Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Paper 12- Company Accounts & Audit

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 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Paper 12- Company Accounts & Audit

Full Marks : 100 Time allowed: 3 hours

Section – A

1. Answer the following questions: [5x2=10]

(a) Explain when the research development cost of a project can be defused to future period
as per AS-26.

Solution:

The expenditure incurred on account of research or development phase can be

deferred to the subsequent years, if an enterprise can demonstrate all of the following,
namely:
 The technical feasibility of completing the intangible asset so that it will not be
available for use or sale.
 The intention to complete the intangible asset and use or sell it.
 The ability to use or sell the intangible asset.
 How the intangible asset will generate probable future economic benefits. Among
other benefits, the enterprise should demonstrate the existence of a market for the
output of the intangible asset.
 Availability of adequate technical, financial and other reseoruces to complete the
development and to use of sell the intangible asset, and
 The ability to measure the expenditure attributable to the intangible asset during the
development reliably.

(b) A company with an issued and subscribed capital of ` 10.00.000 in 1.00.000 shares of face
value ` 10 each of which ` 8 per share is paid up has accumulated a reserve of `3,00,000.
Out of this reserve ` 2,00,000 is intended to be utilized in declaring a bonus at the rate of
25% on the paid up capital so that the shares may become dully paid.
Show the necessary journal entries.

Solution:

Particulars Debit Credit

` `
Equity share final call A/c Dr. 2,00,000
To, Equity share capital A/c 2,00,000
(Being the final call due on 1,00,000 Equity Shares @ `2 each)
Bonus to share holder A/c Dr. 2,00,000
To, Equity share final cost A/c 2,00,000
(Being the final call due is converted in to bonus)
Reserve A/c Dr. 2,00,000
To Bonus to share holder A/c 2,00,000
(Being the reserve amount is used for bonus)

(c) KP Ltd. forfeited 20,000 equity shares of ` 15 each (including ` 5 per share as premium),
for nonpayment of final call of ` 3 per share. Out of these 10,000 shares were reissued at a
discount of ` 4 per share.

Solution:

Equity share capital A/c 200,000

To Equity Sh. Final call A/c 60,000

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 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

To Forfeited share A/c 1,40,000

(20,000 shares forfeited for non-payment of final call money)
Bank A/c 60,000
Forfeited share A/c 40,000
To, Equity Share Capital A/c 1,00,000
(Reissue of 10,000 sh. @ `6 each)
Forfeited share A/c 30,000
To Capital Reserve A/c 30,000
(balance of forfeited share A/c relating to 10,000 shares
transferred)

(d) Write a short note on sweat equity shares.

Solution:

Sweat equity shares means such equity shares as are issued by a company to its directors or
employees at a discount or for consideration, other than cash, for providing their know-how
or making available rights in the nature of intellectual property rights or value additions, by
whatever name called;

Notwithstanding anything contained in Section 53, Companies Act ,2013 a company may
issue sweat equity shares of a class of shares already issued, if the following conditions are
fulfilled, namely:—
the issue is authorised by a special resolution passed by the company; the resolution specifies
the number of shares and other details and the class or classes of directors or employees to
whom such equity shares are to be issued; not less than one year has, at the date of such
issue, elapsed since the date on which the company had commenced business; and

(e) The following particulars are available from the books of RYMIT LTD:
Net profit before provision for income tax and managerial remuneration `98,00,000
But after depreciation
Depreciation provided in the books `30,00,000
Depreciation allowable under schedule II of the companies Act 2013 `25,00,000
You are required to calculate the managerial remuneration if there is one whole-time
director.

Solution:

Calculation of Net Profit under section 197 of the companies Act, 2013:
Particulars `
Net profit before provision for income tax and 98,00,000
managerial remuneration but after depreciation
Add: Depreciation provided in the books 30,00,000
Less: Depreciation allowable under schedule-II of the 25,00,000
companies Act, 2013
Net profit 1,03,00,000

Calculation of Managerial Remuneration for only one whole time director-5% of

` 1,03,00,000 =` 5,15,000

2. Matching the following: [5x1=5]

1. Result of Transaction A. AS – 9
2. Charged against profit B. Current Liability
3. Bank over draft C. Event

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 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

4. Revenue recognition D. AS – 29
5. Provision & contingents E. Depreciation

Solution:

1. — C.
2. — E.
3. — B.
4. — A.
5. — D.

3. Answer the following question: [5x2=10]

(a) What is test checking?

Solution:

Test checking is concerned with selecting and examining a representative sample from a
large number of similar items. There is no hard and fast rule of selecting item for the test
checking. The justification for the test checking lies in the theory of probability which states
that a sample selected from a series of items will tend to exhibit the same characteristics as
present in the population, i.e. full series of items while test checking the following aspects
need to be considered:
(i) Presentation and disclosure.
(ii) Adherence to the generally accepted accounting practices.
(iii) Compliance with the statutory requirements.
(iv) Existence of errors and frauds.
(v) Arithmetical accuracy.
(vi) Materiality of the items involved.

(b) Define vouching.

Solution:

Vouching is the examination by the auditor of all documentary evidences, which are
available to support the authenticity of the transaction entered in the client‘s record‖. –
Spicer and Pegler
The act of examining all documentary evidences (vouchers) is referred to as vouching. Its
basic objective is to establish the authenticity of the transactions recorded in the primary
books of account.

(c) Write a short note on cut off procedure.

Solution:

(i) Definition: Periods usually coincide with calendar months, Which lead to the need for
specific demarcation between transactions forming the part of the one period from
those included in the following period. Thus, cut-off procedures are adopted to
allocate revenues and costs to the proper accounting period.
(ii) Areas of concern: Close attention should be paid to the accounts payable and
accounts receivables functions. These two functions are the most susceptible to
recording of transactions in the wrong accounting period.
(iii) Cut-of-point: Serially numbered documents like invoice for sales or purchase bills are
allocated to the respective accounting periods by establishing cut-off points based
on the serial number.

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 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

(iv) Importance: Cut-off procedures require detailed testing by the auditor so as to

ensure proper accounting of assets and liabilities, which may arise without the
corresponding physical delivery of goods taking place.
(d) What is continuous audit.

Solution:

A continuous auditing is ―a method used to perform control and risk assessments

automatically on a more frequent basis. Continuous auditing changes the audit paradigm
from periodic review of a sample of transactions to ongoing audit testing of 100 percent of
transactions. It becomes an integral part of modern auditing. Technology is a key to enabling
such an approach.‖
Continuous audit may be defined as the examination and verification of firm‘s financial
transactions and their supporting documents, continuously throughout the year, at regular or
irregular intervals.
A continuous audit driven system generates alarm triggers that provide advance notice
about anomalies and errors detected by the system. It is performed usually by firm‘s internal
auditors to eliminate the year-end workload.

(e) What is secret reserve?

Solution:

Any reserve not appearing on the balance sheet is called as a secret Reserve. The existence
of the reserve may be inferred from an intelligent verification of the accounts by the auditor
even through the amount cannot be ascertained. Generally such type of reserve appears in
financial institutions and insurance companies.

Section – B

Answer any Three Questions: [15×3=45]

4. (a) Beekay Ltd. purchased fixed assets costing ` 5,000 lakh on 01.04.2012 payable in foreign
currency (US$) on 05.04.2013. Exchange rate of 1US$=` 50.00 and ` 54.98 as on 01.04.2012
and 31.03.2013 respectively.
The company also obtained a soft loan of US$ 1 lakh on 01.04.2012 payable in three annual
equal installments. First installment was due on 01.05.2013.
You are required to state, how these transactions would be accounted for in the books of
accounts ending 31st March, 2013. [7]

Solution:

As Per As 11 (Revised) ‗The effects of changes in foreign exchange rates, exchange

differences arising on the settlement of monetary items or on reporting an enterprise‘s
monetary items at rates different from those at which they were initially recorded during the
period, or reported in previous financial statements. Should be recognized as income or as an
expense in the period in which they arise. However, Ministry of Corporate Affairs has recently
amended As 11 through a notification. As per the notification, exchange different arising on
reporting of long-term foreign currency monetary items at rates different from those at
which they were initially recorded during the period, or reported in previous financial
statements, in so far as they relate to requisition of depreciable capital asset, can be added
to or deducted from cost of asset. The MCA has given an option for the enterprises to
capitalize the exchange differences arising on reporting of long term foreign currency
monetary items till 31st March, 2020. Thus the company can capitalize the exchange
differences arising due to long term loans linked with acquisition of fixed assets.

Transaction 1: Calculation of exchange difference on fixed assets

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 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Foreign Exchange Liability = = US$ 100 lakhs

Exchange Difference = US $ 100 lakhs x(` 54.98 - ` 50) = `498 lakhs.
Loss due to exchange difference amounting ` 498 lakhs will be capitalized and added in the
carrying value of fixed assets. Depreciation on the unamortized amount will be provided in
the remaining years.
Transaction 2: Soft loan exchange difference (US $1 lakhs i.e. ` 50 lakhs)
Value of loan 31.13.13 US $ 1 lakh x ` 54.98= `54.98 lakhs
As 11 also provides that in case of liability designated as long-term foreign currency monetary
item (having a term of 12 months or more at the time of origination) the exchange difference
is to be accumulated in the Foreign Currency Monetary item Translation Difference (FCMITD)
and should be written off over the useful life of such long –term liability, by recognition as
income or expenses in each of such periods.
Exchange difference between reporting currency (INR) and foreign currency (USD) as on
31.03.2013= Us $ 1.00 lakh X ` (54.98 – 50) = ` 4.98 lakh.
Loan account is to be increased to 54.98 lakh and the account is to be debited by 4.98 lakh.
Since loan is repayable in 3 equal annual installments, ` 4.98 lakh/3 = ` 1.66 lkh is to be
charged in profit and loss account for the year ended 31 st March, 2013 and balance in
FCMITD A/c ` (4.98 lakh – 1.66 lakh)= ` 3.32 lakh is to be shown on the ‗Equity & Liabilities‘ side
of the Balance sheet as a negative figure under the head ‗reserve and surplus‘ as a separate
line item.

(b) Rama Limited issued 8% debentures of `3,00,000 in earlier year on which interest is payable
half yearly on 31st March and 30th September. The company has power to purchase its own
debentures in the open market for cancellation thereof. The following purchases were made
during the financial year 2012-12-13 and cancellation made on 31st March, 2013:
(i) On 1st April, ` 50,000 nominal value debentures purchased for ` 49,450, ex-interest.
(ii) On 1st September, ` 30,000 nominal value debentures purchased for ` 30,250 cum
interest.
Show the journal entries for the transactions held in the year 2012-13. [8]

Solution:
In the books of Rama Limited
Journal Entries
Particulars Dr. (`) Cr. (`)
1st April, Own debentures A/c Dr. 49,450 49,450
2012 To Bank A/c
(Being own debentures purchased ex-interest)
1st Sept. Own debenture A/c Dr. 29,250
2012 Interest on own debentures A/c Dr. 1,000

To Bank A/c 30,250

(Being own debentures purchased cum- interest)
30th Interest on debentures A/c Dr. 12,000
Sept. [`3,00,000 × 8%×(5/12)] 8,800
2012 To Bank A/c Dr.
To Interest on own debentures A/c 3,200
(Being interest @ 8% paid on ` 2,20,000 & adjustment
of interest on ` 50,000 & `30,000 own debentures)
31st Interest on debentures A/c Dr. 12,000
March, To own debentures A/c 8,800
2013 To profit on cancellation of debentures A/c 3,200
(being cancellation of own debentures)
31st Interest on own debentures A/c Dr. 5,400
March, To profit and loss A/c (3,200 + 3,200-1,000) 5,400
2013 (Being total interest paid on own debentures credited

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 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

to P/L A/c)
31st Profit and Loss A/c (12,000 + 12,000) Dr. 24,000
march, To Interest on debentures A/c. 24,000
2013 (being total interest paid on debentures transferred to
P/L A/c)
31st Profit on cancellation of debentures A/c Dr. 1,300
March, To Capital Reserve A/c
2013 (Being profit on cancellation of debentures 1,300
transferred to capital reserve A/c)

5. (a) In April, 2010, A limited 18,00,000 Equity shares of ` 10 each, ` 5 per share was called up
on that date which was paid by all the shareholders. The remaining ` 5 was called up on 1-
9-2010. All the shareholders (except one having 3,60,000 shares) paid the sum in
September 2010. The net profit for the year ended 31-3-2011 is ` 33 lakhs after dividend on
preference shares and dividend distribution tax of ` 6.60 lakhs.
Compute the basic EPS for the year ended 31st March, 2011 as per AS 20. [9]

Solution:

Basic Earnings per share (EPS)=

Working Note:
Calculation of weighted average number of equity shares
As per para 19 of As 20 ‗Earnings per share‘, partly paid equity shares are treated as a
fraction of equity share to the extent that they were entitled to participate in dividend
relative to a fully paid equity share during the reporting period. Assuming that the partly
paid shares are entitled to participate in the dividend to the extent of amount paid,
weighted average number of shares will be calculated as follows:

Date No. of equity shares Amount paid Weighted average no.

per share of equity shares
1.4.2010 18,00,000 5 18,00,000 x 5/10x5/12=3,75,000
1.9.2010 14,40,000 10 14,40,000 x 7/12= 8,40,000
1.9.2010 3,60,000 5 3,60,000x5/10x7/12=1,05,000
13,20,000

(b) On 1st April, 2012, a company offered 100 shares to each of its 500 employees at ` 50 per
share. The employees are given a year to accept the offer. The shares issued under the
plan shall be subject to lock-in on transfer for three years from the grant date. The market
price of shares of the company on the grant date is ` 60 per share. Due to post-vesting
restrictions on transfer, the fair value of shares issued under the plan is estimated at ` 56
per share.
On 31st March, 2013, 400 employees accepted the offer and paid ` 50 per share
purchased Nominal value of each share is ` 10.
Record the issue of share in the books of the company under the aforesaid plan. [6]

Solution:

Fair value of an option = ` 56 – ` 50 = ` 6

Number of shares issued = 400 employees x100 share /employee = 40,000 shares
Fail value of ESP = 40,000 shares x ` 6 = ` 2,40,00

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 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Vesting period = 1 month

Expenses recognized in 2012 – 13 = ` 2,40,000
Date Particulars ` `
31.03.2013 Bank (40,000 shares x ` 50) Dr. 20,00,000
Employees Compensation Expanse A/c Dr. 2,40,00
To Share Capital (40,000 shares x ` 10) 4,00,000
To Securities Premium (40,000 shares x ` 46) 18,40,000

(Being option accepted by 400 employees &

payment made @ ` 56 share)

Profit & Loss A/c Dr. 2,40,000

To Employees Compensation Expense A/c 2,40,000
(being employees compensation expense
transferred to profit & loss A/c)

6. (a) ‘X’ Ltd. issued 1,00,000 equity shares of ` 10 each at par. The entire issue was
underwritten as follows:
A-60,000 shares (Firm underwriting 8,000 shares)
B – 30,000 shares (Firm underwriting 10,000 shares)
C – 10,000 shares (Firm underwriting 2,000 shares)
The total applications including firm underwriting were for 80,000 shares.
The marked applications were as follows:
A – 20,000 shares; B- 14,000 shares, C- 6,000 shares.
The underwriting contract provides that credit for unmarked applications be given to the
underwriters in proportion to the shares underwritten. Determine the liability of each
underwriter. [6]

Solution:

Statement showing liability of underwriters

A B C D
Gross Liability (total issue-purchase by 60,000 30,000 10,000 1,00,000
promoters etc)
Less: Firm Underwriting` (8,000) (10,000) (2,000) (20,000)
52,000 20,000 8,000 80,000
Less: Marked applications received (20,000) (14,000) (6,000) (40,000)
32,000 6,000 2,000 40,000
Less: Unmarked Application (12,000) (6,000) (2,000) (20,000)
Balance 20,000 -- -- 20,000
Add: Firm underwriting 8,000 10,000 2,000 20,000
Total liability of underwriters including firm 28,000 10,000 2,000 40,000
underwriting
Total liability in amount @ ` 10 each `2,80,000 `1,00,000 `20,000 `4,00,000

(b) M/s. ABC Limited has gone into liquidation on 25th June, 2012. Certain creditors could not
receive payments out of realization of assets and contributions from A list contributories.
The following are the details of certain transfer which took place in the year ended 31st
March, 2012
Share holders No. of shares Date of ceasing to be Creditors remaining
transferred a member unpaid and outstanding
on the date of transfer
(`)
P 4,000 10-5-2011 9,000
Q 3,000 22-7-2011 12,000

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 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

R 2,400 15-9-2011 13,500

S 1,600 14-12-2011 14,000
T 1,000 09-03-2012 14,200

All the shares are of ` 10 each, ` 18 8 per share paid up. Show the amount to be realized from
the persons listed above. Ignore remuneration to liquidator and other expenses. [9]

Solution:

Statement of Liability of B List Contributories

Share No. of Maximum Division of liability as on Total
holder shares liability up to
Transferre ` 2 per share
d
22.07.2011 15.09.2011 14.12.2011 09.03.2012
Q 3,000 6,000 4,500 - - - 4,500
R 2,400 4,800 3,600 720 - - 4,320
S 1,600 3,200 2,400 480 300 - 3,188
T 1,000 2,000 1,500 300 192 8 2,000
8,000 16,000 12,000 1,500 500 8 14,008

Notes:
(i) ‗P‘ transferred shares before one year preceding the date of winding up, therefore,
he cannot be held liable for any liability on liquidation.
(ii) Liability of ‗T‘ has been restricted to the maximum allowable limit of ` 2,000. Therefore
amount payable by T on 09.03.2012 is ` 8 only
(iii) ‗Q‘ will not be responsible for further debts incurred after 10th May, 2011 (from the
date when he ceases to be a member). Similarly, ‗R‘ & ‗S‘ will not be liable for the
debts incurred after the date of their transfer of shares.

Working Note:

Calculation of Ratio for discharge of liabilities

Date Cumulative liability Increase in liabilities Ratio of no.of shares
held by Q,R S & T.
22.07.2011 12,000 - 30:24:16:10
15.09.2011 13,500 1,500 24:16:10
14.12.2011 14,000 500 16:10
09.03.2012 14,200 200 Only T

7. (a) Given below are the summarized balance sheets of Vasudha Ltd. and Vaishali Ltd as
at 31st March, 2013.
Liabilities Vasudha Vaishali Assets Vasudha Vaishali
Ltd. Ltd. Ltd. Ltd.
Issued Share Factory Building 2,10,000 1,60,000
capital
Equity shares of 5,40,000 4,03,300 Trade receivables 2,86,900 1,72,900
` 10 each
General 86,000 54,990 Inventory 91,500 82,500
Reserves
Profit & Loss A/c 66,000 43,500 Goodwill 50,000 35,000
Trade payables 44,400 58,200 Cash at Bank 98,000 1,09,590
7,36,400 5,59,990 7,36,400 5,59,990
Goodwill of the companies Vasudha Ltd. and Vaishali Ltd. is to be valued at ` 75,000 and
` 50,000 respectively. Factory Building of Vasudha Ltd is worth ` 1,95,000 and of Vaishali Ltd
` 1,75,000. Inventory of Vaishali has been shown at 10% above of its cost.

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 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

It is decided that Vasudha Ltd will absorb Vaishali Ltd. by taking over its entire business by
issue of shares at the intrinsic value.
You are required to draft the balance sheet of the Vasudha Ltd after putting through the
scheme assuming that the assets & liabilities of Vaishali Ltd. were incorporated in Vasudha ltd
at fair value and assets and liabilities of Vasudha Ltd. have been carried at carrying values
only. [8]

Solution:

Balance sheet of Vasudha Ltd. as on 31st March, 2013 (After absorption)

Particulars Note No Amount
Equity and liabilities
1 Share holders funds
(a) Share capital 1 9,43,300
(b) Reserves and surplus 2 2,72,990
2 Current liabilities
(a) Trade payables (44,400 + 58,200) 1,02,600
Total 13,18,890
Assets
1 (a) Fixed assets
(i) Tangible assets 3 3,85,000
(ii) Intangible assets 4 1,00,000
Current assets
(a) Inventories (91,500 + 75,000) 1,66,500
(b) Trade receivables (2,86,900 + 1,72,900) 4,59,800
(c) Cash and cash equivalents (98,000 + 1,09,590) 2,07,590
Total 13,18,890

Notes to accounts
` `
1 Share capital
Equity share capital
(54,000 + 40,330) Equity shares of Rs. 10 each 9,43,300
2 Reserve and surplus
Profit and Loss A/c 66,000
General reserves 86,000
Securities Premium A/c (refer W.N) 1,20,990 2,72,990
3 Tangible assets
Factory building (2,10,000 + 1,75,000) 3,85,00
4 In tangible assets
Goodwil (50,000 + 50,000) 1,00,000

Note: As the assets of vasudha Ltd. are shown in the books after absorption at carrying value
only, no adjustment for revaluation of the same has been done in the balance sheet.
However, assets of vaishali Ltd have been taken at the fair value as indicated.

Working Note:
Vasudha Ltd. Vaishali Ltd.
Goodwill 75,000 50,000
Factory building 1,95,000 1,75,000
Trade receivables 2,86,900 1,72,900
Inventory 91,500 (82,500/110%)=75,000
Cash at bank 98,000 1,09,590
7,46,400 5,82,490
Less: Trade payables 44,400 58,200
Net assets 7,02,000 5,24,290

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 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

Number of shares 54,000 40,330

Intrinsic value ` 13 ` 13

Hence, Vasudha Ltd. will give its 40,330 shares of ` 10 each @ ` 13 each to vaishali Ltd.
Discharge of purchase consideration.

Share capital Securities premium

40,330 shares @ ` 10 each 4,03,300
40,330 shares @ `3 each 1,20,990

(b) The summarized Balance sheet of X Limited as on 31st March 2013, was as follows:
Liabilities (`) Assets (`)
Authorised and subscribed capital 10,00,000 Fixed Assets:
10,000 equity shares of ` 100 each Machineries 3,50,000
Fully paid Current Assets:
Unsecured loans: Inventory 2,53,000
15% Debentures 3,00,000 Trade receivables 2,30,000
Accrued interest 45,000 Bank 20,000
Current Liabilities: Profit & loss A/c 5,80,000
Trade payables 52,000
Provision for income tax 36,000
14,33,000 14,33,000

It was decided to reconstruct the company for which necessary resolution was passed and
sanctions were obtained from the appropriate authorities. Accordingly, it was decided that:
(i) Eeach share be sub-divided into 10 fully paid up equity share of ` 10 each.
(ii) After sub-division, each shareholder shall surrender to the company 50% of his holding
for the purpose of reissue to debenture holders and trade payables as necessary.
(iii) Out of shares surrendered 10,000 shares of ` 10 each shall be converted into 10%
preference shares of ` 10 each fully paid up.
(iv) The claims of the debentures holders shall be reduced by 50%. In consideration of the
reduction, the debentures holder shall receive preference shares of ` 1,00,000 which
are converted out of shares surrendered.
(v) Trade payables claim shall be reduced by 25%. Remaining trade payables are to be
settled by the issue of equity shares of ` 10 each of out of shares surrendered.
(vi) The shares surrendered and not re-issued shall be cancelled
Pass Journal entries giving effect to the above and the resultant Balance sheet. [7]

Solution:

In the books of X limited journal entries

Particulars Dr.(`) Cr.(`)

(i) Equity Share Capital (` 100) A/c Dr. 10,00,000
To Share Surrender A/c 50,00,00
To Equity Share Capital (` 10) A/c 5,00,000
(Sub-division of 10,000 equity shares of ` 100 each
into 1,00,000 equity shares of ` 10 each and
surrender of 50,000 of such sub-divided shares as
per capital reduction scheme)
(ii) 15% Debentures A/c Dr.
Accrued Interest A/c (proportionate 50%) Dr. 1,50,000
To Reconstruction A/c 22,500 1,72,500
(Transferred 50% of the claims of the debentures
holders to reconstruction A/c in consideration of
which 10% preference shares are being issued, out

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 Answer to MTP_ Intermediate _Syllabus 2012_Dec2016_Set 1

of share surrender A/c as per capital reduction

scheme)
(iii) Trade payables A/c Dr. 52,000
To Reconstruction A/c 52,000
(Transferred claims of the trade payables to
reconstruction A/c 25% of which is reduction and
equity shares are issued in consideration of the
balance amount)
(iv)
Share surrender A/c Dr. 5,00,000
To 10% Preference Share Capital A/c 1,00,000
To Equity Share Capital A/c 39,000
To reconstruction A/c 3,61,000
(Issued preference and equity shares to discharge
the claims of the debenture holders and the trade
payables respectively as per scheme and the
balance in share surrender account is transferred
to reconstruction account)
(v)
Reconstruction A/c Dr. 5,85,500
To Profit & Loss A/c 5,80,000
To Capital Reserve A/c 5,500
(Adjusted debit balance of profit and loss account
against reconstruction account and the balance is
transferred to capital reserve account)

X Limited (and reduced) Balance Sheet as on …..

Particulars Notes ` 000
No
Equity and Liability
1.Share holders funds
a) Share capital 1 6,39,000
b) Reserve and Surplus 2 5,500
3. Non-current liabilities
Long-term borrowings 3 1,50,000
4. Currents liabilities
a) other current liabilities 4 22,500
b) short-term provision 5 36,000
Total 8,53,000
Assets
1. Non-current assets
a) Fixed assets
(i) Tangible assets 6 3,50,000
2. Current assets
a) Inventories 2,53,000
b) trade receivables 2,30,000
c) Cash and cash equivalents 7 20,000
Total 8,53,000

Notes to Account
`
1 Share capital
53,900 equity shares of ` 10 each 5,39,000
10,000 10% preference share of ` 10 each 1,00,000
6,39,000
(all the above shares are allotted as fully paid up pursuant to
capital reduction scheme by conversion of equity shares

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without payment received in cash)

2 Reserves and surplus
Capital reserves
3 Long-term borrowings 5,500
Unsecured
15% debentures 1,50,000
4 Other currents liabilities 22,500
Accrued interest on 15% debentures
5 Short-term provisions 36,000
Provision for income tax
6 Tangible assets
Machineries 3,50,000
7 Cash and cash equivalents
Balances with banks 20,000

Section – C

8. (a)What are the techniques for evaluation of internal control system. [8]

Solution:

Techniques for evaluation of Internal control system:

(i) Narrative Records:

It is a complete and exhaustive description of the system. It is appropriate in
circumstances where a formal control system is lacking, like in the case of small
businesses. Gaps in the control system are difficult to identify using a narrative record.
(ii) Check List:
It is a series of instructions that a member of the audit staff is required to follow. They
have to be signed/initialed by the audit assistant as proof for having followed the
instructions given. A specific statement is required for every weakness area.
(iii) Flow Chart:
It is a pictorial representation of the internal control system depicting its various
elements such as operations, processes and controls, which help in giving a concise
and comprehensive view of the organizations working to the auditor. A complete flow
chart would depict the process of raising documents, personnel involved in doing so,
the flow of documents through various departments, maintenance of records, flow of
goods and consideration, and dealing with results. The internal control evaluation
process becomes easier through a flow chart as a broad picture of all the controls
involved can be gauged in a glimpse
(iv) Internal control questionnaire:
This is the most widely used method for collecting information regarding the internal
control system and involves asking questions to various people at different complete
and all relevant information. The questions are formed in a manner that would
facilitate obtaining full information through answers in ―Yes‖ or ―No‖

(b) Write about audit of educational institution. [7]

Solution:

Audit of an educational institution:

The special steps involved in the audit of an educational institution are the following:
(i) Examine the trust deed, or regulations in the case of school or college and not e
all the provisions affecting accounts. In the case of a university, refer to the Act of
legislature and the regulations framed there under.

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(ii) Read through the minutes of the meetings of the Managing committee or
governing body, nothing resolutions affecting accounts to see that these have
been duly complied with, specially the decisions as regards the operation of bank
accounts and sanctioning of expenditure.
(iii) Check names entered in the students fee register for each month of return, with
the respective class registers, showing names of students on rolls and test amount
of gees charged; and verify that there operates a system of internal check which
ensures that demands against the students are properly raised.
(iv) Check fees received by comparing counterfoils of receipts granted with entries in
the cash book and tracing the collections in the fee register to confirm that the
revenue from this source has been duly accounted for.
(v) Total up the various columns of the fees register for each month or term to
ascertain that fees paid in advance have been carried forward and the arrears
that are irrecoverable have been written off under the sanction of an appropriate
authority.
(vi) Check admission fees with admission slips signed by the head of the institution and
confirm that the amount had been credited to a capital Fund, unless the
managing committee has taken a decision to the contrary.
(vii) See that free studentship and concessions have been granted by a person
authorized to do so having regard to the prescribed rules.
(viii) Confirm that fines for late payment or absence, etc., have either been collected
or remitted under proper authority.
(ix) Confirm that hostel dues were recovered before students accounts were closed
and their deposits of caution money refunded.
(x) Verify rental income from landed property with the rent rolls, etc.
(xi) Vouch in come from endowments and legacies, as well as interest and dividends
form investment also inspect the securities in respect of investments held.
(xii) Verify any government or local authority grant with the relevant papers of grant. If
any expense has been disallowed for purposes of grant, ascertain the reasons and
compliance thereof.
(xiii) Report any old heavy arrears on account of fees, dormitory rents, etc, to the
managing committee.
(xiv) Confirm that caution money and other deposits paid by students on admission
have been shown as liability in the balance sheet and not transferred to revenue.
(xv) See that the investments representing endowment funds for prizes are kept
separate and any income in excess of the prizes has been accumulated and
invested along with the corpus.
(xvi) Verify that the provident fund money of the staff has been invested in appropriate
securities.
(xvii) Vouch donations, if any, with the list published with the annual report. If some
donations were meant for any specific purpose, see that the money was utilized
for the purpose.
(xviii) Vouch all capital expenditure in the usual way and verify the same with the
sanction for the committee as contained in the minute book.
(xix) Vouch in the usual manner all establishment expenses and enquire into any
unduly heavy expenditure under any head.
(xx) See that increase in the salaries of the staff have been sanctioned and minuted
by the committee.
(xxi) Ascertain that the system ordering inspection on receipt and issue of provision,
foodstuffs, clothing and other equipment is efficient and all bills are duly
authorized and passed before payment.
(xxii) Verify the inventories of furniture, stationery, clothing, provision and all equipment,
etc. These should be checked by reference to stock register and values applied to
various items should be test checked.
(xxiii) Confirm that the refund of taxes deducted from the income from investment
(interest on securities, etc.,) has been claimed and recovered since the institutions
are generally exempted from the payment of income-tax.

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(xxiv) Verify the annual statements of accounts and while doing so see that separate
statements of account have been prepared as regards poor boys fund, games
fund, hostel and provident fund of staff, etc.

[Students may mention any 14 points out of the above.]

9. (a) How auditor was appointed what are his power & duties? [9]

Solution:

Appointment of Auditors:

First Auditor
 First auditor of the company, other than a Government company, shall be appointed by
the BOD within 30 days from the date of registration of the company;
 If BOD fails to appoint, by the member of the company within 90 days at an extraordinary
general meeting appoint the first auditor;
 In case of Government company, first auditor shall be appointed by CAG within 60 days
from the date of registration;
 If CAG fails to appoint, by the BOD of the company within next 30 days;
 If again BOD fails to appoint the first auditor of the company, by the member of the
company within 60 days at an extraordinary general meeting;
 Tenure of the first auditor of the company in both the above cases till the conclusion of
the first annual general meeting;

Subsequent Auditor
 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;
 Before such appointment, the written consent of the auditor to such appointment and a
certificate from him shall be in accordance with the condition as may be prescribed;
 Within 15 days of the meeting the company shall file a notice of such appointment with
the
 registrar;
 No listed company or a company belonging to such class or classes of companies as
may be prescribed, shall appoint or re-appoint—
(a) an individual as auditor for more than one term of five consecutive years; and
(b) an audit firm as auditor for more than two terms of five consecutive years:

Power and Duties of the company auditor are as follows:

Every auditor of a company shall have a right of access at all times to the books of account and
vouchers of the company, whether kept at the registered office of the company or at any other
place and shall be entitled to require from the officers of the company such information and
explanation as he may consider necessary for the performance of his duties as auditor and
amongst other matters inquire into the following matters:

(i) Whether the loans & advances made by the company on the basis of security have
been properly secured & the terms are not against the interest of the company or its
members.
(ii) Whether the transactions merely representing book-entries as recorded in the books
are not against the interest of the company;

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(iii) The securities have been sold by company other than banking Investment Company,
at a price-less than purchase price.
(iv) Whether loans & advances made by the company have been shown as deposits.
(v) Personal expenses have been charged to revenue account;
(vi) Whether cash has actually been received in respect of any shares shown in the books
to have been allotted for cash
(vii) Whether the position as stated in the books is correct, regular and is not misleading.

(b) As an auditor how will you verify loose tools appearing in the financial statement of the
company? [6]

Solution:

Loose tools at the end of the year should be checked by the auditor as follows:
(i) The auditor should see that the cost of loose tools is properly determined and verified
by the Chief Engineer.
(ii) If the loose tools are manufactured by the organization, the authorized officer shall
verify the value of such tools.
(iii) He should physically verify these tools or obtain a list of tools duly certified by the
responsible officer. Any discrepancies shall be investigated.
(iv) Ensure that the closing stock of tools is valued at cost. See that the valuation is done
on the basis, which is consistent taking into consideration obsolescence, damage,
brokerage etc.,
(v) See that the loose tools are disclosed in the balance sheet on asset side under the
head ―Current Assets‖.

10. (a) What is the importance of audit report? [8]

Solution:

Audit Report is nothing but a statement of observation gathered & considered while proving
conclusive evidence of company‘s financial position. It is a medium through which an
auditors expresses his opinion on the financial statement under audit. It is an important part
of the audit as it provides the results of the audit conducted by the auditor.

According to J.B.Ray - ―The Report shall either contain as expression of opinion regarding the
financial statements, taken as a whole or an assertion to the effect that an opinion cannot
be expressed when an overall opinion cannot be expressed, the reason therefore should be
stated. In all cases, where auditor‘s name is associated with financial statements the report
should contain a clear cut indication of the character of the auditor‘s examination, if any,
and the degree of responsibility he is taking.‖

Importance of Audit Report

(i) An Audit report is the end product of the audition and is very important & concluding
part of the audit process.
(ii) Audit report gives the auditor‘s opinion on the accounts & record of the company as
examined by him.
(iii) Audit report reflects the work done by the auditor.
(iv) Audit report is the instrument which, measures the auditors responsibility in regard to
the true & fairness of the financial statement of the company.

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(v) Audit report indicates the real position of the financial status of the company & which
is used by different people as a reliable document.

(b) What are the objectives of verification of assets & liabilities? [7]

Solution:

Verification means – ―Proving the truth” An auditor has not only to see the arithmetical
accuracy and bonadides of the transactions in the books of accounts by vouching only, but
has also to see that the assets as recorded in the balance sheet actually exist. The fact that
there is an entry regarding purchases fo an asset and has been found to be currently
recorded, is not a proof that the asset is in the possession of the concern at the date of
baalce sheet. It is possible that after the asset had been acquired and the necessary entries
made in the books of accounts, the asset might have been disposed of or pledged or
mortgaged and no entry had been made regarding these facts in the books of accounts
before the closing of the financial year. He has also to see whether a particular asset as
appearing in the balance sheet exists or not. Verification of liabilities is also as important as
the verification and assets. If the liabilities are overstated or understated, the balance sheet
will not represent a true and fair view of the state of affairs of the company.
In short, verification is a function of examining assets & liabilities to check (i) value (ii)
ownership (iii) title (iv) existence (v) possession and (vi) to see whether the assets are free from
any charge or encumbrance etc.

Objects of verification –
Verification of assets and liabilities is done with the following objects.
i To know whether the balance sheet exhibits a true and fair view of the state of affairs
of the business.
ii To find out whether the assets were in existence.
iii To find out the ownership and title of the assets.
iv To show correct valuation of assets and liabilities.
v To verify the arithmetical accuracy of the books of accounts.
vi To ensure that the assets have been recorded properly.
vii To detect frauds & errors, if any
viii To find out whether there is an adequate internal control regarding acquisition,
utilization and disposal of assets.

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