: Plant and machinery 64,000
A 1,60,000 Land and building 2,40,000
V 1,60,000 3,20,000
7,60,000 7,60,000
(a) The goodwill of the firm was to be valued at two years' purchase of the profits average
of the previous three years.
(b) The loan creditor was agreed to accept 7% redeemable preference shares in
settlement of his claim.
(c) Land and buildings and plant and machinery were to be valued at ` 4,00,000 and
` 96,000 respectively.
(d) The vendors (sundry creditors) were to be allotted equity shares of the value of
` 4,20,000.
(e) The past working results of the firm showed that they had made profits of
` 1,20,000 in 2014, ` 1,44,000 in 2015 and ` 1,68,000 in 2016 after setting aside
` 8,000 to reserve fund each year.
You are required to show realisation account and partners capital accounts in the books
of the firm assuming that all the transactions are duly completed.
Amalgamation of Partnership firms
3. A and B are partners of AB & Co. sharing profits and losses in the ratio of 2:1 and C and
D are partners of CD & Co. sharing profits and losses in the ratio of 3:2. On 1st April 201 7,
they decided to amalgamate and form a new firm M/s. AD & Co. wherein all the partners
of both the firm would be partners sharing profits and losses in the ratio of 2:1:3:2
respectively to A,B,C and D.
Their balance sheets on that date were as under:
Liabilities AB & Co. CD & Co. Assets AB & Co. CD &
(`) (`) (`) Co. (`)
Capitals
A 1,50,000 Building 75,000 90,000
B 1,00,000 Machinery 1,20,000 1,00,000
C 1,20,000 Furniture 15,000 12,000
D 80,000 Inventory 24,000 36,000
Reserve 66,000 54,000 Debtors 65,000 78,000
Creditors 52,000 35,000 Due from CD
Due to AB 47,000 & Co. 47,000
& Co. Cash at Bank 18,000 15,000
Cash in hand 4,000 5,000
3,68,000 3,36,000 3,68,000 3,36,000
The amalgamated firm took over the business on the following terms:
(a) Building was taken over at ` 1,00,000 and ` 1,25,000 of AB & Co. and CD & Co.
respectively and Machinery was taken over at ` 1,25,000 and ` 1,10,000 of AB & Co.
and CD & Co. respectively.
(b) Goodwill of AB & Co. was worth ` 75,000 and that of CD & Co. was worth ` 50,000.
Goodwill account was not to be opened in the books of the new firm, the adjustments
being recorded through capital accounts of the partners.
(c) Provision for doubtful debts has to be carried forward at ` 5,000 in respect of debtors
of AB & Co. and ` 8,000 in respect of CD & Co.
(i) Compute the adjustments necessary for goodwill.
(ii) Pass the Journal Entries in the books of AD & Co. assuming that excess/deficit capital
(taking Ds capital as base) with reference to share in profits are to be transferred to
current accounts.
Dissolution of partnership firm
4. (a) The partners P, Q & R have called you to assist them in winding up the affairs of their
partnership on 31.12.2016. Their balance sheet as on that date is given below:
Liabilities Amount ` Assets Amount `
Capital Accounts: Land & Building 50,000
P 65,000 Plant & Machinery 46,000

Q 50,500 Furniture & Fixture 10,000
R 32,000 Stock 14,500
Creditors 16,000 Debtors 14,000
Cash at Bank 9,000
Loan P 13,000
Loan Q 7,000
Total 1,63,500 Total 1,63,500
(a) The partners share profit and losses in the ratio of 4:3:2.
(b) Cash is distributed to the partners at the end of each month.
(c) A summary of liquidation transactions are as follows:
January 2017
` 9,000 - collected from debtors; balance is uncollectable.
` 8,000 - received from the sale of entire furniture
` 1,000 - Liquidation expenses paid.
` 6,000 - Cash retained in the business at the end of month
February 2017
As part payment of his capital, R accepted a machinery for ` 9,000 (book
value ` 3,500)
` 2,000 - Cash retained in the business at the end of month
March 2017
` 38,000 - received on the sale of remaining plant and machinery.
` 10,000 - received from the sale of entire stock.
` 41,000 - Received on sale of land & building.
No Cash is retained in the business.
You are required to prepare a schedule of cash payments amongst the partners by
"Higher Relative Capital Method".
Issues related to Accounting in LLPs
(b) What are the liabilities of designated partners in a LLP. Explain in brief.
ESOPs
5. A company has its share capital divided into shares of ` 10 each. On 1-1-20X1, it granted
5,000 employees stock options at ` 50, when the market price was ` 140. The options
were to be exercised between 1-3-20X2 to 31-03-20X2. The employees exercised their
options for 4,800 shares only; remaining options lapsed. Pass the necessary journal entries
for the year ended 31-3-20X2, with regard to employees stock options.
Buy Back of Securities
6. Alpha Limited furnishes the following summarized Balance Sheet as at 31 st March, 2017:
Liabilities (` in lakhs) Assets (` in lakhs)
Equity share capital 2,400 Machinery 3,600
(fully paid up shares of ` 10 each) Furniture 450
Securities premium 350 Investment 148
General reserve 530 Inventory 1,200
Capital redemption reserve 400 Trade receivables 500
Profit & loss A/c 340 Cash at bank 1,500
12% Debentures 1,500
Trade payables 1,400
Other current liabilities 478
7,398 7,398
On 1st April, 2017, the company announced the buy back of 25% of its equity shares
@ ` 15 per share. For this purpose, it sold all of its investments for ` 150 lakhs.
On 5th April, 2017, the company achieved the target of buy back.
(1) Pass necessary journal entries for the buy-back.
(2) Prepare Balance Sheet of Alpha Limited after buy-back of the shares.
Redemption of Debentures
7. Malik Ltd. have authorized capital of 8,00,000 equity shares of ` 10 each. But out of these
2,40,000 shares have been issued as fully paid.
The company has an outstanding 14% Debentures loan of ` 24,00,000 redeemable at 102
per cent and interest has been paid up to date on December 31, 2016. On that date, the
balance of the Debenture Redemption Reserve Account is ` 20,00,000 and corresponding
Investment Account ` 20,00,000 (at cost) of which the market value is ` 18,00,000.
The directors resolved to redeem the Debentures on January 1, 2017 and the holders are
given an option to receive payment either wholly in cash or wholly in fully paid equity shares
@ 8 shares for every ` 100 of debentures.
75% of the holders decided to exercise the option for taking shares in repayment and cash
for the rest is procured by realizing an adequate amount of investment at the prevailing
market value.
Draw up journal entries (including Cash Book Entries) to give effect to the above
transactions.
Underwriting of Shares and Debentures
8. Differentiate between Firm underwriting and Partial underwriting along with firm
underwriting.
Amalgamation of Companies
9. The following were the summarized Balance Sheets of P Ltd. and V Ltd. as at 31-3-20X1:
Liabilities P Ltd. V Ltd.
(` in lakhs) (` in lakhs)
Equity Share Capital (Fully paid shares of ` 10 each) 15,000 6,000
Foreign Project Reserve 310
General Reserve 9,500 3,200
Profit and Loss Account 2,870 825
Trade payables 1,200 463
Provisions 1,830 702
33,400 12,500
Assets P Ltd. V Ltd.

Land and Buildings 6,000
Plant and Machinery 14,000 5,000
Furniture, Fixtures and Fittings 2,304 1,700
Inventory 7,862 4,041
Trade receivables 2,120 1,100
Cash at Bank 1,114 609
Cost of Issue of Debentures 50
33,400 12,500
All the bills receivable held by V Ltd. were P Ltd.s acceptances.
On 1st April 20X1, P Ltd. took over V Ltd in an amalgamation in the nature of merger. It
was agreed that in discharge of consideration for the business P Ltd. would allot three fully
paid equity shares of ` 10 each at par for every two shares held in V Ltd. It was also agreed
that 12% debentures in V Ltd. would be converted into 13% debentures in P Ltd. of the
same amount and denomination.
Details of trade receivables and trade payables as under:
Assets P Ltd. V Ltd.
Trade payables
Bills Payable 120 -
Creditors 1,080 463
1,200 463
Trade receivables
Debtors 2,120 1,020
Bills Receivable 80
2,120 1,100
Expenses of amalgamation amounting to ` 1 lakh were borne by P Ltd.
(i) Pass journal entries in the books of P Ltd. and
(ii) Prepare P Ltd.s Balance Sheet immediately after the merger considering that the
cost of issue of debentures shown in the balance sheet of the V Ltd. company is not
transferred to the P Ltd. company.
Internal Reconstruction of a Company
10. Following is the summarized Balance Sheet of Ravi Limited as on 31 st March, 2017.
Balance Sheet as on 31 st March 2017
Liabilities Amount ` Assets Amount `
Authorised and Issued equity share Patent 4,00,000
capital:
30,000 shares of `100 each fully paid 30,00,000 Plant & machinery 30,00,000
20,000 7% cumulative preference 20,00,000 Building 5,50,000
shares of `100 each fully paid
General Reserve 6,00,000 Trade receivables 23,50,000
Loan from Director 4,40,000 Inventory 16,30,000
Trade Payables 24,60,000 Cash 1,20,000

Outstanding expenses 3,20,000 Bank Balance 2,30,000
Declared dividend 3,00,000 Profit and Loss
account 8,40,000
91,20,000 91,20,000
Note: The arrears of preference dividend amount to ` 2,80,000.
The company had suffered losses since last 3 years due to bad market conditions and
hope for a better position in the future.
The following scheme of reconstruction has been agreed upon and duly appr oved by all
concerned:
(1) Equity shares to be converted into 3,00,000 shares of `10 each.
(2) Equity shareholders to surrender to the company 80 percent of their holdings.
(3) Preference shareholders agree to forgo their right on arrears of dividends in
consideration of which 7% preference shares are to be converted into 8% preference
shares.
(4) Trade payables agree to reduce their claim by one fourth in consideration of their
getting shares of ` 5,00,000 out of the surrendered equity shares.
(5) Directors agree to forego the amounts due on account of loan.
(6) Surrendered shares not otherwise utilized to be cancelled.
(7) Assets to be reduced as under:
`
Patent by 4,00,000
Plant & Machinery by 4,00,000
Inventory by 3,40,000
(8) Trade receivables to the extent of ` 17,00,000 are considered good.
(9) Revalued figures for building is accepted at ` 7,00,000.
(10) Declared dividend is paid to the equity shareholders.
(11) Any surplus after meeting the losses should be utilized in writing down the value of
the plant further.
(12) Expenses of reconstruction amounted to ` 60,000.
(13) Further 40,000 equity shares were issued to the existing members for increasing the
working capital. The issue was fully subscribed and paid up.
You are required to pass the Journal Entries for giving effect to the above arrangement
and also to draw up the resultant Balance Sheet of the Company.
Liquidation of Company
11. The following is the summarized Balance Sheet of Shah Ltd. Co. which is in the han ds of
the liquidator:
Balance Sheet as at 31.3.2017
Share Capital: Fixed assets 2,00,000
1,000, 6% Preference Shares of Inventory 1,20,000
` 100 each, fully paid 1,00,000 Book debts 2,40,000
2,000 Equity shares of ` 100 each, Cash in hand 40,000
fully paid 2,00,000 Profit and loss A/c 3,00,000
2,000 Equity shares of ` 100 each `
75 paid up 1,50,000
Loan from bank (on security of stock) 1,00,000
Trade Payables 3,50,000
9,00,000 9,00,000
The assets realized the following amounts (after all costs of realization and liquidators
commission amounting to ` 5,000 paid out of cash in hand).
`
Fixed assets 1,68,000
Inventory 1,10,000
Trade Receivables 2,30,000
Calls on partly paid shares were made but the amounts due on 200 shares were found to
be irrecoverable.
You are required to prepare Liquidators Final Statement of Receipts and Payments.
Financial Statements of Insurance Companies
12. X Fire Insurance Co. Ltd. commenced its business on 1.4.20X1. It submits you the
following information for the year ended 31.3.20X2:
`
Premiums received 15,00,000
Re-insurance premiums paid 1,00,000
Claims paid 7,00,000
Expenses of Management 3,00,000

Commission paid 50,000
Claims outstanding on 31.3.20X2 1,00,000
Create reserve for unexpired risk @50%
Prepare Revenue account for the year ended 31.3.20X2.
Banking Companies
13. The following facts have been taken out from the records of City Bank Ltd. as on
31st March, 2017:
` `
Rebate on bill discounted (not due on March 31 st, 2016) 91,600
Discount received 4,05,000
Bill discounted 24,50,000
An analysis of the bills discounted is as follows:
Amount Due date Rate of discount
` 2017
(i) 7,50,000 April 8 12%
(ii) 3,00,000 May 5 14%
(iii) 4,40,000 June 12 14%
(iv) 9,60,000 July 15 15%
You are required to:-
(i) Calculate Rebate on Bill Discounted as on 31 st March, 2017.
(ii) The amount of discount to be credited to the profit and loss account.
Departmental Accounts
14. The following balances were extracted from the books of M/s Division. You are required
to prepare Departmental Trading Account and Profit and Loss account for the year ended
31st December, 2016 after adjusting the unrealized department profits if any.
Deptt. A Deptt. B
` `
Opening Stock 50,000 40,000
Purchases 6,50,000 9,10,000
Sales 10,00,000 15,00,000
General expenses incurred for both the departments were ` 1,25,000 and you are also
supplied with the following information: (a) Closing stock of Department A
` 1,00,000 including goods from Department B for ` 20,000 at cost of Department A. (b)
Closing stock of Department B ` 2,00,000 including goods from Department A for
` 30,000 at cost to Department B. (c) Opening stock of Department A and Department B
include goods of the value of ` 10,000 and ` 15,000 taken from Department B and
Department A respectively at cost to transferee departments. (d) The rate of gross profit is
uniform from year to year.
Branch Accounting
15. ABC Ltd. has head office at Delhi (India) and branch at New York (U.S.A). New York branch
is an integral foreign operation of ABC Ltd. New York branch furnishes you with its trial
balance as on 31st March, 2017 and the additional information given thereafter:
Dr. ($) Cr. ($)
Stock on 1st April, 2016 150
Purchases and sales 400 750
Sundry Debtors and creditors 200 150
Bills of exchange 60 120
Sundry expenses 540
Bank balance 210
Delhi head office A/c 540
1,560 1,560
The rates of exchange may be taken as follows:
on 1.4.2016 @ ` 40 per US $
on 31.3.2017 @ ` 42 per US $
average exchange rate for the year @ ` 41 per US $.
New York branch account showed a debit balance of ` 22,190 on 31.3.2017 in Delhi books
and there were no items pending reconciliation.
You are asked to prepare trial balance of New York branch in ` in the books of ABC Ltd.
Framework for Preparation and Presentation of Financial Statements
16. (a) With regard to financial statements name any four.
(1) Users
(2) Qualitative characteristics
(3) Elements
(b) What are fundamental accounting assumptions?
AS 4
17. (a) A company deals in petroleum products. The sale price of petrol is fixed by the
government. After the Balance Sheet date, but before the finalisation of the
companys accounts, the government unexpectedly increased the price
retrospectively. Can the company account for additional revenue at the close of the
year? Discuss in line with provisions of AS 4.
AS 5
(b) Explain whether the following will constitute a change in accounting policy or not as
per AS 5.
(i) Introduction of a formal retirement gratuity scheme by an employer in place of
ad hoc ex-gratia payments to employees on retirement.
(ii) Management decided to pay pension to those employees who have retired after
completing 5 years of service in the organistaion. Such employees will get
pension of ` 20,000 per month. Earlier there was no such scheme of pension
in the organization.
AS 11
18. (a) A company had imported raw materials worth US Dollars 6,00,000 on 5 th January,
2017, when the exchange rate was ` 43 per US Dollar. The company had recorded
the transaction in the books at the above mentioned rate. The payment for the import
transaction was made on 5 th April, 2017 when the exchange rate was ` 47 per US
Dollar. However, on 31 st March, 2017, the rate of exchange was ` 48 per US Dollar.
The company passed an entry on 31 st March, 2017 adjusting the cost of raw materials
consumed for the difference between ` 47 and ` 43 per US Dollar.
In the background of the relevant accounting standard, is the companys accounting
treatment correct? Discuss.
AS 12
(b) S Ltd. received a grant of ` 5,000 lakhs during the last accounting year (2015-16)
from government for welfare activities to be carried on by the company for its
employees. The grant prescribed conditions for its utilization. However, during the
year 2016-17, it was found that the conditions of grants were not complied with and
the grant had to be refunded to the government in full. Elucidate the correct
accounting treatment, with reference to the provisions of AS 12.
AS 16
19. (a) Suhana Ltd. issued 12% secured debentures of ` 100 Lakhs on 01.05.2016, to be
utilized as under:
Particulars Amount ( ` in lakhs)
Construction of factory building 40
Purchase of Machinery 35
Working Capital 25
In March 2017, construction of the factory building was completed and machinery was
installed and ready for it's intended use. Total interest on debentures for the financial
year ended 31.03.2017 was ` 11,00,000. During the year 2016-17, the company had
invested idle fund out of money raised from debentures in banks' fixed deposit and
had earned an interest of ` 2,00,000.
Show the treatment of interest under Accounting Standard 16 and also explain nature
of assets.
AS 26
(b) During 2016-17, an enterprise incurred costs to develop and produce a routine, low
risk computer software product, as follows:
Amount (`)
Completion of detailed programme and design 25,000
Coding and Testing 20,000
Other coding costs 42,000
Testing costs 12,000
Product masters for training materials 13,000
Packing the product (1,000 units) 11,000
What amount should be capitalized as software costs in the books of the company,
on Balance Sheet date?
AS 20
20. (a) Compute Basic and Adjusted Earnings per share from the following information:
Net Profit for 2015-16 ` 22 lakhs
Net Profit for 2016-17 ` 33 lakhs
No. of shares before Rights Issue 1,10,000
Rights issue Ratio One for Every Four Held
Rights Issue Price ` 180
Date of exercising Rights option 31.7.2016 (fully subscribed on this date)
Fair value of share before Rights Issue ` 270
All workings may be rounded off to two decimals.
AS 29
(b) An airline is required by law to overhaul its aircraft once in every five years. The
pacific Airlines which operate aircrafts does not provide any provision as required by
law in its final accounts. Discuss with reference to relevant Accounting Standard 29.
SUGGESTED ANSWERS
1. (i) In the books of XYZ & Co.

Realisation Account
` `
To Plant & Machinery 5,00,000 By Trade payables 3,00,000
To Furniture & Fixture 50,000 By ABC Ltd. (Refer W.N.) 6,00,000
To Inventories 2,00,000 By Partners Capital Accounts
(loss):
To Trade receivables 2,00,000 Xs Capital A/c 20,000
Ys Capital A/c 20,000
Zs Capital A/c 10,000
9,50,000 9,50,000
Partners Capital Accounts
X Y Z X Y Z
` ` ` ` ` `
To Realisation 20,000 20,000 10,000 By Balance b/d 2,00,000 3,00,000 1,00,000
A/c
To Shares in 2,40,000 2,40,000 1,20,000 By General 40,000 40,000 20,000
ABC Ltd. Reserve
To Cash A/c - 80,000 - By Cash A/c 20,000 - 10,000
2,60,000 3,40,000 1,30,000 2,60,000 3,40,000 1,30,000
Cash and Bank Account

Cash Bank Cash Bank
` ` ` `
To Balance b/d 40,000 10,000 By Cash A/c 10,000
(Contra)
To Bank A/c 10,000 By Y 80,000
(Contra)*
To X 20,000
It is assumed that cash at bank has been withdrawn to pay ` 80,000 to partner Y. However, payment
to Y of ` 80,000 can also be made by cash ` 70,000 & by cheque ` 10,000.
To Z 10,000
80,000 10,000 80,000 10,000
(ii) In the Books of ABC Ltd.
Journal Entries
Dr. (`) Cr. (`)
1. Business Purchase Account Dr. 6,00,000
To XYZ & Co. 6,00,000
(Being business of XYZ & Co. purchased and
payment due)
2. Plant and Machinery Account Dr. 5,00,000
Furniture and Fixture Account Dr. 50,000
Inventories Account Dr. 2,00,000
Trade Receivables Account Dr. 2,00,000
To Trade Payables Account 3,00,000
To Unrecorded Liability Account 25,000
To Business Purchase Account 6,00,000
To Capital Reserve Account (Bal. Fig.) 25,000
(Being take over of all assets and liabilities)
3. XYZ & Co. Dr. 6,00,000
To Equity Share Capital Account 5,00,000
To Securities Premium Account 1,00,000
(Being purchase consideration discharged in
the form of shares of ` 10 each issued at a
premium of ` 2 each)
4. Trade Payables Account Dr. 1,00,000
To Trade Receivables Account 1,00,000
(Being mutual owings eliminated)
Balance Sheet of ABC Ltd. (After take over of XYZ & Co.)
as at 31.3.2017
Note No. `
Shareholders funds
Share capital 1 25,00,000

Reserve and Surplus 2 8,25,000
Current liabilities
Trade Payables (3,00,000 + 13,00,000 1,00,000) 15,00,000
Others (Unrecorded Liability) 25,000
Total 48,50,000
Assets
Non-current assets
Fixed assets
Current assets
Inventories (2,00,000 + 8,50,000) 10,50,000
Trade Receivables (2,00,000 + 8,25,000 1,00,000) 9,25,000
Cash and cash equivalent 4 5,00,000
Total 48,50,000
Notes to Accounts
`
1. Share Capital
2,50,000, Equity shares of ` 10 each fully paid 25,00,000
up
(out of which 50,000 shares has been issued for
consideration other than cash)
2 Reserve and Surplus
Securities Premium 1,00,000
Capital Reserve 25,000
General Reserve 7,00,000 8,25,000
3. Tangible assets
Plant and Machinery (5,00,000 + 16,00,000) 21,00,000
Furniture and fixture (50,000 + 2,25,000) 2,75,000 23,75,000
4. Cash and cash equivalent
Cash at Bank 4,00,000
Cash in hand 1,00,000 5,00,000
Working Note:
Computation of purchase consideration:
50,000, Equity shares of ` 12 (10+2) each = ` 6,00,000
Equity shares distributed among partners:
Partner X = 20,000 shares @ ` 12 = ` 2,40,000
Partner Y = 20,000 shares @ ` 12 = ` 2,40,000
Partner Z = 10,000 shares @ ` 12 = ` 1,20,000
` 6,00,000
2. Books of A and V
Realisation Account
` ` `
To Sundry debtors 2,40,000 By Sundry creditors 1,92,000
To Bills receivable 40,000 By Loan creditors 1,60,000
To Stock in trade 1,44,000 By Bank overdraft 64,000
To Patents 32,000 By Purchasing Company 8,40,000
To Plant and Machinery 64,000 (W.N. 2)
To Land and Building 2,40,000
To Capital A/c (Profit)
A 2,48,000
V 2,48,000 4,96,000
12,56,000 12,56,000
Partners Capital Accounts

A V A V
` ` ` `
To Shares in Purchasing Co. 4,20,000 4,20,000 By Balance b/d 1,60,000 1,60,000
By Reserves 12,000 12,000
By Realization A/c 2,48,000 2,48,000
4,20,000 4,20,000 4,20,000 4,20,000
Working Notes:
1. Goodwill = (1,20,000 + 1,44,000 + 1,68,000 + 24,000*)/3 x 2 Years = 3,04,000
* Profit transferred to reserve @ ` 8,000 for 3 years.
2. Calculation of Purchase Consideration

` `
Assets taken over:
Goodwill (W.N.1) 3,04,000
Land and Buildings 4,00,000
Plant and Machinery 96,000
Debtors 2,40,000
Bills Receivable 40,000
Stocks 1,44,000
Patents 32,000
12,56,000
Less: Liabilities taken over:
Creditors 1,92,000
Loan Creditors 1,60,000
Bank Overdraft 64,000 4,16,000
Purchase Consideration 8,40,000
3. (i) Adjustment for raising & writing off of goodwill
Goodwill raised in old Goodwill written Difference
profit sharing ratio off in new ratio
AB & Co. CD & Co. Total AD & Co.
` ` ` ` `
A 50,000 50,000 Cr. 31,250 Dr. 18,750 Cr.
B 25,000 25,000 Cr. 15,625 Dr. 9,375 Cr.
C 30,000 30,000 Cr. 46,875 Dr. 16,875 Dr.
D 20,000 20,000 Cr. 31,250 Dr. 11,250 Dr.
75,000 50,000 1,25,000 1,25,000
(ii) In the books of AD & Co.
Journal Entries
Date Particulars Debit Credit
` `
April 1, Building A/c Dr. 1,00,000
2017
Machinery A/c Dr. 1,25,000
Furniture A/c Dr. 15,000
Stock A/c Dr. 24,000

Debtors A/c Dr. 65,000
CD & Co. A/c Dr. 47,000
Cash at bank A/c Dr. 18,000
Cash in hand A/c Dr. 4,000
To Provision for doubtful debts A/c 5,000
To Creditors A/c 52,000
To As capital A/c (W.N. 2a) 2,10,667
To Bs capital A/c (W.N.2 a) 1,30,333
(Being the sundry assets and liabilities of
AB & Co. taken over at the values stated
as per the agreement)
April 1, Building A/c Dr. 1,25,000
2017 Machinery A/c Dr. 1,10,000
Furniture A/c Dr. 12,000
Stock A/c Dr. 36,000
Debtors A/c Dr. 78,000
Cash at bank A/c Dr. 15,000
Cash in hand A/c Dr. 5,000
To Provision for doubtful debts A/c 8,000
To Creditors A/c 35,000
To AB & Co. A/c 47,000
To Cs capital A/c (W.N. 2b) 1,74,600
To Ds capital A/c (W.N. 2b) 1,16,400
(Being the sundry assets and liabilities of
CD & Co. taken over at the values stated
as per the agreement)
Cs capital A/c Dr. 16,875
Ds capital A/c Dr. 11,250
To As capital A/c 18,750
To Bs capital A/c 9,375
(Being adjustment in capital accounts of
the partners on account of goodwill)
AB & Co. A/c Dr. 47,000
To CD & Co. A/c 47,000

(Being mutual indebtedness of AB & Co.
and CD & Co. cancelled)
As Capital A/c Dr. 1,24,267
To As Current A/c 1,24,267
(Being excess amount in As capital A/c
transferred to As current A/c - refer
W.N.3)
Bs Capital A/c Dr. 87,133
To Bs Current A/c 87,133
(Being excess amount in Bs capital A/c
transferred to Bs current A/c - refer
W.N.3)
Working Notes:
(1) Profit on Revaluation
AB & Co. CD & Co.
` `
Building (1,00,000 75,000) 25,000
(1,25,000 90,000) 35,000
Machinery (1,25,000 1,20,000) 5,000
(1,10,000 1,00,000) 10,000
30,000 45,000
Less: Provision for doubtful debts (5,000) (8,000)
25,000 37,000
(2) Balance of capital accounts of partners on transfer of business to AD & Co.
(a) AB & Co.
As Capital Bs Capital
` `
Balance as per the Balance Sheet 1,50,000 1,00,000
Reserves in the profits and losses sharing ratio 44,000 22,000
Profit on revaluation in the profits and losses
sharing ratio (W.N.1) 16,667 8,333
2,10,667 1,30,333
(b) CD & Co.

Cs Capital Ds Capital
` `
Balance as per the Balance Sheet 1,20,000 80,000
Reserves in the profits and losses sharing ratio 32,400 21,600
Profit on revaluation in the profits and losses
sharing ratio (W.N.1) 22,200 14,800
1,74,600 1,16,400
(3) Calculation of capital of each partner in the new firm
Particulars A B C D
` ` ` `
Balance as per W.N.2 2,10,667 1,30,333 1,74,600 1,16,400
Adjustment for goodwill 18,750 9,375 (16,875) (11,250)
2,29,417 1,39,708 1,57,725 1,05,150
Total capital ` 4,20,600* in
the new ratio of 2:1:3:2 (1,05,150) (52,575) (1,57,725) (1,05,150)
Transfer to Current Account 1,24,267 Cr. 87,133 Cr. - -
* Taking Ds capital as the base which is 2/8 th of total capital; total capital will be
1,05,150 8/2 i.e. ` 4,20,600.
4. (a)
Cash Creditors Capitals
Particulars
` ` P ( `) Q (`) R ( `)
Balance due after loan 16,000 52,000 43,500 32,000
January
Balance available 9,000
Realization less expenses 10,000
and cash retained
Amount available and paid 19,000 (16,000) - - (3,000)
Balance due - - 52,000 43,500 29,000
February
Opening Balance 6,000
Expenses paid and cash

carried forward 3,000
Available for distribution 3,000
Cash paid to Q and
Machinery given to R - 3,000 9,000
Balance due - 52,000 40,500 20,000
March
Opening Balance 2,000
Amount realized less
expenses 87,300
Amount paid to partners 89,300 41,689 32,767 14,844
Loss 10,311 7,733 5,156
Working Note:
(i) Highest Relative Capital Basis
P ( `) Q (`) R ( `)
Scheme of payment for January 2017
Balance of Capital Accounts 65,000 50,500 32,000
Less: Loans (13,000) (7,000) -
(A) 52,000 43,500 32,000
Profit Sharing Ratio 4 3 2
Capital / Profit sharing Ratio 13,000 14,500 16,000
Capital in profit sharing ratio, taking Ps 52,000 39,000 26,000
capital as base (B)
Excess of Rs capital and Qs Capital (A B) (i) 4,500 6,000
Profit Sharing Ratio 3 2
Capital / Profit sharing Ratio 1,500 3,000
Capital in profit sharing ratio, taking Qs 4,500 3,000
capital as base (ii)
Excess of Rs Capital over Qs capital (i ii) 3,000
(ii) Scheme of distribution of available cash for March:
P ( `) Q (`) R ( `)
Balance of Capital Accounts at end of February (A) 52,000 40,500 20,000
Profit Sharing Ratio 4 3 2
Capital / Profit sharing Ratio 13,000 13,500 10,000

Capital in profit sharing ratio, taking Rs capital 40,000 30,000 20,000
as base (B) (i)
Excess of Ps Capital and Qs Capital (A B) (i) 12,000 10,500
Profit Sharing Ratio 4 3
Capital / Profit sharing Ratio 3,000 3,500
Capital in profit sharing ratio taking Ps capital as 12,000 9,000
base (ii)
Excess of Qs Capital over Ps Capital (i ii) - 1,500
Payment ` 1500 (C) (1,500)
Balance of Excess Capital 12,000 9,000
(i C)
Payment ` 21000 (D) (12,000) (9,000)
Balance due (A C D) 40,000 30,000 20,000
Balance cash Payment (` 89,300 (29,689) (22,267) (14,844)
` 22,500) = ` 66,800 (E)
Total Payment (` 89,000) (C + D +E) (iii) 41,689 32,767 14,844
Loss (A iii) 10,311 7,733 5,156
(b) Liabilities of designated partners
As per Section 8 of LLP Act, unless expressly provided otherwise in this Act, a
designated partner shall be-
(1) responsible for the doing of all acts, matters and things as are required to be
done by the limited liability partnership in respect of compliance of the provisions
of this Act including filing of any document, return, statement and the like report
pursuant to the provisions of this Act and as may be specified in the limited
liability partnership agreement; and
(2) liable to all penalties imposed on the limited liability partnership for any
contravention of those provisions.
5. In the books of Company
Journal Entries
Date Particulars Dr. ` Cr. `
1-3-X2 to Bank A/c Dr. 2,40,000
31-3-X2 Employees compensation expenses A/c Dr. 4,32,000
To Equity Share Capital A/c 48,000
To Securities Premium A/c 6,24,000
(Being allotment to employees 4,800 shares of

` 10 each at a premium of ` 130 at an exercise
price of ` 50 each)
31-3-X2 Profit and Loss account Dr. 4,32,000
To Employees compensation expenses A/c 4,32,000
(Being transfer of employees compensation
expenses)
Working Note:
1. Employee Compensation Expenses = Discount between Market Price and option
price = ` 140 ` 50 = ` 90 per share = ` 90 x 4,800 = ` 4,32,000 in total.
2. The Employees Compensation Expense is transferred to Securities Premium
Account.
3. Securities Premium Account = ` 50 ` 10 = ` 40 per share + ` 90 per share on
account of discount of option price over market price = ` 130 per share = ` 130 x
4,800= ` 6, 24,000 in total.
6. In the books of Alpha Limited
Journal Entries
Date Particulars Dr. Cr.
2017 (` in lakhs)
April 1 Bank A/c Dr. 150
To Investment A/c 148
To Profit on sale of investment 2
(Being investment sold on profit)
April 5 Equity share capital A/c Dr. 600
Securities premium A/c Dr. 300
To Equity shares buy back A/c 900
(Being the amount due to equity
shareholders on buy back)
Equity shares buy back A/c Dr. 900

To Bank A/c 900
(Being the payment made on account of buy
back of 60 Lakh Equity Shares)
April 5 General reserve A/c Dr. 530
Profit and Loss A/c Dr. 70
To Capital redemption reserve A/c 600

(Being amount equal to nominal value of
bought back shares from free reserves
transferred to capital redemption reserve
account as per the law)
Balance Sheet (After buy back)
Particulars Note No Amount
(` in Lakhs)
I. Equity and Liabilities
(1) Shareholder's Funds
(a) Share Capital 1 1,800
(b) Reserves and Surplus 2 1,322
(2) Non-Current Liabilities
(a) Long-term borrowings - 12% Debentures 1,500
(3) Current Liabilities
(a) Trade payables 1,400
(b) Other current liabilities 478
Total 6,500
II. Assets
(1) Non-current assets
(a) Fixed assets
(i) Tangible assets 3 4,050
(2) Current assets
(a) Current investments
(b) Inventory 1,200
(c) Trade receivables 5,00
(d) Cash and cash equivalents (W.N.) 750
Total 6,500
Notes to Accounts
`
1. Share Capital
Equity share capital (Fully paid up shares of `10 each) 1800

General Reserve 530
Less: Transfer to CRR (530) -
Capital Redemption Reserve 400
Add: Transfer due to buy-back of shares from P/L 70
Transfer due to buy-back of shares from Gen. res. 530 1,000
Less: Adjustment for premium paid on buy back (300) 50
Profit & Loss A/c 340
Add: Profit on sale of investment 2
Less: Transfer to CRR (70) 272 1,322
3. Tangible assets
Machinery 3,600
Furniture 450 4,050
Working Note:
Cash at bank after buy-back
` in lakhs
Cash balance as on April, 2017
1 st 1,500
Add: Sale of investments 150
1,650
Less: Payment for buy back of shares (900)
750
7. Journal Entries
2017 ` `
Jan. 1 14% Debentures A/c Dr. 24,00,000
Premium on Redemption of Debentures A/c Dr. 48,000
To Debentures holders A/c 24,48,000
(Being amount payable on redemption of
` 24,00,000 debentures at a premium of 2%)
Debenture Redemption Reserve A/c Dr. 48,000
To Premium on Redemption of 48,000
Debentures A/c
(Being premium on redemption adjusted
against Debenture Redemption Reserve A/c)
75 Dr. 18,36,000
Debenture holders A/c 24,48,000
100
To Equity Share Capital A/c
(1,44,000 `10) 14,40,000
To Securities Premium A/c 3,96,000
(1,44,000 x ` 2.75)
(Being issue of 1,44,000 shares of ` 10 each
at a premium of ` 2.75 per share to 75%
debenture holders who exercised conversion
option)
Bank A/c Dr. 6,12,000
Debenture Redemption Reserve A/c Dr. 68,000
To Debenture Redemption Reserve 6,80,000
Investment A/c
(Being investment sold at loss)
Debenture holders A/c (24,48,000 x 25%) Dr. 6,12,000
To Bank A/c 6,12,000
(Being cash payment to 25% debenture-
holders)
Debenture Redemption Reserve A/c Dr. 18,84,000
To General Reserve A/c 18,84,000
(Being balance of Debenture Redemption
Reserve A/c transferred on 100% redemption
of debentures)
Investment A/c Dr. 13,20,000
To Debenture Redemption Reserve 13,20,000
Investment A/c
(Being balance of Debenture Redemption
Reserve Investment transferred to Investment
(General) A/c)
Working Notes:
(1) For every ` 100 debenture, amount payable on redemption including ` 102
premium is
Less: Face value of 8 shares of ` 10 each to be issued for ` 80
redemption of each debenture (8 ` 10)
Premium on issue of 8 shares ` 22

` 22 `2.75
Therefore, premium on issue of each share
8
(2) Shares to be issued for conversion of 75% Debentures into shares
@ 8 shares for every ` 100 Debenture i.e.
75 8
`24,00,000 1,44,000shares
100 100
(3) Cash payment for remaining 25% debenture holders who exercised
25 102
the option of cash i.e., `24,00,000 `6,12,000
100 100
(4) Face value of investment to be sold to realize ` 6,12,000 will be
` 6,80,000
20,00,000
i.e. ` 18,00,000 ` 6,12,000

Loss on sale of investment = 6,80,000 6,12,000 = 68,000
(5) Debenture Redemption Reserve transferred to General Reserve:
20,00,000 48,000 68,000 = ` 18,84,000
8. Distinction between firm underwriting and partial underwriting along with firm
underwriting
In firm underwriting the underwriter agrees to subscribe upto a certain number of shares /
debentures irrespective of the nature of public response to issue of securities. He gets these
securities even if the issue is fully subscribed or over-subscribed. These securities are taken
by the underwriter in addition to his liability for securities not subscribed by the public.
Under partial underwriting along with firm underwriting, unless otherwise agreed,
individual underwriter does not get the benefit of firm underwriting in determination of
number of shares/debentures to be taken up by him.
9. Books of P Ltd.
Journal Entries
Dr. Cr.
(` in Lacs) (` in Lacs)
Business Purchase A/c Dr. 9,000
To Liquidator of V Ltd. 9,000
(Being business of V Ltd. taken over for consideration
settled as per agreement)
Plant and Machinery Dr. 5,000

Furniture & Fittings Dr. 1,700
Inventory Dr. 4,041
Debtors Dr. 1,020
Cash at Bank Dr. 609
Bills Receivable Dr. 80
To Foreign Project Reserve 310
To General Reserve (3,200 - 3,000) 200
To Profit and Loss A/c (825 50*) 775
To Liability for 12% Debentures 1,000
To Creditors 463
To Provisions 702
To Business Purchase 9,000
(Being assets & liabilities taken over from V Ltd.)
Liquidator of V Ltd. A/c Dr. 9,000
To Equity Share Capital A/c 9,000
(Purchase consideration discharged in the form of equity
shares)
Profit & loss A/c Dr. 1
To Bank A/c 1
(Liquidation expenses paid by P Ltd.)
Liability for 12% Debentures A/c Dr. 1,000
To 13% Debentures A/c 1,000
(12% debentures discharged by issue of 13% debentures)
Bills Payable A/c Dr. 80
To Bills Receivable A/c 80
(Cancellation of mutual owing on account of bills)
Balance Sheet of P Ltd. as at 1st April, 20X1 (after merger)

Particulars Notes ` (in lakhs)
A Share capital 1 24,000
B Reserves and Surplus 2 16,654
A Long-term borrowings 3 1,000
A Trade Payables (1,543 + 40) 1,583
B Short-term provisions 2,532
Total 45,769
Assets
A Fixed assets
Tangible assets 4 29,004
2 Current assets
A Inventories 11,903
B Trade receivables 3,140
C Cash and cash equivalents 1,722
Total 45,769
Notes to accounts
`
1. Share Capital
Authorised, issued, subscribed and paid up
24 crores equity shares of ` 10 each (Of the above shares, 9
crores shares have been issued for consideration other than cash) 24,000
Total 24,000
General Reserve 9,700

Foreign Project Reserve 310
Profit and Loss Account 3,644
Total 16,654
3. Long-term borrowings
Secured
4. Tangible assets
Land & Buildings 6,000
Plant & Machinery 19,000
Furniture & Fittings 4,004
Total 29,004
Working Note:
Computation of purchase consideration
The purchase consideration was discharged in the form of three equity shares of P Ltd. for
every two equity shares held in V Ltd.
3
Purchase consideration = ` 6,000 lacs = ` 9,000 lacs.
2
* Cost of issue of debenture adjusted against P & L Account of V Ltd.
10. Books of Ravi Ltd.
Journal Entries
Particulars Debit (`) Credit (`)
Equity Share Capital (` 100 each) a/c Dr 30,00,000
To Equity share capital (` 10 each) A/c 30,00,000
(Sub division of equity share into ` 10 each)
Equity Share Capital (`10) A/c Dr. 24,00,000
To Share surrendered A/c 24,00,000
(Surrender of 80% of share holding by equity share
holders)
7% Cumulative preference share capital A/c Dr. 20,00,000
To 8% cumulative preference share capital A/c 20,00,000
(Conversion of 7% Cumulative Preference share

capital into 8% Cumulative Preference share capital.
They also forgo their right to arrears of dividends)
Shares Surrendered A/c Dr. 5,00,000
To Equity share capital A/c 5,00,000
(Surrendered share issued against trade payables
under reconstruction scheme)
Declared Dividend A/c Dr. 3,00,000
Expenses of reconstruction A/c Dr. 60,000
To Bank A/c 3,60,000
(Dividend to Equity Share holders and
reconstruction expenses paid)
Share surrendered A/c Dr. 19,00,000
To capital Reduction A/c 19,00,000
(Cancellation of unissued surrendered shares)
(24,00,000-5,00,000)
Loan from Director A/c Dr. 4,40,000
Trade Payables A/c Dr. 6,15,000
Building A/c Dr. 1,50,000
To Capital reduction A/c 12,05,000
(Amount sacrificed by directors and trade payables
and appreciation in value of building)
Capital reduction A/c Dr. 31,05,000
To Patent A/c 4,00,000
To Trade receivables A/c 6,50,000
To Inventory A/c 3,40,000
To Profit and Loss A/c 8,40,000
To Expenses on Reconstruction A/c 60,000
To Plant A/c (bal. fig) 8,15,000
(Various assets and expenses written off)
Bank A/c Dr. 4,00,000
To Share application money A/c 4,00,000
(Application money received on full and final
payment)
Share application money A/c Dr. 4,00,000

To Share capital A/c 4,00,000
(Being 40,000 equity shares of ` 10 each issued and
fully paid up)
Note: Cancellation of preference dividend need not be journalised. On cancellation, it
ceases to be contingent liability and hence no further disclosure required.
Balance Sheet of Ravi Ltd. (and Reduced) as at 31 st March, 2017
Particulars Note Amount
(`)
I. EQUITY AND LIABILITIES
1. Shareholders funds
a. Share capital 1 35,00 000
b. General reserve 6,00 000
2. Current liabilities
a. Trade payables (24,60,000-6,15,000) 18,45,000
b. Other current liabilities (outstanding expenses) 3,20,000
Total 62,65,000
II. ASSETS
1. Non-current assets
Fixed assets
i. Tangible assets 2 28,85,000
ii. Intangible assets 3 -
2. Current assets
a. Inventories (16,30,000- 3,40,000) 12,90,000
b. Trade receivables (23,50,000- 6,50,000) 17,00,000
c. Cash and cash equivalents 4 3,90,000
Total 62,65,000
Notes to the financial statements
(1) Share capital
a. Authorised
3,00,000 equity shares of `10 each 30,00,000
20,000 8% cumulative preference shares of `100 each 20,00,000

b. Issued, subscribed and fully paid up
1,50,000 equity shares of `10 each (of the above, 50,000 15,00,000
shares were issued as fully paid up for consideration other
than cash under the scheme of reconstruction)
20,000 8% cumulative preference shares of `100 each 20,00,000
Total 35,00,000
(2) Tangible assets
Particulars `
Plant (30,00,000-8,15,000) 21,85,000
Building (5,50,000 + 1,50,000) 7,00,000
Total 28,85,000
(3) Intangible assets
Particulars `
Patent (4,00,000-4,00,000) -
(4) Cash and cash equivalents
Particulars `
a. Balance with bank (2,30,000-3,00,000-60,000+4,00,000) 2,70,000
b. Cash on hand 1,20,000
Total 3,90,000
11. Liquidators Final Statement of Receipts and Payments A/c
` ` `
To Cash in hand 40,000 By Liquidators remuneration 5,000
To Assets realised: and expenses
Fixed assets 1,68,000 By Trade Payables 3,50,000
Inventory By Preference shareholders 1,00,000
(1,10,000 1,00,000) 10,000 By Equity shareholders @
Book debts 2,30,000 4,08,000 ` 10 on 2,000 shares 20,000
To Cash - proceeds of
call on 1,800 equity
shares @ ` 15* 27,000
4,75,000 4,75,000
Working Note:
Return per equity share
`
Cash available before paying preference shareholders
(` 4,48,000 ` 3,55,000) 93,000
Add: Notional calls 1,800 shares (2,000-200) ` 25 45,000
1,38,000
Less: Preference share capital (1,00,000)
Available for equity shareholders 38,000
` 38,000
Return per share= ` 10
3,800 (4,000 200)
and Loss per Equity Share ` (100-10) = ` 90
*Calls to be made @ ` 15 per share (` 90-75) on 1,800 shares.
12. Form B RA (Prescribed by IRDA)
Name of the Insurer: X Fire Insurance Co. Ltd.
Registration No. and Date of registration with the IRDA: ..
Revenue Account for the year ended 31 st March, 20X2
Particulars Schedule Current year

ended on 31 st
March, 20X2
`
1. Premium earned (Net) 1 7,00,000
Total (A) 7,00,000
1. Claims incurred (Net) 2 8,00,000
2. Commission 3 50,000
3. Operating Expenses related to insurance 4 3,00,000
business
Total (B) 11,50,000
Operating Profit/(Loss) from Fire Insurance
Business [C = (A B)] (4,50,000)
Schedule 1
Premium earned (Net)
`
Premium received from direct business written 15,00,000
Less: Premium on re-insurance ceded (1,00,000)
14,00,000
Adjustment for change in reserve for unexpired risk 7,00,000
Net Premium Earned 7,00,000
Schedule 2
Claims incurred (Net)
`
Claims paid Direct 7,00,000
Add: Claims outstanding on 31.3.20X2 1,00,000
Total claims incurred 8,00,000
Schedule 3
Commission
Commission paid 50,000

Net commission 50,000
Schedule 4
Operating expenses related to insurance business
`
Expenses of Management 3,00,000
13. (i) Calculation of Rebate on bills discounted

S.No. Amount (`) Due date Unexpired Rate of Rebate on bill
2017 portion discount discounted `
(i) 7,50,000 April 8 8 days 12% 1,972
(ii) 3,00,000 May 5 35 days 14% 4,028
(iii) 4,40,000 June 12 73 days 14% 12,320
(iv) 9,60,000 July 15 106 days 15% 41,820
60,140
(ii) Amount of discount to be credited to the Profit and Loss Account

`
Transfer from Rebate on bills discount as on 31 st March, 2016 91,600
Add: Discount received during the year ended 31st March, 2017 4,05,000
4,96,600
Less: Rebate on bills discounted as on 31 st March, 2017 60,140
Discount credited to the Profit and Loss Account 4,36,460
14. Departmental Trading and Loss Account of M/s Division
For the year ended 31 st December, 2016
Deptt. A Deptt. B Deptt. A Deptt. B
` ` ` `
To Opening stock 50,000 40,000 By Sales 10,00,000 15,00,000
To Purchases 6,50,000 9,10,000 By Closing
To Gross profit 4,00,000 7,50,000 stock 1,00,000 2,00,000
11,00,000 17,00,000 11,00,000 17,00,000
To General By Gross profit 4,00,000 7,50,000
Expenses
(in ratio of
sales) 50,000 75,000
To Profit ts/f to general 3,50,000 6,75,000
profit and loss
account
4,00,000 7,50,000 4,00,000 7,50,000
General Profit and Loss Account

` `
To Stock reserve required (additional: By Profit from:
Stock in Deptt. A Deptt. A 3,50,000
50% of (` 20,000 - ` 10,000) (W.N.1) 5,000 Deptt. B 6,75,000
Stock in Deptt. B
40% of (` 30,000 - ` 15,000) (W.N.2) 6,000
To Net Profit 10,14,000
10,25,000 10,25,000
Working Notes:
1. Stock of department A will be adjusted according to the rate applicable to department
B = [(7,50,000 15,00,000) 100] = 50%
2. Stock of department B will be adjusted according to the rate applicable to department
A = [(4,00,000 10,00,000) 100] = 40%
15. In the books of ABC Ltd.
New York Branch Trial Balance in (`)
as on 31st March, 2017
Conversion Dr. Cr.
rate per US $
(`) ` `
Stock on 1.4.16 40 6,000
Purchases and sales 41 16,400 30,750
Sundry debtors and creditors 42 8,400 6,300
Bills of exchange 42 2,520 5,040
Sundry expenses 41 22,140
Bank balance 42 8,820
Delhi head office A/c 22,190
64,280 64,280
16. (a) (1) Users of financial statements:

Investors, Employees, Lenders, Supplies/Creditors, Customers, Government &
Public
(2) Qualitative Characteristics of Financial Statements:
Understandability, Relevance, Comparability, Reliability & Faithful
Representation
(3) Elements of Financial Statements:
Asset, Liability, Equity, Income/Gain and Expense/Loss
(b) Fundamental Accounting Assumptions:
Accrual, Going Concern and Consistency
17. (a) According to para 8 of AS 4, the unexpected increase in sale price of petrol by the
government after the balance sheet date cannot be regarded as an event occurring
after the Balance Sheet date, which requires an adjustment at the Balance Sheet
date, since it does not represent a condition present at the balance sheet date. The
revenue should be recognized only in the subsequent year with proper disclosures.
(b) As per para 31 of AS 5 Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies, the adoption of an accounting policy for events or
transactions that differ in substance from previously occurring events or transactions,
will not be considered as a change in accounting policy.
(i) Accordingly, introduction of a formal retirement gratuity scheme by an employer
in place of ad hoc ex-gratia payments to employees on retirement is not a
change in an accounting policy.
(ii) The adoption of a new accounting policy for events or transactions which did not
occur previously or that were immaterial will not be treated as a change in an
accounting policy.
18. (a) As per AS 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates,
monetary items denominated in a foreign currency should be reported using the
closing rate at each balance sheet date. The effect of exchange difference should be
taken into profit and loss account. Trade payables is a monetary item, hence should
be valued at the closing rate i.e., ` 48 at 31st March, 2017 irrespective of the payment
for the same subsequently at lower rate in the next financial year. The difference of
` 5 (` 48 less ` 43) per US dollar should be shown as an exchange loss in the profit
and loss account for the year ended 31 st March, 2017 and is not to be adjusted against
the cost of raw materials. In the subsequent year, the company would record an
exchange gain of `1 per US dollar, i.e., the difference between
` 48 and ` 47 per US dollar. Hence, the accounting treatment adopted by the
company is incorrect.
(b) As per AS 12 Accounting for Government Grants, Government grants sometimes
become refundable because certain conditions are not fulfilled. A government grant
that becomes refundable is treated as an extraordinary item as per AS 5.
The amount refundable in respect of a government grant related to revenue is applied
first against any unamortised deferred credit remaining in respect of the grant. To the
extent that the amount refundable exceeds any such deferred credit, or where no
deferred credit exists, the amount is charged immediately to profit and loss statement.
In the present case, the amount of refund of government grant should be shown in
the profit and loss account of the company as an extraordinary item during the year
2016-17.
19. (a) According to para 6 of AS 16 Borrowing Costs, borrowing costs that are directly
attributable to the acquisition, construction or production of a qualifying asset should
be capitalised as part of the cost of that asset. The amount of borrowing costs eligible
for capitalisation should be determined in accordance with this Standard. Other
borrowing costs should be recognised as an expense in the period in which they are
incurred.
Also para 10 of AS 16 Borrowing Costs states that to the extent that funds are
borrowed specifically for the purpose of obtaining a qualifying asset, the amount of
borrowing costs eligible for capitalisation on that asset should be determined as the
actual borrowing costs incurred on that borrowing during the period less any income
on the temporary investment of those borrowings.
Thus, eligible borrowing cost
= ` 11,00,000 ` 2,00,000
= ` 9,00,000
Sr. Particulars Nature of assets Interest to be Interest to be
No. Capitalized ( `) charged to Profit
& Loss Account
(`)
i Construction of Qualifying Asset* 9,00,000x40/100 NIL
factory building = ` 3,60,000
ii Purchase of Not a Qualifying NIL 9,00,000x35/100
Machinery Asset = ` 3,15,000
iii Working Capital Not a Qualifying NIL 9,00,000x25/100
Asset = ` 2,25,000
Total ` 3,60,000 ` 5,40,000
* A qualifying asset is an asset that necessarily takes a substantial period of time to
get ready for its intended use or sale.
(b) As per para 44 of AS 26, costs incurred in creating a computer software product
should be charged to research and development expense when incurred until
technological feasibility/asset recognition criteria has been established for the
product. Technological feasibility/asset recognition criteria have been established
upon completion of detailed programme design or working model. In this case,
` 45,000 would be recorded as an expense (` 25,000 for completion of detailed
program design and ` 20,000 for coding and testing to establish technological
feasibility/asset recognition criteria). Cost incurred from the point of technological
feasibility/asset recognition criteria until the time when products costs are incurred
are capitalized as software cost (` 42,000 + ` 12,000 + ` 13,000) ` 67,000.
20. (a) Computation of earnings per share
EPS for the year 2015-16 as originally reported
= ` 22,00,000/1,10,000 shares = ` 20
EPS for the year 2015-16 restated for rights issue
= ` 22,00,000/ (1,10,000 shares x 1.07) = ` 18.69
EPS for the year 2016-17 including effects of rights issue

Adjusted No. of Shares = (1,10,000 x 1.07 x 4/12) + (1,37,500 x 8/12) = 1,30,900
33,00,000
EPS = = 25.21
1,30,900
Working Note:
1. Calculation of Theoretical ex-rights fair value per share
Fair value of shares immediately prior to exercise of rights + Total amount received from exercise
Number of shares outstanding prior to exercise + Number of shares issued in the exercise
(` 270 1,10,000 shares) (` 180 27,500 Shares)
1,10,000 27,500 Shares = 3,46,50,000/1,37,500
Theoretical ex-rights fair value per share = ` 252

2. Calculation of Computation of adjustment factor:
Fair value per share prior to exercise of rights

Theoretical ex - rights value per share
` (270)
= 1.071
` (252)
(b) A provision should be recognized only when an enterprise has a present obligation
arising from a past event or obligation. In the given case, there is no present
obligation but a future one, therefore no provision is recognized as per AS 29.
The cost of overhauling aircraft is not recognized as a provision because it is a future
obligation and the incurring of the expenditure depends on the company s decision to
continue operating the aircrafts. Even a legal requirement to overhaul does not
require the company to make a provision for the cost of overhaul because there is no
present obligation to overhaul the aircrafts. Further, the enterprise can avoid the
future expenditure by its future action, for example by selling the aircraft. However,
an obligation might arise to pay fines or penalties under the legislation after
completion of five years. Assessment of probability of incurring fines and penalties
depends upon the provisions of the legislation and the stringency of the enforcement
regime. A provision should be recognized for the best estimate of any fines and
penalties if airline continues to operate aircrafts for more than five years.
PAPER 6: AUDITING AND ASSURANCE
PART I : ACADEMIC UPDATE

(Legislative Amendments / Notifications / Circulars / Rules / Guidelines issued by
Regulating Authority)
1. Duty to report on Frauds

I. Reporting to the Central Government- As per sub-section (12) of section 143 of the
Companies Act, 2013, if an auditor of a company in the course of the performance of his
duties as auditor, has reason to believe that an offence of fraud involving such amount or
amounts as may be prescribed, is being or has been committed in the company by its
officers or employees, the auditor shall report the matter to the Central Government within
such time and in such manner as may be prescribed.
In this regard, Rule 13 of the Companies (Audit and Auditors) Rules, 2014 has been
prescribed. Sub-rule (1) of the said rule states that if an auditor of a company, in the course
of the performance of his duties as statutory auditor, has reason to believe that an of fence
of fraud, which involves or is expected to involve individually an amount of ` 1 crore or
above, is being or has been committed against the company by its officers or employees,
the auditor shall report the matter to the Central Government.
The manner of reporting the matter to the Central Government is as follows:
(a) the auditor shall report the matter to the Board or the Audit Committee, as the case
may be, immediately but not later than 2 days of his knowledge of the fraud, seeking
their reply or observations within 45 days;
(b) on receipt of such reply or observations, the auditor shall forward his report and the
reply or observations of the Board or the Audit Committee along with his comments
(on such reply or observations of the Board or the Audit Committee) to the Central
Government within 15 days from the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the Board or the Audit
Committee within the stipulated period of 45 days, he shall forward his report to the
Central Government along with a note containing the details of his report that was
earlier forwarded to the Board or the Audit Committee for which he has not received
any reply or observations;
(d) the report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed
cover by Registered Post with Acknowledgement Due or by Speed Post followed by
an e-mail in confirmation of the same;
(e) the report shall be on the letter-head of the auditor containing postal address, e-mail
PAPER 6: AUDITING AND ASSURANCE 49
address and contact telephone number or mobile number and be signed by the
auditor with his seal and shall indicate his Membership Number; and
(f) the report shall be in the form of a statement as specified in Form ADT -4.
II. Reporting to the Audit Committee or Board - Sub-section (12) of section 143 of the
Companies Act, 2013 further prescribes that in case of a fraud involving lesser than the
specified amount [i.e. less than ` 1 crore], the auditor shall report the matter to the audit
committee constituted under section 177 or to the Board in other cases within such time
and in such manner as may be prescribed.
In this regard, sub-rule (3) of Rule 13 of the Companies (Audit and Auditors) Rules, 2014
states that in case of a fraud involving lesser than the amount specified in sub-rule (1) [i.e.
less than ` 1 crore], the auditor shall report the matter to Audit Committee constituted
under section 177 or to the Board immediately but not later than 2 days of his knowledge
of the fraud and he shall report the matter specifying the following:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
III. Disclosure in the Board's Report: Sub-section (12) of section 143 of the Companies
Act, 2013 furthermore prescribes that the companies, whose auditors have reported frauds
under this sub-section (12) to the audit committee or the Board, but not reported to the
Central Government, shall disclose the details about such frauds in the Board's report in
such manner as may be prescribed.
In this regard, sub-rule (4) of Rule 13 of the Companies (Audit and Auditors) Rules, 2014
states that the auditor is also required to disclose in the Boards Report the following details
of each of the fraud reported to the Audit Committee or the Board under sub-rule (3) during
the year:
(a) Nature of Fraud with description;
(b) Approximate Amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
Fraud Reporting
[Section 143(12) & Rule 13]
Fraud involving amount of Fraud involving amount of

less than ` 1 crore ` 1 crore or above
Report to Board/ Disclose in Board's Report to Central Government

Audit Committee Report in following manner:
Within 2 days of
knowledge,
Within 2 days of Disclosure of
knowledge, following details: Report to Board/
(a) Nature of Audit Committee
Report the following Fraud with
matters: description;
(a) Nature of Fraud (b) Approximate
Seeking reply
with description; amount involved;
within 45 days
(b) Approximate (c) Parties
amount involved; and involved, if
(c) Parties involved. remedial action
not taken; and Reply/observations Reply/observations not
(d) Remedial received within received within stipulated
actions taken. stipulated time time
Forward
Report+Reply/observations+ Forward
Comments Report+Note
to CG containing details of
within 15 days of receipt of report for which
such reply/observations failed to receive any
reply/ observations
to CG
2. Ceiling on Number of Company Audits

As per section 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for
appointment as an auditor if he is in full time employment elsewhere or a person or a
partner of a firm holding appointment as its auditor, if such person or partner is at the date
of such appointment or reappointment holding appointment as auditor of more than twenty

Fraud Reporting
[Section 143(12) & Rule 13]
Fraud involving amount of Fraud involving amount of

less than ` 1 crore ` 1 crore or above
Report to Board/ Disclose in Board's Report to Central Government

Audit Committee Report in following manner:
Within 2 days of
knowledge,
Within 2 days of Disclosure of
knowledge, following details: Report to Board/
(a) Nature of Audit Committee
Report the following Fraud with
matters: description;
(a) Nature of Fraud (b) Approximate
Seeking reply
with description; amount involved;
within 45 days
(b) Approximate (c) Parties
amount involved; and involved, if
(c) Parties involved. remedial action
not taken; and Reply/observations Reply/observations not
(d) Remedial received within received within stipulated
actions taken. stipulated time time
Forward
Report+Reply/observations+ Forward
Comments Report+Note
to CG containing details of
within 15 days of receipt of report for which
such reply/observations failed to receive any
reply/ observations
to CG
2. Ceiling on Number of Company Audits

As per section 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for
appointment as an auditor if he is in full time employment elsewhere or a person or a
partner of a firm holding appointment as its auditor, if such person or partner is at the date
of such appointment or reappointment holding appointment as auditor of more than twenty

companies, other than one person companies, dormant companies, small companies and
private companies having paid-up share capital less than ` 100 crore.
3. Reporting under Companies (Auditors Report) Order, 2016 [CARO, 2016]
In exercise of the powers conferred by sub-section (11) of section 143 of the Companies
Act, 2013 (18 of 2013 ) and in supersession of the Companies (Auditor's Report) Order,
2015 published in the Gazette of India, Extraordinary, Part II, Section 3, Sub -section (ii),
vide number S.O. 990 (E), dated the 10th April, 2015, except as respects things done or
omitted to be done before such supersession, the Central Government, after consultati on
with the, committee constituted under proviso to sub-section (11) of section 143 of the
Companies Act, 2013 hereby makes the following Order dated 29 th March, 2016, namely:
I. Short title, application and commencement-
(1) This Order may be called the Companies (Auditor's Report) Order, 2016.
(2) Applicability of the Order: The CARO, 2016 is an additional reporting
requirement Order. The order applies to every company including a foreign
company as defined in clause (42) of section 2 of the Companies Act, 2O13
[hereinafter referred to as the Companies Act],
However, the Order specifically exempts the following class of companies-
(i) a banking company as defined in clause (c) of section 5 of the Banking
Regulation Act, 1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act,1938 (4 of
1938);
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined under clause (62) of section 2 of the
Companies Act and a small company as defined under clause (85) of
section 2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding company of a
public company, having a paid up capital and reserves and surplus not
more than rupees one crore as on the balance sheet date and which does
not have total borrowings exceeding rupees one crore from any bank or
financial institution at any point of time during the financial year and which
does not have a total revenue as disclosed in Scheduled III to the
Companies Act, 2013 (including revenue from discontinuing operations)
exceeding rupees ten crore during the financial year as per the financial
statements.
Exempted Class of Companies
Banking
company
Private limited
company
subject to Insurance
fulfilment of company
specified
conditions
Exempted
Class of
Companies
Company
Small company licensed to
as per the operate under
Companies Act section 8 of the
Companies Act
One Person
Company
II. Auditor's report to contain matters specified in paragraphs 3 and 4 - Every report
made by the auditor under section 143 of the Companies Act, 2013 on the accounts
of every company audited by him, to which this Order applies, for the financial years
commencing on or after 1st April, 2015, shall in addition, contain the matters specified
in paragraphs 3 and 4, as may be applicable:
It may be noted that the Order shall not apply to the auditors report on consolidated
financial statements.
III. Matters to be included in the auditor's report - The auditor's report on the accounts
of a company to which this Order applies shall include a statement on the following
matters, namely:-
(i) (a) whether the company is maintaining proper records showing full particulars,
including quantitative details and situation of fixed assets;
(b) whether these fixed assets have been physically verified by the
management at reasonable intervals; whether any material discrepancies
were noticed on such verification and if so, whether the same have been
properly dealt with in the books of account;
(c) whether the title deeds of immovable properties are held in the name of the

company. If not, provide the details thereof;

(ii) whether physical verification of inventory has been conducted at reasonable
intervals by the management and whether any material discrepancies were
noticed and if so, whether they have been properly dealt with in the books of
account;
(iii) whether the company has granted any loans, secured or unsecured to
companies, firms, Limited Liability Partnerships or other parties covered in the
register maintained under section 189 of the Companies Act, 2013. If so,
(a) whether the terms and conditions of the grant of such loans are not
prejudicial to the companys interest;
(b) whether the schedule of repayment of principal and payment of interest has
been stipulated and whether the repayments or receipts are regular;
(c) if the amount is overdue, state the total amount overdue for more than
ninety days, and whether reasonable steps have been taken by the
company for recovery of the principal and interest;
(iv) in respect of loans, investments, guarantees, and security whether provisions of
section 185 and 186 of the Companies Act, 2013 have been complied with. If
not, provide the details thereof.
(v) in case, the company has accepted deposits, whether the directives issued by
the Reserve Bank of India and the provisions of sections 73 to 76 or any other
relevant provisions of the Companies Act, 2013 and the rules framed there
under, where applicable, have been complied with? If not, the nature of such
contraventions be stated; If an order has been passed by Company Law Board
or National Company Law Tribunal or Reserve Bank of India or any court or any
other tribunal, whether the same has been complied with or not?
(vi) whether maintenance of cost records has been specified by the Central
Government under section 148(1) of the Companies Act, 2013 and whether such
accounts and records have been so made and maintained.
(vii) (a) whether the company is regular in depositing undisputed statutory dues
including provident fund, employees' state insurance, income-tax, sales-
tax, service tax, duty of customs, duty of excise, value added tax, cess and
any other statutory dues to the appropriate authorities and if not, the extent
of the arrears of outstanding statutory dues as on the last day of the
financial year concerned for a period of more than six months from the date
they became payable, shall be indicated;
(b) where dues of income tax or sales tax or service tax or duty of customs or
duty of excise or value added tax have not been deposited on account of
any dispute, then the amounts involved and the forum where dispute is
pending shall be mentioned. (A mere representation to the concerned
Department shall not be treated as a dispute).
(viii) whether the company has defaulted in repayment of loans or borrowing to a
financial institution, bank, Government or dues to debenture holders? If yes, the
period and the amount of default to be reported (in case of defaults to banks,
financial institutions, and Government, lender wise details to be provided).
(ix) whether moneys raised by way of initial public offer or further public offer
(including debt instruments) and term loans were applied for the purposes for
which those are raised. If not, the details together with delays or default and
subsequent rectification, if any, as may be applicable, be reported;
(x) whether any fraud by the company or any fraud on the Company by its officers
or employees has been noticed or reported during the year; If yes, the nature
and the amount involved is to be indicated;
(xi) whether managerial remuneration has been paid or provided in accordance with
the requisite approvals mandated by the provisions of section 197 read with
Schedule V to the Companies Act? If not, state the amount involved and steps
taken by the company for securing refund of the same;
(xii) whether the Nidhi Company has complied with the Net Owned Funds to Deposits
in the ratio of 1: 20 to meet out the liability and whether the Nidhi Company is
maintaining ten per cent unencumbered term deposits as specified in the Nidhi
Rules, 2014 to meet out the liability;
(xiii) whether all transactions with the related parties are in compliance with sections
177 and 188 of Companies Act, 2013 where applicable and the details have
been disclosed in the Financial Statements etc., as required by the applicable
accounting standards;
(xiv) whether the company has made any preferential allotment or private placement
of shares or fully or partly convertible debentures during the year under review
and if so, as to whether the requirement of section 42 of the Companies Act,
2013 have been complied with and the amount raised have been used for the
purposes for which the funds were raised. If not, provide the details in respect
of the amount involved and nature of non-compliance;
(xv) whether the company has entered into any non-cash transactions with directors
or persons connected with him and if so, whether the provisions of section 192
of Companies Act, 2013 have been complied with;

(xvi) whether the company is required to be registered under section 45-IA of the
Reserve Bank of India Act, 1934 and if so, whether the registration has been
obtained.
IV. Reasons to be stated for unfavourable or qualified answers -
(1) Where, in the auditor's report, the answer to any of the questions referred to in
paragraph 3 is unfavourable or qualified, the auditor's report shall also state the
basis for such unfavourable or qualified answer, as the case may be.
(2) Where the auditor is unable to express any opinion on any specified matter, his
report shall indicate such fact together with the reasons as to why it is not
possible for him to give his opinion on the same.
4. Amendment in Companies (Cost Records and Audit) Rules, 2014
(I) Maintenance of Cost Records: Rule 3 of the Companies (Cost Records and Audit)
Rules, 2014 provides the classes of companies, engaged in the production of goods
or providing services, having an overall turnover from all its products and services of
` 35 crore or more during the immediately preceding financial year, required to
include cost records in their books of account. These companies include Foreign
Companies defined in sub-section (42) of section 2 of the Act, but exclude a company
classified as a Micro enterprise or a Small enterprise including as per the turnover
criteria provided under Micro, Small and Medium Enterprises Development Act, 2006.
The said rule has divided the list of companies into regulated sectors (Part A) and
non-regulated sectors (Part B).
Additionally, as per clause (vi) to Paragraph 3 of the CARO, 2016, where maintenance
of cost records has been specified by the Government under section 148(1) of the
Companies Act, 2013, the auditor has to report whether such accounts and records
have been made and maintained.
(II) Appointment of Cost Auditor: Rule 6 of the Companies (Cost Records and Audit)
Rules, 2014 requires the companies prescribed under the said Rules to appoint an
auditor within one hundred and eighty days of the commencement of every financial
year. However, before such appointment is made, the written consent of the cost
auditor to such appointment and a certificate from him or it shall be obtaine d.
The certificate to be obtained from the cost auditor shall certify that the-
(a) the individual or the firm, as the case may be, is eligible for appointment and is
not disqualified for appointment under the Companies Act, 2013, the Cost and
Works Accountants Act, 1959 and the rules or regulations made thereunder;
(b) the individual or the firm, as the case may be, satisfies the criteria provided in
section 141 of the Companies Act, 2013 so far as may be applicable;
(c) the proposed appointment is within the limits laid down by or under the authority
of the Companies Act, 2013; and
(d) the list of proceedings against the cost auditor or audit firm or any partner of the
audit firm pending with respect to professional matters of conduct, as disclosed
in the certificate, is true and correct.
(III) Removal of Cost Auditor: The cost auditor may be removed from his office before
the expiry of his term, through a board resolution after giving a reasonable opportunity
of being heard to the cost auditor and recording the reasons for such removal in
writing.
It may be noted that the Form CRA-2 to be filed with the Central Government for
intimating appointment of another cost auditor shall enclose the relevant Board
Resolution to the effect.
It may further be noted that the above provisions shall not prejudice the right of the
cost auditor to resign from such office of the company.
(IV) Submission of Cost Audit Report to the Central Government: A company shall
within thirty days from the date of receipt of a copy of the cost audit report prepared
(in pursuance of a direction issued by Central Government) furnish the Central
Government with such report along with full information and explanation on every
reservation or qualification contained therein, in Form CRA-4 in Extensible Business
Reporting Language (XBRL) format in the manner as specified in the Companies
(Filing of Documents and Forms in Extensible Business Reporting language) Rules,
2015 along with fees specified in the Companies (Registration Offices and Fees)
Rules, 2014.
(V) Cost Audit Rules not to apply in certain cases: The requirement for cost audit
under these rules shall not be applicable to a company which is covered under rule
3, and,
(i) whose revenue from exports, in foreign exchange, exceeds 75% of its total
revenue; or
(ii) which is operating from a special economic zone.
(iii) which is engaged in generation of electricity for captive consumption through
Captive Generating Plant.
5. Direction by Tribunal in case auditor acted in a fraudulent manner

As per sub-section (5) of the section 140, the Tribunal either suo motu or on an application
made to it by the Central Government or by any person concerned, if it is satisfied that the
auditor of a company has, whether directly or indirectly, acted in a fraudulent manner or
abetted or colluded in any fraud by, or in relation to, the company or its directors or officers,
it may, by order, direct the company to change its auditors.
However, if the application is made by the Central Government and the Tribunal is satisfied
that any change of the auditor is required, it shall within fifteen days of receipt of such
application, make an order that he shall not function as an auditor and the Centr al
Government may appoint another auditor in his place.
It may be noted that an auditor, whether individual or firm, against whom final order has
been passed by the Tribunal under this section shall not be eligible to be appointed as an
auditor of any company for a period of five years from the date of passing of the order and
the auditor shall also be liable for action under section 447.
It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every
partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud
by, or in relation to, the company or its director or officers.
6. Curtailing right of the auditor regarding circulation of copy of representation in the
case of appointment of Auditor other than retiring Auditor under section 140(4) of
the Companies Act, 2013
If the Tribunal is satisfied on an application either of the company or of any other aggrieved
person that the rights conferred by section 140(4) of the Companies Act, 2013 are bein g
abused by the auditor, then, the copy of the representation may not be sent and the
representation need not be read out at the meeting.
7. Re-opening of accounts on Courts or Tribunals Orders
Section 130 of the Companies Act, 2013 states that a company shall not re-open its books
of account and not recast its financial statements, unless an application in this regard is
made by the Central Government, the Income-tax authorities, the Securities and Exchange
Board, any other statutory regulatory body or authority or any person concerned and an
order is made by a court of competent jurisdiction or the Tribunal to the effect that
(i) the relevant earlier accounts were prepared in a fraudulent manner; or
(ii) the affairs of the company were mismanaged during the relevant period, casting a
doubt on the reliability of financial statements.
However, a notice shall be given by the Court or Tribunal in this regard and shall take into
consideration the representations, if any.
8. Voluntary revision of financial statements or Boards report

Section 131 of the Companies Act, 2013 states that if it appears to the directors of a company
that
(a) the financial statement of the company; or
(b) the report of the Board,
do not comply with the provisions of section 129 (Financial statement) or section 134 (Financial
statement, Boards report, etc.) they may prepare revised financial statement or a revised report
in respect of any of the three preceding financial years after obtaining approval of the Tribunal
on an application made by the company in such form and manner as may be prescribed and a
copy of the order passed by the Tribunal shall be filed with the Registrar.
9. In exercise of powers conferred by section 143 read with sub-sections (1) and (2) of section
469 of the Companies Act, 2013 (18 of 2013), the Central Government hereby inserted the
clause (d) whether the company had provided requisite disclosures in its financial
statements as to holdings as well as dealings in Specified Bank Notes during the period
from 8th November, 2016 to 30th December, 2016 and if so, whether these are in
accordance with the books of accounts maintained by the company., after clause (c) in
rule 11 of the Companies (Audit and Auditors) Rules, 2014.
For more details students may refer below mentioned link:
http://www.mca.gov.in/Ministry/pdf/CompaniesAuditandAuditorsSecondAmendmentRules201
7.pdf
10. Guidance Note on Reporting under section 143(3)(f) and (h) of the Companies Act,
2013: This Guidance Note is intended to assist the auditors in discharging their duties in
respect of clauses (f) and (h) of sub-section (3) of section 143 of the Act. Clause (f) of the
said sub-section creates a requirement for the auditor to consider observations or
comments of the auditor on financial transactions or matters which have an adverse effect
on the functioning of the company. Such observations or comments would ordinarily lead
to the modification of or an emphasis of matter in the auditors report on financial
statements. It may be noted that the matters that lead to modification in the auditors report
on financial statements are matters that give rise to a qualified opinion, adverse opini on or
a disclaimer of opinion. Further, matters that lead to an emphasis of matter paragraphs are
matters appropriately presented or disclosed in the financial statements that, in the
auditors judgement, are of such importance that they are fundamental to the users
understanding of the financial statements. If the matter leading to the modification of the
auditors opinion or an emphasis of matter in the auditors report on financial statements is
likely to have an adverse effect on the functioning of the company, the auditor is required
to report such matter.
Under clause (h) of sub-section (3) of section 143 of the Act, the auditor is required
to state whether any matter leading to a qualification, reservation or adverse remark,
that is, effectively the modification of the auditors report on financial statements,
relates to the maintenance of accounts and other matters connected therewith.
For Complete Guidance Note refer below mentioned link:
http://220.227.161.86/37392aasb26881.pdf
11. Quality Control and Engagement Standards: The Council of the ICAI has revised
following Quality Control and Engagement Standards which are applicable for November
2017 and onward examination:
S. No. No. of Title of the Standard

Standard
(I) SA 260 Communication with Those Charged with Governance
(II) SA 570 Going Concern
(III) SA 610 Using the Work of Internal Auditors
(I) SA 260 (Revised), Communication with Those Charged with Governance

Introduction
Scope of this SA
1. This Standard on Auditing (SA) deals with the auditors responsibility to communicate with
those charged with governance in an audit of financial statements. Although this SA applies
irrespective of an entitys governance structure or size, particular considerations apply where
all of those charged with governance are involved in managing an entity, and for listed entities.
This SA does not establish requirements regarding the auditors communication with an entitys
management or owners unless they are also charged with a governance role.
2. This SA is written in the context of an audit of financial statements, but may also be
applicable, adapted as necessary in the circumstances, to audits of other historical financial
information when those charged with governance have a responsibility to oversee the
preparation of the other historical financial information.
3. Recognizing the importance of effective two-way communication in an audit of financial
statements, this SA provides an overarching framework for the auditors communication with
those charged with governance, and identifies some specific matters to be communicated with
them. Additional matters to be communicated, which complement the requirements of this SA,
are identified in other SAs (see Appendix 1). In addition, SA 265 1 establishes specific
requirements regarding the communication of significant deficiencies in internal control the
auditor has identified during the audit to those charged with governance. Further matters, not
required by this or other SAs, may be required to be communicated by law or regulation, by
agreement with the entity, or by additional requirements applicable to the engagement, for
1 SA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management.
example, the standards of a national professional accountancy body. No thing in this SA

precludes the auditor from communicating any other matters to those charged with governance.
(Ref: Para. A33A36)
The Role of Communication
4. This SA focuses primarily on communications from the auditor to those charged with
governance. Nevertheless, effective two-way communication is important in assisting:
a. The auditor and those charged with governance in understanding matters related to the
audit in context, and in developing a constructive working relationship. This relationship is
developed while maintaining the auditors independence and objectivity;
b. The auditor in obtaining from those charged with governance information relevant to the
audit. For example, those charged with governance may assist the auditor in understanding
the entity and its environment, in identifying appropriate sources of audit evide nce, and in
providing information about specific transactions or events; and
c. Those charged with governance in fulfilling their responsibility to oversee the financial
reporting process, thereby reducing the risks of material misstatement of the financial
statements.
5. Although the auditor is responsible for communicating matters required by this SA,
management also has a responsibility to communicate matters of governance interest to
those charged with governance. Communication by the auditor does not relie ve
management of this responsibility.
Similarly, communication by management with those charged with governance of matters that
the auditor is required to communicate does not relieve the auditor of the responsibility to also
communicate them. Communication of these matters by management may, however, affect the
form or timing of the auditors communication with those charged with governance.
6. Clear communication of specific matters required to be communicated by SAs is an integral
part of every audit. SAs do not, however, require the auditor to perform procedures specifically
to identify any other matters to communicate with those charged with governance.
7. Law or regulation may restrict the auditors communication of certain matters with those
charged with governance. For example, laws or regulations may specifically prohibit a
communication, or other action, that might prejudice an investigation by an appropriate authority
into an actual, or suspected, illegal act. In some circumstances, potential conflicts between the
auditors obligations of confidentiality and obligations to communicate may be complex. In such
cases, the auditor may consider obtaining legal advice.
Effective Date
8. This SA is effective for audits of financial statements for periods beginni ng on or after
April 1, 2017.
Objectives
9. The objectives of the auditor are:
(a) To communicate clearly with those charged with governance the responsibilities of the
auditor in relation to the financial statement audit, and an overview of the planned scope
and timing of the audit;
(b) To obtain from those charged with governance information relevant to the audit;
(c) To provide those charged with governance with timely observations arising from the audit
that are significant and relevant to their responsibility to oversee the financial reporting
process; and
(d) To promote effective two-way communication between the auditor and those charged with
governance.
Definitions
10. For purposes of the SAs, the following terms have the meanings attributed below:
(a) Those charged with governance The person(s) or organization(s) (e.g., a corporate
trustee) with responsibility for overseeing the strategic direction of the entity and obligations
related to the accountability of the entity. This includes overseeing the financial reporting
process. For some entities, those charged with governance may include management
personnel, for example, executive members of a governance board of a private or public sector
entity, or an owner-manager. For discussion of the diversity of governance structures, see
paragraphs A1A8.
(b) Management The person(s) with executive responsibility for the conduct of the entitys
operations. For some entities, management includes some or all of those charged with
governance, for example, executive members of a governance board, or an owner -manager.
Requirements
Those Charged with Governance
11. The auditor shall determine the appropriate person(s) within the entitys governance
structure with whom to communicate. (Ref: Para. A1A4)
Communication with a Subgroup of Those Charged with Governance
12. If the auditor communicates with a subgroup of those charged with governance, for
example, an audit committee, or an individual, the auditor shall determine whether the auditor
also needs to communicate with the governing body. (Ref: Para. A5A7)
When All of Those Charged with Governance Are Involved in Managing the Entity
13. In some cases, all of those charged with governance are involved in managing the entity,
for example, a small business where a single owner manages the entity and no one else has a
governance role. In these cases, if matters required by this SA are communicated with person(s)
with management responsibilities, and those person(s) also have governance responsibilities,
the matters need not be communicated again with those same person(s) in their governance
role. These matters are noted in paragraph 16(c). The auditor shall nonetheless be satisfied
that communication with person(s) with management responsibilities adequately informs all of
those with whom the auditor would otherwise communicate in their governance capacity. (Ref:
Para. A8)
Matters to Be Communicated
The Auditors Responsibilities in Relation to the Financial Statement Audit
14. The auditor shall communicate with those charged with governance the responsibilities of
the auditor in relation to the financial statement audit, including that:
(a) The auditor is responsible for forming and expressing an opinion on the financial
statements that have been prepared by management with the oversight of those charged
with governance; and
(b) The audit of the financial statements does not relieve management or those charged with
governance of their responsibilities. (Ref: Para. A9A10)
Planned Scope and Timing of the Audit
15. The auditor shall communicate with those charged with governance an overview of the
planned scope and timing of the audit, which includes communicating about the significant risks
identified by the auditor. (Ref: Para. A11A16)
Significant Findings from the Audit
16. The auditor shall communicate with those charged with governance: (Ref: Para. A17A18)
(a) The auditors views about significant qualitative aspects of the entitys accounting
practices, including accounting policies, accounting estimates and financial statement
disclosures. When applicable, the auditor shall explain to those charged with governance
why the auditor considers a significant accounting practice, that is acceptable under the
applicable financial reporting framework, not to be most appropriate to the particular
circumstances of the entity; (Ref: Para. A19A20)
(b) Significant difficulties, if any, encountered during the audit; (Ref: Para. A21)
(c) Unless all of those charged with governance are involved in managing the entity:
i. Significant matters arising during the audit that were discussed, or subject to
correspondence, with management; and (Ref: Para. A22)
ii. Written representations the auditor is requesting;
(d) Circumstances that affect the form and content of the auditors report, if any; and (Ref:
Para. A23A25)
(e) Any other significant matters arising during the audit that, in the auditors professional
judgment, are relevant to the oversight of the financial reporting process. (Ref: Para. A26
A28)
Auditor Independence
17. In the case of listed entities, the auditor shall communicate with those charged with
governance:
(a) A statement that the engagement team and others in the firm as appropriate, the firm and,
when applicable, network firms have complied with relevant ethical requirements regarding
independence; and
i. All relationships and other matters between the firm, network firms, and the entity
that, in the auditors professional judgment, may reasonably be thought to bear on
independence. This shall include total fees charged during the period covered by the
financial statements for audit and non-audit services provided by the firm and network
firms to the entity and components controlled by the entity. These fees shall be
allocated to categories that are appropriate to assist those charged with governance
in assessing the effect of services on the independence of the auditor; and
ii. The related safeguards that have been applied to eliminate identified threats to
independence or reduce them to an acceptable level. (Ref: Para. A29A32)
The Communication Process
Establishing the Communication Process
18. The auditor shall communicate with those charged with governance the form, timing and
expected general content of communications. (Ref: Para. A37A45)
Forms of Communication
19. The auditor shall communicate in writing with those charged with governance regarding
significant findings from the audit if, in the auditors professional judgment, oral communication
would not be adequate. Written communications need not include all matters that arose during
the course of the audit. (Ref: Para. A46A48)
20. The auditor shall communicate in writing with those charged with governance regarding
auditor independence when required by paragraph 17.
Timing of Communications
21. The auditor shall communicate with those charged with governance on a timely basis. (Ref:
Para. A49A50)
Adequacy of the Communication Process
22. The auditor shall evaluate whether the two-way communication between the auditor and
those charged with governance has been adequate for the purpose of the audit. If it has not, the
auditor shall evaluate the effect, if any, on the auditors assessment of the risks of material
misstatement and ability to obtain sufficient appropriate audit evidence, and shall take
appropriate action. (Ref: Para. A51A53)
Documentation
23. Where matters required by this SA to be communicated are communicated orally, the
auditor shall include them in the audit documentation, and when and to whom they were
communicated. Where matters have been communicated in writing, the auditor shall retain a
copy of the communication as part of the audit documentation. 2 (Ref: Para. A54)
***
2 SA 230, Audit Documentation, paragraphs 811, and A6.
Application and Other Explanatory Material

Those Charged with Governance (Ref: Para. 11)
A1. Governance structures vary by entities, reflecting influences such as different cultural
and legal backgrounds, and size and ownership characteristics. For example:
In some entities, a supervisory (wholly or mainly non-executive) board exists that is legally
separate from an executive (management) board (a two-tier board structure). In other
entities, both the supervisory and executive functions are the legal responsibility of a
single, or unitary, board (a one-tier board structure).
In some entities, those charged with governance hold positions that are an integral part of
the entitys legal structure, for example, company directors. In others, for example, some
government entities, a body that is not part of the entity is charged with governance.
In some cases, some or all of those charged with governance are involved in managing
the entity. In others, those charged with governance and management comprise different
persons.
In some cases, those charged with governance are responsible for approving3 the entitys
financial statements (in other cases management has this responsibility).
A2. In most entities, governance is the collective responsibility of a governing body, such as
a board of directors, a supervisory board, partners, proprietors, a committee of management, a
council of governors, trustees, or equivalent persons. In some smaller entities, however, one
person may be charged with governance, for example, the owner-manager where there are no
other owners, or a sole trustee. When governance is a collective responsibility, a subgroup such
as an audit committee or even an individual, may be charged with specific tasks to assist the
governing body in meeting its responsibilities. Alternatively, a subgroup or individual may have
specific, legally identified responsibilities that differ from those of the governing body.
A3. Such diversity means that it is not possible for this SA to specify for all audits the person(s)
with whom the auditor is to communicate particular matters. Also, in some cases, the appropriate
person(s) with whom to communicate may not be clearly identifiable from the applicable legal
framework or other engagement circumstances, for example, entities where the governance
structure is not formally defined, such as some family-owned entities, some not-for-profit
organizations, and some government entities. In such cases, the auditor may need to discuss
and agree with the engaging party the relevant person(s) with whom to communicate. In deciding
with whom to communicate, the auditors understanding of an entitys governance structure and
processes obtained in accordance with SA 315 4 is relevant. The appropriate person(s) with
whom to communicate may vary depending on the matter to be communicated.
A4. SA 600 includes specific matters to be communicated by group auditors with those
charged with governance. When the entity is a component of a group, the appropriate person(s)
3 As described in paragraph A60 of SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, having responsibility
for approving in this context means having the authority to conclude that all the statements that comprise the financial statements, including
the related notes, have been prepared.
4 SA 315, Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.
with whom the component auditor communicates depends on the engagement circumstances
and the matter to be communicated. In some cases, a number of components may be conducting
the same businesses within the same system of internal control and using the same accounting
practices. Where those charged with governance of those components are the same (e.g.,
common board of directors), duplication may be avoided by dealing with these components
concurrently for the purpose of communication.
Communication with a Subgroup of Those Charged with Governance (Ref: Para. 12)
A5. When considering communicating with a subgroup of those charged with governance, the
auditor may take into account such matters as:
The respective responsibilities of the subgroup and the governing body.
The nature of the matter to be communicated.
Relevant legal or regulatory requirements.
Whether the subgroup has the authority to take action in relation to the information
communicated, and can provide further information and explanations the auditor may need.
A6. When deciding whether there is also a need to communicate information, in full or in
summary form, with the governing body, the auditor may be influenced by the auditors
assessment of how effectively and appropriately the subgroup communicates relevant
information with the governing body. The auditor may make explicit in agreeing the terms of
engagement that, unless prohibited by law or regulation, the auditor retains the right to
communicate directly with the governing body.
A7. Audit committees (or similar subgroups with different names) exist in many entities.
Although their specific authority and functions may differ, communication with the audit
committee, where one exists, has become a key element in the auditors communication with
those charged with governance. Good governance principles suggest that:
The auditor will be invited to regularly attend meetings of the audit committee.
The chair of the audit committee and, when relevant, the other members of the audit
committee, will liaise with the auditor periodically.
The audit committee will meet the auditor without management present at least annually.
When All of Those Charged with Governance Are Involved in Managing the Entity (Ref: Para.13)
A8. In some cases, all of those charged with governance are involved in managing the entity,
and the application of communication requirements is modified to recognize this position. In
such cases, communication with person(s) with management responsibilities may not
adequately inform all of those with whom the auditor would otherwise communicate in their
governance capacity. For example, in a company where all directors are involved in managing
the entity, some of those directors (e.g., one responsible for marketing) may be unaware of
significant matters discussed with another director (e.g., one responsible for the preparation of
the financial statements).
Matters to Be Communicated
The Auditors Responsibilities in Relation to the Financial Statement Audit (Ref: Para. 14)
A9. The auditors responsibilities in relation to the financial statement audit are often included
in the engagement letter or other suitable form of written agreement that records the agreed
terms of the engagement. 5 Law, regulation or the governance structure of the entity may require
those charged with governance to agree the terms of the engagement with the auditor. When
this is not the case, providing those charged with governance with a copy of that engagement
letter or other suitable form of written agreement may be an appropriate way to communicate
with them regarding such matters as:
The auditors responsibility for performing the audit in accordance with SAs, which is
directed towards the expression of an opinion on the financial statements. The matters that
SAs require to be communicated, therefore, include significant matters arising during the
audit of the financial statements that are relevant to those charged with governance in
overseeing the financial reporting process.
The fact that SAs do not require the auditor to design procedures for the purpose of
identifying supplementary matters to communicate with those charged with governance.
When SA 7016 applies, the auditors responsibilities to determine and communicate key
audit matters in the auditors report.
When applicable, the auditors responsibility for communicating particular matters required
by law or regulation, by agreement with the entity or by additional requirements applicable
to the engagement, for example, the standards of a national professional accountancy
body.
A10. Law or regulation, an agreement with the entity or additional requirements applicable to
the engagement may provide for broader communication with those charged with governance.
For example, (a) an agreement with the entity may provide for particular matters to be
communicated when they arise from services provided by a firm or network firm other than the
financial statement audit; or (b) the mandate of a public sector auditor may provide for matters
to be communicated that come to the auditors attention as a result of other work, such as
performance audits.
Planned Scope and Timing of the Audit (Ref: Para. 15)
A11. Communication regarding the planned scope and timing of the audit may:
Assist those charged with governance to understand better the consequences of the
auditors work, to discuss issues of risk and the concept of materiality with the auditor, and
to identify any areas in which they may request the auditor to undertake additi onal
procedures; and
Assist the auditor to understand better the entity and its environment.
5 See paragraph 10 of SA 210, Agreeing the Terms of Audit Engagements.

6 SA 701, Communicating Key Audit Matters in the Independent Auditors Report.
A12. Communicating significant risks identified by the auditor helps those charged with
governance understand those matters and why they require special audit consideration. The
communication about significant risks may assist those charged with governance in fulfilling
their responsibility to oversee the financial reporting process.
A13. Matters communicated may include:
(a) How the auditor plans to address the significant risks of material misstatement, whether
due to fraud or error.
(b) How the auditor plans to address areas of higher assessed risks of material misstatement.
(c) The auditors approach to internal control relevant to the audit.
(d) The application of the concept of materiality in the context of an audit. 7
(e) The nature and extent of specialized skill or knowledge needed to perform the planned
audit procedures or evaluate the audit results, including the use of an auditors expert. 8
(f) When SA 701 applies, the auditors preliminary views about matters that may be areas of
significant auditor attention in the audit and therefore may be key audit matters.
A14. Other planning matters that it may be appropriate to discuss with those charged with
governance include:
Where the entity has an internal audit function, how the external auditor and internal
auditors can work together in a constructive and complementary manner, including any
planned use of the work of the internal audit function, and the nature and extent of any
planned use of internal auditors to provide direct assistance.9
The views of those charged with governance of:
The appropriate person(s) in the entitys governance structure with whom to
communicate.
The allocation of responsibilities between those charged with governance and
management.
The entitys objectives and strategies, and the related business risks that may result
in material misstatements.
Matters those charged with governance consider warrant particular attenti on during
the audit, and any areas where they request additional procedures to be undertaken.
Significant communications with regulators.
Other matters those charged with governance consider may influence the audit of the
The attitudes, awareness, and actions of those charged with governance concerning (a)
the entitys internal control and its importance in the entity, including how those charged
7 SA 320, Materiality in Planning and Performing an Audit.

8 See SA 620, Using the Work of an Auditors Expert.
9 SA 610 (Revised), Using the Work of Internal Auditors, paragraph 31.
with governance oversee the effectiveness of internal control, and (b) the detection or
possibility of fraud.
The actions of those charged with governance in response to developments in accounting
standards, corporate governance practices, exchange listing rules, and related matters.
The responses of those charged with governance to previous communications with the
auditor.
A15. While communication with those charged with governance may assist the auditor to plan
the scope and timing of the audit, it does not change the auditors sole responsibility to establish
the overall audit strategy and the audit plan, including the nature, timing and extent of
procedures necessary to obtain sufficient appropriate audit evidence.
A16. Care is necessary when communicating with those charged with governance about the
planned scope and timing of the audit so as not to compromise the effectiveness of the audit,
particularly where some or all of those charged with governance are involved in managing the
entity. For example, communicating the nature and timing of detailed audit procedures may
reduce the effectiveness of those procedures by making them too predictable.
Significant Findings from the Audit (Ref: Para. 16)
A17. The communication of findings from the audit may include requesting further information
from those charged with governance in order to complete the audit evidence obtained. For
example, the auditor may confirm that those charged with governance have the same
understanding of the facts and circumstances relevant to specific transactions or events.
A18. When SA 701 applies, the communications with those charged with governance required
by paragraph 16, as well as the communication about the significant risks identified by the
auditor required by paragraph 15, are particularly relevant to the auditors determination of
matters that required significant auditor attention and which therefore may be key audit
matters.10
Significant Qualitative Aspects of Accounting Practices (Ref: Para. 16(a))
A19. Financial reporting frameworks ordinarily allow for the entity to make accounting
estimates, and judgments about accounting policies and financial statement disclosures, for
example, in relation to the use of key assumptions in the development of accounting estimates
for which there is significant measurement uncertainty. In addition, law, regulation or financial
reporting frameworks may require disclosure of a summary of significant accounting policies or
make reference to critical accounting estimates or critical accounting policies and practices
to identify and provide additional information to users about the most difficult, subjective or
complex judgments made by management in preparing the financial statements.
A20. As a result, the auditors views on the subjective aspects of the financial statements may
be particularly relevant to those charged with governance in discharging their responsibilities
for oversight of the financial reporting process. For example, in relation to the matters described
in paragraph A19, those charged with governance may be interested in the auditors evaluation
10 SA 701, paragraphs 910.
of the adequacy of disclosures of the estimation uncertainty relating to accounting estimates

that give rise to significant risks. Open and constructive communication about significant
qualitative aspects of the entitys accounting practices also may include comment on the
acceptability of significant accounting practices. Appendix 2 identifies matters that may be
included in this communication.
Significant Difficulties Encountered during the Audit (Ref: Para. 16(b))
A21. Significant difficulties encountered during the audit may include such matters as:
(i) Significant delays by management, the unavailability of entity personnel, or an
unwillingness by management to provide information necessary for the auditor to perform
the auditors procedures.
(ii) An unreasonably brief time within which to complete the audit.
(iii) Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
(iv) The unavailability of expected information.
(v) Restrictions imposed on the auditor by management.
(vi) Managements unwillingness to make or extend its assessment of the entitys ability to
continue as a going concern when requested.
In some circumstances, such difficulties may constitute a scope limitation that leads to a
modification of the auditors opinion. 11
Significant Matters Discussed, or Subject to Correspondence with Management (Ref: Para.
16(c)(i))
A22. Significant matters discussed, or subject to correspondence with management may
include such matters as:
Significant events or transactions that occurred during the year.
Business conditions affecting the entity, and business plans and strategies that may affect
the risks of material misstatement.
Concerns about managements consultations with other accountants on accounting or
auditing matters.
Discussions or correspondence in connection with the initial or recurring appointment of
the auditor regarding accounting practices, the application of auditing standards, or fees
for audit or other services.
Significant matters on which there was disagreement with management, exce pt for initial
differences of opinion because of incomplete facts or preliminary information that are later
resolved by the auditor obtaining additional relevant facts or information.
Circumstances that Affect the Form and Content of the Auditors Report (Ref: Para 16(d))
11 SA 705 (Revised), Modifications to the Opinion in the Independent Auditors Report.
A23. SA 210 requires the auditor to agree the terms of the audit engagement with management
or those charged with governance, as appropriate. 12 The agreed terms of the audit engagement
are required to be recorded in an audit engagement letter or other suitable form of written
agreement and include, among other things, reference to the expected form and content of the
auditors report.13 As explained in paragraph A9, if the terms of engagement are not agreed with
those charged with governance, the auditor may provide those charged with governance with a
copy of the engagement letter to communicate about matters relevant to the audit. The
communication required by paragraph 16(d) is intended to inform those charged with
governance about circumstances in which the auditors report may differ from its expected form
and content or may include additional information about the audit that was performed.
A24. Circumstances in which the auditor is required or may otherwise consider it necessary to
include additional information in the auditors report in accordance with the SAs, and for which
communication with those charged with governance is required, include when:
The auditor expects to modify the opinion in the auditors report in accordance with SA 705
(Revised).14
A material uncertainty related to going concern is reported in accordance with SA 570
(Revised).15
Key audit matters are communicated in accordance with SA 701. 16
The auditor considers it necessary to include an Emphasis of Matter paragrap h or Other
Matters paragraph in accordance with SA 706 (Revised) 17 or is required to do so by other
SAs.
In such circumstances, the auditor may consider it useful to provide those charged with
governance with a draft of the auditors report to facilitate a discussion of how such matters will
be addressed in the auditors report.
A25. In the rare circumstances that the auditor intends not to include the name of the
engagement partner in the auditors report in accordance with SA 700 (Revised), the auditor is
required to discuss this intention with those charged with governance to inform the auditors
assessment of the likelihood and severity of a significant personal security threat. The auditor
also may communicate with those charged with governance in circumstances when the auditor
elects not to include the description of the auditors responsibilities in the body of the auditors
report as permitted by SA 700 (Revised). 18
Other Significant Matters Relevant to the Financial Reporting Process (Ref: Para. 16(e) )
12 SA 210, paragraph 9.
14 SA 705 (Revised), paragraph 30.
15 SA 570 (Revised), Going Concern, paragraph 25(d).
17 SA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditors Report, paragraph 12.
18 SA 700 (Revised), paragraph 40.
A26. SA 30019 notes that, as a result of unexpected events, changes in conditions, or the audit
evidence obtained from the results of audit procedures, the auditor may need to modify the
overall audit strategy and audit plan and thereby the resulting planned nature, timing and extent
of further audit procedures, based on the revised consideration of assessed risks. The auditor
may communicate with those charged with governance about such matters, for example, as an
update to initial discussions about the planned scope and timing of the audit.
A27. Other significant matters arising from the audit that are directly relevant to those charged
with governance in overseeing the financial reporting process may include such matters as
material misstatements of fact or material inconsistencies in information accompanying the
audited financial statements that have been corrected.
A28. To the extent not already addressed by the requirements in paragraphs 16(a)(d) and
related application material, the auditor may consider communicating about other matters
discussed with, or considered by, the engagement quality control reviewer, if one has been
appointed, in accordance with SA 220. 20
Auditor Independence (Ref: Para. 17)
A29. The auditor is required to comply with relevant ethical requirements, including those
pertaining to independence, relating to financial statement audit engagements. 21
A30. The relationships and other matters, and safeguards to be communicated, vary with the
circumstances of the engagement, but generally address:
(a) Threats to independence, which may be categorized as: self-interest threats, self-review
threats, advocacy threats, familiarity threats, and intimidation threats; and
(b) Safeguards created by the profession, legislation or regulation, safeguards within the
entity, and safeguards within the firms own systems and procedures.
A31. Relevant ethical requirements or law or regulation may also specify particular
communications to those charged with governance in circumstances where breaches of
independence requirements have been identified. For example, the Code of Ethics issued by
ICAI requires the auditor to communicate with those charged with governance in writing about
any breach and the action the firm has taken or proposes to take.
A32. The communication requirements relating to auditor independence that apply in the case
of listed entities may also be appropriate in the case of some other entities, including those that
may be of significant public interest, for example because they have a large num ber and wide
range of stakeholders and considering the nature and size of the business. Examples of such
entities may include financial institutions (such as banks, insurance companies, and pension
funds), and other entities such as charities. On the other hand, there may be situations where
communications regarding independence may not be relevant, for example, where all of those
19 SA 300, Planning an Audit of Financial Statements, paragraph A14.

20 See paragraphs 1921 and A23A31 of SA 220, Quality Control for an Audit of Financial Statements.
21 SA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing, paragraph
14.
charged with governance have been informed of relevant facts through their management
activities. This is particularly likely where the entity is owner-managed, and the auditors firm
and network firms have little involvement with the entity beyond a financial statement audit.
Supplementary Matters (Ref: Para. 3)
A33. The oversight of management by those charged with governance includes ensuring that
the entity designs, implements and maintains appropriate internal control with regard to
reliability of financial reporting, effectiveness and efficiency of operations and compliance with
applicable laws and regulations.
A34. The auditor may become aware of supplementary matters that do not necessarily relate to the
oversight of the financial reporting process but which are, nevertheless, likely to be significant to the
responsibilities of those charged with governance in overseeing the strategic direction of the entity
or the entitys obligations related to accountability. Such matters may include, for example, significant
issues regarding governance structures or processes, and significant decisions or actions by senior
management that lack appropriate authorization.
A35. In determining whether to communicate supplementary matters with those charged with
governance, the auditor may discuss matters of this kind of which the auditor has become aware
with the appropriate level of management, unless it is inappropriate to do so in the
circumstances.
A36. If a supplementary matter is communicated, it may be appropriate for the auditor to make
those charged with governance aware that:
(a) Identification and communication of such matters is incidental to the purpose of the audit,
which is to form an opinion on the financial statements;
(b) No procedures were carried out with respect to the matter other than any that were
necessary to form an opinion on the financial statements; and
(c) No procedures were carried out to determine whether other such matters exist.
The Communication Process
Establishing the Communication Process (Ref: Para. 18)
A37. Clear communication of the auditors responsibilities, the planned scope and timing of the
audit, and the expected general content of communications helps establish the basis for
effective two-way communication.
A38. Matters that may also contribute to effective two-way communication include discussion
of:
The purpose of communications. When the purpose is clear, the auditor and those charged
with governance are better placed to have a mutual understanding of relevant issues and
the expected actions arising from the communication process.
The form in which communications will be made.
The person(s) in the engagement team and among those charged with governance who
will communicate regarding particular matters.
The auditors expectation that communication will be two-way, and that those charged with
governance will communicate with the auditor matters they consider relevant to the audit,
for example, strategic decisions that may significantly affect the nature, timing and extent
of audit procedures, the suspicion or the detection of fraud, and concerns with the integrity
or competence of senior management.
The process for taking action and reporting back on matters communicated by the auditor.
The process for taking action and reporting back on matters communicated by those
charged with governance.
A39. The communication process will vary with the circumstances, including the size and
governance structure of the entity, how those charged with governance operate, and the
auditors view of the significance of matters to be communicated. Difficulty in establi shing
effective two-way communication may indicate that the communication between the auditor and
those charged with governance is not adequate for the purpose of the audit (see paragraph
A52).
Considerations Specific to Smaller Entities
A40. In the case of audits of smaller entities, the auditor may communicate in a less structured
manner with those charged with governance than in the case of listed or larger entities.
Communication with Management
A41. Many matters may be discussed with management in the ordinary course of an audit,
including matters required by this SA to be communicated with those charged with governance.
Such discussions recognize managements executive responsibility for the conduct of the
entitys operations and, in particular, managements responsibility for the preparation of the
A42. Before communicating matters with those charged with governance, the auditor may
discuss them with management, unless that is inappropriate. For example, it may not be
appropriate to discuss questions of managements competence or integrity with management.
In addition to recognizing managements executive responsibility, these initial discussions may
clarify facts and issues, and give management an opportunity to provide further information and
explanations. Similarly, when the entity has an internal audit function, the auditor may discuss
matters with the internal auditor before communicating with those charged with governance.
Communication with Third Parties
A43. Those charged with governance may be required by law or regulation, or may wish, to
provide third parties, for example, bankers or certain regulatory authorities, with copies of a
written communication from the auditor. In some cases, disclosure to third parties may be illegal
or otherwise inappropriate. When a written communication prepared for those charged with
governance is provided to third parties, it may be important in the circumstances that the third
parties be informed that the communication was not prepared with them in mind, for example,
by stating in written communications with those charged with governance:
That the communication has been prepared for the sole use of those charged with
governance and, where applicable, the group management and the group auditor, and
should not be relied upon by third parties;

That no responsibility is assumed by the auditor to third parties; and
Any restrictions on disclosure or distribution to third parties.
A44. In some entities, the auditor may be required by law or regulation to, for example:
Notify a regulatory or enforcement body of certain matters communicated with those
charged with governance. For example, in some countries the auditor has a duty to report
misstatements to authorities where management and those charged with governance fail
to take corrective action;
Submit copies of certain reports prepared for those charged with governance to relevant
regulatory or funding bodies, or other bodies such as a central authority in the case of
some public sector entities; or
Make reports prepared for those charged with governance publicly available.
A45. Unless required by law or regulation to provide a third party with a copy of the auditors
written communications with those charged with governance, the auditor may n eed the prior
consent of those charged with governance before doing so.
Forms of Communication (Ref: Para. 19)
A46. Effective communication may involve structured presentations and written reports as well
as less structured communications, including discussions. The auditor may communicate
matters other than those identified in paragraphs 1920 either orally or in writing. Written
communications may include an engagement letter that is provided to those charged with
governance.
A47. In addition to the significance of a particular matter, the form of communication (e.g.,
whether to communicate orally or in writing, the extent of detail or summarization in the
communication, and whether to communicate in a structured or unstructured manner) may be
affected by such factors as:
(a) Whether a discussion of the matter will be included in the auditors report. For example,
when key audit matters are communicated in the auditors report, the auditor may consider
it necessary to communicate in writing about the matters determined to be ke y audit
matters.
(b) Whether the matter has been satisfactorily resolved.
(c) Whether management has previously communicated the matter.
(d) The size, operating structure, control environment, and legal structure of the entity.
(e) In the case of an audit of special purpose financial statements, whether the auditor also
audits the entitys general purpose financial statements.
(f) Legal requirements. In some entities, a written communication with those charged with
governance is required in a prescribed form by local law.
(g) The expectations of those charged with governance, including arrangements made for
periodic meetings or communications with the auditor.
(h) The amount of ongoing contact and dialogue the auditor has with those charged with
governance.
(i) Whether there have been significant changes in the membership of a governing body.
A48. When a significant matter is discussed with an individual member of those charged with
governance, for example, the chair of an audit committee, it may be appropriate for the auditor
to summarize the matter in later communications so that all of those charged with governance
have full and balanced information.
Timing of Communications (Ref: Para. 21)
A49. Timely communication throughout the audit contributes to the achievement of robust two-
way dialogue between those charged with governance and the auditor. However, the
appropriate timing for communications will vary with the circumstances of the engagement.
Relevant circumstances include the significance and nature of the matter, and the a ction
expected to be taken by those charged with governance. For example:
(a) Communications regarding planning matters may often be made early in the audit
engagement and, for an initial engagement, may be made as part of agreeing the terms of
the engagement.
(b) It may be appropriate to communicate a significant difficulty encountered during the audit
as soon as practicable if those charged with governance are able to assist the auditor to
overcome the difficulty, or if it is likely to lead to a modified opinion. Similarly, the auditor
may communicate orally to those charged with governance as soon as practicable
significant deficiencies in internal control that the auditor has identified, prior to
communicating these in writing as required by SA 265. 22
When SA 701 applies, the auditor may communicate preliminary views about key audit
matters when discussing the planned scope and timing of the audit (see paragraph A13),
and the auditor also may have more frequent communications to further discuss such
matters when communicating about significant audit findings.
Communications regarding independence may be appropriate whenever significant
judgments are made about threats to independence and related safeguards, for example,
when accepting an engagement to provide non-audit services, and at a concluding
discussion.
Communications regarding findings from the audit, including the auditors views about the
qualitative aspects of the entitys accounting practices, may also be made as part of the
concluding discussion.
When auditing both general purpose and special purpose financial statements, it may be
appropriate to coordinate the timing of communications.
A50. Other factors that may be relevant to the timing of communications include:
The size, operating structure, control environment, and legal structure of the entity being
22 SA 265, paragraphs 9 and A14.
audited.
Any legal obligation to communicate certain matters within a specified timeframe.
The expectations of those charged with governance, including arrangements made for
periodic meetings or communications with the auditor.
The time at which the auditor identifies certain matters, for example, the auditor may not
identify a particular matter (e.g., noncompliance with a law) in time for preventive action to
be taken, but communication of the matter may enable remedial action to be taken.
Adequacy of the Communication Process (Ref: Para. 22)
A51. The auditor need not design specific procedures to support the evaluation of the two -way
communication between the auditor and those charged with governance; rather, that evaluation
may be based on observations resulting from audit procedures performed for other purposes.
Such observations may include:
The appropriateness and timeliness of actions taken by those charged with governance in
response to matters raised by the auditor. Where significant matters raised in previous
communications have not been dealt with effectively, it may be appropriate for the auditor
to inquire as to why appropriate action has not been taken, and to consider raising th e
point again. This avoids the risk of giving an impression that the auditor is satisfied that
the matter has been adequately addressed or is no longer significant.
The apparent openness of those charged with governance in their communications with
the auditor.
The willingness and capacity of those charged with governance to meet with the auditor
without management present.
The apparent ability of those charged with governance to fully comprehend matters raised
by the auditor, for example, the extent to which those charged with governance probe
issues, and question recommendations made to them.
Difficulty in establishing with those charged with governance a mutual understanding of
the form, timing and expected general content of communications.
Where all or some of those charged with governance are involved in managing the entity,
their apparent awareness of how matters discussed with the auditor affect their broader
governance responsibilities, as well as their management responsibilities.
Whether the two-way communication between the auditor and those charged with
governance meets applicable legal and regulatory requirements.
A52. As noted in paragraph 4, effective two-way communication assists both the auditor and
those charged with governance. Further, SA 315 identifies participation by those charged with
governance, including their interaction with internal audit, if any, and external auditors, as an
element of the entitys control environment. 23 Inadequate two-way communication may indicate
an unsatisfactory control environment and influence the auditors assessment of the risks of
23 SA 315, paragraph A70.
material misstatements. There is also a risk that the auditor may not have obtained sufficient
appropriate audit evidence to form an opinion on the financial statements.
A53. If the two-way communication between the auditor and those charged with governance is not
adequate and the situation cannot be resolved, the auditor may take such actions as:
Modifying the auditors opinion on the basis of a scope limitation.
Obtaining legal advice about the consequences of different courses of action.
Communicating with third parties (e.g., a regulator), or a higher authority in the governance
structure that is outside the entity, such as the owners of a business (e.g., shareholders in a
general meeting), or the responsible government minister or parliament in the public sector.
Withdrawing from the engagement, where withdrawal is possible under applicable law or
regulation.
Documentation (Ref: Para. 23)
A54. Documentation of oral communication may include a copy of minutes prepared by the
entity retained as part of the audit documentation where those minutes are an appropriate record
of the communication.
Appendix 1
(Ref: Para. 3)
Specific Requirements in SQC 1 and Other SAs that Refer to Communications with
Those Charged With Governance
This appendix identifies paragraphs in SQC 1 1 and other SAs that require communication of
specific matters with those charged with governance. The list is not a substitute for considering
the requirements and related application and other explanatory material in SAs.
SQC 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements paragraph 42(a).
SA 240, The Auditors Responsibilities Relating to Fraud in an Audit of Financial
Statements paragraphs 21, 38(c)(i) and 40-42.
SA 250, Consideration of Laws and Regulations in an Audit of Financial Statements
paragraphs 14, 19 and 2224.
SA 265, Communicating Deficiencies in Internal Control to Those Charged with
Governance and Management paragraph 9.
SA 450, Evaluation of Misstatements Identified during the Audit paragraphs 12-13.
SA 505, External Confirmations paragraph 9.
SA 510, Initial Audit EngagementsOpening Balances paragraph 7.
1SQC 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related
Services Engagements.
SA 550, Related Parties paragraph 27.

SA 560, Subsequent Events paragraphs 7(b)-(c), 10(a), 13(b), 14(a) and 17.
SA 570 (Revised), Going Concern paragraph 25.
SA 610 (Revised), Using the Work of Internal Auditors paragraphs 20 and 31.
SA 701, Communicating Key Audit Matters in the Independent Auditors Report
paragraph 17.
SA 705 (Revised), Modifications to the Opinion in the Independent Auditors Report
paragraphs 12, 14, 23 and 30.
SA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditors Report paragraph 12.
SA 710, Comparative InformationCorresponding Figures and Comparative Financial
Statements - paragraph 18.
SA 720, The Auditors Responsibilities in Relation to Other Information in Documents
Containing Audited Financial Statements paragraphs 10, 13 and 16.
Appendix 2
(Ref: Para. 16(a), A19A20)
Qualitative Aspects of Accounting Practices
The communication required by paragraph 16(a), and discussed in paragraphs A19A20, may
include such matters as:
Accounting Policies
The appropriateness of the accounting policies to the particular circumstances of the entity,
having regard to the need to balance the cost of providing information with the likely benefit
to users of the entitys financial statements. Where acceptable alternative accounting
policies exist, the communication may include identification of the financial statement items
that are affected by the choice of significant accounting policies as well as information on
accounting policies used by similar entities.
The initial selection of, and changes in, significant accounting policies, including the
application of new accounting pronouncements. The communication may include: the
effect of the timing and method of adoption of a change in accounting policy on the current
and future earnings of the entity; and the timing of a change in accounting policies in
relation to expected new accounting pronouncements.
The effect of significant accounting policies in controversial or emerging areas (or those unique
to an industry, particularly when there is a lack of authoritative guidance or consensus).
The effect of the timing of transactions in relation to the period in which they are recorded.
Accounting Estimates
For items for which estimates are significant, issues discussed in SA 540,1 including, for
example:
How management identifies those transactions, events and conditions that may give
rise to the need for accounting estimates to be recognized or disclosed in the financial
statements.
Changes in circumstances that may give rise to new, or the need to revise existing,
accounting estimates.
Whether managements decision to recognize, or to not recognize, the accounting
estimates in the financial statements is in accordance with the applicable financial
reporting framework.
Whether there has been or ought to have been a change from the prior period in the
methods for making the accounting estimates and, if so, why, as well as the outcome
of accounting estimates in prior periods.
Managements process for making accounting estimates (e.g., when management
has used a model), including whether the selected measurement basis for the
accounting estimate is in accordance with the applicable financial reporting
framework.
Whether the significant assumptions used by management in developing the
accounting estimate are reasonable.
Where relevant to the reasonableness of the significant assumptions used by
management or the appropriate application of the applicable financial reporting
framework, managements intent to carry out specific courses of action and its ability
to do so.
Risks of material misstatement.
Indicators of possible management bias.
How management has considered alternative assumptions or outcomes and why it
has rejected them, or how management has otherwise addressed estimation
uncertainty in making the accounting estimate.
The adequacy of disclosure of estimation uncertainty in the financial statements.
Financial Statement Disclosures
The issues involved, and related judgments made, in formulating particularly sensitive
financial statement disclosures (e.g., disclosures related to revenue recognition,
remuneration, going concern, subsequent events, and contingency issues).
1 SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures.
The overall neutrality, consistency and clarity of the disclosures in the financial statements.
Related Matters
The potential effect on the financial statements of significant risks, exposures and
uncertainties, such as pending litigation, that are disclosed in the financial statements.
The extent to which the financial statements are affected by significant transactions that
are outside the normal course of business for the entity, or that otherwise appear to be
unusual. This communication may highlight:
The non-recurring amounts recognized during the period.
The extent to which such transactions are separately disclosed in the financial
statements.
Whether such transactions appear to have been designed to ach ieve a particular
accounting or tax treatment, or a particular legal or regulatory objective.
Whether the form of such transactions appears overly complex or where extensive
advice regarding the structuring of the transaction has been taken.
Where management is placing more emphasis on the need for a particular accounting
treatment than on the underlying economics of the transaction.
The factors affecting asset and liability carrying values, including the entitys bases for
determining useful lives assigned to tangible and intangible assets. The communication
may explain how factors affecting carrying values were selected and how alternative
selections would have affected the financial statements.
The selective correction of misstatements, for example, correcting misstatements with the
effect of increasing reported earnings, but not those that have the effect of decreasing
reported earnings.
(II) SA 570 (Revised), Going Concern
Introduction
Scope of this SA
1. This Standard on Auditing (SA) deals with the auditors responsibilities in the audit of
financial statements relating to going concern and the implications for the auditors report. (Ref:
Para. A1)
Going Concern Basis of Accounting
2. Under the going concern basis of accounting, the financial statements are prepared on the
assumption that the entity is a going concern and will continue its operations for the foreseeable
future. General purpose financial statements are prepared using the going concern basis o f
accounting, unless management either intends to liquidate the entity or to cease operations, or
has no realistic alternative but to do so. Special purpose financial statements may or may not
be prepared in accordance with a financial reporting framework for which the going concern
basis of accounting is relevant (e.g., the going concern basis of accounting is not relevant for
some financial statements prepared on a tax basis). When the use of the going concern basis
of accounting is appropriate, assets and liabilities are recorded on the basis that the entity will
be able to realize its assets and discharge its liabilities in the normal course of business. (Ref:
Para. A2)
Responsibility for Assessment of the Entitys Ability to Continue as a Going Concern
3. Some financial reporting frameworks contain an explicit requirement for management to
make a specific assessment of the entitys ability to continue as a going concern, and standards
regarding matters to be considered and disclosures to be made in connection with going
concern. The detailed requirements regarding managements responsibility to assess the
entitys ability to continue as a going concern and related financial statement disclosures may
also be set out in law or regulation.
4. In other financial reporting frameworks, there may be no explicit requirement for
management to make a specific assessment of the entitys ability to continue as a going
concern. Nevertheless, where the going concern basis of accounting is a fundamental principle
in the preparation of financial statements as discussed in paragraph 2, the preparation of the
financial statements requires management to assess the entitys ability to continue as a going
concern even if the financial reporting framework does not include an explicit requirement to do
so.
5. Managements assessment of the entitys ability to continue as a going concern involves
making a judgment, at a particular point in time, about inherently uncertain future outcomes of
events or conditions. The following factors are relevant to that judgment:
The degree of uncertainty associated with the outcome of an event or condition increases
significantly the further into the future an event or condition or the outcome occurs. For
that reason, most financial reporting frameworks that require an explicit management
assessment specify the period for which management is required to take into account all
available information.
The size and complexity of the entity, the nature and condition of its business and the
degree to which it is affected by external factors affect the judgment regarding the outcome
of events or conditions.
Any judgment about the future is based on information available at the time at which the
judgment is made. Subsequent events may result in outcomes that are inconsistent with
judgments that were reasonable at the time they were made.
Responsibilities of the Auditor
6. The auditors responsibilities are to obtain sufficient appropriate audit evidence regarding,
and conclude on, the appropriateness of managements use of the going concern basis of
accounting in the preparation of the financial statements, and to conclude, based on the audit
evidence obtained, whether a material uncertainty exists about the entitys ability to continue as
a going concern. These responsibilities exist even if the financial reporting framework used in
the preparation of the financial statements does not include an explicit requirement for
management to make a specific assessment of the entitys ability to continue as a going
concern.
7. However, as described in SA 200, 24 the potential effects of inherent limitations on the
auditors ability to detect material misstatements are greater for future events or conditions that
may cause an entity to cease to continue as a going concern. The auditor cannot predict such
future events or conditions. Accordingly, the absence of any reference to a material u ncertainty
about the entitys ability to continue as a going concern in an auditors report cannot be viewed
as a guarantee as to the entitys ability to continue as a going concern.
Effective Date
8. This SA is effective for audits of financial statements for periods beginning on or after April
1, 2017.
Objectives
9. The objectives of the auditor are:
(a) To obtain sufficient appropriate audit evidence regarding, and conclude on, the
appropriateness of managements use of the going concern basis of accounting in t he
preparation of the financial statements;
(b) To conclude, based on the audit evidence obtained, whether a material uncertainty exists
related to events or conditions that may cast significant doubt on the entitys ability to
continue as a going concern; and
(c) To report in accordance with this SA.
Requirements
Risk Assessment Procedures and Related Activities
10. When performing risk assessment procedures as required by SA 315, 25 the auditor shall
consider whether events or conditions exist that may cast significant doubt on the entitys ability
to continue as a going concern. In so doing, the auditor shall determine whether management
has already performed a preliminary assessment of the entitys ability to continue as a going
concern, and: (Ref: Para. A3A6)
(a) If such an assessment has been performed, the auditor shall discuss the assessment with
management and determine whether management has identified events or conditions that,
individually or collectively, may cast significant doubt on the entitys ability to continue as
24 SA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing,
paragraphs A51A52
25 SA 315 , Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment, paragraph
a going concern and, if so, managements plans to address them; or

(b) If such an assessment has not yet been performed, the auditor shall discuss with
management the basis for the intended use of the going concern basis of accounting, and
inquire of management whether events or conditions exist that, individually or collectively,
may cast significant doubt on the entitys ability to continue as a going concern.
11. The auditor shall remain alert throughout the audit for audit evidence of events or
conditions that may cast significant doubt on the entitys ability to continue as a going concern.
(Ref: Para. A7)
Evaluating Managements Assessment
12. The auditor shall evaluate managements assessment of the entitys ability to continue as
a going concern. (Ref: Para. A8A10, A12A13)
13. In evaluating managements assessment of the entitys ability to continue as a going
concern, the auditor shall cover the same period as that used by management to make its
assessment as required by the applicable financial reporting framework, or by law or regulation
if it specifies a longer period. If managements assessment of the entitys ability to continue as
a going concern covers less than twelve months from the date of the financial statements as
defined in SA 560,26 the auditor shall request management to extend its assessment period to
at least twelve months from that date. (Ref: Para. A11A13)
14. In evaluating managements assessment, the auditor shall consider whether
managements assessment includes all relevant information of which the auditor is aware as a
result of the audit.
Period beyond Managements Assessment
15. The auditor shall inquire of management as to its knowledge of events or conditions
beyond the period of managements assessment that may cast significant doubt on the entitys
ability to continue as a going concern. (Ref: Para. A14A15)
Additional Audit Procedures When Events or Conditions Are Identified
16. If events or conditions have been identified that may cast significant doubt on the entitys
ability to continue as a going concern, the auditor shall obtain sufficient appropriate audit
evidence to determine whether or not a material uncertainty exists related to events or
conditions that may cast significant doubt on the entitys ability to continue as a going concern
(hereinafter referred to as material uncertainty) through performing additional audit
procedures, including consideration of mitigating factors. These procedures shall include: (Ref:
Para. A16)
(a) Where management has not yet performed an assessment of the entitys ability to continue
as a going concern, requesting management to make its assessment.
(b) Evaluating managements plans for future actions in relation to its going concern
26 SA 560, Subsequent Events, paragraph 5(a)
assessment, whether the outcome of these plans is likely to improve the situation and
whether managements plans are feasible in the circumstances. (Ref: Para. A17)
(c) Where the entity has prepared a cash flow forecast, and analysis of the forecast is a
significant factor in considering the future outcome of events or conditions in the evaluation
of managements plans for future actions: (Ref: Para. A18A19)
(i) Evaluating the reliability of the underlying data generated to prepare the forecast; and
(ii) Determining whether there is adequate support for the assumptions underlying the
forecast.
(d) Considering whether any additional facts or information have become available since the
date on which management made its assessment.
(e) Requesting written representations from management and, where appropriate, those
charged with governance, regarding their plans for future actions and the feasibility of
these plans. (Ref: Para. A20)
Auditor Conclusions
17. The auditor shall evaluate whether sufficient appropriate audit evidence has been obtained
regarding, and shall conclude on, the appropriateness of managements use of the going
concern basis of accounting in the preparation of the financial statements.
18. Based on the audit evidence obtained, the auditor shall conclude whether, in the auditors
judgment, a material uncertainty exists related to events or conditions that, individually or
collectively, may cast significant doubt on the entitys ability to continue as a going concern. A
material uncertainty exists when the magnitude of its potential impact and likelihood of
occurrence is such that, in the auditors judgment, appropriate disclosure of the nature and
implications of the uncertainty is necessary for: (Ref: Para. A21A22)
(a) In the case of a fair presentation financial reporting framework, the fair presentation of the
financial statements, or
(b) In the case of a compliance framework, the financial statements not to be misleading.
Adequacy of Disclosures When Events or Conditions Have Been Identified and a Material
Uncertainty Exists
19. If the auditor concludes that managements use of the going concern basis of accounting
is appropriate in the circumstances but a material uncertainty exists, the auditor shall determine
whether the financial statements: (Ref: Para. A22A23)
(a) Adequately disclose the principal events or conditions that may cast significant doubt on
the entitys ability to continue as a going concern and managements plans to deal with
these events or conditions; and
(b) Disclose clearly that there is a material uncertainty related to events or conditions that may
cast significant doubt on the entitys ability to continue as a going concern and, therefore,
that it may be unable to realize its assets and discharge its liabilities in the normal course
of business.
Adequacy of Disclosures When Events or Conditions Have Been Identified but No Material
Uncertainty Exists
20. If events or conditions have been identified that may cast significant doubt on the entitys
ability to continue as a going concern but, based on the audit evidence obtained the auditor
concludes that no material uncertainty exists, the auditor shall evaluate whether, in view of the
requirements of the applicable financial reporting framework, the financial state ments provide
adequate disclosures about these events or conditions. (Ref: Para. A24A25)
Implications for the Auditors Report
Use of Going Concern Basis of Accounting Is Inappropriate
21. If the financial statements have been prepared using the going concern basis of accounting
but, in the auditors judgment, managements use of the going concern basis of accounting in
the preparation of the financial statements is inappropriate, the auditor shall express an adverse
opinion. (Ref: Para. A26A27)
Use of Going Concern Basis of Accounting Is Appropriate but a Material Uncertainty Exists
Adequate Disclosure of a Material Uncertainty Is Made in the Financial Statements
22. If adequate disclosure about the material uncertainty is made in the financial statements,
the auditor shall express an unmodified opinion and the auditors report shall include a separate
section under the heading Material Uncertainty Related to Going Concern to: (Ref: Para. A28
A31, A34)
(a) Draw attention to the note in the financial statements that discloses the matters set out in
paragraph 19; and
(b) State that these events or conditions indicate that a material uncertainty exists that may
cast significant doubt on the entitys ability to continue as a going concern and that the
auditors opinion is not modified in respect of the matter.
Adequate Disclosure of a Material Uncertainty Is Not Made in the Financial Statements
23. If adequate disclosure about the material uncertainty is not made in th e financial
statements, the auditor shall: (Ref: Para. A32A34)
(a) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705
(Revised)27; and
(b) In the Basis for Qualified (Adverse) Opinion section of the auditors report, state that a
material uncertainty exists that may cast significant doubt on the entitys ability to continue
as a going concern and that the financial statements do not adequately disclose this matter.
27 SA 705 (Revised), Modifications to the Opinion in the Independent Auditors Report.
Management Unwilling to Make or Extend Its Assessment

24. If management is unwilling to make or extend its assessment when requested to do so by
the auditor, the auditor shall consider the implications for the auditors report. (Ref: Para. A35)
Communication with Those Charged with Governance
25. Unless all those charged with governance are involved in managing the entity, 28 the auditor
shall communicate with those charged with governance events or conditions identified that may
cast significant doubt on the entitys ability to continue as a going concern. Such communication
with those charged with governance shall include the following:
(a) Whether the events or conditions constitute a material uncertainty;
(b) Whether managements use of the going concern basis of accounting is appropriate in the
preparation of the financial statements;
(c) The adequacy of related disclosures in the financial statements; and
(d) Where applicable, the implications for the auditors report.
Significant Delay in the Approval of Financial Statements
26. If there is significant delay in the approval of the financial statements by management or
those charged with governance after the date of the financial statements, the auditor shall
inquire as to the reasons for the delay. If the auditor believes that the delay could be related to
events or conditions relating to the going concern assessment, the auditor shall perform those
additional audit procedures necessary, as described in paragraph 16, as well as consider the
effect on the auditors conclusion regarding the existence of a material uncertainty, as described
in paragraph 18.
Scope of this SA (Ref: Para 1)
A1. SA 70129 deals with the auditors responsibility to communicate key audit matters in the
auditors report. That SA acknowledges that, when SA 701 applies, matters relating to going
concern may be determined to be key audit matters, and explains that a material uncertainty
related to events or conditions that may cast significant doubt on the entitys abili ty to continue
as a going concern is, by its nature, a key audit matter. 30
Going Concern Basis of Accounting (Ref: Para. 2)
Considerations Specific to Public Sector Entities
A2. Managements use of the going concern basis of accounting is also relevant to public
sector entities. Going concern risks may arise, but are not limited to, situations where public
28 SA 260 (Revised), Communication with Those Charged with Governance, paragraph 13.
29 SA 701, Communicating Key Audit Matters in the Independent Auditors Report.
30 See paragraphs 15 and A41 of SA 701.
sector entities operate on a for-profit basis, where government support may be reduced or
withdrawn, or in the case of privatization. Events or conditions that may cast significant doubt
on an entitys ability to continue as a going concern in the public sector may include situations
where the public sector entity lacks funding for its continued existence or when policy decisions
are made that affect the services provided by the public sector entity.
Risk Assessment Procedures and Related Activities
Events or Conditions That May Cast Significant Doubt on the Entitys Ability to Continue as a
Going Concern (Ref: Para. 10)
A3. The following are examples of events or conditions that, individually or collectively, may
cast significant doubt on the entitys ability to continue as a going concern. This listing is not all -
inclusive nor does the existence of one or more of the items always signify that a material
uncertainty exists.
Financial
Net liability or net current liability position.
Fixed-term borrowings approaching maturity without realistic prospects of renewal or
repayment; or excessive reliance on short-term borrowings to finance long-term assets.
Indications of withdrawal of financial support by creditors.
Negative operating cash flows indicated by historical or prospective financial statements.
Adverse key financial ratios.
Substantial operating losses or significant deterioration in the value of assets used to
generate cash flows.
Arrears or discontinuance of dividends.
Inability to pay creditors on due dates.
Inability to comply with the terms of loan agreements.
Change from credit to cash-on-delivery transactions with suppliers.
Inability to obtain financing for essential new product development or other essential
investments.
Operating
Management intentions to liquidate the entity or to cease operations.
Loss of key management without replacement.
Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
Labor difficulties.
Shortages of important supplies.
Emergence of a highly successful competitor.

Other
Non-compliance with capital or other statutory or regulatory requirements, such as
solvency or liquidity requirements for financial institutions.
Pending legal or regulatory proceedings against the entity that may, if successful, result in
claims that the entity is unlikely to be able to satisfy.
Changes in law or regulation or government policy expected to adversely affect the entity.
Uninsured or underinsured catastrophes when they occur.
The significance of such events or conditions often can be mitigated by other factor s. For
example, the effect of an entity being unable to make its normal debt repayments may be
counter-balanced by managements plans to maintain adequate cash flows by alternative
means, such as by disposing of assets, rescheduling loan repayments, or obtaining additional
capital. Similarly, the loss of a principal supplier may be mitigated by the availability of a suitable
alternative source of supply.
A4. The risk assessment procedures required by paragraph 10 help the auditor to determine
whether managements use of the going concern basis of accounting is likely to be an important
issue and its impact on planning the audit. These procedures also allow for more timely
discussions with management, including a discussion of managements plans and resolution of
any identified going concern issues.
Considerations Specific to Smaller Entities (Ref: Para. 10)
A5. The size of an entity may affect its ability to withstand adverse conditions. Small entities
may be able to respond quickly to exploit opportunities, but may lack reserves to sustain
operations.
A6. Conditions of particular relevance to small entities include the risk that banks and other
lenders may cease to support the entity, as well as the possible loss of a principal supplier,
major customer, key employee, or the right to operate under a license, franchise or other legal
agreement.
Remaining Alert throughout the Audit for Audit Evidence about Events or Conditions (Ref: Para. 11)
A7. SA 315 requires the auditor to revise the auditors risk assessment and modify the further
planned audit procedures accordingly when additional audit evidence is obtained during the
course of the audit that affects the auditors assessment of risk. 31 If events or conditions that
may cast significant doubt on the entitys ability to continue as a going concern are identified
after the auditors risk assessments are made, in addition to performing the procedures in
paragraph 16, the auditors assessment of the risks of material misstatement may need to be
revised. The existence of such events or conditions may also affect the nature, timing and extent
31 SA 315, paragraph 31
of the auditors further procedures in response to the assessed risks. SA 330 32 establishes
requirements and provides guidance on this issue.
Evaluating Managements Assessment
Managements Assessment and Supporting Analysis and the Auditors Evaluation (Ref: Para. 12)
A8. Managements assessment of the entitys ability to continue as a going concern is a key
part of the auditors consideration of managements use of the going concern basis of
accounting.
A9. It is not the auditors responsibility to rectify the lack of analysis by management. In some
circumstances, however, the lack of detailed analysis by management to support its assessment
may not prevent the auditor from concluding whether managements use of the going concern
basis of accounting is appropriate in the circumstances. For example, when there is a history of
profitable operations and a ready access to financial resources, management may make its
assessment without detailed analysis. In this case, the auditors evaluation of the
appropriateness of managements assessment may be made without performing detailed
evaluation procedures if the auditors other audit procedures are sufficient to enable the auditor
to conclude whether managements use of the going concern basis of accounting in the
preparation of the financial statements is appropriate in the circumstances.
A10. In other circumstances, evaluating managements assessment of the entitys ability to
continue as a going concern, as required by paragraph 12, may include an evaluation of the
process management followed to make its assessment, the assumptions on which the
assessment is based and managements plans for future action and whether managements
plans are feasible in the circumstances.
The Period of Managements Assessment (Ref: Para. 13)
A11. Most financial reporting frameworks requiring an explicit management assessment
specify the period for which management is required to take into account all available
information.
Considerations Specific to Smaller Entities (Ref: Para. 1213)
A12. In many cases, the management of smaller entities may not have prepared a detailed
assessment of the entitys ability to continue as a going concern, but instead may rely on in -
depth knowledge of the business and anticipated future prospects. Nevertheless, in accordance
with the requirements of this SA, the auditor needs to evaluate managements assessment of
the entitys ability to continue as a going concern. For smaller entities, it may be appropriate to
discuss the medium and long-term financing of the entity with management, provided that
managements contentions can be corroborated by sufficient documentary evidence and are not
inconsistent with the auditors understanding of the entity. Therefore, the requirement in
paragraph 13 for the auditor to request management to extend its assessment may, for
example, be satisfied by discussion, inquiry and inspection of supporting documentation, for
32 SA 330, The Auditors Responses to Assessed Risks
example, orders received for future supply, evaluated as to their feasibility or other wise
substantiated.
A13. Continued support by owner-managers is often important to smaller entities ability to
continue as a going concern. Where a small entity is largely financed by a loan from the owner -
manager, it may be important that these funds are not withdrawn. For example, the continuance
of a small entity in financial difficulty may be dependent on the owner -manager subordinating a
loan to the entity in favor of banks or other creditors, or the owner-manager supporting a loan
for the entity by providing a guarantee with his or her personal assets as collateral. In such
circumstances, the auditor may obtain appropriate documentary evidence of the subordination
of the owner-managers loan or of the guarantee. Where an entity is dependent on additio nal
support from the owner-manager, the auditor may evaluate the owner-managers ability to meet
the obligation under the support arrangement. In addition, the auditor may request written
confirmation of the terms and conditions attaching to such support and the owner-managers
intention or understanding.
Period beyond Managements Assessment (Ref: Para. 15)
A14. As required by paragraph 11, the auditor remains alert to the possibility that there may
be known events, scheduled or otherwise, or conditions that will occur beyond the period of
assessment used by management that may bring into question the appropriateness of
managements use of the going concern basis of accounting in preparing the financial
statements. Since the degree of uncertainty associated with the outcome of an event or
condition increases as the event or condition is further into the future, in considering events or
conditions further in the future, the indications of going concern issues need to be significant
before the auditor needs to consider taking further action. If such events or conditions are
identified, the auditor may need to request management to evaluate the potential significance
of the event or condition on its assessment of the entitys ability to continue as a going concern.
In these circumstances, the procedures in paragraph 16 apply.
A15. Other than inquiry of management, the auditor does not have a responsibility to perform
any other audit procedures to identify events or conditions that may cast significant doubt on
the entitys ability to continue as a going concern beyond the period assessed by management,
which, as discussed in paragraph 13, would be at least twelve months from the date of the
Additional Audit Procedures When Events or Conditions Are Identified (Ref: Para.16)
A16. Audit procedures that are relevant to the requirement in paragraph 16 may include the
following:
Analyzing and discussing cash flow, profit and other relevant forecasts with management.
Analyzing and discussing the entitys latest available interim financial statements.
Reading the terms of debentures and loan agreements and determining whether any have
been breached.
Reading minutes of the meetings of shareholders, those charged with governance and
relevant committees for reference to financing difficulties.
Inquiring of the entitys legal counsel regarding the existence of litigation and claims and
the reasonableness of managements assessments of their outcome and the estimate of
their financial implications.
Confirming the existence, legality and enforceability of arrangements to provide or maintain
financial support with related and third parties and assessing the financial ability of such
parties to provide additional funds.
Evaluating the entitys plans to deal with unfilled customer orders.
Performing audit procedures regarding subsequent events to identify those that either
mitigate or otherwise affect the entitys ability to continue as a going concern.
Confirming the existence, terms and adequacy of borrowing facilities.
Obtaining and reviewing reports of regulatory actions.
Determining the adequacy of support for any planned disposals of assets.
Evaluating Managements Plans for Future Actions (Ref: Para. 16(b))
A17. Evaluating managements plans for future actions may include inquiries of management
as to its plans for future action, including, for example, its plans to liquidate assets, borrow
money or restructure debt, reduce or delay expenditures, or increase capital.
The Period of Managements Assessment (Ref: Para. 16(c))
A18. In addition to the procedures required in paragraph 16(c), the auditor may compare:
The prospective financial information for recent prior periods with historical results; and
The prospective financial information for the current period with results achieved to date.
A19. Where managements assumptions include continued support by third parties, whether
through the subordination of loans, commitments to maintain or provide additional funding, or
guarantees, and such support is important to an entitys ability to continue as a going concern,
the auditor may need to consider requesting written confirmation (including of terms and
conditions) from those third parties and to obtain evidence of their ability to provide such
support.
Written Representations (Ref: Para. 16(e))
A20. The auditor may consider it appropriate to obtain specific written representations beyond
those required in paragraph 16 in support of audit evidence obtained regarding managements
plans for future actions in relation to its going concern assessment and the feasibility of those
plans.
Auditor Conclusions
Material Uncertainty Related to Events or Conditions that May Cast Significant Doubt on the
Entitys Ability to Continue as a Going Concern (Ref: Para. 18-19)

A21. The phrase material uncertainty means the uncertainties related to events or conditions
which may cast significant doubt on the entitys ability to continue as a going concern that should
be disclosed in the financial statements. In some other financial reporting frameworks the phrase
significant uncertainty is used in similar circumstances.
Adequacy of Disclosure when Events or Conditions Have Been Identified and a Material
Uncertainty Exists
A22. Paragraph 18 explains that a material uncertainty exists when the magnitude of the
potential impact of the events or conditions and the likelihood of occurrence is such that
appropriate disclosure is necessary to achieve fair presentation (for fair presentation
frameworks) or for the financial statements not to be misleading (for compliance frameworks).
The auditor is required by paragraph 18 to conclude whether such a material uncertainty exists
regardless of whether or how the applicable financial reporting framework defines a material
uncertainty.
A23. Paragraph 19 requires the auditor to determine whether the financial statement disclosures
address the matters set forth in that paragraph. This determination is in addition to the auditor
determining whether disclosures about a material uncertainty, required by the applicable
financial reporting framework, are adequate. Disclosures required by some financial reporting
frameworks that are in addition to matters set forth in paragraph 19 may include disclosures
about:
Managements evaluation of the significance of the events or conditions relating to the
entitys ability to meet its obligations; or
Significant judgments made by management as part of its assessment of the entitys ability
to continue as a going concern.
Some financial reporting frameworks may provide additional guidance regarding managements
consideration of disclosures about the magnitude of the potential impact of the principal events
or conditions, and the likelihood and timing of their occurrence.
Adequacy of Disclosures When Events or Conditions Have Been Identified but No Material
Uncertainty Exists (Ref: Para. 20)
A24. Even when no material uncertainty exists, paragraph 20 requires the auditor to evaluate
whether, in view of the requirements of the applicable financial reporting framework, the financial
statements provide adequate disclosure about events or conditions that may cast significant
doubt on the entitys ability to continue as a going concern. Some financial reporting frameworks
may address disclosures about:
Principal events or conditions;
Managements evaluation of the significance of those events or conditions in relation to
the entitys ability to meet its obligations;
Managements plans that mitigate the effect of these events or conditions; or

Significant judgments made by management as part of its assessment of the entitys ability
to continue as a going concern.
A25. When the financial statements are prepared in accordance with a fair presentation
framework, the auditors evaluation as to whether the financial statements achieve fair
presentation includes the consideration of the overall presentation, structure and content of the
financial statements, and whether the financial statements, including the related notes,
represent the underlying transactions and events in a manner that achieves fair presentation. 33
Depending on the facts and circumstances, the auditor may determine that additional
disclosures are necessary to achieve fair presentation. This may be the case, for example, when
events or conditions have been identified that may cast significant doubt on the entitys ability
to continue as a going concern but, based on the audit evidence obtained, the auditor concludes
that no material uncertainty exists, and no disclosures are explicitly required by the applicable
financial reporting framework regarding these circumstances.
Implications for the Auditors Report
Use of Going Concern Basis of Accounting is Inappropriate (Ref: Para. 21)
A26. If the financial statements have been prepared using the going concern basis of
accounting but, in the auditors judgment, managements use of the going concern basis of
accounting in the financial statements is inappropriate, the requirement in paragraph 21 for the
auditor to express an adverse opinion applies regardless of whether or not the financial
statements include disclosure of the inappropriateness of managements use of the going
concern basis of accounting.
A27. When the use of the going concern basis of accounting is not appropriate in the
circumstances, management may be required, or may elect, to prepare the financial statements
on another basis (e.g., liquidation basis). The auditor may be able to perform an audit of those
financial statements provided that the auditor determines that the other basis o f accounting is
acceptable in the circumstances. The auditor may be able to express an unmodified opinion on
those financial statements, provided there is adequate disclosure therein about the basis of
accounting on which the financial statements are prepared, but may consider it appropriate or
necessary to include an Emphasis of Matter paragraph in accordance with SA 706 (Revised) 34
in the auditors report to draw the users attention to that alternative basis of accounting and the
reasons for its use.
Use of the Going Concern Basis of Accounting Is Appropriate but a Material Uncertainty Exists
(Ref: Para. 22-23)
A28. The identification of a material uncertainty is a matter that is important to users
33 SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements, paragraph 14

34 SA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditors Report
understanding of the financial statements. The use of a separate section with a heading that
includes reference to the fact that a material uncertainty related to going concern exists alerts
users to this circumstance.
A29. The Appendix to this SA provides illustrations of the statements that are required to be
included in the auditors report on the financial statements when the Accounting Principles
generally accepted in India is the applicable financial reporting framework. If an applicable
financial reporting framework other than abovementioned framework is used, the illustrative
statements presented in the Appendix to this SA may need to be adapted to reflect the
application of the other financial reporting framework in the circumstances.
A30. Paragraph 22 establishes the minimum information required to be presented in the
auditors report in each of the circumstances described. The auditor may provide additional
information to supplement the required statements, for example to explain:
That the existence of a material uncertainty is fundamental to users understanding of the
financial statements; 35 or
How the matter was addressed in the audit. (Ref: Para. A1)
Adequate Disclosure of a Material Uncertainty Is Made in the Financial Statements (Ref: Para. 22)
A31. Illustration 1 of the Appendix to this SA is an example of an auditors report when the
auditor has obtained sufficient appropriate audit evidence regarding the appropriateness of
managements use of the going concern basis of accounting but a material uncertainty exists
and disclosure is adequate in the financial statements. The Appendix of SA 700 (Revised) also
includes illustrative wording to be included in the auditors report for all entities in relation to
going concern to describe the respective responsibilities of those responsible for the fin ancial
statements and the auditor in relation to going concern.
Adequate Disclosure of a Material Uncertainty is Not Made in the Financial Statements (Ref:
Para. 23)
A32. Illustrations 2 and 3 of the Appendix to this SA are examples of auditors reports
containing qualified and adverse opinions, respectively, when the auditor has obtained sufficient
appropriate audit evidence regarding the appropriateness of the managements use of the going
concern basis of accounting but adequate disclosure of a material uncertainty is not made in
the financial statements.
A33. In situations involving multiple uncertainties that are significant to the financial statements
as a whole, the auditor may consider it appropriate in extremely rare cases to express a
disclaimer of opinion instead of including the statements required by paragraph 22. SA 705
35 SA 706(Revised), paragraph A2
(Revised) provides guidance on this issue. 36

Communication with Regulators (Ref: Para. 2223)
A34. When the auditor of a regulated entity considers that it may be necessary to inc lude a
reference to going concern matters in the auditors report, the auditor may have a duty to
communicate with the applicable regulatory, enforcement or supervisory authorities.
Management Unwilling to Make or Extend Its Assessment (Ref: Para. 24)
A35. In certain circumstances, the auditor may believe it necessary to request management to
make or extend its assessment. If management is unwilling to do so, a qualified opinion or a
disclaimer of opinion in the auditors report may be appropriate, because it may not be possible
for the auditor to obtain sufficient appropriate audit evidence regarding managements use of
the going concern basis of accounting in the preparation of the financial statements, such as
audit evidence regarding the existence of plans management has put in place or the existence
of other mitigating factors.
Appendix
(Ref: Para. A29, A31A32)
Illustrations of Auditors Reports Relating to Going Concern
Illustration 1: An auditors report containing an unmodified opinion when the auditor has
concluded that a material uncertainty exists and disclosure in the financial statements is
adequate.
Illustration 2: An auditors report containing a qualified opinion when the auditor has
concluded that a material uncertainty exists and that the financial statements are materially
misstated due to inadequate disclosure.
Illustration 3: An auditors report containing an adverse opinion when the auditor has
concluded that a material uncertainty exists and the financial statements omit the required
disclosures relating to a material uncertainty.
Illustration 1 Unmodified Opinion When a Material Uncertainty Exists and Disclosure in
the Financial Statements Is Adequate
For purposes of this illustrative auditors report, the following circumstances are assumed:
Audit of a complete set of financial statements of a listed company (registered under the
Companies Act, 2013) using a fair presentation framework. The audit is not a group audit
(i.e., SA 600 does not apply).
The financial statements are prepared by management of the entity in accordance with the
36 SA 705(Revised), paragraph 10
accounting Standards prescribed under section 133 of the Companies Act, 2013.
The terms of the audit engagement reflect the description of managements responsibility
for the financial statements in SA 210.37
The auditor has concluded an unmodified (i.e., clean) opinion is appropriate based on
the audit evidence obtained.
The relevant ethical requirements that apply to the audit are those of the jurisdiction.
Based on the audit evidence obtained, the auditor has concluded that a material
uncertainty exists related to events or conditions that may cast significant doubt on the
entitys ability to continue as a going concern. The disclosure of the material uncertainty in
the financial statements is adequate.
Key audit matters have been communicated in accordance with SA 701.
Those responsible for oversight of the financial statements differ from those responsible
for the preparation of the financial statements.
In addition to the audit of the financial statements, the auditor has other reporting
responsibilities required under the Companies Act, 2013.
INDEPENDENT AUDITORS REPORT

To the Members of ABC Company Limited
Report on the Audit of the Standalone Financial Statements 38
Opinion
We have audited the standalone financial statements of ABC Company Limited (the Company),
which comprise the balance sheet as at 31st March 20XX, and the statement of Profit and Loss,
(statement of changes in equity)39 and statement of cash flows for the year then ended, and notes
to the financial statements, including a summary of significant accounting policies and other
explanatory information [in which are included the Returns for the year ended on that date audited
by the branch auditors of the Companys branches located at (location of branches)]40.
In our opinion and to the best of our information and according to the explanations given to us,
the aforesaid standalone financial statements give the information required by the Act in the
manner so required and give a true and fair view in conformity with the accounting principles
37 SA 210, Agreeing the Terms of Audit Engagements

38 The sub-title Report on the Audit of the Standalone Financial Statements is unnecessary in circumstances when the second sub-title
Report on Other Legal and Regulatory Requirements is not applicable.
39 Where applicable.
generally accepted in India, of the state of affairs of the Company as at March 31, 20XX, and
profit/loss, (changes in equity) 41 and its cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit in accordance with the Standards on Auditing (SAs) specified under
section 143(10) of the Companies Act, 2013. Our responsibilities under those Standards are
further described in the Auditors Responsibilities for the Audit of the Financial Statements
section of our report. We are independent of the Company in accordance with the Code of Ethics
issued by the Institute of Chartered Accountants of India together with the ethical requirements
that are relevant to our audit of the financial statements under the provisions of the Companies
Act, 2013 and the Rules thereunder, and we have fulfilled our other ethical responsibilities in
accordance with these requirements and the Code of Ethics. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our opinion.
Material Uncertainty Related to Going Concern
We draw attention to Note XX in the financial statements, which indicates that the Company
incurred a net loss of ZZZ during the year ended December 31, 20X1 and, as of that date, the
Companys current liabilities exceeded its total assets by YYY. As stated in Note 6, these events
or conditions, along with other matters as set forth in Note XX, indicate that a material
uncertainty exists that may cast significant doubt on the Companys ability to continue as a going
concern. Our opinion is not modified in respect of this matter.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance
in our audit of the financial statements of the current period. These matters were addressed in
the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters. In addition to the matter
described in the Material Uncertainty Related to Going Concern section, we have determined
the matters described below to be the key audit matters to be communicated in our report.
[Description of each key audit matter in accordance with SA 701.]
Responsibilities of Management and Those Charged with Governance for the Financial
Statements
[Reporting in accordance with SA 700 (Revised)see Illustration 1 in SA 700 (Revised). 42]
41Where applicable
42Paragraphs 33 and 38 of SA 700 (Revised) require wording to be included in the auditors report for all entities in relation to going
concern to describe the respective responsibilities of those responsible for the financial statements and the auditor in relation to going
concern.
Auditors Responsibilities for the Audit of the Financial Statements

[Reporting in accordance with SA 700 (Revised) see Illustration 1 in SA 700 (Revised).]
Report on Other Legal and Regulatory Requirements
For XYZ & Co

Chartered Accountants
(Firms Registration No.)
Signature
(Name of the Member signing the Audit Report)
(Designation43)
(Membership No. XXXXX)
Place of Signature:
Date:
Illustration 2 Qualified Opinion When a Material Uncertainty Exists and the Financial
Statements Are Materially Misstated Due to Inadequate Disclosure
For purposes of this illustrative auditors report, the following circumstances are assumed:
Audit of a complete set of financial statements of a listed company using a fair presentation
framework. The audit is not a group audit (i.e., SA 600 does not apply).
accounting Standards prescribed under section 133 of the Companies Act, 2013.
for the financial statements in SA 210.
entitys ability to continue as a going concern. Note YY to the financial statements
discusses the magnitude of financing arrangements, the expiration and the total financing
arrangements; however the financial statements do not include discussion on the impact
or the availability of refinancing or characterize this situation as a material uncertainty.
The financial statements are materially misstated due to the inadequate disclosure of the
material uncertainty. A qualified opinion is being expressed because the auditor concluded
that the effects on the financial statements of this inadequate disclosure are material but
43 Partner or Proprietor, as the case may be
not pervasive to the financial statements.

Key audit matters have been communicated in accordance with SA 701.
In addition to the audit of the financial statements, the auditor has other re porting
responsibilities required under the Companies Act, 2013.
To the Members of ABC Company Limited
Report on the Audit of the Standalone Financial Statements 44
Qualified Opinion
We have audited the standalone financial statements of ABC Company Limited (the
Company), which comprise the balance sheet as at 31 st March 20XX, and the statement of
Profit and Loss, (statement of changes in equity)45 and statement of cash flows for the year then
ended, and notes to the financial statements, including a summary of significant accounting
policies and other explanatory information [in which are included the Returns for the year ended
on that date audited by the branch auditors of the Companys branches located at (location of
branches)]46.
In our opinion and to the best of our information and according to the explanations given to us,
except for the incomplete disclosure of the information referred to in the Basis for Qualified
Opinion section of our report, the aforesaid standalone financial statements give the information
required by the Act in the manner so required and give a true and fair view in conformity with
the accounting principles generally accepted in India, of the state of affairs of the Company as
at March 31, 20XX, and profit/loss, (changes in equity) 47 and its cash flows for the year ended
on that date.
Basis for Qualified Opinion
As discussed in Note YY, the Companys financing arrangements expire and amounts
outstanding are payable on April 30, 20X2. The Company has been unable to conclude re-
negotiations or obtain replacement financing. This situation indicates that a material uncertainty
exists that may cast significant doubt on the Companys ability to continue as a going concern.
The financial statements do not adequately disclose this matter.
We conducted our audit in accordance with the Standards on Auditing (SAs) specified under
section 143(10) of the Companies Act, 2013. Our responsibilities under those Standards are
44 The sub-title Report on the Audit of the Standalone Financial Statements is unnecessary in circumstances when the second sub-title
Report on Other Legal and Regulatory Requirements is not applicable.
47 Where applicable
further described in the Auditors Responsibilities for the Audit of the Financial Statements
section of our report. We are independent of the Company in accordance with the Code of Ethics
issued by the Institute of Chartered Accountants of India together with the ethical requirements
that are relevant to our audit of the financial statements under the provisions of the Companies
Act, 2013 and the Rules thereunder, and we have fulfilled our other ethical responsibilities in
accordance with these requirements and the Code of Ethics. We believe that the audit evidence
we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key Audit Matters
Key audit matters are those matters that, in our professional judgment, were of most significance
in our audit of the financial statements of the current period. These matters were addressed in
the context of our audit of the financial statements as a whole, and in forming our opinion
thereon, and we do not provide a separate opinion on these matters. In addition to the matter
described in the Basis for Qualified Opinion section, we have determined the matters described
below to be the key audit matters to be communicated in our report.
[Descriptions of each key audit matter in accordance with SA 701.]
Statements
[Reporting in accordance with SA 700 (Revised) see Illustration 1 in SA 700 (Revised).48]
For XYZ & Co
Signature
(Designation49)
Place of Signature:
Date:
48 Paragraphs 33 and 38 of SA 700 (Revised) require wording to be included in the auditors report for all entities in relation to going
concern.
Illustration 3 Adverse Opinion When a Material Uncertainty Exists and Is Not Disclosed
in the Financial Statements
For purposes of the illustrative auditors report, the following circumstances are assumed:
Audit of a complete set of financial statements of a non corporate entity using a fair
presentation framework. The audit is not a group audit (i.e., SA 600 does not apply).
Accounting Standards issued by the Institute of Chartered Accountants of India.
for the financial statements in SA 210.
entitys ability to continue as a going concern, and the entity is considering bankruptcy.
The financial statements omit the required disclosures relating to the material uncertainty.
An adverse opinion is being expressed because the effects on the financial statements of
such omission are material and pervasive.
The auditor is not required, and has otherwise not decided, to communicate key audit
matters in accordance with SA 701.
In addition to the audit of the financial statements, the auditor has other reporting
responsibilities required under local law.

To the Partners of ABC & Associates [or other Appropriate Addressee]
Report on the Audit of the Financial Statements 50
Adverse Opinion
We have audited the financial statements of ABC & Associates (the entity), which comprise the
balance sheet at March 31 st 20XX, and the profit and loss account, (and statement of cash
flows)51 for the year then ended, and notes to the financial statements, including a summary of
significant accounting policies.
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly (or
do not give a true and fair view of), the financial position of the entity as at March 31, 20X1, and
50 The sub-title Report on the Audit of the Financial Statements is unnecessary in circumstances when the second sub-title Report on
Other Legal and Regulatory Requirements is not applicable.
of its financial performance and its cash flows for the year then ended in accordance with the
Accounting Standards issued by the Institute of Chartered Accountants of India.
Basis for Adverse Opinion
The entitys financing arrangements expired and the amount outstanding was payable on March
31,20X1. The entity has been unable to conclude re-negotiations or obtain replacement
financing and is considering filing for bankruptcy. This situation indicates that a material
uncertainty exists that may cast significant doubt on the Companys ability to continue as a going
concern. The financial statements do not adequately disclose this fact.
Basis for Opinion
We conducted our audit in accordance with the Standards on Auditing (SAs) issued by ICAI .
Our responsibilities under those standards are further described in the Auditors Responsibilities
for the Audit of the Financial Statements section of our report. We are independent of the entity
in accordance with the ethical requirements that are relevant to our audit of the financial
statements in [jurisdiction], and we have fulfilled our other ethical responsibilities in accordance
with these requirements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Statements52
[Reporting in accordance with SA 700 (Revised) see Illustration 4 in SA 700 (Revised).53]
For XYZ & Co

Signature
(Designation54)
Place of Signature:
Date:
52 Or other terms that are appropriate in the context of the legal framework of the particular jurisdiction.
53 Paragraphs 33 and 38 of SA 700 (Revised) require wording to be included in the auditors report for all entities in relation to going
concern.
(III) SA 610 (Revised), Using the Work of Internal Auditors

Introduction
Scope of this SA
1. This Standard on Auditing (SA) deals with the external auditors responsibilities if using the
work of internal auditors. This includes (a) using the work of the internal audit function in
obtaining audit evidence and (b) using internal auditors to provide direct assistance under the
direction, supervision and review of the external auditor.
2. This SA does not apply if the entity does not have an internal audit function. (Ref: Para. A2)
3. If the entity has an internal audit function, the requirements in this SA relating to using the
work of that function do not apply if:
(a) The responsibilities and activities of the function are not relevant to the audit; or
(b) Based on the auditors preliminary understanding of the function obtained as a result of
procedures performed under SA 315, 55 the external auditor does not expect to use the
work of the function in obtaining audit evidence.
Nothing in this SA requires the external auditor to use the work of the internal audit fu nction to
modify the nature or timing, or reduce the extent, of audit procedures to be performed directly
by the external auditor; it remains a decision of the external auditor in establishing the overall
audit strategy.
4. Furthermore, the requirements in this SA relating to direct assistance do not apply if the
external auditor does not plan to use internal auditors to provide direct assistance.
5. In some cases, the external auditor may be prohibited, or restricted to some extent, by law
or regulation from using the work of the internal audit function or using internal auditors to
provide direct assistance. The SAs do not override laws or regulations that govern an audit of
financial statements. 56 Such prohibitions or restrictions will therefore not prevent the external
auditor from complying with the SAs. (Ref: Para. A31)
Relationship between SA 315 and SA 610 (Revised)
6. Many entities establish internal audit functions as part of their internal control and
governance structures. The objectives and scope of an internal audit function, the nature of its
responsibilities and its organizational status, including the functions authority and
accountability, vary widely and depend on the size and structure of the entity and the
requirements of management and, where applicable, those charged with governance.
55Please see the conforming amendments to Revised SA 315, Identifying and Assessing the Risks of Material Misstatement through
Understanding the Entity and Its Environment, arising pursuant to issuance of this SA 610 (Revised). These are given at the end of the
document.
56 SA 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing, paragraph
A55.
7. SA 315 addresses how the knowledge and experience of the internal audit function can
inform the external auditors understanding of the entity and its environment and identification
and assessment of risks of material misstatement. SA 315 57 also explains how effective
communication between the internal and external auditors also creates an environment in which
the external auditor can be informed of significant matters that may affect the external auditors
work.
8. Depending on whether the internal audit functions organizational status and relevant
policies and procedures adequately support the objectivity of the internal auditors, the level of
competency of the internal audit function, and whether the function applies a systematic and
disciplined approach, the external auditor may also be able to use the work of the internal audit
function in a constructive and complementary manner. This SA addresses the external auditors
responsibilities when, based on the external auditors preliminary understanding of the internal
audit function obtained as a result of procedures performed under SA 315, the external auditor
expects to use the work of the internal audit function as part of the audit evidence obtained 58.
Such use of that work modifies the nature or timing, or reduces the extent, of audit procedures
to be performed directly by the external auditor.
9. In addition, this SA also addresses the external auditors responsibilities if considering
using internal auditors to provide direct assistance under the direction, supervision and review
of the external auditor.
10. There may be individuals in an entity that perform procedures similar to those performed
by an internal audit function. However, unless performed by an objective and competent function
that applies a systematic and disciplined approach, including quality control, such procedures
would be considered internal controls and obtaining evidence regarding the effectiveness of
such controls would be part of the auditors responses to assessed risks in accordance with SA
33059.
The External Auditors Responsibility for the Audit
11. The external auditor has sole responsibility for the audit opinion expressed, and that
responsibility is not reduced by the external auditors use of the work of the internal audit
function or internal auditors to provide direct assistance on the engagement. Although they may
perform audit procedures similar to those performed by the external auditor, neither the internal
audit function nor the internal auditors are independent of the entity as is required of the external
auditor in an audit of financial statements in accordance with SA 200 60. This SA, therefore,
defines the conditions that are necessary for the external auditor to b e able to use the work of
internal auditors. It also defines the necessary work effort to obtain sufficient appropriate
document. (Para A116 of SA 315 in those conforming amendments)
58 See paragraphs 1525
59 SA 330,The Auditors Responses to Assessed Risks.
evidence that the work of the internal audit function, or internal auditors providing direct
assistance, is adequate for the purposes of the audit. The requirements are designed to provide
a framework for the external auditors judgments regarding the use of the work of internal
auditors to prevent over or undue use of such work.
Effective Date
12. This SA is effective for audits of financial statements for periods beginning on or after 01st
April, 2016.
Objectives
13. The objectives of the external auditor, where the entity has an internal audit function and
the external auditor expects to use the work of the function to modify the natur e or timing, or
reduce the extent, of audit procedures to be performed directly by the external auditor, or to use
internal auditors to provide direct assistance, are:
(a) To determine whether the work of the internal audit function or direct assistance from
internal auditors can be used, and if so, in which areas and to what extent; and having
made that determination:
(b) If using the work of the internal audit function, to determine whether that work is adequate
for purposes of the audit; and
(c) If using internal auditors to provide direct assistance, to appropriately direct, supervise and
review their work.
Definitions
(a) Internal audit function A function of an entity that performs assurance and consulting
activities designed to evaluate and improve the effectiveness of the entitys governance,
risk management and internal control processes. (Ref: Para. A1A4)
(b) Direct assistance The use of internal auditors to perform audit procedures under the
direction, supervision and review of the external auditor.
Requirements
Determining Whether, in Which Areas, and to What Extent the Work of the Internal Audit
Function Can Be Used
Evaluating the Internal Audit Function
15. The external auditor shall determine whether the work of the internal audit function can be
used for purposes of the audit by evaluating the following:
(a) The extent to which the internal audit functions organizational status and relevant policies
and procedures support the objectivity of the internal auditors; (Ref: Para. A5 A9)
(b) The level of competence of the internal audit function; and (Ref: Para. A5 A9)
(c) Whether the internal audit function applies a systematic and disciplined approach,
including quality control. (Ref: Para. A10A11)
16. The external auditor shall not use the work of the internal audit function if the external
auditor determines that:
(a) The functions organizational status and relevant policies and procedures do not
adequately support the objectivity of internal auditors;
(b) The function lacks sufficient competence; or
(c) The function does not apply a systematic and disciplined approach, including quality
control. (Ref: Para. A12A14)
Determining the Nature and Extent of Work of the Internal Audit Function that Can Be
Used
17. As a basis for determining the areas and the extent to which the work of the internal audit
function can be used, the external auditor shall consider the nature and scope of the work that
has been performed, or is planned to be performed, by the internal audit function and its
relevance to the external auditors overall audit strategy and audit plan. (Ref: Para. A15 A17)
18. The external auditor shall make all significant judgments in the audit engagement and, to
prevent undue use of the work of the internal audit function, shall plan to use less of the work
of the function and perform more of the work directly: (Ref: Para. A15A17)
(a) The more judgment is involved in:
(i) Planning and performing relevant audit procedures; and
(ii) Evaluating the audit evidence gathered; (Ref: Para. A18A19)
(b) The higher the assessed risk of material misstatement at the assertion level, with special
consideration given to risks identified as significant; (Ref: Para. A20A22)
(c) The less the internal audit functions organizational status and relevant policies and
procedures adequately support the objectivity of the internal auditors; and
(d) The lower the level of competence of the internal audit function.
19. The external auditor shall also evaluate whether, in aggregate, using the work of the
internal audit function to the extent planned would still result in the external auditor being
sufficiently involved in the audit, given the external auditors sole respo nsibility for the audit
opinion expressed. (Ref: Para. A15A22)
20. The external auditor shall, in communicating with those charged with governance an
overview of the planned scope and timing of the audit in accordance with SA 260 61,communicate
how the external auditor has planned to use the work of the internal audit function. (Ref: Para.
A23)
61 SA 260, Communication with Those Charged with Governance, paragraph 11.
Using the Work of the Internal Audit Function

21. If the external auditor plans to use the work of the internal audit function, the external
auditor shall discuss the planned use of its work with the function as a basis for coordinating
their respective activities. (Ref: Para. A24A26)
22. The external auditor shall read the reports of the internal audit function relating to the work
of the function that the external auditor plans to use to obtain an understanding of the nature
and extent of audit procedures it performed and the related findings.
23. The external auditor shall perform sufficient audit procedures on the body of work of the
internal audit function as a whole that the external auditor plans to use to determine its adequacy
for purposes of the audit, including evaluating whether:
(a) The work of the function had been properly planned, performed, supervised, reviewed and
documented;
(b) Sufficient appropriate evidence had been obtained to enable the function to draw
reasonable conclusions; and
(c) Conclusions reached are appropriate in the circumstances and the reports prepared by the
function are consistent with the results of the work performed. (Ref: Pa ra. A27A30)
24. The nature and extent of the external auditors audit procedures shall be responsive to the
external auditors evaluation of:
(a) The amount of judgment involved;
(b) The assessed risk of material misstatement;
(c) The extent to which the internal audit functions organizational status and relevant policies
and procedures support the objectivity of the internal auditors; and
(d) The level of competence of the function; 62 (Ref: Para. A27A29) and shall include
reperformance of some of the work. (Ref: Para. A30)
25. The external auditor shall also evaluate whether the external auditors conclusions
regarding the internal audit function in paragraph 15 of this SA and the determination of the
nature and extent of use of the work of the function for purposes of the audit in paragraphs 18
19 of this SA remain appropriate.
Determining Whether, in Which Areas, and to What Extent Internal Auditors Can Be Used
to Provide Direct Assistance
Determining Whether Internal Auditors Can Be Used to Provide Direct Assistance for
Purposes of the Audit
26. The external auditor may be prohibited by law or regulation from obtaining direct assistance
from internal auditors. If so, paragraphs 2735 and 37 do not apply. (Ref: Para. A31)
62 See paragraph 18.
27. If using internal auditors to provide direct assistance is not prohibited by law or regulation,
and the external auditor plans to use internal auditors to provide direct assistance on the audit,
the external auditor shall evaluate the existence and significance of threats t o objectivity and
the level of competence of the internal auditors who will be providing such assistance. The
external auditors evaluation of the existence and significance of threats to the internal auditors
objectivity shall include inquiry of the internal auditors regarding interests and relationships that
may create a threat to their objectivity. (Ref: Para. A32A34)
28. The external auditor shall not use an internal auditor to provide direct assistance if:
(a) There are significant threats to the objectivity of the internal auditor; or
(b) The internal auditor lacks sufficient competence to perform the proposed work. (Ref: Para.
A32A34)
Determining the Nature and Extent of Work that Can Be Assigned to Internal Auditors
Providing Direct Assistance
29. In determining the nature and extent of work that may be assigned to internal auditors and
the nature, timing and extent of direction, supervision and review that is appropriate in the
circumstances, the external auditor shall consider:
(a) The amount of judgment involved in:
(i) Planning and performing relevant audit procedures; and
(ii) Evaluating the audit evidence gathered;
(b) The assessed risk of material misstatement; and
(c) The external auditors evaluation of the existence and significance of th reats to the
objectivity and level of competence of the internal auditors who will be providing such
assistance. (Ref: Para. A35A39)
30. The external auditor shall not use internal auditors to provide direct assistance to perform
procedures that:
(a) Involve making significant judgments in the audit; (Ref: Para. A19)
(b) Relate to higher assessed risks of material misstatement where the judgment required in
performing the relevant audit procedures or evaluating the audit evidence gathered is more
than limited; (Ref: Para. A38)
(c) Relate to work with which the internal auditors have been involved and which has already
been, or will be, reported to management or those charged with governance by the internal
audit function; or
(d) Relate to decisions the external auditor makes in accordance with this SA regarding the
internal audit function and the use of its work or direct assistance. (Ref: Para. A35 A39)
31. Having appropriately evaluated whether and, if so, to what extent internal auditors can be
used to provide direct assistance on the audit, the external auditor shall, in communicating with
those charged with governance an overview of the planned scope and timing of the audit in
accordance with SA 260, 63 communicate the nature and extent of the planned use of internal
auditors to provide direct assistance so as to reach a mutual understanding that such use is not
excessive in the circumstances of the engagement. (Ref: Para. A39)
32. The external auditor shall evaluate whether, in aggregate, using internal auditors to provide
direct assistance to the extent planned, together with the planned use of the work of the internal
audit function, would still result in the external auditor being sufficiently involved in the audit,
given the external auditors sole responsibility for the audit opinion expressed.
Using Internal Auditors to Provide Direct Assistance
33. Prior to using internal auditors to provide direct assistance for purposes of the audit, the
external auditor shall:
(a) Obtain written agreement from an authorized representative of the entity that the internal
auditors will be allowed to follow the external auditors instructions, and that the entity will
not intervene in the work the internal auditor performs for the external auditor; and
(b) Obtain written agreement from the internal auditors that they will keep confidential specific
matters as instructed by the external auditor and inform the external auditor of any threat
to their objectivity.
34. The external auditor shall direct, supervise and review the work performed by internal
auditors on the engagement in accordance with SA 220 64. In so doing:
(a) The nature, timing and extent of direction, supervision, and review shall recognize that the
internal auditors are not independent of the entity and be responsive to the outcome of the
evaluation of the factors in paragraph 29 of this SA; and
(b) The review procedures shall include the external auditor checking back to the underlying
audit evidence for some of the work performed by the internal auditors.
The direction, supervision and review by the external auditor of the work performed by the
internal auditors shall be sufficient in order for the external auditor to be satisfied that the internal
auditors have obtained sufficient appropriate audit evidence to support the conclusions based
on that work. (Ref: Para. A40A41)
35. In directing, supervising and reviewing the work performed by internal auditors, the
external auditor shall remain alert for indications that the external auditors evaluations in
paragraph 27 are no longer appropriate.
Documentation
36. If the external auditor uses the work of the internal audit function, the external auditor shall
include in the audit documentation:

64 SA 220, Quality Control for an Audit of Financial Statements.
(a) The evaluation of:

(i) Whether the functions organizational status and relevant policies and procedures
adequately support the objectivity of the internal auditors;
(ii) The level of competence of the function; and
(iii) Whether the function applies a systematic and disciplined approach, including quality
control;
(b) The nature and extent of the work used and the basis for that decision; and
(c) The audit procedures performed by the external auditor to evaluate the adequacy of the
work used.
37. If the external auditor uses internal auditors to provide direct assistance on the audit, the
external auditor shall include in the audit documentation:
(a) The evaluation of the existence and significance of threats to the objectivity of the internal
auditors, and the level of competence of the internal auditors used to provide direct
assistance;
(b) The basis for the decision regarding the nature and extent of the work performed by the
internal auditors;
(c) Who reviewed the work performed and the date and extent of that review in accordance
with SA 23065;
(d) The written agreements obtained from an authorized representative of the entity and the
internal auditors under paragraph 33 of this SA; and
(e) The working papers prepared by the internal auditors who provided direct assistance on
the audit engagement.
Definition of Internal Audit Function (Ref: Para. 2, 14(a))
A1. The objectives and scope of internal audit functions typically include assurance and
consulting activities designed to evaluate and improve the effectiveness of the entitys
governance processes, risk management and internal control such as the following:
Activities Relating to Governance
The internal audit function may assess the governance process in its accomplishment of
objectives on ethics and values, performance management and accountability,
communicating risk and control information to appropriate areas of the organization and
effectiveness of communication among those charged with governance, external and
internal auditors, and management.
65 SA 230, Audit Documentation.
Activities Relating to Risk Management

The internal audit function may assist the entity by identifying and evaluating significant
exposures to risk and contributing to the improvement of risk management and internal
control (including effectiveness of the financial reporting process).
The internal audit function may perform procedures to assist the entity in the detection of
fraud.
Activities Relating to Internal Control
Evaluation of internal control. The internal audit function may be assigned specific
responsibility for reviewing controls, evaluating their operation and recommending
improvements thereto. In doing so, the internal audit function provides assurance on the
control. For example, the internal audit function might plan and perform tests or other
procedures to provide assurance to management and those charged with governance
regarding the design, implementation and operating effectiveness of internal control,
including those controls that are relevant to the audit.
Examination of financial and operating information. The internal audit function may be
assigned to review the means used to identify, recognize, measure, classify and report
financial and operating information, and to make specific inquiry into individual items,
including detailed testing of transactions, balances and procedures.
Review of operating activities. The internal audit function may be assigned to review the
economy, efficiency and effectiveness of operating activities, including non - financial
activities of an entity.
Review of compliance with laws and regulations. The internal audit function may be
assigned to review compliance with laws, regulations and other external requirements, and
with management policies and directives and other internal requirements.
A2. Activities similar to those performed by an internal audit function may be conducted by
functions with other titles within an entity. Some or all of the activities of an internal audit function
may also be outsourced to a third-party service provider. Neither the title of the function, nor
whether it is performed by the entity or a third-party service provider, are sole determinants of
whether or not the external auditor can use the work of the function. Rather, it is the nature of
the activities; the extent to which the internal audit functions organizational status and relevant
policies and procedures support the objectivity of the internal auditors; competence; and
systematic and disciplined approach of the function that are relevant. References in this SA to
the work of the internal audit function include relevant activities of other functions or third -party
providers that have these characteristics.
A3. In addition, those in the entity with operational and managerial duties and responsibilities
outside of the internal audit function would ordinarily face threats to their objectivity that would
preclude them from being treated as part of an internal audit function for the purpose of this SA,
although they may perform control activities that can be tested in accordance with SA 33066. For
this reason, monitoring controls performed by an owner- manager would not be considered
equivalent to an internal audit function.
A4. While the objectives of an entitys internal audit function and the external auditor differ, the
function may perform audit procedures similar to those performed by the external auditor in an
audit of financial statements. If so, the external auditor may make use of the function for
purposes of the audit in one or more of the following ways:
To obtain information that is relevant to the external auditors assessments of the risks of
material misstatement due to error or fraud. In this regard, SA 315 67 requires the external
auditor to obtain an understanding of the nature of the internal audit functions
responsibilities, its status within the organization, and the activities performed, or to be
performed, and make inquiries of appropriate individuals within the internal audit function
(if the entity has such a function); or
Unless prohibited, or restricted to some extent, by law or regulation, the external auditor,
after appropriate evaluation, may decide to use work that has been performed by the
internal audit function during the period in partial substitution for audit evidence to be
obtained directly by the external auditor68.14
In addition, unless prohibited, or restricted to some extent, by law or regulation, the external
auditor may use internal auditors to perform audit procedures under the direction, supervision
and review of the external auditor (referred to as direct assistance in this SA) 69.
Determining Whether, in Which Areas, and to What Extent the Work of the Internal Audit
Function Can Be Used
Evaluating the Internal Audit Function
Objectivity and Competence (Ref: Para. 15(a)(b))
A5. The external auditor exercises professional judgment in determining whether the work of
the internal audit function can be used for purposes of the audit, and the nature and extent to
which the work of the internal audit function can be used in the circumstances.
A6. The extent to which the internal audit functions organizational status and relevant policies
and procedures support the objectivity of the internal auditors and the level of competence of
the function are particularly important in determining whether to use and, if so, the nature and
extent of the use of the work of the function that is appropriate in the circumstances.
66 See paragraph 10.

document.(please see SA 315, paragraph 6(a) therein)
68 See paragraphs 1525.
69 See paragraphs 2635
A7. Objectivity refers to the ability to perform those tasks without allowing bias, conflict of
interest or undue influence of others to override professional judgments. Factors that may affect
the external auditors evaluation include the following:
Whether the organizational status of the internal audit function, including the functions
authority and accountability, supports the ability of the function to be free from bias, conflict
of interest or undue influence of others to override professional judgments. For example,
whether the internal audit function reports to those charged with governance or an officer
with appropriate authority, or if the function reports to management, whether it has direct
access to those charged with governance.
Whether the internal audit function is free of any conflicting responsibilities, for example,
having managerial or operational duties or responsibilities that are outside of the internal
audit function.
Whether those charged with governance oversee employment decisions related to the
internal audit function, for example, determining the appropriate remuneration policy.
Whether there are any constraints or restrictions placed on the internal audit function by
management or those charged with governance, for example, in communicating the
internal audit functions findings to the external auditor.
Whether the internal auditors are members of relevant professional bodies and their
memberships obligate their compliance with relevant professional standards relating to
objectivity, or whether their internal policies achieve the same objectives.
A8. Competence of the internal audit function refers to the attainment and m aintenance of
knowledge and skills of the function as a whole at the level required to enable assigned tasks
to be performed diligently and in accordance with applicable professional standards. Factors
that may affect the external auditors determination include the following:
Whether the internal audit function is adequately and appropriately resourced relative to
the size of the entity and the nature of its operations.
Whether there are established policies for hiring, training and assigning internal audi tors
to internal audit engagements.
Whether the internal auditors have adequate technical training and proficiency in auditing.
Relevant criteria that may be considered by the external auditor in making the assessment
may include, for example, the internal auditors possession of a relevant professional
designation and experience.
Whether the internal auditors possess the required knowledge relating to the entitys
financial reporting and the applicable financial reporting framework and whether the
internal audit function possesses the necessary skills (for example, industry-specific
knowledge) to perform work related to the entitys financial statements.
Whether the internal auditors are members of relevant professional bodies that oblige them
to comply with the relevant professional standards including continuing professional
development requirements.
A9. Objectivity and competence may be viewed as a continuum. The more the internal audit
functions organizational status and relevant policies and procedures adequately support the
objectivity of the internal auditors and the higher the level of competence of the function, the
more likely the external auditor may make use of the work of the function and in more areas.
However, an organizational status and relevant policies and procedures that provide strong
support for the objectivity of the internal auditors cannot compensate for the lack of sufficient
competence of the internal audit function. Equally, a high level of competence of the internal
audit function cannot compensate for an organizational status and policies and procedures
that do not adequately support the objectivity of the internal auditors.
Application of a Systematic and Disciplined Approach (Ref: Para. 15(c))
A10. The application of a systematic and disciplined approach to planning, performing,
supervising, reviewing and documenting its activities distinguishes the activities of the internal
audit function from other monitoring control activities that may be performed within the entity.
A11. Factors that may affect the external auditors determination of whether the internal audit
function applies a systematic and disciplined approach include the following:
The existence, adequacy and use of documented internal audit procedures or guidance
covering such areas as risk assessments, work programs, documentation and reporting, the
nature and extent of which is commensurate with the size and circumstances of an entity.
Whether the internal audit function has appropriate quality control policies and procedures,
for example, such as those policies and procedures in SQC 1 70 that would be applicable to
an internal audit function (such as those relating to leadership, human resources and
engagement performance) or quality control requirements in standards set by the relevant
professional bodies for internal auditors. Such bodies may also establish other appropriate
requirements such as conducting periodic external quality assessments.
Circumstances When Work of the Internal Audit Function Cannot Be Used (Ref: Para. 16)
A12. The external auditors evaluation of whether the internal audit functions organizational
status and relevant policies and procedures adequately support the objectivity of the internal
auditors, the level of competence of the internal audit function, and whether it applies a
systematic and disciplined approach may indicate that the risks to the quality of the work of the
function are too significant and therefore it is not appropriate to use any of the work of the
function as audit evidence.
A13. Consideration of the factors in paragraphs A7, A8 and A11 of this SA individually and in
aggregate is important because an individual factor is often not sufficient to conclude that the
70 Standard on Quality Control (SQC) 1, Quality Control for Firms that Perform Audits and Reviews of Historical
Financial Information, and Other Assurance and Related Services Engagements.
work of the internal audit function cannot be used for purposes of the audit. For example, the
internal audit functions organizational status is particularly important in evaluating threats to the
objectivity of the internal auditors. If the internal audit function reports to management, this
would be considered a significant threat to the functions objectivity unless other factors such
as those described in paragraph A7 of this SA collectively provide sufficient safeguards to
reduce the threat to an acceptable level.
A14. In addition, a self-review threat71 is created when the external auditor accepts an
engagement to provide internal audit services to an audit client, and the results of those services
will be used in conducting the audit. This is because of the possibility that the engagement team
will use the results of the internal audit service without properly evaluating those results or
without exercising the same level of professional skepticism as would be exercised when the
internal audit work is performed by individuals who are not members of the firm. Paragrap h
290.173 of the Code of Ethics, issued by the Institute of Chartered Accountants of India
therefore in the context of provision of internal audit service to financial statement audit clients,
specifically provides that a statutory auditor of an entity cannot be its internal auditor as it will
not be possible for him to give an independent and objective opinion. The said Code of Ethics
discusses the threats and the safeguards that can be applied to reduce the threats to an
acceptable level in other circumstances.
Determining the Nature and Extent of Work of the Internal Audit Function that Can Be
Used
Factors Affecting the Determination of the Nature and Extent of the Work of the Internal
Audit Function that Can Be Used (Ref: Para. 1719)
A15. Once the external auditor has determined that the work of the internal audit function can
be used for purposes of the audit, a first consideration is whether the planned nature and scope
of the work of the internal audit function that has been performed, or is planned to be
performed, is relevant to the overall audit strategy and audit plan that the external auditor has
established in accordance with SA 300 72.18
A16. Examples of work of the internal audit function that can be used by the external auditor
include the following:
Testing of the operating effectiveness of controls.
Substantive procedures involving limited judgment.
Observations of inventory counts.
Tracing transactions through the information system relevant to financial reporting.
Attention of the members is also invited to paragraph 2.1 of the Guidance Note on Independence of Auditors, issued by the Institute of
71
Chartered Accountants of India.

72 SA 300, Planning an Audit of Financial Statements.
Testing of compliance with regulatory requirements.

In some circumstances, audits or reviews of the financial information of subsidiaries that
are not significant components to the group (where this does not conflict with the
requirements of SA 600) 73.
A17. The external auditors determination of the planned nature and extent of use of the work
of the internal audit function will be influenced by the external auditors evaluation of the extent
to which the internal audit functions organizational status and relevant policies and proc edures
adequately support the objectivity of the internal auditors and the level of competence of the
internal audit function in paragraph 18 of this SA. In addition, the amount of judgment needed
in planning, performing and evaluating such work and the assessed risk of material
misstatement at the assertion level are inputs to the external auditors determination. Further,
there are circumstances in which the external auditor cannot use the work of the internal audit
function for purpose of the audit as described in paragraph 16 of this SA.
Judgments in planning and performing audit procedures and evaluating results (Ref: Para.
18(a), 30(a))
A18. The greater the judgment needed to be exercised in planning and performing the audit
procedures and evaluating the audit evidence, the external auditor will need to perform more
procedures directly in accordance with paragraph 18 of this SA, because using the work of the
internal audit function alone will not provide the external auditor with sufficient appropriate audit
evidence.
A19. Since the external auditor has sole responsibility for the audit opinion expressed, the
external auditor needs to make the significant judgments in the audit engagement in accordance
with paragraph 18. Significant judgments include the following:
Assessing the risks of material misstatement;
Evaluating the sufficiency of tests performed;
Evaluating the appropriateness of managements use of the going concern assumption;
Evaluating significant accounting estimates; and
Evaluating the adequacy of disclosures in the financial statements, and other matters
affecting the auditors report.
Assessed risk of material misstatement (Ref: Para. 18(b))
A20. For a particular account balance, class of transaction or disclosure, the higher an assessed
risk of material misstatement at the assertion level, the more judgment is often involved in
planning and performing the audit procedures and evaluating the results thereof. In such
circumstances, the external auditor will need to perform more procedures directly in accordance
with paragraph 18 of this SA, and accordingly, make less use of the work of the internal audit
73 SA 600, Using the Work of Another Auditor.
function in obtaining sufficient appropriate audit evidence. Furthermore, as explained in SA

20074, the higher the assessed risks of material misstatement, the more persuasive the audit
evidence required by the external auditor will need to be, and, therefore, the external auditor
will need to perform more of the work directly.
A21. As explained in SA 315 75, significant risks require special audit consideration and therefore
the external auditors ability to use the work of the internal audit function in relation to significant
risks will be restricted to procedures that involve limited judgment. In addition, where the risks
of material misstatement is other than low, the use of the work of the internal audit function
alone is unlikely to reduce audit risk to an acceptably low level and eliminate the need for the
external auditor to perform some tests directly.
A22. Carrying out procedures in accordance with this SA may cause the external auditor to
revaluate the external auditors assessment of the risks of material misstatement. Consequently,
this may affect the external auditors determination of whether to use the work of the internal
audit function and whether further application of this SA is necessary.
Communication with Those Charged with Governance (Ref: Para. 20)
A23. In accordance with SA 260 76, the external auditor is required to communicate with those
charged with governance an overview of the planned scope and timing of the audit. The planned
use of the work of the internal audit function is an integral part of the external auditors overall
audit strategy and is therefore relevant to those charged with governance for their underst anding
of the proposed audit approach.
Using the Work of the Internal Audit Function
Discussion and Coordination with the Internal Audit Function (Ref: Para. 21)
A24. In discussing the planned use of their work with the internal audit function as a basis f or
coordinating the respective activities, it may be useful to address the following:
The timing of such work.
The nature of the work performed.
The extent of audit coverage.
Materiality for the financial statements as a whole (and, if applicable, material ity level or
levels for particular classes of transactions, account balances or disclosures), and
performance materiality.
Proposed methods of item selection and sample sizes.
Documentation of the work performed.
74 SA 200, paragraph A29.

75 SA 315, paragraph 4(e).
Review and reporting procedures.

A25. Coordination between the external auditor and the internal audit function is effective when,
for example:
Discussions take place at appropriate intervals throughout the period.
The external auditor informs the internal audit function of significant matters that may affect
the function.
The external auditor is advised of and has access to relevant reports of the internal audit
function and is informed of any significant matters that come to the attention of the function
when such matters may affect the work of the external auditor so that the external auditor
is able to consider the implications of such matters for the audit engagement.
A26. SA 20077 discusses the importance of the auditor planning and performing the audit with
professional skepticism, including being alert to information that brings into question the
reliability of documents and responses to inquiries to be used as audit evidence. Accordingly,
communication with the internal audit function throughout the engagement may provide
opportunities for internal auditors to bring matters that may affect the work of the external auditor
to the external auditors attention. 78 The external auditor is then able to take such information
into account in the external auditors identification and assessment of risks of material
misstatement. In addition, if such information may be indicative of a heightened risk of a material
misstatement of the financial statements or may be regarding any actual, suspected or alleged
fraud, the external auditor can take this into account in the external auditors identification of
risk of material misstatement due to fraud in accordance with SA 240 79.
Procedures to Determine the Adequacy of Work of the Internal Audit Function (Ref: Para.
2324)
A27. The external auditors audit procedures on the body of work of the internal audit function
as a whole that the external auditor plans to use provide a basis for evaluating the overall quality
of the functions work and the objectivity with which it has been performed.
A28. The procedures the external auditor may perform to evaluate the quality of the work
performed and the conclusions reached by the internal audit function, in addition to
reperformance in accordance with paragraph 24, include the following:
Making inquiries of appropriate individuals within the internal audit function.
Observing procedures performed by the internal audit function.
Reviewing the internal audit functions work program and working papers.
77 SA 200, paragraphs 15 and A18.

document. (please see SA 315, paragraph A116 therein).
79 SA 315, paragraph A11 (as given in the conforming amendments) in relation to SA 240, The Auditors Responsibilities Relating to Fraud
in an Audit of Financial Statements.
A29. The more judgment involved, the higher the assessed risk of material misstatement,
the less the internal audit functions organizational status and relevant policies and procedures
adequately support the objectivity of the internal auditors, or the lower the level of competence
of the internal audit function, the more audit procedures are needed to be performed by the
external auditor on the overall body of work of the function to support the decision to use the
work of the function in obtaining sufficient appropriate audit evidence on which to base the audit
opinion.
Reperformance (Ref: Para. 24)
A30. For purposes of this SA, reperformance involves the external auditors independent
execution of procedures to validate the conclusions reached by the internal audit function. This
objective may be accomplished by examining items already examined by the internal audit
function or, where it is not possible to do so, the same objective may also be accomplished by
examining sufficient other similar items not actually examined by the internal audit function.
Reperformance provides more persuasive evidence regarding the adequacy of the work of the
internal audit function compared to other procedures the external auditor may perform in
paragraph A28. While it is not necessary for the external auditor to do reperformance in each
area of work of the internal audit function that is being used, some reperformance is required
on the body of work of the internal audit function as a whole that the external auditor plans to
use in accordance with paragraph 24. The external auditor is more likely to focus reperformance
in those areas where more judgment was exercised by the internal audit function in planning,
performing and evaluating the results of the audit procedures and in areas of higher risk of
material misstatement.
Determining Whether, in Which Areas and to What Extent Internal Auditors Can Be Used
to Provide Direct Assistance
Determining Whether Internal Auditors Can Be Used to Provide Direct Assistance for
Purposes of the Audit (Ref: Para. 5, 2628)
A31. In case where the external auditor is prohibited by law or regulation from using internal
auditors to provide direct assistance, it is relevant for the principal auditors to consider whether
the prohibition also extends to component auditors and, if so, to address this in the
communication to the component auditors.
A32. As stated in paragraph A7 of this SA, objectivity refers to the ability to perform the proposed
work without allowing bias, conflict of interest or undue influence of others to override
professional judgments. In evaluating the existence and significance of threats to the objectivity
of an internal auditor, the following factors may be relevant:
The extent to which the internal audit functions organizational status and relevant policies
and procedures support the objectivity of the internal auditors 80.
Family and personal relationships with an individual working in, or responsible for, the
aspect of the entity to which the work relates.
80 See paragraph A7.
Association with the division or department in the entity to which the work rela tes.
Significant financial interests in the entity other than remuneration on terms consistent with
those applicable to other employees at a similar level of seniority.
Material issued by relevant professional bodies for internal auditors may provide addit ional
useful guidance.
A33. There may also be some circumstances in which the significance of the threats to the
objectivity of an internal auditor is such that there are no safeguards that could reduce them to
an acceptable level. For example, because the adequacy of safeguards is influenced by the
significance of the work in the context of the audit, paragraph 30(a) and (b) prohibits the use of
internal auditors to provide direct assistance in relation to performing procedures that involve
making significant judgments in the audit or that relate to higher assessed risks of material
misstatement where the judgment required in performing the relevant audit procedures or
evaluating the audit evidence gathered is more than limited. This would also be the case where
the work involved creates a self-review threat, which is why internal auditors are prohibited from
performing procedures in the circumstances described in paragraph 30(c) and (d).
A34. In evaluating the level of competence of an internal auditor, many of the factors in
paragraph A8 of this SA may also be relevant, applied in the context of individual internal
auditors and the work to which they may be assigned.
Determining the Nature and Extent of Work that Can Be Assigned to Internal Auditors
Providing Direct Assistance (Ref: Para. 2931)
A35. Paragraphs A15A22 of this SA provide relevant guidance in determining the nature and
extent of work that may be assigned to internal auditors.
A36. In determining the nature of work that may be assigned to inte rnal auditors, the external
auditor is careful to limit such work to those areas that would be appropriate to be assigned.
Examples of activities and tasks that would not be appropriate to use internal auditors to provide
direct assistance include the following:
Discussion of fraud risks. However, the external auditors may make inquiries of internal
auditors about fraud risks in the organization in accordance with SA 315 81.
Determination of unannounced audit procedures as addressed in SA 240.
A37. Similarly, since in accordance with SA 505 82 the external auditor is required to maintain
control over external confirmation requests and evaluate the results of external confirmation
procedures, it would not be appropriate to assign these responsibilities to interna l auditors.
However, internal auditors may assist in assembling information necessary for the external
auditor to resolve exceptions in confirmation responses.
A38. The amount of judgment involved and the risk of material misstatement are also relevant
in determining the work that may be assigned to internal auditors providing direct assistance.
81 SA 315, paragraph 6(a).

82 SA 505, External Confirmations, paragraphs 7 and 16.
For example, in circumstances where the valuation of accounts receivable is assessed as an

area of higher risk, the external auditor could assign the checking of the accuracy of the aging
to an internal auditor providing direct assistance. However, because the evaluation of the
adequacy of the provision based on the aging would involve more than limited judgment, it
would not be appropriate to assign that latter procedure to an internal auditor providing direct
assistance.
A39. Notwithstanding the direction, supervision and review by the external auditor, excessive
use of internal auditors to provide direct assistance may affect perceptions regarding the
independence of the external audit engagement.
Using Internal Auditors to Provide Direct Assistance (Ref: Para. 34)
A40. As individuals in the internal audit function are not independent of the entity as is required
of the external auditor when expressing an opinion on financial statements, the external auditors
direction, supervision and review of the work performed by internal auditors providing direct
assistance will generally be of a different nature and more extensive than if members of the
engagement team perform the work.
A41. In directing the internal auditors, the external auditor may, for example, remind the internal
auditors to bring accounting and auditing issues identified during the audit to the attention of the
external auditor. In reviewing the work performed by the internal auditors, the external auditors
considerations include whether the evidence obtained is sufficient and appropriate in the
circumstances, and that it supports the conclusions reached.
RELATED CONFORMING AMENDMENTS

Note: The following are conforming amendments to SQC 1 and other SAs as a result of SA 610
(Revised), Using the Work of Internal Auditors. The footnote numbers within these amendments
do not align with the SAs that will be amended, and reference should be made to those SAs.
SQC 1, Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements
Definitions
6. In this SQC, the following terms have the meanings attributed below:
(e) Engagement team all personnel performing an engagement, including any experts
contracted by the firm in connection with that engagement. The term engagement team
excludes individuals within the clients internal audit function who provide direct assistan ce on
an audit engagement when the external auditor complies with the requirements of SA 610
(Revised)83.
83SA 610 (Revised), Using the Work of Internal Auditors, establishes limits on the use of direct assistance. It also acknowledges that the
external auditor may be prohibited by law or regulation from obtaining direct assistance from internal auditors. Therefore, the use of direct
assistance is restricted to situations where it is permitted.
SA 220, Quality Control for an Audit of Financial Statements

Definitions
(d) Engagement team all personnel performing an engagement, including any experts
contracted by the firm in connection with that engagement. The term engagement team
excludes individuals within the clients internal audit function who provide direct assistance on
an audit engagement when the external auditor complies with the requirements of SA 610
(Revised)84.
SA 260, Communication with Those Charged with Governance
A18. Other planning matters that it may be appropriate to discuss with those c harged with
governance include:
Where the entity has an internal audit function, the extent to which the auditor will use the
work of internal audit, and how the external and internal auditors can best work together
in a constructive and complementary manner, and the nature and extent of any planned
use of internal auditors to provide direct assistance 85.
SA 300, Planning an Audit of Financial Statements
Appendix
Characteristics of the Engagement
The availability of the work of internal auditors and the extent of the auditors potential
reliance on such work, or internal auditors can be used to provide direct assistance.
SA 315, Identifying and Assessing the Risks of Material Misstatement Through
Understanding the Entity and Its Environment
6. The risk assessment procedures shall include the following:
(a) Inquiries of management, of appropriate individuals within the internal audit function
(if the function exists), and of others within the entity who in the auditors judgment
may have information that is likely to assist in identifying risks of material
misstatement due to fraud or error. (Ref: Para. A6-A13)
23. If the entity has an internal audit function 86, the auditor shall obtain an understanding of
the following in order to determine whether the internal audit function is likely to be relevant to
the audit:
84SA 610 (Revised), Using the Work of Internal Auditors, establishes limits on the use of direct assistance. It also acknowledges that the
external auditor may be prohibited by law or regulation from obtaining direct assistance from internal auditors. Therefore, the use of direct
assistance is restricted to situations where it is permitted.
85 SA 610 (Revised), paragraphs 20 and 31.
86SA 610(Revised),Using the Work of Internal Auditors, paragraph 7(a)14(a), defines the term internal audit function for purposes of
the SAs.
(a) Tthe nature of the internal audit functions responsibilities, and how the internal audit
function fits in the entitys its organisational structurestatus, ; and
(b) T the activities performed, or to be performed. , by the internal audit function. (Ref: Para.
A101 109 -A103 116)
Inquiries of Management, the Internal Audit Function and Others Within the Entity (Ref:
Para. 6(a))
A6. Much of the information obtained by the auditors inquiries is obtained from management
and those responsible for financial reporting. Information may also be obtained by the auditor
through inquiries with the internal audit function, if the entity has such a f unction, and others
within the entity.
A7. However, tThe auditor may also obtain information, or a different perspective in identifying
risks of material misstatement, through inquiries of others within the entity and other employees
with different levels of authority. For example:

Inquiries directed toward internal audit personnel may provide information about internal
audit procedures performed during the year relating to the design and effectiveness of the
entitys internal control and whether management has satisfactorily responded to findings
from those procedures.
..
.
.
Inquiries of the Internal Audit Function
A9. If an entity has an internal audit function, inquiries of the appropriate individuals within
the function may provide information that is useful to the auditor in obtaining an understanding
of the entity and its environment, and in identifying and assessing risks of material
misstatement at the financial statement and assertion levels. In performing its work, the
internal audit function is likely to have obtained insight into the entitys operations and
business risks, and may have findings based on its work, such as identified control
deficiencies or risks, that may provide valuable input into the auditors understanding of
the entity, the auditors risk assessments or other aspects of the audit. The auditors inquiries
are therefore made whether or not the auditor expects to use the work of the internal audit
function to modify the nature or timing, or reduce the extent, of audit procedures to be
performed87. Inquiries of particular relevance may be about matters the internal audit function
has raised with those charged with governance and the outcomes of the functions own risk
assessment process.
87 The relevant requirements are contained in SA 610 (Revised).

A10. If, based on responses to the auditors inquiries, it appears that there are findings
that may be relevant to the entitys financial reporting and the audit, the auditor may consider
it appropriate to read related reports of the internal audit function. Examples of reports of the
internal audit function that may be relevant include the functions strategy and planning
documents and reports that have been prepared for management or those charged with
governance describing the findings of the internal audit functions examinations.
A11. In addition, in accordance with SA 240 88, if the internal audit function provides
information to the auditor regarding any actual, suspected or alleged fraud, the auditor takes
this into account in the auditos idenficiation of risk of material misstatement due to fraud.
A12. Appropriate individuals within the internal audit function with whom inquiries are made
are those who, in the auditors judgment, have the appropriate knowledge, experience and
authority, such as the chief internal audit executive or, depending on the circumstances,
other personnel within the function. The auditor may also consider it appropriate to have
periodic meetings with these individuals.
Considerations specific to public sector entities (Ref: Para 6(a))
A13. Auditors of public sector entities often have additional responsibilities with regard to
internal control and compliance with applicable laws and regulations. Inquiries of
appropriate individuals in the internal audit function can assist the auditors in identifying the
risk of material noncompliance with applicable laws and regulations and the risk of deficiencies
in internal control over financial reporting.
A79. The auditor may also consider how management has responded to the findings
and recommendations of the internal audit function regarding identified deficiencies in
internal control relevant to the audit, including whether and how such responses have been
implemented, and whether they have been subsequently evaluated by the internal audit
function.
The Entitys Internal Audit Functions (Ref: Para 23)
A109101. If the The entitys has an internal audit function, obtaining an understanding of
that function contributes to the auditors understanding of the entity and its environment,
including internal control in particular the role that the function plays in the entitys monitoring
of internal control over financial reporting. This understanding, together with the information
obtained from the auditors inquiries in paragraph 6(a) of this SA, may also provide information
that is directly relevant to the auditors identification and assessment of the r isks of material
misstatement.is likely to be relevant to the audit if the nature of the internal audit functions
responsibilities and activities are related to the entitys financial reporting, and the auditor
expects to use the work of the internal auditors to modify the nature or timing, or reduce the
extent, of audit procedures to be performed. When the auditor determines that the internal audit
function is likely to be relevant to the audit, SA 610 applies.
A110102. The objectives and scope of an internal audit function, and therefore the nature
of its responsibilities and its status within the organisation, including the functions authority and
accountability, vary widely and depend on the size and structure of the entity and the
requirements of management and, where applicable, those charged with governance. The
responsibilities of an internal audit function may include, for example, monitoring of internal
control, risk management, and review of compliance with laws and regulations. On the other
hand, the responsibilities of the internal audit function may be limited to the review of the
economy, efficiency and effectiveness of operations, for example, and accordingly, may not
relate to the entitys financial reporting. These matters may be set out in an internal audit charter
or terms of reference.
A111. The responsibilities of an internal audit function may include performing procedures and
evaluating the results to provide assurance to management and those charged with governance
regarding the design and effectiveness of risk management, internal control and governance
processes. If so, the internal audit function may play an important role in the entitys monitoring
of internal control over financial reporting. However, the responsibilities of the internal audit
function may be focussed on evaluating the economy, efficiency and effectiveness of operations
and, if so, the work of the function may not directly relate to the entitys financial reporting.
A112. The auditors inquiries of appropriate individuals within the internal audit function in
accordance with paragraph 6(a) of this SA help the auditor obtain an understanding of the nature
of the internal audit functions responsibilities. If the auditor determines that the functions
responsibilities are related to the entitys financial reporting, the auditor may obtain further
understanding of the activities performed, or to be performed, by the internal audit function by
reviewing the internal audit functions audit plan for the period, if any, a nd discussing that plan
with the appropriate individuals within the function.
A113103. If the nature of the internal audit functions responsibilities and assurance
activities are related to the entitys financial reporting, the auditor may also be able to use the
work of the internal audit function to modify the nature or timing, or reduce the extent, of audit
procedures to be performed directly by the auditor in obtaining audit evidence. Auditors may be
more likely to be able to use the work of an entitys internal audit function when it appears, for
example, based on experience in previous audits or the auditors risk assessment procedures,
that the entity has an internal audit function that is adequately and appropriately resourced
relative to the size of the entity and the nature of its operations, and has a direct reporting
relationship to those charged with governance the external auditors consideration of the
activities performed, or to be performed by, the internal audit function may include revie w of the
internal audit functions audit plan for the period, if any, and discussion of that plan with the
internal auditors.
A114. If, based on the auditors preliminary understanding of the internal audit function, the
auditor expects to use the work of the internal audit function to modify the nature or timing, or
reduce the extent, of audit procedures to be performed, SA 610 (Revised) applies.
A115. As is further discussed in SA 610 (Revised), the activities of an internal audit function
are distinct from other monitoring controls that may be relevant to financial reporting, such as
reviews of management accounting information that are designed to contribute to how the entity
prevents or detects misstatements.
A116. Establishing communications with the appropriate individuals within an entitys internal
audit function early in the engagement, and maintaining such communications throughout the
engagement, can facilitate effective sharing of information. It creates an environment in which
the auditor can be informed of significant matters that may come to the attention of the internal
audit function when such matters may affect the work of the auditor. SA 200 discusses the
importance of the auditor planning and performing the audit with professional skepti cism,
including being alert to information that brings into question the reliability of documents and
responses to inquiries to be used as audit evidence. Accordingly, communication with the
internal audit function throughout the engagement may provide opportunities for internal
auditors to bring such information to the auditors attention. The auditor is then able to take
such information into account in the auditors identification and assessment of risks of material
misstatement.
Note: Students are advised to refer RTP of Paper 1, Paper 2 and Paper 5 also for
changes/amendments relevant to Auditing and Assurance.

QUESTIONS
1. State with reasons (in short) whether the following statements are correct or incorrect:
(i) The purpose of an audit is to enhance the degree of confidence of intended users in
(ii) Planning is a discrete phase of an audit.
(iii) Sufficiency is the measure of the quality of audit evidence.
(iv) The method which involves dividing the population into groups of items is knows as
block sampling.
(v) As per the Standard on Auditing (SA) 520 Analytical Procedures the term analytical
procedures means evaluations of financial information through analysis of plausible
relationships among financial data only.
(vi) Director's relative can act as an auditor of the company.
(vii) The auditor of A Ltd. Company wanted to refer to the minute books during audit but
board of directors refused to show the minute books to the auditors.
(viii) The first auditor of a Government company was appointed by the Board in its meeting
after 10 days from the date of registration.
(ix) A Chartered Accountant holding securities of S Ltd. having face value of 950 is
qualified for appointment as an auditor of S Ltd.
(x) The auditor shall express a qualified opinion when the auditor concludes that the
financial statements are prepared, in all material respects, in accordance with the
applicable financial reporting framework.
Nature of Auditing
2. (a) The auditors should consider the effect of subsequent events on the financial
statement and on auditors report Comment according to SA 560.
(b) All those personal qualities required to make a good person contribute to the making
of a good auditor. Explain stating the qualities of an Auditor.
3. Give your comment on the following:
(a) Auditors of M/s Tender India (P) Ltd. were changed for the accounting year 201 6-17.
The closing inventory of the company as on 31.3.2016 amounting to ` 100 lacs
continued as it is and became closing inventory as on 31.3.2017. The auditors of the
company propose to exclude from their audit programme the audit of closing inventory
of ` 100 lacs on the understanding that it pertains to the preceding year which was
audited by another auditor.
(b) What are the obvious assertions in the following items appearing in the Financial
Statements?
(i) Statement of Profit and Loss
Travelling Expenditure ` 50,000
(ii) Balance Sheet
Trade receivable ` 2,00,000
4. (a) The process of auditing is such that it suffers from certain limitations, i.e. the limitation
which cannot be overcome irrespective of the nature and extent of audit procedures.
Explain.
(b) Fraudulent financial reporting involves intentional misstatements including omissions
of amounts or disclosures in financial statements to deceive financial statement
users." Discuss.
Basic Concepts in Auditing
5. (a) Disclosure of significant accounting policies followed is necessary if the view
presented is to be properly appreciated. Explain.
(b) Audit Working Papers are the record of audit procedures performed, relevant audit
evidence obtained, and conclusions the auditor reached. Explain stating meaning and
advantages of working papers.
6. (a) The concept of True and Fair is a fundamental concept in auditing. Discuss.
(b) Discuss the concept of materiality in the context of the preparation and presentation
of financial statements.
7. (a) Risk of material misstatement at the assertion level for classes of transactions,
account balances and disclosures need to be considered. Explain stating the
different categories of assertions used by the auditor.
(b) Why Test of Controls are performed? Also explain what does it include.
Preparation for an Audit
8. (a) An element of surprise can significantly improve the audit effectiveness. Explain.
(b) In performing an audit of financial statements, the auditor should have or ob tain
knowledge of the business. Explain in the light of SA 315 Identifying and Assessing
the Risks of Material Misstatement through Understanding the Entity and its
Environment.
9. (a) "The auditor is faced with sampling risk in both tests of control and substantive
procedures." Comment on this statement with reference to SA 530 on "Audit
Sampling.
(b) Random selection ensures that all items in the population or within each stratum have
a known chance of selection. Explain.
Internal Control
10. (a) Doing an audit in a Computerised Information System (CIS) environment is simpler
since the trial balance always tallies. Analyse critically.
(b) An audit trail refers to a situation where it is possible to relate one -to-one basis, the
original input along with the final output. Explain.
(c) What are the different design and procedural aspects of Computerised Information
Systems (CIS)?
11. (a) Explain the Internal controls in Computerised Information System (CIS) Environment.
(b) Internal control can provide only reasonable but not absolute assurance. Explain.
Vouching & Verification of Assets and Liabilities
12. How will you vouch and verify the following:
(a) Receipt of capital subsidy.
(b) Wages paid to seasonal labourer.
(c) Retirement Gratuity to Employees.
(d) Cash at bank.
13. How will you vouch and/or verify the following:

(a) Endowment Policies.
(b) Discounted bill receivable dishonoured.
(c) Deferred Tax Liability.
(d) Goods lying with third party.
The Company Audit
14. State the circumstances which could lead to any of the following in an Auditors Report:
(a) A modification of opinion.
(b) Disclaimer of opinion.
(c) Adverse opinion.
(d) Qualified opinion.
15. Explain the following:
(a) Appointment of First Auditor of a Non-Government Company.
(b) Appointment of First Auditor of a Government Company.
(c) Appointment of Subsequent Auditor of a Non-Government Company.
(d) Appointment of Subsequent Auditor of a Government Company.
16. (a) Explain the Directors Responsibility Statement in brief.
(b) Briefly discuss the provisions of the Companies Act, 2013 with regard to issue of
shares at a discount.
17. (a) Discuss the audit procedure for verification of payment of dividends.
(b) XYZ& Co. Ltd. issued shares to the equity shareholders in the proportion of one bonus
share for every three existing shares. As an auditor of the Company, how would you
verify this issue?
Special Audit
18. (a) Draft an Audit Programme to audit the accounts of a Recreation Club with facilities
for indoor games and in-house eating.
(b) An NGO operating in Delhi had collected large scale donations for Tsunami victims.
The donations so collected were sent to different NGOs operating in Tamil Nadu for
relief operations. This NGO operating in Delhi has appointed you to audit its accounts
for the year in which it collected and remitted donations for Tsunami victims. Draft
audit programme for audit of receipts of donations and remittance of the collected
amount to different NGOs. Mention six points each, peculiar to the situation, which
you will like to incorporate in your audit programme for audit of said receipts and
remittances of donations.
19. What special steps will you take into consideration in auditing the accounts of a hotel?
20. What are the special audit points to be considered by the auditor during the audit of a
Hospital?
1. (i) Correct: As per SA 200 Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance with Standards on Auditing, the purpose of an
audit is to enhance the degree of confidence of intended users in the financial
statements. This is achieved by the expression of an opinion by the auditor on
whether the financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework.
(ii) Incorrect. Planning is not a discrete phase of an audit, but rather a continual and
iterative process that often begins shortly after (or in connection with) the completion
of the previous audit and continues until the completion of the current audit
engagement. Planning, however, includes consideration of the timing of certain
activities and audit procedures that need to be completed prior to the performance of
further audit procedures.
(iii) Incorrect: Sufficiency is the measure of the quantity of audit evidence. On the other
hand, appropriation is the measure of the quality of audit evidence.
(iv) Incorrect. The method which involves dividing the population into groups of items is
known as cluster sampling whereas block sampling involves the selection of a defined
block of consecutive items.
(v) Incorrect. As per the Standard on Auditing (SA) 520 Analytical Procedures the term
analytical procedures means evaluations of financial information through analysis
of plausible relationships among both financial and non-financial data.
(vi) Incorrect: As per section 141(3) of the Companies Act, 2013, a person shall not be
eligible for appointment as an auditor of a company whose relative is a Director or is
in the employment of the Company as a director or Key Managerial Personnel.
(vii) Incorrect: The provisions of Companies Act, 2013 grant rights to the auditor to
access books of account and vouchers of the company. He is also entitled to require
information and explanations from the company. Therefore, he has a statutory right
to inspect the minute book.
(viii) Incorrect: According to section 139(7) of the Companies Act, 2013, in the case of a
Government company, the first auditor shall be appointed by the Comptroller and
Auditor-General of India within 60 days from the date of registration of the co mpany.
If C&AG fails to make the appointment within 60 days, the Board shall appoint in next
30 days.
(ix) Incorrect: As per the provisions of the Companies Act, 2013, a person is disqualified
to be appointed as an auditor of a company if he is holding any security of or interest
in the company.
(x) Incorrect: The auditor shall express an unmodified opinion when the auditor
concludes that the financial statements are prepared, in all material respects, in
accordance with the applicable financial reporting framework.
2. (a) Effect of Subsequent Events: SA 560 Subsequent Events, establishes standards
on the auditors responsibility regarding subsequent events.
According to it, subsequent events refer to those events which occur between the
date of financial statements and the date of the auditors report, and facts that become
known to the auditor after the date of the auditors report. It lays down the standard
that the auditor should consider the effect of subsequent events on the financial
statements and on the auditors report.
The auditor should obtain sufficient appropriate evidence that all events upto the date
of the auditors report requiring adjustment or disclosure have been identified and to
identify such events.
The auditor should-
(i) obtain an understanding of any procedures management has established to
ensure that subsequent events are identified.
(ii) inquire of management and, where appropriate, those charged with governance
as to whether any subsequent events have occurred which might affect the
Examples of inquiries of management on specific matters are:
Whether new commitments, borrowings or guarantees have been entered
into.
Whether sales or acquisitions of assets have occurred or are planned.
Whether there have been increases in capital or issuance of debt
instruments, such as the issue of new shares or debentures, or an
agreement to merge or liquidate has been made or is planned.
Whether there have been any developments regarding contingencies.
Whether there have been any developments regarding risk areas and
contingencies.
Whether any unusual accounting adjustments have been made or are
contemplated.
Whether any events have occurred or are likely to occur which will bring
into question the appropriateness of accounting policies used in the
financial statements as would be the case, for example, if such events call
into question the validity of the going concern assumption.
Whether any events have occurred that are relevant to the measurement
of estimates or provisions made in the financial statements.
Whether any events have occurred that are relevant to the recoverability of
assets.
(iii) Read minutes, if any, of the meetings, of the entitys owners, management and
those charged with governance, that have been held after the date of the
financial statements and inquiring about matters discussed at any such meetings
for which minutes are not yet available.
(iv) Read the entitys latest subsequent interim financial statements, if any.
(v) Read the entitys latest available budgets, cash flow forecasts and other related
management reports for periods after the date of the financial statements.
(vi) Inquire, or extend previous oral or written inquiries, of the entitys legal counsel
concerning litigation and claims.
(vii) Consider whether written representations covering particular subsequent events
may be necessary to support other audit evidence and thereby obtain sufficient
appropriate audit evidence.
When the auditor identifies events that require adjustment of, or disclosure in, the
financial statements, the auditor shall determine whether each such event is
appropriately reflected in those financial statements. If such events have not been
considered by the management and which in the opinion of the auditor are material,
the auditor shall modify his report accordingly.
(b) Qualities of an Auditor: The auditor should possess specific knowledge of
accountancy, auditing, taxation, etc. which are acquired by him during the course of
his theoretical education.
The auditor should also have sufficient knowledge of general principles of law of
contracts, partnership; specific statutes and provisions applicable, e.g. Companies
Act, 2013, Co-operative Societies Act, etc.; clients nature of business and its peculiar
features. Apart from the knowledge acquired by the auditor in the formal manner, the
auditor should also possess certain personal qualities such as, tact; caution firmness;
good temper; judgement; patience; clear headedness and common sense reliability
and trust, etc.
In short, all those personal qualities required to make a good person contribute to the
making of a good auditor. In addition, the auditor must have the shine of culture for
attaining a great height. He must have the highest degree of integ rity backed by
adequate independence. In fact, SA 200 mentions integrity, objectivity and

independence as one of the basic principles.
Auditing is a profession, calling for wide variety of knowledge to which no one has yet
set a limit, the most useful part of the knowledge is probably that which cannot be
learnt from books because its acquisition depends on the alertness of the mind in
applying to ever varying circumstances, the fruits of his own observation and
reflection; only he who is endowed with common sense in adequate measure can
achieve it.
3. (a) Verification of Inventory: As per SA 510 Initial Audit Engagements Opening
Balances, in conducting an initial audit engagement, the objective of the auditor with
respect to opening balances is to obtain sufficient appropriate audit evidence about
whether-
(i) Opening balances contain misstatements that materially affect the current
periods financial statements; and
(ii) Appropriate accounting policies reflected in the opening balances have been
consistently applied in the current periods financial statements, or changes
thereto are properly accounted for and adequately presented and disclosed in
accordance with the applicable financial reporting framework.
When the financial statements for the preceding period were audited by predecessor
auditor, the current auditor may be able to obtain sufficient appropriate audit evidence
regarding opening balances by perusing the copies of the audited financial
statements including the other relevant documents relating to the prior period financial
statements such as supporting schedules to the audited financial statements .
Ordinarily, the current auditor can place reliance on the closing balances contained
in the financial statements for the preceding period, except when during the
performance of audit procedures for the current period the possibility of
misstatements in opening balances is indicated.
General principles governing verification of assets require that the auditor should
confirm that assets have been correctly valued as on the Balance Sheet date. The
contention of the management that the inventory has not undergone any change
cannot be accepted, it forms part of normal duties of auditor to ensure that the figures
on which he is expressing opinion are correct and properly valued. Moreover, it is
also quite likely that the inventory lying as it is might have deteriorated and the same
need to be examined. The auditor is advised not to exclude the audit of closing
inventory from his audit programme.
(b) (i) Travelling Expenditure ` 50,000
Expenditure has been actually incurred for the purpose of travelling.
Travelling has been undertaken during the year under consideration.
Total amount of expenditure incurred is ` 50,000 during the year.

It has been treated as revenue expenditure and charged to Statement of
Profit and Loss.
(ii) Trade receivable ` 2,00,000
These include all sales transaction occurred during the year.
These have been recorded properly and occurred during the year.
These constitute assets of the entity.
These have been shown at proper value, i.e. after showing the deduction
on account of provision for bad and doubtful debts.
4. (a) Inherent Limitations of Audit: As per SA 200 Overall Objectives of the Independent
Auditor and the Conduct of an Audit in Accordance with Standards on Auditing, the
objectives of an audit of financial statements, prepared with in a framework of
recognised accounting policies and practices and relevant statutory requirements, if
any, is to enable an auditor to express an opinion on such financial statements. In
forming his opinion on the financial statements, the auditor follows procedures
designed to satisfy him that the financial statements reflect a true and fair view of the
financial position and operating results of the enterprise. The process of auditing,
however, is such that it suffers from certain limitations, i.e. the limitation which cannot
be overcome irrespective of the nature and extent of audit procedures. The limitations
of an audit arise from-
(i) The Nature of Financial Reporting: The preparation of financial statements
involves judgment by management in applying the requirements of the entitys
applicable financial reporting framework to the facts and circumstances of the
entity. In addition, many financial statement items involve subjective decisions
or assessments or a degree of uncertainty, and there may be a range of
acceptable interpretations or judgments that may be made. Consequently, some
financial statement items are subject to an inherent level of variability which
cannot be eliminated by the application of additional auditing procedures.
(ii) The Nature of Audit Procedures: There are practical and legal limitations on
the auditors ability to obtain audit evidence. For example:
(1) There is the possibility that management or others may not provide,
intentionally or unintentionally, the complete information that is relevant to
the preparation and presentation of the financial statements or that has
been requested by the auditor.
(2) Fraud may involve sophisticated and carefully organised schemes
designed to conceal it. The auditor is neither trained as nor expected to be
an expert in the authentication of documents.
(3) An audit is not an official investigation into alleged wrongdoing.

Accordingly, the auditor is not given specific legal powers, such as the
power of search, which may be necessary for such an investigation.
(iii) Timeliness of Financial Reporting and the Balance between Benefit and
Cost: The relevance of information, and thereby its value, tends to diminish over
time, and there is a balance to be struck between the reliability of information
and its cost. There is an expectation by users of financial statements that the
auditor will form an opinion on the financial statements within a reasonable
period of time and at a reasonable cost, recognising that it is impracticable to
address all information that may exist or to pursue every matter exhaustively on
the assumption that information is in error or fraudulent until proved otherwise.
(iv) Other Matters that Affect the Limitations of an Audit: In the case of certain
assertions or subject matters, the potential effects of the limitations on the
auditors ability to detect material misstatements are particularly significant.
Such assertions or subject matters include:
- Fraud, particularly fraud involving senior management or collusion.
- The existence and completeness of related party relationships and
transactions.
- The occurrence of non-compliance with laws and regulations.
- Future events or conditions that may cause an entity to cease to continue
as a going concern.
Because of the limitations of an audit, there is an unavoidable risk that some
material misstatements of the financial statements may not be detected, even
though the audit is properly planned and performed in accordance with SAs.
(b) Fraudulent Financial Reporting: Fraudulent financial reporting involves intentional
misstatements including omissions of amounts or disclosures in financial statements
to deceive financial statement users. It can be caused by the efforts of management
to manage earnings in order to deceive financial statement users by influencing their
perceptions as to the entitys performance and profitability. Such earnings
management may start out with small actions or inappropriate adjustment of
assumptions and changes in judgments by management. Pressures and incentives
may lead these actions to increase to the extent that they result in fraudulent financial
reporting.
In some entities, management may be motivated to reduce earnings by a material
amount to minimize tax or to inflate earnings to secure bank financing.
Fraudulent financial reporting may be accomplished by the following:
(i) Manipulation, falsification (including forgery), or alteration of accounting records
or supporting documentation from which the financial statements are prepared.
(ii) Misrepresentation in or intentional omission from, the financial statements of

events, transactions or other significant information.
(iii) Intentional misapplication of accounting principles relating to amounts,
classification, manner of presentation, or disclosure.
Fraudulent financial reporting often involves management override of controls that
otherwise may appear to be operating effectively.
5. (a) Disclosure of Accounting Policies: The view presented in the financial statements
of an enterprise of its state of affairs and of the profit or loss can be significantly
affected by the accounting policies followed in the preparation and presentation of
The accounting policies followed vary from enterprise to enterprise. Disclosure of
significant accounting policies followed is necessary if the view presented is to be
properly appreciated. The disclosure of some of the accounting policies followed in
the preparation and presentation of the financial statements is required by some
cases.
The purpose of AS 1 is to promote better understanding of financial statements by
establishing through an accounting standard and the disclosure of significant
accounting policies and the manner in which such accounting policies are disclosed
in the financial statements.
Such disclosure would also facilitate a more meaningful comparison between
financial statements of different enterprises.
To ensure proper understanding of financial statements, it is necessary that all
significant accounting policies adopted in the preparation and presentation of
financial statements should be disclosed. Such disclosure should form part of the
It would be helpful to the reader of financial statements if they are all disclosed at one
place instead of being scattered over several statements, schedules and notes which
form part of financial statements.
Any change in accounting policy, which has a material effect, should be disclosed.
The amount by which any item is in the financial statement is affected by such change
should also be disclosed to the extent ascertainable. Where such amount is not
ascertainable, wholly or in part, the fact should be indicated. If a change is made in
the accounting policies, which has not material effect on the financial statements for
the current period, which is reasonably expected to have material effect in latter
periods, the fact of such change should be appropriately disclosed in the period in
which the change is adopted.
(b) Audit Working Papers: As per SA 230 Audit Documentation, Audit Working Papers
are the record of audit procedures performed, relevant audit evidence obtained, and
conclusions the auditor reached.
Working papers are the-
(a) Evidence of the auditors basis for a conclusion about the achievement of the
overall objective of the auditor; and
(b) Evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.
Besides they serve a number of additional purposes, including the following:
Assisting the engagement team to plan and perform the audit.
Assisting members of the engagement team responsible for supervision to direct
and supervise the audit work, and to discharge their review responsibilities in
accordance with SA 220.
Enabling the engagement team to be accountable for its work.
Retaining a record of matters of continuing significance to future audits.
Enabling the conduct of quality control reviews and inspections in accordance
with
SQC 1.
Enabling the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements.
Standard on Quality Control (SQC) 1, Quality Control for Firms that Perform Audits
and Reviews of Historical Financial Information, and Other Assurance and Related
Services Engagements, issued by the Institute, provides that, unless otherwise
specified by law or regulation, working papers are the property of the auditor. He may
at his discretion, make portions of, or extracts from, working papers available to
clients, provided such disclosure does not undermine the validity of the work
performed, or, in the case of assurance engagements, the independence of the
auditor or of his personnel.
Retention of working papers: Working papers should be retained, long enough, for
a period of time sufficient to meet the needs of his practice and satisfy any legal or
professional requirement of record retention. SQC 1 requires firms to establish
policies and procedures for the retention of engagement documentation. The
retention period for audit engagements ordinarily is no shorter than seven years from
the date of the auditor's report, or, if later, the date of the group auditor's report.
6. (a) Concept of True and Fair: The concept of true and fair is a fundamental concept
in auditing. The phrase true and fair in the auditors report signifies that the auditor
is required to express his opinion as to whether the state of affairs and the results of
the entity as ascertained by him in the course of his audit are truly and fairly
represented in the accounts under audit.
This requires that the auditor should examine the accounts with a view to verifying
that all assets and liabilities, incomes and expenses are stated at the amounts which
are in accordance with accounting principles and policies, and no material item has
been omitted.
The importance of the concept of true and fair view can also be understood and
appreciated from the facts that sections 128, 129 and 143 of the Companies Act, 2013
also discusses this concept in relation to account books, financial statements and
reporting on financial statements respectively.
Section 128(1) of the said Act provides that every company shall prepare and keep
at its registered office books of account and other relevant books and papers and
financial statement for every financial year which give a true and fair view of the state
of the affairs of the company, including that of its branch office or offices, if any. The
company shall be in a position to explain the transactions effected both at the
registered office and its branches. Such books of Accounts shall be kept on accrual
basis and according to the double entry system of accounting.
Section 129(1) of the Companies Act, 2013 provides that the financial statements
shall give a true and fair view of the state of affairsof the company or companies, comply
with the accounting standards notified under section 133 of the Companies Act, 2013, (in
which the Central Government may prescribe the standards of accounting or any
addendum thereto, as recommended by the Institute of Chartered Accountants of
India, constituted under section 3 of the Chartered Accountants Act, 1949, in
consultation with and after examination of the recommendations made by the National
Financial Reporting Authority) and shall be in the form or forms as may be provided
for different class or classes of companies in Schedule III to the said Act.
The term financial statement shall include any notes annexed to or forming part of
such financial statement, giving information required to be given and allowed to be
given in the form of such notes under the said Act.
It may be noted that nothing contained in sub-section (1) shall apply to any insurance
or banking company or any company engaged in the generation or supply of
electricity, or to any other class of company for which a form of financial statement
has been specified in or under the Act governing such class of company.
However, the financial statements shall not be treated as not disclosing a true and
fair view of the state of affairs of the company, merely by reason of the fact that they
do not disclose-
(a) in the case of an insurance company, any matters which are not required to be
disclosed by the Insurance Act, 1938, or the Insurance Regulatory and
Development Authority Act, 1999;
(b) in the case of a banking company, any matters which are not required to
be disclosed by the Banking Regulation Act, 1949;
(c) in the case of a company engaged in the generation or supply of electricity, any
matters which are not required to be disclosed by the Electricity Act, 2003;
(d) in the case of a company governed by any other law for the time being in force,
any matters which are not required to be disclosed by that law.
It may be noted that where the financial statements of a company do not comply with
the accounting standards referred to in sub-section (1), the company shall disclose in
its financial statements, the deviation from the accounting standards, the reasons for
such deviation and the financial effects, if any, arising out of such deviation.
Further, according to section 143(2) of the said Act, the auditor is required to make a
report to the members of the company indicating that, to the best of his information
and knowledge, the financial statements give a true and fair view of th e state of the
companys affairs as at the end of its financial year and profit or loss and cash flow
for the year and such other matters as may be prescribed.
SA 700 Forming an Opinion and Reporting on Financial Statements, requires the
auditor to form an opinion on the financial statements based on an evaluation of the
conclusions drawn from the audit evidence obtained; and express clearly that opinion
through a written report that also describes the basis for the opinion. The auditor is
required to express his opinion on the financial statements that it gives a true and fair
view in conformity with the accounting principles generally accepted in India (a) in the
case of the Balance Sheet, of the state of affairs of the Company as at March 31,
20XX; (b) in the case of the Statement of Profit and Loss, of the profit/ loss for the
year ended on that date; and (c) in the case of the Cash Flow Statement, of the cash
flows for the year ended on that date.
(b) Concept of Materiality: According to SA 320 Materiality in Planning and Performing
an Audit, financial reporting frameworks often discuss the concept of materiality in
the context of the preparation and presentation of financial statements. Although
financial reporting frameworks may discuss materiality in different terms, they
generally explain that:
Misstatements, including omissions, are considered to be material if they,
individually or in the aggregate, could reasonably be expected to influence the
economic decisions of users taken on the basis of the financial statements;
Judgments about materiality are made in the light of surrounding circumstances,
and are affected by the auditors perception of the financial information needs of
users of the financial statements, and by the size or nature of a misstatement,
or a combination of both; and
Judgments about matters that are material to users of the financial statements
are based on a consideration of the common financial information needs of users
as a group. The possible effect of misstatements on specific individual users,
whose needs may vary widely, is not considered.
(1) Such a discussion, if present in the applicable financial reporting
framework, provides a frame of reference to the auditor in determining
materiality for the audit. If the applicable financial reporting framework does
not include a discussion of the concept of materiality, the characteristics
referred above provides the auditor with such a frame of reference.
(2) The auditors determination of materiality is a matter of professional
judgment, and is affected by the auditors perception of the financial
information needs of users of the financial statements. In this context, it is
reasonable for the auditor to assume that users:
(a) Have a reasonable knowledge of business and economic activities
and accounting and a willingness to study the information in the
financial statements with reasonable diligence;
(b) Understand that financial statements are prepared, presented and
audited to levels of materiality;
(c) Recognize the uncertainties inherent in the measurement of amounts
based on the use of estimates, judgment and the consideration of
future events; and
(d) Make reasonable economic decisions on the basis of the information
in the financial statements.
(3) The concept of materiality is applied by the auditor both in planning and
performing the audit, and in evaluating the effect of identified
misstatements on the audit and of uncorrected misstatements, if any, on
the financial statements and in forming the opinion in the auditors report.
7. (a) Risk of Material Misstatement at the Assertion Level: According to SA 315
Identifying and Assessing the Risk of Material Misstatement Through Understanding the
Entity and its Environment, risks of material misstatement at the assertion level for
classes of transactions, account balances, and disclosures need to be considered
because such consideration directly assists in determining the nature, timing, and
extent of further audit procedures at the assertion level necessary to obtai n sufficient
appropriate audit evidence. In identifying and assessing risks of material
misstatement at the assertion level, the auditor may conclude that the identified risks
relate more pervasively to the financial statements as a whole and potentially a ffect
many assertions.
Assertions used by the auditor to consider the different types of potential

misstatements that may occur fall into the following three categories and may take
the following forms-
(1) Assertions about classes of transactions and events for the period under
audit:
(i) Occurrence- transactions and events that have been recorded have
occurred and pertain to the entity.
(ii) Completeness- all transactions and events that should have been
recorded have been recorded.
(iii) Accuracy- amounts and other data relating to recorded transactions and
events have been recorded appropriately.
(iv) Cut-off- transactions and events have been recorded in the correct
accounting period.
(v) Classification- transactions and events have been recorded in the proper
accounts.
(2) Assertions about account balances at the period end:
(i) Existence- assets, liabilities, and equity interests exist.
(ii) Rights and obligations- the entity holds or controls the rights to assets,
and liabilities are the obligations of the entity.
(iii) Completeness- all assets, liabilities and equity interests that should have
been recorded have been recorded.
(iv) Valuation and allocation- assets, liabilities, and equity interests are
included in the financial statements at appropriate amounts and any
resulting valuation or allocation adjustments are appropriately recorded.
(3) Assertions about presentation and disclosure:
(i) Occurrence and rights and obligationsdisclosed events, transactions,
and other matters have occurred and pertain to the entity.
(ii) Completenessall disclosures that should have been included in the
financial statements have been included.
(iii) Classification and understandabilityfinancial information is appropriately
presented and described, and disclosures are clearly expressed.
(iv) Accuracy and valuationfinancial and other information are disclosed fairly
and at appropriate amounts.
(b) Tests of Control: Tests of control are performed to obtain audit evidence about the
effectiveness of the -
(i) design of the accounting and internal control systems, that is, whether they are
suitably designed to prevent or detect and correct material misstatements; and
(ii) operation of the internal controls throughout the period.
Tests of control include tests of elements of the control environment where strengths
in the control environment are used by auditors to reduce control risk.
Tests of control may include:
Inspection of documents supporting transactions and other events to gain audit
evidence that internal controls have operated properly, for example, verifying
that a transaction has been authorised.
Inquiries about, and observation of, internal controls which leave no audit trail,
for example, determining who actually performs each function and not merely
who is supposed to perform it.
Re-performance of internal controls, for example, reconciliation of bank
accounts, to ensure they were correctly performed by the entity.
Testing of internal control operating on specific computerised applications or
over the overall information technology function, for example, access or program
change controls.
8. (a) Surprise Checks: Surprise checks are a part of normal audit procedures. An element
of surprise can significantly improve the audit effectiveness. Wherever prac tical, an
element of surprise should be incorporated in the audit procedures.
The element of surprise in an audit may be, both in regard to the time of audit, i.e.
selection of date, when the auditor will visit the clients office for audit and selection
of areas of audit.
Surprise checks are mainly intended to ascertain whether the internal control system
is working effectively and whether the accounting and other records are kept up to
date as per the statutory regulations. Surprise checks can exercise good moral check
on the clients staff. It helps in determining whether errors or frauds exist and if they
exist, brings the matter promptly to the managements attention, so that corrective
action can be taken at the earliest. Surprise checks are very effective in verification
of cash and investments, test checking of inventory, verification of accounting
records, statutory registers and internal control system. The frequency of surprise
checks may be determined by the auditor in the circumstances of each audit but
should normally be at least once in the course of an audit.
(b) Obtaining Knowledge of the Business: The auditor needs to obtain a level of
knowledge of the clients business that will enable him to identify the events,
transactions and practices that, in his judgment, may have significant effect on the
financial information among other things.
As per SA 315 Identifying and Assessing the Risk of Material Misstatement

Through Understanding the Entity and its Environment, the auditor shall obtain
an understanding of the following:
(a) Relevant industry, regulatory, and other external factors including the applicable
financial reporting framework.
(b) The nature of the entity, including:
(i) its operations;
(ii) its ownership and governance structures;
(iii) the types of investments that the entity is making and plans to make,
including investments in special-purpose entities; and
(iv) the way that the entity is structured and how it is financed;
to enable the auditor to understand the classes of transactions, account
balances, and disclosures to be expected in the financial statements.
(c) The entitys selection and application of accounting policies, including the
reasons for changes thereto. The auditor shall evaluate whether the entitys
accounting policies are appropriate for its business and consistent with the
applicable financial reporting framework and accounting policies used in the
relevant industry.
(d) The entitys objectives and strategies, and those related business risks that may
result in risks of material misstatement.
(e) The measurement and review of the entitys financial performance.
In addition to the importance of knowledge of the clients business in establishing the
overall audit plan, such knowledge helps the auditor to identify areas of special audit
consideration, to evaluate the reasonableness both of accounting estimates and
management representations, and to make judgement regarding the appropriateness
of accounting policies and disclosures.
9. (a) Sampling Risk: As per SA 530 Audit Sampling, audit sampling enables the auditor
to obtain and evaluate audit evidence about some characteristic of the items selected
in order to form or assist in forming a conclusion concerning the population from which
the sample is drawn. Audit sampling can be applied using either non -statistical or
statistical sampling approaches.
When designing a sample, the auditor determines tolerable misstatement in order to
address the risk that the aggregate of individually immaterial misstatements may
cause the financial statements to be materially misstated and provide a margin for
possible undetected misstatements.
The risk that the auditors conclusion based on a sample may be different from the
conclusion if the entire population were subjected to the same audit procedure.
Sampling risk can lead to two types of erroneous conclusions-
(i) In the case of a test of controls, that controls are more effective than they
actually are, or in the case of a substantive procedure i.e. test of details, that a
material misstatement does not exist when in fact it does. The auditor is primarily
concerned with this type of erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an inappropriate audit opinion.
(ii) In the case of a test of controls, that controls are less effective than they actually
are, or in the case of a substantive procedure i.e. test of details, that a material
misstatement exists when in fact it does not. This type of erroneous conclusion
affects audit efficiency as it would usually lead to additional work to establish
that initial conclusions were incorrect.
(b) Random Sampling: Random selection ensures that all items in the population or
within each stratum have a known chance of selection. It may involve use of random
number tables. Random sampling includes two very popular methods which are
discussed below
(i) Simple random sampling: Under this method each unit of the whole population
e.g. purchase or sales invoice has an equal chance of being selected. The
mechanics of selection of items may be by choosing numbers from table of
random numbers by computers or picking up numbers randomly from a drum. It
is considered that random number tables are simple and easy to use and also
provide assurance that the bias does not affect the selection. This method is
considered appropriate provided the population to be sampled consists of
reasonably similar units and fall within a reasonable range. For example the
population can be considered homogeneous, if say, trade receivables balances
fall within the range of ` 5,000 to ` 25,000 and not in the range between ` 25
to ` 2,50,000.
(ii) Stratified Sampling: This method involves dividing the whole population to be
tested in a few separate groups called strata and taking a sample from each of
them. Each stratum is treated as if it was a separate population and if
proportionate of items are selected from each of these stratum. The number of
groups into which the whole population has to be divided is determined on the
basis of auditor judgment. For example in the above case, trade receivables
balances may be divided into four groups as follows -
(a) balances in excess of ` 1,00,000;
(b) balances in the range of ` 75,000 to ` 1,00,000;
(c) balances in the range of ` 25,000 to ` 75,000; and
(d) balances below ` 25,000.
10. (a) Audit in a Computerised Information System (CIS) Environment: Though it is true
that in CIS environment the trial balance always tallies, the same cannot imply that
the job of an auditor becomes simpler. There can still be some accounting errors like
omission of certain entries, compensating errors, duplication of entries, errors of
commission in the form of wrong account head is posted. Possibility of Window
Dressing and/or Creation of Secret Reserves where the trial balance tallied. At
present, due to complex business environment the importance of trial balance cannot
be judged only upto the arithmetical accuracy but the nature of transactions recorded
in the books and appear in the trial balance should be focused.
The emergence of new forms of financial instruments like options and futures,
derivatives, off balance sheet financing etc. have given rise to further complexities in
recording and disclosure of transactions. In an audit, besides the tallying of a trial
balance, there are also other issue like estimation of provision for depreciation,
valuation of inventories, obtaining audit evidence, ensuring compliance procedure
and carrying out substantive procedure, verification of assets & liabilities their
valuation etc. which still requires judgement to be exercised by the auditor.
Responsibility of expressing an audit opinion and objectives of an audit are not
changed in the audit in CIS environment. Therefore, it can be said that simply because
of CIS environment and the trial balance has tallied it does not mean that the audit
would become simpler.
(b) Audit Trail: An audit trail refers to a situation where it is possible to relate one-to-
one basis, the original input along with the final output. The work of an auditor would
be hardly affected if Audit Trail is maintained i.e. if it were still possible to relate, on
a one-to-one basis, the original input with the final output. A simplified representation
of the documentation in a manually created audit trail.
For example, the particular credit notes may be located by the auditor at any time he
may wish to examine them, even months after the balance sheet date. He also has
the means, should he so wish, of directly verifying the accuracy of the totals and sub -
totals that feature in the control listing, by reference to individual credit notes. He can,
of course, check all detailed calculations, casts and postings in the accounting
records, at any time.
In first and early second-generation computer systems, such a complete and trail was
generally available, no doubt, to managements own healthy skepticism of what the
new machine could be relied upon to achieve an attitude obviously shared by the
auditor.
It is once iterated that there is an abundance of documentation upon which the auditor
can use his traditional symbols of scrutiny, in the form of colored ticks and rubber
stamps. Specifically:
(i) The output itself is as complete and as detailed as in any manual system.
(ii) The trail, from beginning to end, is complete, so that all documents may be
identified by located for purposes of vouching, totalling and cross -referencing.
Any form of audit checking is possible, including depth testing in either direction.
(c) Different Design and Procedural Aspects of a Computerised Information
System (CIS): The development of Computerised Information Systems (CIS) will
generally result in design and procedural characteristics that are different from those
found in manual systems. These different design and procedural aspects of CIS are -
(i) Consistency of Performance: Computerised Information Systems (CIS)
perform functions exactly as programmed and are potentially more reliable than
manual systems, provided that all transaction type and conditions that could
occur are anticipated and incorporated into the system.
(ii) Programmed Control Procedures: The nature of computer processing allows
the design of internal control procedures in computer programs. These
procedures can be designed to provide controls with limited visibility (e.g.,
protection of data against unauthorized access may be provided by passwords).
Other procedures can be designed for use with manual intervention, such as
review of reports printed for exception and error reporting, and reasonableness
and limit checks of data.
(iii) Single Transaction Update of Multiple or Data Base Computer Files: A
single input to the accounting system may automatically update all records
associated with the transaction (e.g., shipment of goods documents may update
the sales and customers accounts receivable files as well as the inventory file).
Thus, an erroneous entry in such a system may create errors in various financial
accounts.
(iv) Systems Generated Transactions: Certain transactions may be initiated by the
Computerised Information System (CIS) itself without the need for an input
document. The authorisation of such transactions may neither be supported by
visible input documentation nor documented in the same way as transactions
which are initiated outside the CIS (e.g., interest may be calculated and charged
automatically to customers account balances on the basis of pre-authorized
terms contained in a computer program).
(v) Vulnerability of Data and Programme Storage Media: Large volumes of data
and the computer programs used to process such data may be stored on
portable or fixed storage media, such as magnetic discs and tapes. These media
are vulnerable to theft, or international or accidental destruction.
11. (a) Internal Controls in CIS Environment: The internal controls over computer
processing, which help to achieve the overall objectives of internal control, include
both manual procedures and procedures designed into computer programmes. Such
manual and computer controls affect the CIS environment (general CIS controls) and
the specific controls over the accounting applications (CIS application controls).
General CIS Controls: The purpose of general CIS controls is to establish a
framework of overall control over the CIS activities and to provide a reasonable level
of assurance that the overall objectives of internal control are achieved. These
controls may include-
(1) Organisation and management controls are designed to establish an
organizational framework over CIS activities, including:
(i) Policies and procedures relating to control functions.
(ii) Appropriate segregation of incompatible functions.
(2) Application systems development and maintenance controls are designed to
establish control over:
(i) Testing, conversion, implementation and documentation of new or revised
systems.
(ii) Changes to application systems.
(iii) Access to systems documentation.
(iv) Acquisition of application systems from third parties.
(3) Computer operation controls are designed to control the operation of the
systems and to provide reasonable assurance that:
(i) The systems are used for authorised purposes only.
(ii) Access to computer operations is restricted to authorised personnel.
(iii) Only authorised programs are used.
(iv) Processing errors are detected and corrected.
(4) Systems software controls include:
(i) Authorisation, approval, testing, implementation and documentation of new
systems software and systems software modifications.
(ii) Restriction of access to systems software and documentation to authorised
personnel.
(5) Data entry and program controls are designed to provide reasonable assurance
that:
(i) An authorisation structure is established over transactions being entered
into the system.
(ii) Access to data and programs is restricted to authorised personnel.
(iii) Offsite back-up of data and computer programmes.
(iv) Recovery procedures for use in the event of theft, loss or international or
accidental destruction.
(v) Provision for offsite processing in the event of disaster.
CIS Application Controls: The purpose of CIS application controls is to establish
specific control procedures over the accounting applications to provide reasonable
assurance that all transactions are authorised and recorded, and are processed
completely, accurately and on a timely basis. These include:
(a) Controls over input are designed to provide reasonable assurance that:
(i) Transactions are properly authorised before being processed by the
computer.
(ii) Transactions are accurately converted into machine readable form and
recorded in the computer data files.
(iii) Transactions are not lost, added, duplicated or improperly changed.
(iv) Incorrect transactions are rejected, corrected and if necessary, resubmitted
on a timely basis.
(b) Controls over processing and computer data files are designed to provide
reasonable assurance that:
(i) Transactions, including system generated transactions, are properly
processed by the computer.
(ii) Transactions are not lost, added, duplicated or improperly changed.
(iii) Processing errors are identified and corrected on a timely basis.
(c) Controls over output are designed to provide reasonable assurance that:
(i) Results of processing are accurate.
(ii) Access to output is restricted to authorised personnel.
(iii) Output is provided to appropriate authorised personnel on a timely basis.
(b) Inherent Limitations of Internal Control System: Internal control can provide only
reasonable but not absolute assurance that its objective relating to prevention and
detection of errors/frauds, safeguarding of assets etc., are achieved. This is because
it suffers from some inherent limitations, such as-
(i) Managements consideration that cost of an internal control does not exceeds
the expected benefits.
(ii) Most controls do not tend to be directed at unusual transactions.
(iii) The potential of human error due to carelessness, misjudgment and
misunderstanding of instructions.
(iv) The possibility that control may be circumvented through collusion with
employees or outsiders.
(v) The possibility that a person responsible for exercising control may abuse that
authority.
(vi) Compliance with procedures may deteriorate because the procedures becoming
inadequate due to change in condition.
(vii) Manipulation by management with respect to transactions or estimates and
judgements required in the preparation of financial statements.
(viii) Inherent limitations of Audit.
12. (a) Receipt of Capital Subsidy:
(i) Refer to application made for the claim of subsidy to ascertain the purpose and
the scheme under which the subsidy has been made available.
(ii) Examine documents for the grant of subsidy and note the conditions attached
with the same relating to its use, etc.
(iii) See that conditions to be fulfilled and other terms especially whether the same
is for a specific asset or is for setting up a factory at a specific location.
(iv) Check relevant entries for receipt of subsidy.
(v) Check compliance with requirements of AS 12 on Accounting for Government
Grants i.e. whether it relates to specific amount or in the form of promoters
contribution and accordingly accounted for as also compliance with the
disclosure requirements.
(b) Wages Paid to Seasonal Labourers:
(i) Ascertain and evaluate the internal control system for recruitment and usage of
seasonal labourers.
(ii) Examine that these labourers are hired on proper authority and the rates of pay
are authorized at appropriate levels.
(iii) Ensure that the attendance is properly checked by the Time Keeping
Department.
(iv) Check that the certificate regarding work done by the labourers has been given
by the proper person, in case the labourers have been appointed on a per piece
basis.
(v) Check the computation of wages payable to the labourers, after taking into
account the deductions.
(vi) Confirm that all the payments to the labourers have been acknowledged.
(vii) See the time and job records, to ensure that the labourers have been paid for
time worked. See the treatment of abnormal idle time.

(viii) Reconcile the number of seasonal labourers on payroll as per the Personnel
Departments records vis--vis the number of labourers to whom the wages have
been paid, to ensure that there are no ghost workers. This assumes greater
importance, if the seasonal labourers are hired on temporary basis, and not on
permanent payroll.
(c) Retirement Gratuity to Employees:
(i) Examine the basis on which the gratuity payable to employees is worked out.
The liability for gratuity may either be worked out on actuarial rules or agreement
or on the presumption that all employees retire on the balance sheet date.
(ii) Verify computation of liability of gratuity on the aggregate basis.
(iii) Check the amount of gratuity paid to employees who retired during the year with
reference to number of years of service rendered by them.
(iv) See that the annual premium has been charged to the Statement of Profit and
Loss.
(v) Ensure that the accounting treatment is in accordance with AS 15 Employee
Benefits.
(d) Verification of Cash at Bank: While testing the authenticity of cash at bank, the
following areas may be considered by the auditor-
(i) Apart from comparing the entries in the cash book with those in the Pass Book
the auditor should obtain a certificate from the bank confirming the balance at
the close of the year as shown in the Pass Book.
(ii) Examine the bank reconciliation statement prepared as on the last day of the
year and see whether (a) cheques issued by the entity but not presented for
payment, and (b) cheques deposited for collection by the entity but not cred ited
in the bank account have been duly debited/credited in the subsequent period.
(iii) Pay special attention to those items in the reconciliation statements which are
outstanding for an unduly long period. The auditor should ascertain the reasons
for such outstanding items from the management. He should also examine
whether any such items require an adjustment write-off.
(iv) Examine relevant certificates in respect of fixed deposits or any type of deposits
with banks duly supported by bank advices.
(v) The auditor should examine the possibility, that even though the balance in an
apparently inoperative account may have remained stagnant, transactions may
have taken place in that account during the year.
(vi) In relation to balances/deposits with specific charge on them, or those held
under the requirements of any law, the auditor should examine that suitable
disclosures are made in the financial statements.

(vii) Remittances shown as being in transit should be examined with reference to
their credit in the bank in the subsequent period. Where the auditor finds that
such remittances have not been credited in the subsequent period, he should
ascertain the reasons for the same. He should also examine whether the entity
has reversed the relevant entries in appropriate cases.
(viii) The auditor should examine that suitable adjustments are made in respect of
cheques which have become stale as at the close of the year.
(ix) Where material amounts are held in bank accounts which are blocked, e.g. in
foreign banks with exchange control restrictions or any banks which are under
moratorium or liquidation, the auditor should examine whether the relevant facts
have been suitably disclosed in the financial statements. He should also
examine whether suitable adjustments on this account have been made in the
financial statements in appropriate cases.
(x) Where the auditor finds that the number of bank accounts maintained by the
entity is disproportionately large in relation to its size, the auditor should exercise
greater care in satisfying himself about the genuineness of banking transactions
and balances.
13. (a) Endowment Policies:
(i) Ascertain the specific purpose for which the endowment policy is taken, e.g.,
Sinking Fund policies for redemption of debentures, redemption of leases or
policies taken for other similar purposes, etc.
(ii) Verify the terms and conditions of policies and ensure that all such conditions
are in force and being followed.
(iii) Check that premium has been deposited in time and the policy is in force.
(iv) Examine that proper disclosures have been made in the financial statements in
respect of items for which the policy has been taken.
(b) Discounted Bill Receivable Dishonoured:
(i) Obtain the schedule of discounted bills receivable dishonoured.
(ii) Check the entry in bank statement regarding the amount of bills dishonoured
and see that the bank has debited the account of client.
(iii) Verify the bills receivable returned by the bank along with banks advice.
(iv) See that the dishonoured bills have been noted and protested by following the
proper procedure and the account of the drawee or the trade receivable is also
debited.
(v) Check that bank commission, if any, charged by the bank has been recovered
from the party.

(c) Deferred Tax Liability:
(i) The deferred tax liability is created when there is timing difference which results
in deferred tax payable with reduction in current tax to the same extent. For
example, when more depreciation amount is claimed in Income tax profits than
in accounting profits, the current tax payable will be less with a liability to pay
more tax in future. This is called Deferred Tax Liability.
(ii) Check the creation of Deferred Tax Liability and its actual working.
(iii) Check how much Deferred Tax Liability is reversed during the year.
(iv) Check that Deferred Tax Liability is disclosed as relating to depreciation and as
relating to others.
(v) Check that the provisions of AS 22 Accounting for Taxes on Income have been
complied with.
(d) Goods Lying with Third Party:
(i) The auditor should check that the materiality of the item under this caption
included in inventories.
(ii) He should obtain confirmation of the amount of goods lying with them. The
confirmation may be directly obtained by auditor or be produced by client
depending upon the situation.
(iii) He should inquire into the necessity of sub contractor retaining the inventory. He
should ensure the process that they do are related to the business requirement
and there is no ground for suspicion on this score.
(iv) The goods lying with them for the very long period would merit auditors special
attention for making provision.
(v) The records, voucher/slips for the regulating the movement of inventory into and
out of entity for sub-contracting work be reviewed by vouching for few
transaction for ensuring existence and working of internal control system for
them.
(vi) The excise gate pass, entry in such records, information in returns, be also
cross-verified.
(vii) The valuation of inventories should be correctly made for including material cost
on appropriate inventory valuation formulae and also for inclusion of
proportionate processing charges for the work in process with the contractors.
(viii) The provision should be created for work done, billed for processing and also
for incidence of any applicable levy like service tax payable.
14. (a) Modification of Opinion: The auditor shall modify the opinion in the auditors report
when-
(i) The auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement; or
(ii) The auditor is unable to obtain sufficient appropriate audit evidence to conclude
that the financial statements as a whole are free from material misstatement.
(b) Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is
unable to obtain sufficient appropriate audit evidence on which to base the opinion,
and the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive.
The auditor shall disclaim an opinion when, in extremely rare circumstances involving
multiple uncertainties, the auditor concludes that, notwithstanding having obtained
sufficient appropriate audit evidence regarding each of the individual uncertainties, it
is not possible to form an opinion on the financial statements due to the potential
interaction of the uncertainties and their possible cumulative effect on the financial
statements.
(c) Adverse Opinion: The auditor shall express an adverse opinion when the auditor,
having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are both material and pervasive to the financial
statements.
(d) Qualified Opinion: The auditor shall express a qualified opinion when-
(i) The auditor, having obtained sufficient appropriate audit evidence, concludes
that misstatements, individually or in the aggregate, are material, but not
pervasive, to the financial statements; or
(ii) The auditor is unable to obtain sufficient appropriate audit evidence on which to
base the opinion, but the auditor concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be material but
not pervasive.
15. Appointment of Auditors: Section 139 of the Companies Act, 2013 contains provisions
regarding appointment of Auditors. Provisions related to appointment of auditors may be
grouped under two broad headings-
I Appointment of First Auditors.
II Appointment of Subsequent Auditors.
Appointment of Auditor
(Section 139)
First Auditor Subsequent Auditor
Other than Goverment Company Other than Goverment Company

Government Company defined u/s 2 (45) Government Company defined u/s 2 (45)
[Section 139(6)] [Section 139(7)] [Section 139(1)] [Section 139(5)]
Appointment by C&AG
Appointment by BOD - within 60 days from the
within 30 days from Appointment Appointment by C& AG
DOR within 180 days from the
DOR by Members
in AGM commencement of year
in case of failure:
in case of failure: BOD within 30 days
Members in EGM
within 90 days. Hold the
in case of failure: Hold the office from office till the
Members in EGM within 1st AGM to 6th conclusion of
60 days AGM subject to the AGM
Hold the fulfillment of certain
office till the conditions
conclusion of
the first AGM Hold the
office till the
conclusion of
the first AGM
(a) Appointment of First Auditor of a Non-Government Company: As per Section

139(6) of the Companies Act, 2013, the first auditor of a company, other than a
Government company, shall be appointed by the Board of Directors within 30 days
from the date of registration of the company.
In the case of failure of the Board to appoint the auditor, it shall inform the mem bers
of the company.
The members of the company shall within 90 days at an extraordinary general
meeting appoint the auditor. Appointed auditor shall hold office till the conclusion of
the first annual general meeting.
(b) Appointment of First Auditor of a Government Company: Section 139(7) of the
Companies Act, 2013 provides that in the case of a Government company or any
other company owned or controlled, directly or indirectly, by the Central Government,
or by any State Government, or Governments, or partly by the Central Government
and partly by one or more State Governments, the first auditor shall be appointed by
the Comptroller and Auditor-General of India within 60 days from the date of
registration of the company.
In case the Comptroller and Auditor-General of India does not appoint such auditor
within the above said period, the Board of Directors of the company shall appoint
such auditor within the next 30 days. Further, in the case of failure of the Board to
appoint such auditor within next 30 days, it shall inform the members of the company
who shall appoint such auditor within 60 days at an extraordinary general meeting.
Auditors shall hold office till the conclusion of the first annual general meeting.
(c) Appointment of Subsequent Auditor of a Non-Government Company: As per
section 139(1) of the Companies Act, 2013, every company shall, at the first annual
general meeting appoint an individual or a firm as an auditor who shall hold office
from the conclusion of that meeting till the conclusion of its sixth annual general
meeting and thereafter till the conclusion of every sixth meeting.
(d) Appointment of Subsequent Auditor of a Government Company: As per Section
139(5) of the Companies Act, 2013, in the case of a Government company or any
other company owned or controlled, directly or indirectly, by the Central Government,
or by any State Government or Governments, or partly by the Central Government
and partly by one or more State Governments, the Comptroller and Auditor-General
of India shall, in respect of a financial year, appoint an auditor duly qualified to be
appointed as an auditor of companies under this Act, within a period of 180 days from
the commencement of the financial year, who shall hold office till the conclusion of
the annual general meeting.
16. (a) Directors Responsibility Statement: According to section 134(3)(c) of the
Companies Act, 2013, the report of board of directors on annual accounts shall also
include a Directors Responsibility Statement. However, the provisions related to
Directors Responsibility Statement are provided under section 134(5) of the
Companies Act, 2013 which requires to state that-
(i) in the preparation of the annual accounts, the applicable accounting standards
had been followed along with proper explanation relating to material departures;
(ii) the directors had selected such accounting policies and applied them
consistently and made judgments and estimates that are reasonable and
prudent so as to give a true and fair view of the state of affairs of the company
at the end of the financial year and of the profit and loss of the company for that
period;
(iii) the directors had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of this Act for
safeguarding the assets of the company and for preventing and detecting fraud
and other irregularities;
(iv) the directors had prepared the annual accounts on a going concern basis;
(v) the directors, in the case of a listed company, had laid down internal financial
controls to be followed by the company and that such internal financial controls
are adequate and were operating effectively.

Here, the term internal financial controls means the policies and procedures
adopted by the company for ensuring the orderly and efficient conduct of its
business, including adherence to companys policies, the safeguarding of its
assets, the prevention and detection of frauds and errors, the accuracy and
completeness of the accounting records, and the timely preparation of reliable
financial information; and
(vi) the directors had devised proper systems to ensure compliance with the
provisions of all applicable laws and that such systems were adequate and
operating effectively.
(b) Issue of Shares at a Discount: According to Section 53 of the Companies Act, 2013,
except sweat equity issued as mentioned in section 54, any share issued by a
company at a discounted price shall be void.
Where a company contravenes the provisions of this section, the company shall be
punishable with fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees and every officer who is in default shall be punishable with
imprisonment for a term which may extend to six months or with fine which shall not
be less than one lakh rupees but which may extend to five lakh rupees, or with both .
17. (a) Verification of Payment of Dividends: The procedure for the verification of payment
of dividends is stated below-
(i) Examine the companys Memorandum and Articles of Association to ascertain
the dividend rights of different classes of shares.
(ii) Confirm that the profits appropriated for payment of dividend are distributable
having regard to the provisions contained in Section 123 of the Companies Act,
2013. If the company proposes to pay the dividend out of past profit in reserves,
see that either this is in accordance with the rules framed by the Central
Government in this behalf.
(iii) Inspect the Shareholders Minute Book to verify the amount of dividend declared
and confirm that the amount recommended by the directors.
(iv) If a separate bank account was opened for payment of dividends, check the
transfer of the total amount of dividends payable from the Dividends Accounts.
(v) Check the particulars of members as are entered in the Dividend Register or
Dividend List by reference to the Register of Members, test check the calculation
of the gross amount of dividend payable to each shareholder on the basis of the
number of the shares held and the amount of CDT, if applicable. Verify the casts
and crosscast of the different columns.
(vi) Check the amount of dividend paid with the dividend warrants surrendered.
Reconcile the amount of dividend warrants outstanding with the balance in the
Dividend Bank Account.
(vii) Examine the dividend warrants in respect of previous years, presented during
the year for payment and verify that by their payment, any provision contained
in the Articles in the matter of period of time during which amount of unclaimed
dividend can be paid had not been contravened.
(viii) It is compulsory for a company to transfer the total amount of dividend which
remains unpaid or unclaimed, within thirty days of the declaration of the dividend
to a special bank account entitled Unpaid Dividend Account. Such an account
is to be opened only in a scheduled bank. The transfer must be made within 7
days from the date of expiry of thirty days.
(ix) In case any money transferred to the unpaid dividend amount of a company
remain unpaid or unclaimed for a period of 7 years from the date of such transfer
shall be transferred to Investor Education and Protection Fund.
(x) Ensure the compliance, in case dividend is paid in case of inadequate profits.
(b) Verification of Issue of Bonus Shares: Section 63 of the Companies Act, 2013
allows a company to issue fully paid-up bonus shares to its members, in any manner
whatsoever, out of-
(i) its free reserves;
(ii) the securities premium account; or
(iii) the capital redemption reserve account.
The auditor should ensure that no issue of bonus shares shall be made by capitalising
reserves created by the revaluation of assets.
Further, he should also ensure the compliance of condition for capitalization of profits
or reserves for the issuing fully paid-up bonus shares like -
(i) it is authorised by its articles;
(ii) it has, on the recommendation of the Board, been authorised in the general
meeting of the company;
(iii) it has not defaulted in payment of interest or principal in respect of fixed deposits
or debt securities issued by it;
(iv) it has not defaulted in respect of the payment of statutory dues of the
employees, such as, contribution to provident fund, gratuity and bonus;
(v) the partly paid-up shares, if any outstanding on the date of allotment, are made
fully paid-up;
(vi) it complies with such conditions as may be prescribed like the company which
has once announced the decision of its Board recommending a bonus issue,
shall not subsequently withdraw the same;
(vii) the bonus shares shall not be issued in lieu of dividend.
18. (a) Audit Programme to Audit the Accounts of a Recreation Club:

(i) Examine the constitution, powers of governing body and relevant rules relating
to preparation and finalisation of accounts. In case, it is constituted as a
company limited by guarantee, application of provisions of the Companies Act,
2013 should also be seen.
(ii) Vouch the receipt on account of entrance fees with members applications,
counterfoils issued to them, and minutes of the Managing Committee.
(iii) Vouch Members' subscription with the counterfoils of receipts issued to them.
Trace receipts for a selected period to the Register of Members; reconcile the
amount of total subscription due with the amount collected and the outstanding.
Check totals of various columns of the Register of Members and tally them
across. See the Register of Members to ascertain the Member's dues which are
in arrear and enquire whether necessary steps have been taken for their
recovery. The amount considered irrecoverable, if any should be written off.
(iv) Ensure that arrears of subscriptions for the previous year have been correctly
brought over and arrears for the year under audit and subscription received in
advance have been correctly adjusted.
(v) Verify the internal check as regards members being charged with the price of
foodstuffs and drinks provided to them and their guests as well as with the fees
chargeable for the special service rendered such as billiards, tennis, etc. Trace
debits for a selected period from subsidiary registers maintained in respect of
supplies and services to members to confirm that the account of every member
has been debited with amounts recoverable from him.
(vi) Vouch purchase of sports items, furniture, crockery, etc., and trace their entries
into the respective inventory registers. Vouch purchases of food-stuffs, cigars,
wines, etc. and test their sale price so as to confirm that the normal rates of
profit have been earned on their sales.
The inventory of unsold provisions and stores, at the end of the year should be
verified physically and its valuation checked.
(vii) Check the inventory of furniture, sports material and other assets physically with
the respective inventory registers or inventories prepared at the end of the year.
(viii) Inspect the share scrips and bonds in respect of investments, check their current
values for disclosure in final accounts, also ascertain that the arrangements for
their safe custody are satisfactory, check the accrual of income therefrom and
provision of income tax thereon.
(b) Receipt of Donations:
(i) Internal Control System: Existence of internal control system particularly with
reference to division of responsibilities in respect of authorised collection o f
donations, custody of receipt books and safe custody of money.

(ii) Custody of Receipt Books: Existence of system regarding issue of receipt
books, whether unused receipt books are returned and the same are verified
physically including checking of number of receipt books and sequence of
numbering therein.
(iii) Receipt of Cheques: Receipt Book should have carbon copy for duplicate
receipt and signed by a responsible official. All details relating to date of cheque,
banks name, date, amount, etc. should be clearly stated.
(iv) Bank Reconciliation: Reconciliation of bank statements with reference to all
cash deposits not only with reference to date and amount but also with reference
to receipt book.
(v) Cash Receipts: Register of cash donations to be vouched more extensively. If
addresses are available of donors who had given cash, the same may be cross -
checked by asking entity to post thank you letters mentioning amount, date and
receipt number.
(vi) Foreign Contributions, if any, to receive special attention to compliance with
applicable laws and regulations.
Remittance of Donations to Different NGOs:
(i) Mode of Sending Remittance: All remittances are through account payee
cheques. Remittances through Demand Draft would also need to be scrutinised
thoroughly with reference to recipient.
(ii) Confirming Receipt of Remittance: All remittances are supported by receipts
and acknowledgements.
(iii) Identity: Recipient NGO is a genuine entity. Verify address, 80G Registration
Number, etc.
(iv) Direct Confirmation Procedure: Send confirmation letters to entities to whom
donations have been paid.
(v) Donation Utilisation: Utilisation of donations for providing relief to Tsunami
victims and not for any other purpose.
(vi) System of NGOs Selection: System for selecting NGO to whom donations
have been sent.
19. Auditing the Accounts of a Hotel: The business of running a hotel is very much dissimilar
to running an industrial unit for manufacturing of products. It is a service-oriented industry.
The business is characterized by handling of large amounts of liquid cash, inventory of
foods providing a variety of services, and keeping watch on customers to ensure that they
do not leave hotel without settling the dues. In view of these, the following matters requi re
special attention by the auditor.
(i) Internal Control: Pilferage is one of the greatest problems in any hotel and it is
extremely important to have a proper internal control to minimize the leakage. The
following points should be checked-
(a) Effectiveness of arrangement regarding receipts and disbursements of cash.
(b) Procedure for purchase and inventory stocking of various commodities and
provisions.
(c) Procedure regarding billing of the customers in respect of room service,
telephone, laundry, etc.
(d) System regarding recording and physical custody of edibles, wines, cigarettes,
crockery and cutlery, linen, furniture, carpets, etc.
(e) Ensure that are trading accounts are prepared preferably weekly, for each sales
point. A scrutiny of the percentage of profit should be made, and any deviation
from the norms is to be investigated.
(ii) Room Sales and Cash Collections:
(a) There are various sales points scattered in a hotel and sales are both for cash
and credit. The control over cash is very important. The charge for room sales
is made from the guest register, and tests are to be carried out to ensure that
the correct numbers of guests are charged for the exact period of stay. Any
difference between the rate charged to the guests and standard room rent is to
be investigated to see that it is properly authorized.
(b) The total sales reported with the total bills issued at each sales point have to be
reconciled.
(c) Special care must be taken in respect of bills issued to customers who are
staying in the hotel, because they may not be required to pay the bills
immediately in cash but at a future date or by credit cards. Billing is to be done
room-wise. It must be ensured that all customers pay their bills on leaving the
hotel or within specified dates.
(iii) Inventory: The inventories in a hotel are all saleable item like food and beverages.
Therefore, following may be noted in this regard:
(a) All movement and transfer of inventories must be properly documented.
(b) Areas where inventories are kept must be kept locked and the key retained by
the departmental manager.
(c) The key should be released only to trusted personnel and unauthorized persons
should not be permitted in the stores area.
(d) Many hotels use specialized professional valuers to count and value the
inventories on a continuous basis throughout the year.
(e) The auditor should ensure that all inventories are valued at the year end and
that he should himself be present at the year end physical verification, to the
extent practicable, having regard to materiality consideration and nature and
location of inventories
(iv) Fixed Assets: The fixed assets should be properly depreciated, and the Fixed Assets
Register should be updated.
(v) Casual Labour: In case the hotel employs a casual labour, the auditor should
consider, whether adequate records have been maintained in this respect and there
is no manipulation taking place. The wages payment of the casual labour must also
be checked thoroughly.
(vi) The compliance with all statutory provisions, and compliance with the Foreign
Exchange Regulations must also be verified by the auditor, especially because hotels
offer facility of conversion of foreign exchange to rupees.
(vii) Other Special Aspects are to be verified as under-
(a) Consumption shown in various physical inventory accounts must be traced to
the customers bills to ensure that all issues to the customers have been billed.
(b) All payments to the foreign collaborator, it any, are to be checked.
(c) Expenses and receipts are to be compared with figures of the previous year,
having regard to the average occupancy of visitors and changes in rates.
(d) Special receipts on account of letting out of auditorium, banquet hall, spaces for
shops, boutiques, and special shows should be verified with the arrangements
made.
(e) In depth check should be carried out on the customers' ledgers to verify that all
charges have been properly made and recovered.
(f) The occupancy rate should be worked out, and compared with other similar
hotels, and with previous year. Material deviations should be investigated.
(g) Expenses for painting, decoration, renovation of building, etc. are to be properly
checked.
(h) It is common that hotels get their bookings done through travel agents. The
auditor should ensure that the money is recovered from the travel agents as per
credit terms allowed. Commission paid to travel agents should be checked by
reference to the agreement on that behalf.

(i) Apart from control over inventory of edibles, control over issue and physical
inventory of linen crockery, cutlery, glassware, silver, toilet items, etc. should be
verified.
(j) The auditor should verify the restaurant bills with reference to KOT (Kitchen
Order Ticket).
(k) The auditor should ensure that all taxes have been included in the client's bills.
(I) Computation and payment of salaries and wages vis-a-vis number of employees
must be checked.
20. Audit of Hospital: The audit points to be considered by the auditor during the audit of a
Hospital are stated below-
(i) Income from Services: Vouch the Register of patients with copies of bills issued to
them. Verify bills for a selected period with the patients attendance record to see that
the bills have been correctly prepared. Also see that bills have been issued to all
patients from whom an amount was recoverable according to the rules of the hospital.
(ii) Collection of Cash: Check cash collections as entered in the Cash Book with the
receipts, counterfoils and other evidence for example, copies of patients bills,
counterfoils of dividend and other interest warrants, copies of rent bills, etc.
(iii) Income from Investments: See by reference to the property and Investment Regis-
ter that all income that should have been received by way of rent on properties,
dividends, and interest on securities settled on the hospital, has been collected.
(iv) Legacies and Donations: Ascertain that legacies and donations received for a
specific purpose have been applied in the manner agreed upon.
(v) Reconciliation of Subscriptions: Trace all collections of subscription and donations
from the Cash Book to the respective Registers. Reconcile the total subscriptions due
(as shown by the Subscription Register and the amount collected and that still
outstanding).
(vi) Authorisation and Sanctions: Vouch all purchases and expenses and verify that
the capital expenditure was incurred only with the prior sanction of the Trustees or
the Managing Committee and that appointments and increments to staff have been
duly authorised.
(vii) Grants and TDS: Verify that grants, if any, received from Government or local
authority has been duly accounted for. Also, that refund in respect of taxes deducted
at source has been claimed.
(viii) Budgets: Compare the totals of various items of expenditure and income with the
amount budgeted for them and report to the Trustees or the Managing Committee
significant variations which have taken place.
(ix) Internal Check: Examine the internal check as regards the receipt and issue of
stores; medicines, linen, apparatus, clothing, instruments, etc. so as to ensure that
purchases have been properly recorded in the Inventory Register and that issues
have been made only against proper authorisation.
(x) Depreciation: See that depreciation has been written off against all the assets at the
appropriate rates.
(xi) Registers: Inspect the bonds, share scrips, title deeds of properties and compare
their particulars with those entered in the property and Investment Registers.
(xii) Inventories: Obtain inventories, especially of stocks and stores as at the end of the
year and check a percentage of the items physically; also compare their total values
with respective ledger balances.
(xiii) Management Representation and Certificate: Get proper Management
Representation and Certificate with respect to various aspects covered during the
course of audit.
Exempted Class of Companies
Banking
company
Private limited
company
subject to Insurance
fulfilment of company
specified
conditions
Exempted
Class of
Companies
Company
Small company licensed to
as per the operate under
Companies Act section 8 of the
Companies Act
One Person
Company
II. Auditor's report to contain matters specified in paragraphs 3 and 4 - Every report
made by the auditor under section 143 of the Companies Act, 2013 on the accounts
of every company audited by him, to which this Order applies, for the financial years
commencing on or after 1st April, 2015, shall in addition, contain the matters specified
in paragraphs 3 and 4, as may be applicable:
It may be noted that the Order shall not apply to the auditors report on consolidated
III. Matters to be included in the auditor's report - The auditor's report on the accounts
of a company to which this Order applies shall include a statement on the following
matters, namely:-
(i) (a) whether the company is maintaining proper records showing full particulars,
including quantitative details and situation of fixed assets;
(b) whether these fixed assets have been physically verified by the
management at reasonable intervals; whether any material discrepancies
were noticed on such verification and if so, whether the same have been
properly dealt with in the books of account;
(c) whether the title deeds of immovable properties are held in the name of the

(a) Tthe nature of the internal audit functions responsibilities, and how the internal audit
function fits in the entitys its organisational structurestatus, ; and
(b) T the activities performed, or to be performed. , by the internal audit function. (Ref: Para.
A101 109 -A103 116)
Inquiries of Management, the Internal Audit Function and Others Within the Entity (Ref:
Para. 6(a))
A6. Much of the information obtained by the auditors inquiries is obtained from management
and those responsible for financial reporting. Information may also be obtained by the auditor
through inquiries with the internal audit function, if the entity has such a f unction, and others
within the entity.
A7. However, tThe auditor may also obtain information, or a different perspective in identifying
risks of material misstatement, through inquiries of others within the entity and other employees
with different levels of authority. For example:

Inquiries directed toward internal audit personnel may provide information about internal
audit procedures performed during the year relating to the design and effectiveness of the
entitys internal control and whether management has satisfactorily responded to findings
from those procedures.
..
.
.
Inquiries of the Internal Audit Function
A9. If an entity has an internal audit function, inquiries of the appropriate individuals within
the function may provide information that is useful to the auditor in obtaining an understanding
of the entity and its environment, and in identifying and assessing risks of material
misstatement at the financial statement and assertion levels. In performing its work, the
internal audit function is likely to have obtained insight into the entitys operations and
business risks, and may have findings based on its work, such as identified control
deficiencies or risks, that may provide valuable input into the auditors understanding of
the entity, the auditors risk assessments or other aspects of the audit. The auditors inquiries
are therefore made whether or not the auditor expects to use the work of the internal audit
function to modify the nature or timing, or reduce the extent, of audit procedures to be
performed87. Inquiries of particular relevance may be about matters the internal audit function
has raised with those charged with governance and the outcomes of the functions own risk
assessment process.
87 The relevant requirements are contained in SA 610 (Revised).

PAPER 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
SECTION A: INFORMATION TECHNOLOGY
QUESTIONS
1. Define the following terms briefly:

(i) Business Process
(ii) Benefits of Business Process Automation (BPA)
(iii) Micro Architecture
(iv) Infrastructure as a Service (IaaS)
(v) Extranets
(vi) Electronic Commerce
(vii) Examples of Management Information Systems (MIS)
(viii) Specialized Systems
(ix) Custom-built Application
(x) Personal Identification Number (PIN)
2. Differentiate between the following:
(i) Entity of Data Flow Diagram (DFD) and Process of Data Flow Diagram (DFD)
(ii) One-to-Many Relationship (1:N) and Many-to-One (M:1) Relationship in E-R Diagram
(iii) Connection Oriented Networks and Connectionless Networks
(iv) Application Server and Web Server
(v) Star Network and Mesh Network
(vi) Transport Layer and Session Layer of OSI Model
(vii) Transaction Processing System (TPS) and Management Information System (MIS)
(viii) Explicit Knowledge and Tacit Knowledge
(ix) Storage Virtualization and Hardware Virtualization
(x) Concurrent Audit and General Audit
3. Write short note on the following:
(i) Six Sigma
(ii) Value Chain Automation
(iii) Application Software
(iv) Database Management Systems (DBMS)
(v) Fibre Optics
(vi) Decentralized Computing
PAPER 7: INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT 165
(vii) Core Banking Systems (CBS)

(viii) Information System
(ix) Advantages of Cloud Computing
(x) TALLY
Business Process Flow
4. Discuss Order to Cash Process flow in detail.
Information Systems Life Cycle
5. Discuss Information Systems Life Cycle, in brief.
Flowchart
6. Draw a flow chart to compute and print Income-tax, Surcharge and Education Cess on the
income of a person, where income is to be read from terminal and tax is to be calculated
as per the following rates:
Slab
Rate
(`)
(i) 1 to 1,00,000 No tax
(ii) 1,00,001 to 1,50,000 @ 10% of amount above 1,00,000
(iii) 1,50,001 to 2,50,000 ` 5,000 + 20% of amount above 1,50,000
(iv) 2,50,001 onwards ` 25,000 + 30% of amount above 2,50,000
Surcharge @ 10% on the amount of total tax, if the income of a
person exceeds ` 10,00,000
Education cess 2% on the total tax
Impact of IT on Risks and Controls

7. Discuss the impact of Information Technology on Information Systems Risks and Controls.
Client Server Networking
8. Discuss Client Server Networking, in detail.
Benefits of e-Commerce Application and Implementation
9. Discuss various benefits of e-Commerce application and implementation.
Network Security
10. Discuss the various aspects involved in Network Security.
Supply Chain Management

11. What do you understand by the term Supply Chain Management (SCM)? Discuss its core
components.
Communication Controls
12. Discuss Communication Controls under Application Controls.
Grid Computing
13. Discuss the numerous benefits of Grid Computing.
Operating System
14. Discuss the various tasks performed by Operating System.
1. (i) Business Process: A Business Process consists of a set of activities that are
performed in coordination in an organizational and technical environment. These
activities jointly realize a business goal. Each business process is enacted by a single
organization, but it may interact with business processes performed by other
organizations. To manage a process, the first task is to define it that involves defining
the steps/tasks in the process and mapping the tasks to the roles involved in the
process. Once the process is mapped and implemented, performance measures are
established. The last piece of the process management definition describes the
organizational setup that enables the standardization of and adherence to the
process throughout the organization.
(ii) Benefits of Business Process Automation (BPA) are as follows:
Saving on costs: Automation leads to saving in time and labor costs.
Staying ahead in competition: Today, to survive, businesses need to adopt
automation.
Fast service to customers: Nowadays, business managers realize that
automation help them to serve their customers faster and better.
(iii) Micro Architecture: Micro Architecture is a lower level detailed description of the
system that is sufficient for completely describing the operation of all parts of the
computing system, and how they are inter-connected and inter-operate to implement
the Information Systems Architecture (ISA). This describes the data paths, data
processing elements and data storage elements, and describes how they should
implement ISA. The Micro architecture considers how the ISA does and what it does.
Its how everything is ultimately organized on the chip or processor.
(iv) Infrastructure as a Service (IaaS): It is the foundation of cloud services that provides
clients with access to server hardware, storage, bandwidth and other fundamental
computing resources. The service is typically paid for on a usage basis. The service
may also include dynamic scaling so that if the customer needs more resources than
expected, s/he can get them on the fly (probably to a given limit). It provides access
to shared resources on need basis, without revealing details like location and
hardware to clients.
(v) Extranets: Extranets are network links that use Internet technologies to interconnect
the Intranet of a business with the Intranets of its customers, suppliers, or other
business partners. Companies can use Extranets to perform following functions:
Establish direct private network links between themselves, or create private
secure Internet links between them called virtual private networks.
Use the unsecured Internet as the extranet link between its intranet and
consumers and others, but rely on encryption of sensitive data and its own
firewall systems to provide adequate security.
(vi) Electronic Commerce: Electronic Commerce is the process of doing business
electronically. It refers to the use of technology to enhance the processing of
commercial transactions between a company, its customers and its business
partners. It involves the automation of a variety of business-to-business and
business-to-consumer transactions through reliable and secure connections.
(vii) Examples of Management Information Systems (MIS) are as follows:
Airline reservations (seat, booking, payment, schedules, boarding list, special
needs, etc.).
Bank operations (deposit, transfer, withdrawal) electronically with a distinguish
payment gateways.
Integration of department with the help of contemporary softwares like ERP .
Logistics management application to streamline the transportation system.
Train reservation.
(viii) Specialized Systems: Specialized Systems provide comprehensive end to end IT
solutions and services including systems integration, implementation, engineering
services, software application customization and maintenance to various
corporations. These systems offer comprehensive solutions to various sectors to
confront challenges, and convert every challenge into an opportunity. Enterprise
Resource Planning (ERP), Customer Relationship Management (CRM), and Supply
Chain Management (SCM) etc. are some examples of specialized systems.
(ix) Custom-built Application: These applications can be configured to meet a
companys requirements. Customization involves additional coding while
configuration is based on settings which are inputted by the user . Whether they are
for one function or integrate processes across the company like an ERP these are
the easiest ones to customize. Example Billing, Inventory, Attendance etc.
(x) Personal Identification Number (PIN): The Personal Identification Number is similar
to a password assigned to a user by an institution based on the user characteristics
and encrypted using a cryptographic algorithm. The application generates a random
number stored in its database independent of user identification details or a customer
selected number.
2. (i) Entity of Data Flow Diagram (DFD): An entity of DFD is the source or destination of
data. The source in a DFD represents these entities that are outside the context of
the system. Entities either provide data to the system (referred to as a source) or
receive data from it (referred to as a sink). Entities are often represented as
rectangles (a diagonal line across the right-hand corner means that this entity is
represented somewhere else in the DFD). Entities are also referred to as agents,
terminators, or source/sink.
Process of Data Flow Diagram (DFD): The process is the manipulation or work that
transforms data, performing computations, making decisions (logic flow), or directing
data flows based on business rules. In other words, a process receives input and
generates some output. Process names (simple verbs and dataflow names, such as
Submit Payment or Get Invoice) usually describe the transformation, which can be
performed by people or machines. Processes can be drawn as circles or a segmented
rectangle on a DFD, and include a process name and process number.
(ii) One-to-Many relationship (1:N) A One-to-Many relationship is shown on the E-R
Diagram by a line connecting the two entities with a crow's foot symbol denoting the
'many' end of the relationship.
Example: A student may borrow some books from the library. A book in the library
may be borrowed by at most a student.
Student Borrows Book
Many-to-One relationship (M:1) It is the reverse of One-to-Many relationship.

Example: As in two or more parent records to a single child record. For example,
Parent Records Child

to
(iii) Connection Oriented Networks: The communication wherein a connection is first

established and then data is exchanged between two networks are known as
Connection Oriented Networks. Like it happens in case of telephone networks.

configuration is based on settings which are inputted by the user . Whether they are
for one function or integrate processes across the company like an ERP these are
the easiest ones to customize. Example Billing, Inventory, Attendance etc.
(x) Personal Identification Number (PIN): The Personal Identification Number is similar
to a password assigned to a user by an institution based on the user characteristics
and encrypted using a cryptographic algorithm. The application generates a random
number stored in its database independent of user identification details or a customer
selected number.
2. (i) Entity of Data Flow Diagram (DFD): An entity of DFD is the source or destination of
data. The source in a DFD represents these entities that are outside the context of
the system. Entities either provide data to the system (referred to as a source) or
receive data from it (referred to as a sink). Entities are often represented as
rectangles (a diagonal line across the right-hand corner means that this entity is
represented somewhere else in the DFD). Entities are also referred to as agents,
terminators, or source/sink.
Process of Data Flow Diagram (DFD): The process is the manipulation or work that
transforms data, performing computations, making decisions (logic flow), or directing
data flows based on business rules. In other words, a process receives input and
generates some output. Process names (simple verbs and dataflow names, such as
Submit Payment or Get Invoice) usually describe the transformation, which can be
performed by people or machines. Processes can be drawn as circles or a segmented
rectangle on a DFD, and include a process name and process number.
(ii) One-to-Many relationship (1:N) A One-to-Many relationship is shown on the E-R
Diagram by a line connecting the two entities with a crow's foot symbol denoting the
'many' end of the relationship.
Example: A student may borrow some books from the library. A book in the library
may be borrowed by at most a student.
Student Borrows Book
Many-to-One relationship (M:1) It is the reverse of One-to-Many relationship.

Example: As in two or more parent records to a single child record. For example,
Parent Records Child

to
(iii) Connection Oriented Networks: The communication wherein a connection is first

established and then data is exchanged between two networks are known as
Connection Oriented Networks. Like it happens in case of telephone networks.

Connectionless Networks: The communication wherein no prior connection is made

before data exchanges between two networks is known as Connectionless Networks.
Data which is being exchanged in fact has a complete contact information of recipient
and at each intermediate destination, it is decided how to proceed further like it
happens in case of postal networks.
(iv) Application Server: This is a program that handles all application operations
between users and an enterprise's backend business applications or databases.
Web Server: Web server is a computer that delivers (serves up) web pages. Every
web server has an IP address and possibly a domain name. For example, if we enter
the URL http://www.icai.org in our browser, this sends a request to the Web server
whose domain name is icai.org. The server then fetches the home page named and
sends it to our browser. Any computer can be turned into a Web server by installing
server software and connecting the machine to the Internet.
(v) Difference between Star Network and Mesh Network are as follows:
Star Network Mesh Network
Concept The star network, a popular In this structure, there is
network configuration, random connection of nodes
involves a central unit that using communication links.
has a number of terminals tied A mesh network may be fully
into it. The characteristics of a connected or connected with
star network are: only partial links. In fully
It ties end user interconnected topology,
computers to a central each node is connected by a
computer. dedicated point to point link
The central unit in the to every node. The reliability
star network acts as the is very high as there are
traffic controller among always alternate paths
all the other computers available if direct link
tied to it. The central between two nodes is down
computer is usually a or dysfunctional. Fully
mainframe (host), which connected networks are not
acts as the file server. very common because of the
high cost. Only military
A star network is well installations, which need
suited to companies with high degree of redundancy,
one large data may have such networks,
processing facility that too with a small number
shared by a number of of nodes.
smaller departments.
Many star networks take
the form of hierarchical
networks with a
centralized approach.
Advantages Several users can use Yields the greatest
the central unit at the amount of redundancy
same time. in the event that if one
It is easy to add new of the nodes fails, the
nodes and remove network traffic can be
existing nodes. redirected to another
node.
A node failure does not
bring down the entire Network problems are
network. easier to diagnose.
It is easier to diagnose
network problems
through a central hub.
Disadvantages The whole network is Its high cost of
affected if the main unit installation and
goes down, and all maintenance (more
communications stop. cable is required than
Considered less reliable any other
than a ring network, configuration).
since the other
computers in the star are
heavily dependent on
the central host
computer. If it fails, there
is no backup processing
and communications
capability and the local
computers will be cut off
from the corporate
headquarters and from
each other.
Cost of cabling the
central system and the
points of the star
network together are
very high.
(vi) Transport Layer of OSI Model: The Transport Layer (Layer 4) ensures reliable and
transparent transfer of data between user processes, assembles and disassembles
message packets, and provides error recovery and flow control. Multiplexing and
encryption are undertaken at this layer level. This means that the Transport Layer
can keep track of the segments and retransmit those that fail.
Session Layer of OSI Model: The Session Layer (Layer 5) sets up, coordinates, and
terminates conversations, exchanges, and dialogs between the applications at each
end. It deals with session and connection coordination. It provides for full-duplex, half-
duplex, or simplex operation, and establishes check pointing, adjournment,
termination, and restart procedures. The OSI model made this layer responsible for
"graceful close" of sessions also.
(vii) Transaction Processing System (TPS): A Transaction Processing System (TPS)
may be defined as a type of Information System that collects, stores, modifies and
retrieves the day-to-day data transactions of an enterprise. TPS systems are
designed to process transactions virtually instantly to ensure that customer data is
available to the processes that require it.
Management Information System (MIS): Management Information System (MIS) is
an old management tool, which has been long used by people for superior
management and scientific decision making. MIS is primarily dependent upon
information and is an example of Management Level systems that help middle
managers who are responsible for carrying out the goals set by Top Management.
(viii)Explicit Knowledge: Explicit knowledge is that which can be formalized easily and
therefore is easily available across the organization. Explicit knowledge is articulated,
and represented as spoken words, written material and compiled data. This type of
knowledge is codified, easy to document, transfer and reproduce. For example
Online tutorials, Policy and procedural manuals.
Tacit Knowledge: Tacit knowledge, on the other hand, resides in a few often-in just
one person and hasnt been captured by the organization or made available to others.
Tacit knowledge is unarticulated and represented as intuition, perspective, beliefs,
and values that individuals form based on their experiences. It is personal,
experimental and context-specific. It is difficult to document and communicate the
tacit knowledge. For example hand-on skills, special know-how, employee
experiences.
(ix) Storage Virtualization: Storage virtualization is the apparent pooling of data from
multiple storage devices, even different types of storage devices, into what appears
to be a single device that is managed from a central console. Storage virtualization
helps the storage administrator perform the tasks of backup, archiving, and recovery
more easily - and in less time - by disguising the actual complexity of a Storage Area
Network (SAN). Administrators can implement virtualization with software
applications or by using hardware and software hybrid appliances. The servers
connected to the storage system arent aware of where the data really is. Storage
virtualization is sometimes described as abstracting the logical storage from the
physical storage.
Hardware Virtualization: Hardware Virtualization or Platform Virtualization refers to

the creation of a virtual machine that acts like a real computer with an operating
system. Software executed on these virtual machines is separated from the
underlying hardware resources. For example, a computer that is running Microsoft
Windows may host a virtual machine that looks like a computer with the Linux
operating system; based software that can be run on the virtual machine. The basic
idea of Hardware virtualization is to consolidate many small physical servers into one
large physical server so that the processor can be used more effectively.
(x) Concurrent Audit: In this, Auditors are members of the system development team.
They assist the team in improving the quality of systems development for the specific
system they are building and implementing.
General Audit: In this, Auditors evaluate systems development controls overall. They
seek to determine whether they can reduce the extent of substantive testing needed
to form an audit opinion about managements assertions relating to the financial
statements in systems effectiveness and efficiency.
3. (i) Six Sigma: Six Sigma is a set of strategies, techniques, and tools for process
improvement. It seeks to improve the quality of process outputs by identifying and
removing the causes of defects and minimizing variability in manufacturing and
business processes. Each Six Sigma project carried out within an organization follows
a defined sequence of steps and has quantified value targets, for example: reduce
process cycle time, reduce pollution, reduce costs, increase customer satisfaction,
and increase profits. It follows a life-cycle having phases: Define, Measure, Analyze,
Improve and Control (or DMAIC).
(ii) Value Chain Automation: This refers to separate activities which are necessary to
strengthen an organization's strategies and are linked together both inside an d
outside the organization. It is defined as a chain of activities that a firm operating in
a specific industry performs to deliver a valuable product or service for the market.
The idea of the Value Chain is based on the process view of organizations, the idea
of seeing a manufacturing (or service) organization as a system, made up of
subsystems each with inputs, transformation processes and outputs. Six business
functions of the value chain are Research and development; Design of products,
services, or processes; Production; Marketing and sales; Distribution and Customer
service.
(iii) Application Software: Application software includes all that computer software that
cause a computer to perform useful tasks beyond the running of the computer itself.
It is a collection of programs which address a real-life problem of its end users which
may be business or scientific or any other problem. The different types of application
software are as follows:
Application Suite: Has multiple applications bundled together. Related

functions, features and user interfaces interact with each other. E.g. MS Office
2010 which has MS Word, MS Excel, MS Access, etc.
Enterprise Software: Addresses an enterprise's needs and data flow in a huge
distributed environment. E.g. ERP Applications like SAP.
Enterprise Infrastructure Software: Provides capabilities required to support
enterprise software systems. E.g. email servers, Security software.
Information Worker Software: Addresses individual needs required to manage
and create information for individual projects within departments. E.g.
Spreadsheets, CAAT (Computer Assisted Audit Tools) etc.
Content Access Software: Used to access contents and addresses a desire
for published digital content and entertainment. E.g. Media Players, Adobe
Digital etc.
Educational Software: Holds contents adopted for use by students. E.g.
Examination Test CDs.
Media Development Software: Addresses individual needs to generate and
print electronic media for others to consume. E.g. Desktop Publishing, Video
Editing etc.
(iv) Database Management Systems (DBMS): Every enterprise needs to manage its
information in an appropriate and desired manner. The enterprise has to know its
information needs; acquire that information; organize that information in a meaningful
way; assure information quality; and provide software tools so that users in the
enterprise can access information they require. DBMS are software that aid in
organizing, controlling and using the data needed by the applic ation programme.
They provide the facility to create and maintain a well-organized database.
Applications access the DBMS, which then accesses the data. Commercially
available Data Base Management Systems are Oracle, My SQL, SQL Servers and
DB2 etc. DBMS helps us do various operations on the files, such as adding new files
to database; deleting existing files from database; inserting data in existing files;
modifying data in existing files; deleting data in existing files; and retrieving or
querying data from existing files.
(v) Fibre Optics: This media consists of one or more hair-thin filaments of glass fibre
wrapped in a protective jacket. Signals are converted to light form and fired by laser
in bursts. Optical fibres can carry digital as well as analog signals and provides
increased speed and greater carrying capacity than coaxial cable and twisted-pair
lines. It is not affected by electromagnetic radiation and not susceptible to electronic
noise and so it has much lower error rates than twisted-pair and coaxial cable. Fibre
optic cables are easy to install since they are smaller and more flexible and c an be
used undersea for transatlantic use. Speed of communications is 10,000 times faster
than that of microwave and satellite systems. Biggest disadvantages of using fibre
optic cable are that installation can be difficult and costly to purchase.
(vi) Decentralized Computing: Decentralized computing is the allocation of resources,
both hardware and software, to each individual workstation, or office location. In
contrast, centralized computing exists when majority of functions are carried out, or
obtained from a remote centralized location. A collection of decentralized computers
systems are components of a larger computer network, held together by local stations
of equal importance and capability. These systems can run independently of each
other. Decentralized systems enable file sharing and all computers can share
peripherals such as printers and scanners as well as modems, allowing all the
computers in the network to connect to the internet.
(vii) Core Banking Systems (CBS): Core Banking System may be defined as the set of
basic software components that manage the services provided by a bank to its
customers through its branches (branch network). In other words, the platform where
communication technology and information technology are merged to suit core needs
of banking is known as Core Banking Solutions (CBS). Normal core banking functions
will include deposit accounts, loans, mortgages and payments. Banks make these
services available across multiple channels like ATMs, Internet banking, and
branches. The other various elements of core banking include making and servicing
loans; opening new accounts; processing cash deposits and withdrawals; processing
payments and cheques; calculating interest; Customer Relationship Management
(CRM) activities; managing customer accounts; establishing criteria for minimum
balances, interest rates, number of withdrawals allowed and so on; establishing
interest rates; and maintaining records for all the banks transactions.
(viii) Information System: Information System (IS) is a combination of people, hardware,
software, communication devices, network and data resources that processes (can
be storing, retrieving, transforming information) data and information for a specific
purpose. The system needs inputs from user (key in instructions and commands,
typing, scanning) which will then be processed (calculating, reporting) using
technology devices such as computers, and produce output (printing reports,
displaying results) that will be sent to another user or other system via a network and
a feedback method that controls the operation. In general, any specific Information
System aims to support operations, management and decision-making.
(ix) Advantages of Cloud Computing are as follows:
Cost Efficient: Cloud computing is probably the most cost efficient method to
use, maintain and upgrade.
Almost Unlimited Storage: Storing information in the cloud gives us almost
unlimited storage capacity.
Backup and Recovery: Since all the data is stored in the cloud, backing it up
and restoring the same is relatively much easier than storing the same on a
physical device. Furthermore, most cloud service providers are us ually
competent enough to handle recovery of information.
Automatic Software Integration: In the cloud, software integration is usually
something that occurs automatically. Not only that, cloud computing allows us
to customize the options with great ease. Hence, we can handpick just those
services and software applications that we think will best suit the particular
enterprise.
Easy Access to Information: Once we register ourselves in the cloud, we can
access the information from anywhere, where there is an Internet connection.
Quick Deployment: Once we opt for this method of functioning, the entire
system can be fully functional in a matter of a few minutes. Of course, the
amount of time taken here will depend on the exact kind of technology that we
need for our business.
(x) TALLY: It is an accounting application that helps entity to automate processes
relating to accounting of transactions. It also helps to achieve automation of few
processes in inventory management. The latest version has been upgraded to help
user achieve TAX compliances also. It has features such as Remote Access
Capabilities, Tax Audit and Statutory Compliance, Payroll, Excise for Manufacturers,
Multilingual Support, VAT Composition Returns, TDS, VAT (Value Added Tax), Rapid
Implementation, Real Time Processing, Dynamic Interactive Reports and Unique
Drill-Down Facility, Unlimited Companies and Periods of Accounting.
4. Order to Cash Process Flow: Order to Cash (OTC or O2C) or Sales covers all the
business processes relating to fulfilling customer requests for goods or services. It involves
transactional flow of data from the initial point of documenting a customer order to the final
point of collecting the cash.
The typical life cycle of a sales transaction which may include the following transactions:
(i) Customer Order: A purchase order is received from a customer specifying the type,
quantity and agreed prices for products.
(ii) Recording: Availability of the items is checked and customer order is booked.
(iii) Pick release: The items are moved from the warehouse to the staging area.
(iv) Shipping: The items are loaded onto the carrier for transport to the customer.
(v) Invoice: Invoice of the transaction is generated and sent to the customer.
(vi) Receipt: Money is received from the customer against the invoices.
(vii) Reconciliation: The bank reconciliation of all the receipts is performed.
1 4
2 3
6
5
7
Order to Cash process flow

5. Information Systems Life Cycle: This is commonly referred as Software/System
Development Life Cycle (SDLC), which is a methodology used to describe the process
of building information systems. It is the logical starting point in the entire life cycle of a
computerized system. Activities start when any enterprise decides to go for
computerization or migrate from existing computerized system to a new one. SDLC
framework provides a sequence of activities for system designers and developers to follow.
It consists of a set of steps or phases in which each phase of the SDLC uses the resu lts
of the previous one. This serves as a guideline to the designer, who seeks to use it as
template while working on a project development.
Phase 1: System Investigation: This phase examines that What is the problem and is it
worth solving? the various dimensions under which Systems investigation is done are
Technical feasibility, Economic feasibility, Legal feasibility, Operational feasibility and
Schedule feasibility.
Phase 2: System Analysis: This phase examines that What must the Information System
do to solve the problem? System analyst would be gathering details about the current
system and will involve the activities like Interviewing staff, examining current business,
sending out questionnaires and observation of current procedures. The Systems Analyst
will examine data and information flows in the enterprise using data flow diagrams;
establish what the proposed system will do (not how it will do it); analyse costs and
benefits; outline system implementation options. (e.g. in-house or using consultants);
consider possible hardware configurations; and make recommendations.

Phase 3: System Designing: This phase examines that How will the Information System
do that it must do to obtain the solution to the problem? This phase specifies the technica l
aspects of a proposed system in terms of Hardware platform, Software, Outputs, Inputs,
User interface, Modular design, Test plan, Conversion plan and Documentation.
Phase 4: System Implementation: This phase examines that How will the Solution be
put into effect? This phase involves the steps like Coding and testing of the system;
Acquisition of hardware and software; and either installation of the new system or
conversion of the old system to the new one.
Phase 5: System Maintenance and Review: This phase evaluates results of solution and
modifies the system to meet the changing needs. Post implementation review would be
done to address programming amendments; adjustment of clerical procedures;
Modification of Reports, and Request for new programs.
6. We shall define the variables first:
SCHG: Surcharge; TAX: Income Tax; EC: Education Cess; INC: Income
7. Data handling capacity of computer combined with telecommunications technology greatly

increases ability of an individual to access and to manipulate large quantities of data -
within a relatively short time; thus, increasing amount of potential damage or risk of
exposure. The impact of Information Technology (IT) on Information Systems Risks is as
follows:
Ready access to terminals as computerized Information Systems are highly
distributed and leads to ease in perpetration of computer related crimes thereby
increasing temptation for abuse.
On-line processing of data and validation checks would help the prospective
perpetrator in guessing passwords and aid in circumventing controls in inputs to
computer.
Appropriate controls are not resident within the computer systems to detect or to
prevent the accidents. If threats are not anticipated and adequate controls are not
designed to mitigate or counter them, system and its resources will be vulnerable.
The greatest exposure of all is a failure to recognize risks or potential impacts of those
risks. Prudence demands that contingencies are to be anticipated and planning done to
handle them.
The four major areas in which controls have been affected are as follows:
Realignment of functions data entry and source of transactions may be centralized;
Changes in custody of files and documents. Ready access to data over telecom links
complicate custodial functions of data. Data librarian may become in charge for data;
Transfer of responsibilities Single action by user may complete the entire processing cycle
of the transaction; and
Decline of accountability Traditional functions, responsibilities and boundaries have been
eliminated or are obscured by new methods.
8. Client-Server Networking: Client/Server network is a computer network in which one
centralized powerful computer (called Server) is connected to many less powerful PCs or
workstations (called Clients). The clients run programs and access data that are stored on
the server. Example WWW/E-Mail.
Client: A client is a single-user workstation that provides presentation services and
the appropriate computing, connectivity and the database services relevant to the
business need.
Server: A server is one or more multi-user processors with shared memory providing
computing, connectivity and the database services and the interfaces relevant to the
business need.
Some of the prominent characteristics of C/S architecture are as follows:

Service: C/S provides a clean separation of function based on the idea of service.
The server process is a provider of services and the client is a consumer of services.
Shared Resources: A server can service many clients at the same time and regulate
their access to the shared resources.
Transparency of Location: C/S software usually masks the location of the server
from the clients by redirecting the service calls when needed.
Mix-and-Match: The ideal C/S software is independent of hardware or Operating
System software platforms.
Scalability: In a C/S environment, client workstations can either be added or
removed and the server load can be distributed across multiple servers.
Integrity: The server code and server data is centrally managed, which results in
cheaper maintenance and the guarding of shared data integrity. At the same time,
the clients remain personal and independent.
Issues in Client/Server Network are as follows:
(i) When the server goes down or crashes, all the computers connected to it become
unavailable to use.
(ii) Simultaneous access to data and services by the user takes little more time for server
to process the task.
9. The various benefits of e-Commerce application and implementation are as follows:
Reduction in costs to buyers from increased competition in procurement as more
suppliers can compete in an electronically open marketplace.
Reduction in errors, time, and overhead costs in information processing by eliminating
requirements for re-entering data.
Reduction in costs to suppliers by electronically accessing on-line databases of bid
opportunities, on-line abilities to submit bids, and on-line review of rewards.
Reduction in time to complete business transactions, particularly from delivery to
payment.
Creation of new markets through the ability to easily and cheaply reach potential
customers.
Easier entry into new markets, especially geographically remote markets, for
enterprises regardless of size and location.
Better quality of goods as specifications are standardized and competition is
increased and improved variety of goods through expanded markets and the ability
to produce customized goods.
Faster time to market as business processes are linked, thus enabling seamless
processing and eliminating time delays.
Optimization of resource selection as businesses form cooperative teams to increase
the chances of economic successes, and to provide the customer products and
capabilities more exactly meeting the requirements.
Reduction in inventories and reduction of risk of obsolete inventories as the demand
for goods and services is electronically linked through just-in-time inventory and
integrated manufacturing techniques.
Reduction in overhead costs through uniformity, automation, and large -scale
integration of management processes.
Reduction in use of ecologically damaging materials through electronic coordination
of activities and the movement of information rather than physical objects).
Reduction in advertising costs.
10. Based on the increasing demand and expectations, the network security involves four
aspects: Privacy, Message Authentication, Message Integrity and Non-repudiation.
(a) Privacy: This means that the sender and the receiver expect confidentiality. The
transmitted message should make sense to only the intended receiver and the
message should be unintelligible to unauthorized users. This is achieved by
cryptography and encryption techniques so that the data is secured and can only be
decrypted with a special algorithm, logical key, mathematical formula and/or a
combination of all of them.
(b) Message Authentication: This means that the receiver is sure of the senders
identity and that an imposter has not sent the message.
(c) Message Integrity: This means that the data must arrive at the receiver exactly as it
was sent. There must not be any changes during the transmission either accidental
or malicious.
(d) Non-Repudiation: This means that a receiver must be able to prove that a received
message came from a specific sender and the sender must not be able to deny
sending it.
11. Supply Chain Management (SCM) is a chain that starts with customers and ends with
customers. Supply Chain Management may be defined as the process of planning,
implementing and controlling the operations of the supply chain with the purpose of
satisfying the customer's requirement as efficiently as possible. Supply Chain spans
all movement and storage of raw materials, Work-in-process, inventory and finished goods
from the point of origin to the point of consumption. The main components of SCM include
the following:
(a) Procurement/Purchasing: This begins with the purchasing of parts, components, or
services. Procurement must ensure that the right items are delivered in the exact
quantities at the correct location on the specified time schedule at minimal cost. It
must address the question of assurance that these suppliers will deliver as promised.
(b) Operations: The second major element of supply chain management system is
operations. Having received raw materials, parts, components, assemblies, or services
from suppliers, the firm must transform them and produce the products or the services
that meet the needs of its consumers. It must conduct this transformation in an efficient
and effective manner for the benefit of the supply chain management system.
(c) Distribution: The third element of the supply chain management system is
distribution. Distribution involves several activities - transportation (logistics),
warehousing, and customer relationship management (CRM). The first and most
obvious is logistics - the transportation of goods across the entire supply chain.
(d) Integration: The last element of supply chain management is the need
for integration. It is critical that all participants in the service chain recognize the
entirety of the service chain. The impact of the failure to adopt a system-wide
perspective - that is, examining the totality of the chain can significantly increase
costs and destroy value.
12. Communication Controls: Components in the communication subsystem are responsible
for transporting data among all the other subsystems within a system and for transporting
data to or receiving data from another system. These involve the following:
Physical Component Controls: One way to reduce expected losses in the
communication subsystem is to choose physical component that have characteristics
that make them reliable and that incorporate features or provide controls that mitigate
the possible effects of exposures. These controls involve Transmission Media -
Bounded (Guided) Media or Unbounded (Unguided) Media; Communication Lines
Private (Leased) or Public; Modems; Port Protection Devices; Multiplexors and
Concentrators.
Line Error Controls: Whenever data is transmitted over a communication line, it can
be received in error because of attenuation, distortion, or noise that occurs on the
line. Error Detection (using Parity Checking, Cyclic Redundancy Checks (CRC) and
Loop Check) and Error Correction (using forward Error Correcting Codes and
Backward Error Correction) are the two major approaches under Line Error Controls.
Flow Controls: These are needed because two nodes in a network can differ in terms
of the rate at which they can send receive and process data. The simplest form of
flow control is Stop-and-Wait Flow Control in which the sender transmits a frame of
data only when the receiver is ready to accept the frame.
Link Controls: This involves two common protocols HDLC (Higher Level Data
Control) and SDLC (Synchronous Data Link Control).
Topological Controls: A communication network topology specifies the location of
nodes within a network, the ways in which these nodes will be linked, and the data
transmission capabilities of the links between the nodes. Some of the four basic
topologies include Bus, Ring, Star and Tree Topology.
Channel Access Controls: Two different nodes in a network can compete to use a
communication channel. Whenever the possibility of contention for the channel exists,
some type of channel access control technique must be used. These tec hniques fall
into two classes Polling methods and Contention methods.
Internetworking Controls: Internetworking is the process of connecting two or more
communication networks together to allow the users of one network to communicate
with the users of other networks. Three types of devices are used to connect sub-
networks in an Internet: Bridge, Router and Gateway.
13. Benefits of Grid Computing are as follows:
Making use of Underutilized Resources: In most organizations, there are large
amounts of underutilized computing resource. Grid computing provides a framework
for exploiting these underutilized resources. Grid computing (more specifically, a data
grid) can be used to aggregate this unused storage into a much larger virtual data
store, possibly configured to achieve improved performance and reliability over that
of any single machine.
Resource Balancing: For applications that are grid-enabled, the grid can offer a
resource balancing effect by scheduling grid jobs on machines with low utilization.
This feature of grid computing handles occasional peak loads of activity in parts of a
larger organization. An unexpected peak can be routed to relatively idle machines in
the grid; and if the grid is already fully utilized, the lowest priority work being
performed on the grid can be suspended or even cancelled and performed again later
to make room for the higher priority work.
Parallel CPU Capacity: The potential for usage of massive parallel CPU capacity is
one of the most common visions and attractive features of a grid. A CPU -intensive
grid application can be thought of as many smaller sub-jobs, each executing on a
different machine in the grid. To the extent that these sub-jobs do not need to
communicate with each other, the more scalable the application becomes. A perfectly
scalable application will, for example, finish in one tenth of the time if it uses ten times
the number of processors.
Virtual resources and virtual organizations for collaboration: The users of the
grid can be organized dynamically into several virtual organizations, each with
different policy requirements. These virtual organizations can share their resources
such as data, specialized devices, software, services, licenses, and so on, collectively
as a larger grid. These resources are virtualized to give them a more uniform
interoperability among heterogeneous grid participants. The participants and users of
the grid can be members of several real and virtual organizations. The gr id can help
in enforcing security rules among them and implement policies, which can resolve
priorities for both resources and users.
Access to additional resources: In addition to CPU and storage resources, a grid can
provide access to other resources as well. For example, if a user needs to increase
their total bandwidth to the Internet to implement a data mining search engine, the work
can be split among grid machines that have independent connections to the Internet. In
this way, total searching capability is multiplied, since each machine has a separate
connection to the Internet.
Reliability: High-end conventional computing systems use expensive hardware to
increase reliability. The machines also use duplicate processors in such a way that
when they fail, one can be replaced without turning the other off. Power supplies and
cooling systems are duplicated. The systems are operated on special power sources
that can start generators if utility power is interrupted. All of this builds a reliable
system, but at a great cost, due to the duplication of expensive components.
Management: The goal to virtualize the resources on the grid and more uniformly handle
heterogeneous systems create new opportunities to better manage a larger, more
distributed IT infrastructure. The grid offers management of priorities among different
projects. Aggregating utilization data over a larger set of projects can enhance an
organizations ability to project future upgrade needs. When maintenance is required, grid
work can be rerouted to other machines without crippling the projects involved.
14. Variety of activities that are executed by Operating Systems (OS)include the following:
Performing hardware functions: Application programs to perform tasks to obtain
input from keyboards, retrieve data from disk & display output on monitors. Achieving
all this is facilitated by operating system. Operating system acts as an intermediary
between the application program and the hardware.
User Interfaces: An important function of any operating system is to provide user
interface. Unlike DOS days, which had a command based User Interface (UI),
nowadays we have Graphic User Interface (GUI) which uses icons & menus like in
the case of Windows. So, how we interface with our system will be provided by
Operating system.
Hardware Independence: Every computer could have different specifications and
configurations of hardware. These days, we have operating system, which provides
Application Program Interfaces (API), which can be used by application developers
to create application software, thus obviating the need to understand the inner
workings of OS and hardware. Thus, OS gives us hardware independence.
Memory Management: Memory Management features of Operating System allow
controlling how memory is accessed and maximize available memory & storage.
Operating systems also provides Virtual Memory by carving an area of hard disk to
supplement the functional memory capacity of RAM. In this way, it augments memory
by creating a virtual RAM.
Task Management: Task Management feature of Operating system helps in
allocating resources to make optimum utilization of resources. This facilitates a user
to work with more than one application at a time i.e. multitasking and allows more
than one user to use the system i.e. timesharing.
Networking Capability: Operating systems can provide systems with features &
capabilities to help connect computer networks. Like Linux & Windows 8 give us an
excellent capability to connect to internet.
Logical access security: Operating systems provide logical security by establishing
a procedure for identification and authentication using a User ID and Password. It can
log the user access thereby providing security control.
File management: The operating system keeps a track of where each file is stored
and who can access it, based on which it provides the file retrieval.
PAPER 7B: STRATEGIC MANAGEMENT
Correct/Incorrect with reasoning

1. State with reasons which of the following statements are correct/incorrect:
(a) Competition adversely hits the organizational growth.
(b) The process of strategy avoids matching potential of the organization with the
environment opportunities.
(c) SBU concepts facilitate multi-business operations.
(d) The management of funds can play a pivotal role in strategy implementation.
(e) Corporate-level managers can be viewed as the guardians of shareholders.
(f) SWOT analysis merely examines external environment of an organization.
(g) Reengineering involves slow and gradual improvement in the existing work processes
that occur over a period of time.
(h) Successful businesses have to recognize different elements of environment.
(i) Diversification only involves entering in new businesses that are related to the
existing business of an organisation.
(j) A company's strategy has always to be proactive in nature.
Differences between the two concepts
2. Distinguish between the following:
(a) SWOT and TOWS Matrix
(b) Shared Vision and Vision Shared
(c) Strategy Formulation and Strategy Implementation
(d) DMAIC and DMADV Methodology of Six Sigma
Short notes
3. Write short notes on the following:
(a) Central thrust of BPR
(b) Grand strategy alternative during recession
(c) Strategic surveillance
(d) Global strategy
Brief answers
4. Briefly answer the following questions:
(a) Mission statement of a company focuses on the question: who we are and what we
do. Explain briefly.
(b) A strategic professional has to analyse and redesign the work flows in the context
of business process reengineering Briefly explain.
(c) How internet has helped business?
(d) Do you agree that control systems run parallel with strategic levels? How?
Descriptive answers
Chapter 1-Business Environment
5. Can a business succeed in the long run by focusing only on profit as its primary objective?
What are other objectives of a business?
6. What do you mean by micro environment of business? Explain its elements.
Chapter 2-Business Policy and Strategic Management
7. What is Corporate Strategy? How would you argue that 'corporate strategy' ensures the
correct alignment of the firm with its environment'?
8. What is Strategic Decision Making? Briefly explain the major dimensions of strategic
decisions.
Chapter 3-Strategic Analysis
9. Explain GE model. How is it useful in making strategic choices?
10. Key Success Factors (KSFs) are the rules that shape whether a company will be financially
and competitively successful? Do you agree with this statement? How to identify an
industrys key success factors?
Chapter 4-Strategic Planning
11. Devise an ideal work plan for implementing a turnaround strategy in an organization?
12. Discuss strategic alternatives with reference to Michael Porters strategies.
Chapter 5-Formulation of Functional Strategy
13. What is logistics strategy? What are the areas to examine while developing a logistics
strategy?
14. What is meant by Functional strategies? In term of level where will you put them? Are
functional strategies really important for business?
Chapter 6-Strategic Implementation and Control
15. Define Strategic business unit (SBU). Explain in brief the advantages on SBU structure.
16. Describe the importance of corporate culture.
Chapter 7-Reaching Strategic Edge

17. What are the various guiding principles of total quality management?
18. How internet is affecting the business? Explain the strategy-shaping characteristics of the
E-commerce environment.
1. (a) Incorrect: All organizations have competition. Multinationals and large organizations
clash directly on every level of product and service. Mid-sized and small business
also chase same customers and finds that prices and product quality are bounded by
the moves of their competitors. Competition can challenge organizations to work
better, improve and grow. Lack of competition can make organizations complacent
with their present positions.
(b) Incorrect: In the process of strategic management, an organisation continuously
scan its relevant environment to identify various opportunities and threats.
Organisations keen to grow and expand often look for promising opportunities that
match their potential. Such opportunities become a good stepping stone for achieving
the goals of the organisation.
(c) Correct: Organizing business along SBU lines and creating strategic business units
has become a common practice for multi-product/service and global organizations. It
is a convenient and intelligent grouping of activities along distinct businesses and has
replaced the conventional groupings. SBU facilitates focussed strategic planning,
gaining product-related/market-related specialization, gaining cost-economies and
more rational organizational structure.
(d) Correct: The management of funds can play a pivotal role in strategy implementation
as it aims at the conservation and optimum utilization of funds objectives which are
central to any strategic action. Organizations that implement strategies of stability,
growth or retrenchment cannot escape the rigours of proper management of funds.
In fact, good management of funds often creates the difference between a
strategically successful and unsuccessful company.
(e) Correct: Corporate-level managers provide a link between the people who oversee
the strategic development of a firm and those who own it (the shareholders).
Corporate-level managers, and particularly the CEO, can be viewed as the guardians
of shareholder welfare. It is their responsibility to ensure that the corporate and
business strategies that the company pursues are consistent with maximizing
shareholder wealth. The CEO is ultimately accountable to shareholders.
(f) Incorrect: SWOT analysis presents the information about both external and internal
environment in a structured form to compare external opportunities and threats with
internal strengths and weaknesses. This helps in matching external and internal
environments so that strategic decision makers in an organisation can come out with
suitable strategies by identifying patterns of relationship and develop suitable
strategies.
(g) Incorrect: Reengineering does not involve slow and gradual improvement in the
existing work processes. It is a revolutionary approach towards radical and total
redesigning of the business processes.
(h) Correct: To be successful businesses have to recognise different elements of the
environment. They have to respect, adapt to or have to manage and influence them.
Businesses must continuously monitor and adapt to the environment to survive and
prosper.
(i) Incorrect: Although, organisations can diversify into businesses that are vertically or
horizontally related to the existing businesses, the diversification is not limited to the
related businesses. In conglomerate diversification; the new businesses/products are
disjointed from the existing businesses/products in every way. There is no connection
between the new products and the existing ones in process, technology or function.
(j) Incorrect: A companys strategy is a blend of proactive actions and reactive actions
by the management. Reactive actions are required to address unanticipated
developments and environmental conditions. Thus, not every strategic move is the
result of proactive and deliberate management actions. At times, some kind of
strategic reaction or adjustments are required.
2. (a) TOWS Analysis is a variant of the classic business tool, SWOT Analysis. TOWS and
SWOT are acronyms for different arrangements of the words Strengths, Weaknesses,
Opportunities and Threats. However, the difference lies in the approach followed. By
analyzing the external environment (threats and opportunities), and internal
environment (weaknesses and strengths), we can use these techniques to think about
the strategy of a company. Following are the some basic differences between TOWS
and SWOT matrix:
TOWS emphasise on external environment whereas SWOT emphasises on
internal environment.
TOWS matrix is about the combinations of SO, ST, WO, WT whereas SWOT
matrix is about S, W, O, T.
TOWS analysis is an action tool whereas SWOT analysis is a planning tool.
TOWS is particularly useful in evaluating the potential impact of sudden events
or developments while SWOT is usually employed in evaluating a companys
business plan.
(b) Individuals in organisations relate themselves with the vision of their organisations in
different manner. When the individuals are able to bring organisational vision close
to their hearts and minds they have "shared vision". Shared vision is a force that
creates a sense of commonality that permeates the organization and gives coherence
to diverse activities. However, 'vision shared' shows imposition of vision from the top
management. It may demand compliance rather than commitment. For success of
organisations having shared vision is better than vision shared.
(c) Strategy formulation and implementation can be distinguished in the following ways:
Strategy Formulation Strategy Implementation
Strategy formulation focuses on Strategy implementation focuses
effectiveness. on efficiency.
Strategy formulation is primarily an Strategy implementation is
intellectual process. primarily an operational process.
Strategy formulation requires good Strategy implementation requires
intuitive and analytical skills. motivation and leadership skills.
Strategy formulation requires Strategy implementation requires
coordination among the executives at coordination among the
the top level. executives at the middle and
lower levels.
(d) For implementing six sigma, there are two separate key methodologies for existing
and new processes. They are known as DMAIC and DMADV.
DMAIC is an acronym for five different steps used in six sigma - Define, Measure,
Analyze Improve, and control. DMAIC methodology is directed towards improvement
of existing product, process or service.
Define: To begin with six sigma experts define the process improvement goals
that are consistent with the strategy of the organization and customer demands.
They discuss different issues with the senior managers so as to define what
needs to done.
Measure: The existing processes are measured to facilitate future comparison.
Six sigma experts collect process data by mapping and measuring relevant
processes.
Analyze: Verify cause-and-effect relationship between the factors in the
processes. Experts need to identify the relationship between the factors. They
have to make a comprehensive analysis to identify hidden or not so obvious
factor.
Improve: On the basis of the analysis experts make a detailed plan to improve.
Control: Initial trial or pilots are run to establish process capability and transition
to production. Afterwards continuously measure the process to ensure that
variances are identified and corrected before they result in defects.
DMADV is an acronym for Define, Measure, Analyze, Design, and Verify. DMADV is
a strategy for designing new products, processes and services.
Define: As in case of DMAIC six sigma experts have to formally define goals of
the design activity that are consistent with strategy of the organization and the
demands of the customer.
Measure: Next identify the factors that are critical to quality (CTQs). Measure
factors such as product capabilities and production process capability. Also,
assess the risks involved.
Analyze: Develop and design alternatives. Create high-level design and
evaluate to select the best design.
Design: Develop details of design and optimise it. Verify designs may require
using techniques such as simulations.
Verify: Verify designs through simulations or pilot runs. Verified and
implemented processes are handed over to the process owners.
However, in spite of different orientation in two methodologies, conceptually there is
overlapping between the DMAIC and DMADV as both are essentially having similar
objectives.
3. (a) BPR is continuous improvement process. Although BPR is a multi-dimensional
approach in improving the business performance its thrust area may be identified as
the reduction of the total cycle time of a business process. BPR aims at reducing
the cycle time of process by eliminating the unwanted and redundant steps and by
simplifying the systems and procedures and also by eliminating the transit and waiting
times as far as possible. Even after redesigning of a process, BPR maintains a
continuous effort for more and more improvement.
(b) Stability strategy is advisable option for the organisations facing recession. During
recession businesses face reduced demand for their products even at low prices.
Funds become scarce, expenditure on expansion is stopped, profits decline and
businesses try to minimise the costs. They work hard to maintain the existing market
share, so that company survives the recessionary period.
(c) Contrary to the premise control, the strategic surveillance is unfocussed. It involves
general monitoring of various sources of information to uncover unanticipated
information having a bearing on the organizational strategy. It involves casual
environmental browsing. Reading financial and other newspapers, business
magazines, meetings, conferences, discussions at clubs or parties and so on can
help in strategic surveillance.
Strategic surveillance may be loose form of strategic control, but is capable of
uncovering information relevant to the strategy.
(d) A global strategy assumes more standardization of products across country

boundaries. Under this strategy, the company tries to focus on a low cost structure
by leveraging their expertise in providing certain products and services and
concentrating the production of these standard products and services at a few
favourable locations around the world. Competitive strategy is centralized and
controlled by the home office.
4. (a) A companys mission statement is typically focused on its present business scope
who we are and what we do; mission statements broadly describe an organizations
present capabilities, customer focus activities and business makeup. An
organisations mission states what customers it serves, what need it satisfies, and
what type of product it offers. It is an expression of the growth ambition of the
organisation. It helps organisation to set its own special identity, business emphasis
and path for development. Mission amplifies what brings the organisation to this
business or why it is there, what existence it seeks and what purpose it seeks to
achieve as a business organisation.
In other words, the mission serves as a justification for the firm's very presence and
existence; it legitimizes the firm's presence.
(b) Business Process Reengineering (BPR) refers to the analysis and redesign of
workflows and processes both within and between the organizations. The orientation
of the redesign effort is radical. It involves total deconstruction and rethinking of a
business process in its entirety.
The workflows are studied, appraised and improved in terms of time, cost, output,
quality, and responsiveness to customers. The redesign effort aims to simplify and
streamline a process by eliminating all extra avoidable steps, activities, and
transactions. With the help of redesigning workflows, organizations can dra stically
reduce the number of stages of work, and improve their performance.
(c) The Internet is an integrated network of high-speed computers and servers, digital
switches and routers, telecommunications equipment and lines and individual
computers of users. The Internet has provided a very fast means of communication
to business with no geographic limitations. Internet also makes it feasible for
companies to find, negotiate and deal across the world with suppliers on one hand
and customers on the other. The evolving Internet technology is altering industry
value chains, spawning substantial opportunities for increasing efficiency and
reducing costs, and affecting strengths and weaknesses of business organisations.
(d) There are three strategic levels corporate, business and functional. Control systems
are required at all the three levels. At the top level, strategic controls are built to check
whether the strategy is being implemented as planned and the results produced by
the strategy are those intended. Down the hierarchy management controls and
operational controls are built in the systems. Operational controls are required for
day-to-day management of business. Thus, control systems are required at all the
strategic level.
5. Business enterprises pursue multiple objectives rather than a single objective; however, it
is generally asserted that private enterprises are primarily motivated by the objective of
profit. All other objectives are facilitative objectives and are meant to be subservient to the
profit motive. However, profits cannot remain primary objective in long run. Although some
profits are necessary, organizations need to pursue other objectives such as survival,
stability, growth and like. These objectives also change with the changes in the
environment. Organisations monitor the changes in the environment, analyse their impact
on their own goals and activities and translate their assessment in terms of specific
strategies. In general, all organizations aim for optimum utilization of resources and
economy in operational costs. Some of the other important objectives of a business are as
follows:
Survival: Survival is a basic, implicit objective of most organizations. While survival
is an obvious objective, it gains more value and prominence during the initial stage
of the establishment of the enterprise and during general economic adversity. The
ability to survive is a function of the nature of ownership, nature of business
competence of management, general and industry conditions, financial strength of
the enterprise and so on.
Stability: Another important objective of business enterprises is stability. It is a
cautious, conservative objective that is often employed when things are not very
conducive. It is a strategy of least resistance in a hostile external environment.
Growth: This is a promising and popular objective which is equated with dynamism,
vigor, promise and success. Enterprise growth may take one or more of the forms like
increase in assets, manufacturing facilities, increase in sales volume and so on.
Growth may take the enterprise along relatively unknown and risky paths, full of
promises and pitfalls.
Efficiency: Business enterprises seek efficiency in rationally choosing appropriate
means to achieve their goals. In a sense, efficiency is an economic version of the
technical objective of productivity designing and achieving suitable input output
ratios of funds, resources, facilities and efforts. Efficiency is a very useful operational
objective.
6. The environment of business can be categorised into two broad categories micro -
environment and macro-environment. Micro-environment is related to small area or
immediate periphery of an organization. Micro-environment influences an organization
regularly and directly. Developments in the micro environment have direct impact on the
working of organizations. Micro environment includes the company itself, its suppliers,
marketing intermediaries, customer markets and competitors. The elements of micro
environment are specific to the said business and affects its working on short term basis.
Consumers / Customers: Customers who may or may not be consumers are the
people who pay money to acquire organisational products and services. Consumer is
the one who ultimately consumes or uses the product or services. The marketer has
to closely monitor and analyse the changes in the consumer tastes and preferenc es
and their buying habits. Consumer occupies the central position in the market.
Competitors: Competitors are the other business entities that compete for resources
as well as markets. A study of the competitive scenario is essential for the marketer,
particularly threats from competition.
Organization: Individuals occupying different positions or working in different
capacities in organizations consists of individuals who come from outside. They have
different and varied interests. An organization has several non-specific elements in
form of individuals and groups that may affect its activities. Owners, board of directors
and employees form part of organisation.
Market: The market is larger than customers. The market is to be studied in terms of
its actual and potential size, its growth prospect and also its attractiveness. The
marketer should study the trends and development and the key success factors of
the market.
Suppliers: Suppliers form an important component of the micro environment. The
suppliers provide raw materials, equipment, services and so on. Suppliers with their
own bargaining power affect the cost structure of the industry. They constitute a major
force, which shapes competition in the industry.
Market Intermediaries: Intermediaries bridge the gap between the organisations and
customers. They are in form of stockist, wholesalers and retailers. They exert
considerable influence on the business organizations. In many cases the consumers
are not aware of the manufacturer of the products they buy. They buy product from
the local retailers or big departmental stores.
7. Corporate strategy helps an organisation to achieve and sustain success. It is basically
concerned with the choice of businesses, products and markets. It is often correlated wit h
the growth of the firm.
Corporate strategy in the first place ensures the growth of the firm and its correct alignment
with the environment. Corporate strategies are concerned with the broad and long-term
questions of what businesses the organization is in or wants to be in, and what it wants to
do with those businesses. They set the overall direction the organization will follow. It
serves as the design for filling the strategic planning gap. It also helps to build the relevant
competitive advantages. A right fit between the organisation and its external environment
is the primary contribution of corporate strategy. Basically, the purpose of corporate
strategy is to harness the opportunities available in the environment and countering the
threats embedded therein. With the help of corporate strategy, organizations match their
unique capabilities with the external environment so as to achieve its vision and mission.
8. Decision making is a managerial process and a function of choosing a particular course of

action out of several alternative courses for the purpose of accomplishment of the
organizational goals. Strategic decisions are different in nature than all other decisions
which are taken at various levels of the organization during their day -to-day working. The
major dimensions of strategic decisions are given below:
Strategic issues require top-management decisions: Strategic issues involve thinking
in totality of the organizations and also there is lot of risk involved.
Strategic issues involve the allocation of large amounts of company resources: It may
require huge financial investment to venture into a new area of business or the
organization may require huge manpower with new set of skills in them.
Strategic issues are likely to have a significant impact on the long term prosperity of
the firm: Generally the results of strategic implementation are seen on a long term
basis and not immediately.
Strategic issues are future oriented: Strategic thinking involves predicting the future
environmental conditions and how to orient for the changed conditions.
Strategic issues usually have major multifunctional or multi-business consequences:
As they involve organization in totality they affect different sections of the organization
with varying degree.
Strategic issues necessitate consideration of factors in the firms external
environment: Strategic focus in organization involves orienting its internal
environment to the changes of external environment.
9. GE model has been used by General Electric Company (developed by GE with the
assistance of the consulting firm McKinsey & Company) known as Stop-Light Strategy
Model. This model is also known as Business Planning Matrix, GE Nine-Cell Matrix and
GE Model. The strategic planning approach in this model has been inspired from traffic
control lights. The lights that are used at crossings to manage traffic are: green for go,
amber or yellow for caution, and red for stop. This model uses two factors while taking
strategic decisions: Business Strength and Market Attractiveness. The vertical axis
indicates market attractiveness and the horizontal axis shows the business strength in the
industry. The market attractiveness is measured by a number of factors like:
1. Size of the market.
2. Market growth rate.
3. Industry profitability.
4. Competitive intensity.
5. Availability of Technology.
6. Pricing trends.
7. Overall risk of returns in the industry.
8. Opportunity for differentiation of products and services.

9. Demand variability.
10. Segmentation.
11. Distribution structure (e.g. retail, direct, wholesale) etc.
Business strength is measured by considering the typical drivers like:
1. Market share.
2. Market share growth rate.
3. Profit margin.
4. Distribution efficiency.
5. Brand image.
6. Ability to compete on price and quality.
7. Customer loyalty.
8. Production capacity.
9. Technological capability.
10. Relative cost position.
11. Management caliber, etc.
Business Strength
Strong Average Weak
High
Attractiveness
Market
Medium
Low
Figure: The GE Portfolio Matrix
Zone Strategic Signals

Invest/Expand
Green
Yellow Select/Earn
Red Harvest/Divest
If a product falls in the green section, the business is at advantageous position. To reap
the benefits, the strategic decision can be to expand, to invest and grow. If a product is in
the amber or yellow zone, it needs caution and managerial discretion is called for making
the strategic choices. If a product is in the red zone, it will eventually lead to losses that
would make things difficult for organisations. In such cases, the appropriate strategy
should be retrenchment, divestment or liquidation.
10. An industrys key success factors (KSFs) are those things or strategic elements that affect
industry members ability to prosper in a market place. For a business organization within
an industry, it may include, cost structure, technology, distribution sys tem and so on. It is
correct to state that the KSFs help to shape whether a company will be financially and
competitively successful.
The answers to the following three questions help identify an industry's key success factors:
On what basis do customers choose between the competing brands of sellers? What
product attributes are crucial?
What resources and competitive capabilities does a seller need to have to be
competitively successful?
What does it take for sellers to achieve a sustainable competitive advantage?
11. Action plan for turnaround strategy, an organization can implement:
Stage One Assessment of current problems: The first step is to assess the
current problems and get to the root causes and the extent of damage the problem
has caused. Once the problems are identified, the resources should be focused
toward those areas essential to efficiently work on correcting and repairing any
immediate issues.
Stage Two Analyze the situation and develop a strategic plan: Before you make
any major changes; determine the chances of the businesss survival. Identify
appropriate strategies and develop a preliminary action plan. For this one should look
for the viable core businesses, adequate bridge financing and available
organizational resources. Analyze the strengths and weaknesses in the areas of
competitive position. Once major problems and opportunities are identified, develop
a strategic plan with specific goals and detailed functional actions.
Stage Three Implementing an emergency action plan: If the organization is in a
critical stage, an appropriate action plan must be developed to stop the bleeding and
enable the organization to survive. The plan typically includes human resource,
financial, marketing and operations actions to restructure debts, improve working
capital, reduce costs, improve budgeting practices, prune product lines and
accelerate high potential products. A positive operating cash flow must be established
as quickly as possible and enough funds to implement the turnaround strategies must
be raised.
Stage Four Restructuring the business: The financial state of the organizations
core business is particularly important. Prepare cash forecasts, analyze assets and
debts, review profits and analyze other key financial functions to position the
organization for rapid improvement.
During the turnaround, the product mix may be changed, requiring the organization
to do some repositioning. Core products neglected over time may require immediate
attention to remain competitive. Organisations may also withdraw from some markets,
close some facilities or discontinue some products.
The people mix is another important ingredient in the organizations competitive
effectiveness. Reward and compensation systems that encourage dedication and
creativity encourage employees to think profits and return on investments .
Stage Five Returning to normal: In the final stage of turnaround strategy process,
the organization should begin to show signs of profitability, return on investments and
enhancing economic value-added. Emphasis is placed on a number of strategic
efforts such as carefully adding new products and improving customer service,
creating alliances with other organizations, increasing the market share, etc.
12. According to Porter, strategies allow organizations to gain competitive advantage from
three different bases: cost leadership, differentiation, and focus. Porter calls these base
generic strategies. Cost leadership emphasizes producing standardized products at a very
low per-unit cost for consumers who are price-sensitive. Differentiation is a strategy aimed
at producing products and services considered unique industry wide and directed at
consumers who are relatively price-insensitive. Focus means producing products and
services that fulfill the needs of small groups of consumers.
STRATEGIC ADVANTAGE
Uniqueness perceived by the customer Low cost position
Industry
wide OVERALL COST
DIFFERENTIATION LEADERSHIP
STRATEGIC
TARGET
Particular
Segment Only FOCUS
S
Figure: Michael Porters Generic Strategy

Cost Leadership Strategies
A primary reason for pursuing forward, backward, and horizontal integration strategies is
to gain cost leadership benefits. But cost leadership generally must be pursued in
conjunction with differentiation. A number of cost elements affect the relative attractiveness
of generic strategies, including economies or diseconomies of scale achieved, capacity
utilization and linkages with suppliers and distributors and so on.
Differentiation Strategies
Different strategies offer different degrees of differentiation. A differentiation strategy
should be pursued only after a careful study of buyers needs and preferences to determine
the feasibility of incorporating one or more differentiating features into a unique product
that features the desired attributes. A successful differentiation strategy allows a firm to
charge a higher price for its product and to gain customer loyalty. Special features that
differentiate one's product can include superior service, spare parts availability, design,
product performance, useful life, or ease of use and so on.
Focus Strategies
A successful focus strategy depends on an industry segment that is of sufficient size, has
good growth potential, and is not crucial to the success of other major competitors.
Strategies such as market penetration and market development offer substantial focusing
advantages. Midsize and large firms can effectively pursue focus-based strategies only in
conjunction with differentiation or cost leadership-based strategies. All firms in essence
follow a differentiated strategy.
13. Management of logistics is a process that integrates the flow of supplies into, through and
out of an organization to achieve a level of service that facilitate movement and availability

of materials in a proper manner. When a company creates a logistics strategy it is defining

the service levels at which its logistics is smooth and is cost effective.
A company may develop a number of logistics strategies for specific product lines, specific
countries or specific customers because of constant changes in supply chains. There are
different areas that should be examined for each company that should be considered and
should include:
Transportation: Does the current transportation strategies help service levels
required by the organisation?
Outsourcing: Areas of outsourcing of logistics function are to be identified. The effect
of partnership with external service providers on the desired service level of
organisation is also to be examined.
Competitors: Review the procedures adopted by competitors. It is also to be judged
whether adopting the procedures followed by the competitors will be overall benef icial
to the organisation. This will also help in identifying the areas that may be avoided.
Availability of information: The information regarding logistics should be timely and
accurate. If the data is inaccurate then the decisions that are made will be incorrect.
With the newer technologies, it is possible to maintain information on movement of
fleets and materials on real time basis.
Strategic uniformity: The objectives of the logistics should be in line with overall
objectives and strategies of the organisation. They should aid in the accomplishment
of major strategies of the business organisation.
14. Once higher level corporate and business strategies are developed, management need to
formulate and implement strategies for each functional area. For effective implementation,
strategists have to provide direction to functional managers regarding the plans and
policies to be adopted. In fact, the effectiveness of strategic management depends critically
on the manner in which strategies are implemented. Strategy of one functional area cannot
be looked at in isolation, because it is the extent to which all the functional tasks are
interwoven that determines the effectiveness of the major strategy.
Functional area strategy such as marketing, financial, production and human resource are
based on the functional capabilities of an organisation. For each functional area, first the
major sub areas are identified and then for each of these sub functional areas, contents of
functional strategies, important factors, and their importance in the process of strategy
implementation is identified.
In terms of the levels of strategy formulation, functional strategies operate below the SBU
or business-level strategies. Within functional strategies there might be several su b-
functional areas. Functional strategies are made within the higher level strategies and
guidelines therein that are set at higher levels of an organisation. Functional managers
need guidance from the business strategy in order to make decisions. Operational plans
tell the functional managers what has to be done while policies state how the plans are to
be implemented.
Major strategies need to be translated to lower levels to give holistic strategic direction to
an organisation. Functional strategies provide details to business strategy & govern as to
how key activities of the business will be managed. Functional strategies play two
important roles. Firstly, they provide support to the overall business strategy. Secondly,
they spell out as to how functional managers will work so as to ensure better performance
in their respective functional areas. The reasons why functional strategies are really
important and needed for business can be enumerated as follows:
The development of functional strategies is aimed at making the strategies-
formulated at the top management level-practically feasible at the functional level.
Functional strategies facilitate flow of strategic decisions to the different parts of an
organisation.
They act as basis for controlling activities in the different functional areas of business.
The time spent by functional managers in decision-making is reduced as plans lay
down clearly what is to be done and policies provide the discretionary framework
within which decisions need to be taken.
Functional strategies help in bringing harmony and coordination as they remain part
of major strategies.
Similar situations occurring in different functional areas are handled in a consistent
manner by the functional managers.
15. SBU is any part of a business organization which is treated separately for strategic
management purposes. The concept of SBU is helpful in creating an SBU organizational
structure. It is discrete element of the business serving product markets with readily identifiable
competitors and for which strategic planning can be concluded. It is created by adding another
level of management in a divisional structure after the divisions have been grouped under a
divisional top management authority based on the common strategic interests.
Its advantages are:
Establishing coordination between divisions having common strategic interests.
Facilitates strategic management and control on large and diverse organizations.
Fixes accountabilities at the level of distinct business units.
Allows strategic planning to be done at the most relevant level within the total
enterprise.
Makes the task of strategic review by top executives more objective and more
effective.
Helps allocate corporate resources to areas with greatest growth opportunities.
16. A culture where creativity, embracing change, and challenging the status quo are pervasive
themes is very conducive to successful execution of a product innovation and technological
leadership strategy. A culture built around such business principles as listening to
customers, encouraging employees to take pride in their work, and giving employees a
high degree of decision-making responsibility is very conducive to successful execution of
a strategy of delivering superior customer service.
A strong strategy-supportive culture nurtures and motivates people to do their jobs in ways
conducive to effective strategy execution; it provides structure, standards, and a value
system in which to operate; and it promotes strong employee identification with the
company's vision, performance targets, and strategy. All this makes employees feel
genuinely better about their jobs and work environment and the merits of what the company
is trying to accomplish. Employees are stimulated to take on the challenge of realizing the
company's vision, do their jobs competently and with enthusiasm, and collaborate with
others as needed to bring the strategy to success.
17. Implementing TQM requires organization wide support. There are several principles that
guide success of TQM. Various principles that guide the total quality management
philosophy are as follows:
A sustained management commitment to quality
Focusing on the customer
Preventing rather than detecting defects
Universal quality responsibility
Quality measurement
Continuous improvement and learning
Root cause corrective action
Employee involvement and empowerment
The synergy of teams
Thinking statistically
Inventory reduction
Value improvement
Supplier teaming
Training
18. The impact of the Internet and the rapidly emerging e-commerce environment is profound.
The advent of the Internet and online networks changes everything. There can be no doubt
that the Internet is a driving force of historical and revolutionary proportions. The coming
of ecommerce has changed the character of the market, created new driving forces and
key success factors and bred the formation of new strategic groups. The creativeness with
which a company incorporates e-commerce practices holds enormous potential for
reconfiguring its value chain and affecting its company's competitiveness. Also the Internet
economy presents opportunities and threats that demand strategic response and that
require managers to craft bold new strategies.
We need to understand how growing use of the Internet by businesses and consumers
reshapes the economic landscape and alters traditional industry boundaries. The following
characteristics of the strategy-shaping E-Commerce environment are:
1. The Internet makes it feasible for companies everywhere to compete in global
markets.
2. Competition in an industry is greatly intensified by the new e-commerce strategic
initiatives of existing rivals and by the entry of new, enterprising e-commerce rivals.
3. Entry barriers into the e-commerce world are relatively low.
4. Online buyers gain bargaining power because they confront far fewer obstacles to
comparing the products, prices, and shipping times of rival vendors.
5. The Internet makes it feasible for companies to reach beyond their borders to find the
best suppliers and, further, to collaborate closely with them to achieve efficiency gains
and cost savings.
6. Internet and PC technologies are advancing rapidly, often in uncertain and
unexpected directions.
7. The internet results in much faster diffusion of new technology and new idea across
the world.
8. The e-commerce environment demands that companies move swiftly.
9. E-commerce technology opens up a host of opportunities for reconfiguring industry
and company value chains.
10. The Internet can be an economical means of delivering customer service.
11. The capital for funding potentially profitable e-commerce businesses is readily
available.
12. The needed e-commerce resource in short supply is human talent-in the form of both
technological expertise and managerial know-how.
(vi) Receipt: Money is received from the customer against the invoices.
(vii) Reconciliation: The bank reconciliation of all the receipts is performed.
1 4
2 3
6
5
7
Order to Cash process flow

5. Information Systems Life Cycle: This is commonly referred as Software/System
Development Life Cycle (SDLC), which is a methodology used to describe the process
of building information systems. It is the logical starting point in the entire life cycle of a
computerized system. Activities start when any enterprise decides to go for
computerization or migrate from existing computerized system to a new one. SDLC
framework provides a sequence of activities for system designers and developers to follow.
It consists of a set of steps or phases in which each phase of the SDLC uses the resu lts
of the previous one. This serves as a guideline to the designer, who seeks to use it as
template while working on a project development.
Phase 1: System Investigation: This phase examines that What is the problem and is it
worth solving? the various dimensions under which Systems investigation is done are
Technical feasibility, Economic feasibility, Legal feasibility, Operational feasibility and
Schedule feasibility.
Phase 2: System Analysis: This phase examines that What must the Information System
do to solve the problem? System analyst would be gathering details about the current
system and will involve the activities like Interviewing staff, examining current business,
sending out questionnaires and observation of current procedures. The Systems Analyst
will examine data and information flows in the enterprise using data flow diagrams;
establish what the proposed system will do (not how it will do it); analyse costs and
benefits; outline system implementation options. (e.g. in-house or using consultants);
consider possible hardware configurations; and make recommendations.

STRATEGIC ADVANTAGE
Uniqueness perceived by the customer Low cost position
Industry
wide OVERALL COST
DIFFERENTIATION LEADERSHIP
STRATEGIC
TARGET
Particular
Segment Only FOCUS
S
Figure: Michael Porters Generic Strategy

Cost Leadership Strategies
A primary reason for pursuing forward, backward, and horizontal integration strategies is
to gain cost leadership benefits. But cost leadership generally must be pursued in
conjunction with differentiation. A number of cost elements affect the relative attractiveness
of generic strategies, including economies or diseconomies of scale achieved, capacity
utilization and linkages with suppliers and distributors and so on.
Differentiation Strategies
Different strategies offer different degrees of differentiation. A differentiation strategy
should be pursued only after a careful study of buyers needs and preferences to determine
the feasibility of incorporating one or more differentiating features into a unique product
that features the desired attributes. A successful differentiation strategy allows a firm to
charge a higher price for its product and to gain customer loyalty. Special features that
differentiate one's product can include superior service, spare parts availability, design,
product performance, useful life, or ease of use and so on.
Focus Strategies
A successful focus strategy depends on an industry segment that is of sufficient size, has
good growth potential, and is not crucial to the success of other major competitors.
Strategies such as market penetration and market development offer substantial focusing
advantages. Midsize and large firms can effectively pursue focus-based strategies only in
conjunction with differentiation or cost leadership-based strategies. All firms in essence
follow a differentiated strategy.
13. Management of logistics is a process that integrates the flow of supplies into, through and
out of an organization to achieve a level of service that facilitate movement and availability


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CA IPCC

Standard (AS) 10, and Equipment. and Equipment.

investments. accordance with model

longer required to the reserves

B. Not applicable for November, 2017 examination

PART II: QUESTIONS AND ANSWERS

The following additional information is also provided:

(iii) Income-tax paid 10,200

Reserve account 1,00,000 Trade receivables 40,000

Hire Purchase Transactions

received from creditors

Book value of furniture sold is ` 7,000. Entrance fees capitalized ` 4,000. On

Cash at bank 8,500

AS 3 Cash flow Statements

cc. Bank Overdraft

Interest charges paid to supplier of plant for deferred credit ` 2,00,000

SUGGESTED ANSWERS / HINTS

1. (a) Alpha Ltd.

Tangible assets 6 56,25,000

4 Other current liabilities

(b) Calculation of effective capital and maximum amount of monthly remuneration

Add: Non cash expenditures:

remaining 9 months = ` 24,00,000 ` 2,40,000 = ` 21,60,000.

5. Journal Entries in the books of Weak Ltd.

To P & L A/c 6,00,000

1,30,000 equity shares of ` 40 each 52,00,000

6. Balance Sheet of Super Fast Express Ltd

Insurance reserve 1,00,000

8. In the books of Sunil

Calculation of Interest and Cash Price

3rd 4,40,000 1/11 of ` 4,40,000 =` 40,000 4,00,000

Balance Sheet as on 31st March, 2015 (An Extract)

(b) Receipts and Payments Account

To Subscription A/c 67,050 By Balance b/d

3. Calculation of Furniture purchased during 2016-2017

12. Trading and Profit and Loss Account

To Gross Profit c/d (@20% on 2,10,000

(ii) Total Creditors Account

Note 1: ` 3,713 received on 31.12.2016 represents interest on the debentures

4. Loss on Sale of Debentures

= 9,00,000/10,42,500 9,82,500 = ` 8,48,201

(ii) Partners Capital Accounts

(iii) Balance Sheet of LH & Co.

Proportion of total contract value recognised as turnover:

ascertaining revenue since they represent a reduction of cost. Revenue is al so

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

The Institute of Chartered Accountants of India

2. Bearer Plant:Is a plant that (satisfies all 3 conditions):

The Institute of Chartered Accountants of India

(b) The cost of the item can be measured reliably.

The Institute of Chartered Accountants of India

Examples of directly attributable costs are:

AS 29 is not covered in syllabus of paper-1

AS 16 is not covered in syllabus of paper-1

C. PPE purchased for a Consolidated Price:

Revaluation for entire class of PPE

May be restated proportionately to the change in the carrying amount.

Treatment of Revaluation Surplus

The Institute of Chartered Accountants of India

Land and Buildings

The Institute of Chartered Accountants of India

Review of Depreciation Method:

The Institute of Chartered Accountants of India