pSA-GRP2-May 2014 PDF

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SA GRP2-May 2014
PAPER – 5 : ADVANCED ACCOUNTING
Question No. 1 is compulsory.
Answer any five questions from the remaining six questions.
Wherever necessary, suitable assumption(s) may be made by the candidates.
Working Notes should form part of the answer
Question 1
Answer the following questions:
(a) In its Final Accounts for the year ended 31st March, 2014, Z Ltd. made a provision of 3% of its total debtors. On 10th March, 2014, a
debtor of ₹ 5 lakhs suffered a heavy loss and became insolvent in April 2014. The loss was not insured.
State giving reasons, if the company may provide for the full loss in its accounts for the year ended 31 st March, 2014. (5 Marks)
(b) Suhana Ltd. issued 12% secured debentures of ₹ 100 Lakhs on 01.05.2013, to be utilized as under:
Particulars Amount (₹ in lakhs)

Construction of factory building Purchase of Machinery 40
Working Capital 35
25
In March 2014, 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 31.03.2014 was ₹ 11,00,000. During the year 2013-14, 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. (5 Marks)
(c) What do you understand by the term "Interest rate implicit on lease"? Calculate the interest rate implicit on lease from the following
details:
Annual Lease Rent ₹ 80,000 at the end of each year
Lease Period 5 Years
Guaranteed Residual Value ₹ 40,000
Unguaranteed Residual Value ₹ 24,000
Fair Value at the inception of the lease ₹ 3,20,000
Discounted rates for the first 5 years are as below: At 10% 0.909, 0.826, 0.751, 0.683, 0621
At 14% 0.877, 0.769, 0.675, 0.592, 0.519 (5 Marks)
(d) The following information is available for AB Ltd. for the accounting year 2012-13 and 2013-14:
Net profit for ₹

Year 2012-13 22,00,000
Year 2013-14 30,00,000
No of shares outstanding prior to right issue 10,00,000 shares.

Right issue: One new share for each five shares outstanding i.e. 2,00,000 shares.
: Right Issue price ₹ 25
: Last date to exercise right 31st July, 2013
Fair value of one equity share immediately prior to exercise of rights on 31.07.2013 is
₹ 32.
You are required to compute:
(i) Basic earnings per share for the year 2012-13.
(ii) Restated basic earnings per share for the year 2012-13 for right issue.
(iii) Basic earnings per share for the year 2013-14. (5 Marks)
Answer
(a) According to para 8.2 of Accounting Standard 4 “Contingencies and Events Occurring after the Balance Sheet Date”, adjustments to
assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially
affecting the determination of the amounts relating to conditions existing at the balance sheet date.
In the given case, though the debtor became insolvent after balance sheet date, yet he had suffered heavy loss (not covered by the
insurance), before the balance sheet date and this loss was the cause of the insolvency of the debtor.
Therefore the company must make full provision for bad debts amounting ₹ 5 lakhs in its final accounts for the year ended 31st March, 2014.
(b) 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
© The Institute of Chartered Accountants of India
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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 charged to Profit

No. Capitalized & Loss Account (₹)
(₹)
i Construction of Qualifying 9,00,000x40/100 NIL

Asset*
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.
(c) As per para 3 of AS 19 ‘ Leases’ the interest rate implicit in the lease is the discount rate that, at the inception of the lease, causes the
aggregate present value of
(a) the minimum lease payments under a finance lease from the standpoint of the lessor; and
(b) any unguaranteed residual value accruing to the lessor, to be equal to the fair value of the leased asset.
Present value at discount rate of 10%
Year Lease Payments (₹) Disc. Factor Present Value (₹)

(10%)
1 80,000 0.909 72,720
2 80,000 0.826 66,080
3 80,000 0.751 60,080
4 80,000 0.683 54,640
5 80,000 0.621 49,680
5 40,000 0.621 24,840
5 24,000 0.621 14,904
Total 3,42,944
Present value at discount rate of 14%
Year Lease Payments (₹) Disc. Factor Present Value (₹)

(10%)
1 80,000 0.877 70,160
2 80,000 0.769 61,520
3 80,000 0.675 54,000
4 80,000 0.592 47,360
5 80,000 0.519 41,520
5 40,000 0.519 20,760
5 24,000 0.519 12,456
Total----------- 3,07,776
Interest Rate Implicit on Lease = 10% +14%  10%  3,42,944  3,20,000 = 10% + 2.609% = 12.609% or say 12.61%
3,42,944 -3,07,776

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(d) Computation of Basic Earnings per Share
Year 2012-13 Year 2013-14

(₹) (₹)
(i) EPS for the year 2012-13 as originally reported

= Net profit for the year attributable to equity share holder /
weighted average number of equity shares outstanding
during the year 2.20
₹ 22,00,000
10,00,000 shares
(ii) EPS for the year 2012-13 restated for the right issue
₹ 22,00,000 2.12
10,00,000 shares x 1.04
(iii) EPS for the year 2013-14 (including effect of right issue)
₹ 30,00,000 2.62
(10,00,000 x 1.04 x 4/12)  (12,00,000 x 8/12)
Working Notes:
1. Computation of theoretical ex-rights fair value per share =
Fair value of all outstanding 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
(₹ 32 x 10,00,000) + (₹ 25 x 2,00,000)
10,00,000 + 2,00,000
= ₹ 30.83
2. Computation of adjustment factor
Fair value per share prior to exercise of rights Theoretical ex-rights value per share
₹ 32
=
₹ 30.83
= 1.04 (approx.)
Question 2
The partners P, Q & R have called you to assist them in winding up the affairs of their partnership on 31.12.2013. 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
Sundry 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:

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January 2014
 ₹ 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 2014
 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 2014
 ₹ 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". (16 Marks)
Answer
Particulars Cash Creditors Capitals

₹ ₹ P (₹) Q (₹) R (₹)
Balance due after loan 16,000 52,000 43,50 32,000
0
January
Balance available 9,000
Realization less expenses and cash 10,000
retained
Amount available and paid 19,000 (16,000) - - 3,000
Balance due - - 52,000 43,50 29,000
0
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 40,50 20,000
0
March
Opening Balance 2,000
Amount realized less expenses 87,300
Amount paid to partners 89,300 41,689 32,76 14,844
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Loss 10,311 7,733 5,156
Working Note:
(i) Highest Relative Capital Basis
P (₹) Q (₹) R (₹)

Scheme of payment for January 2014
Balance of Capital Accounts 65,000 50,500 32,000
Less: Loans (13,000) (7,000) -
(A) 52,000 43,500 32,000
Profit Sharing Ratio 4 3 2
Capital / Profit sharing Ratio 13,000 14,500 16,000
Capital in profit sharing ratio, taking P’s capital as base 52,000 39,000 26,000
(B)
Excess of R’s capital and Q’s 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 Q’s capital as base (ii) 4,500 3,000
Excess of R’s Capital over Q’s capital (i – ii) 3,000

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(ii) Scheme of distribution of available cash for March:
P (₹) Q (₹) R (₹)

Balance of Capital Accounts end of February 52,000 40,50 20,00
0 0
(A)
Profit Sharing Ratio 4 3 2
Capital / Profit sharing Ratio 13,000 13,50 10,00
0 0
Capital in profit sharing ratio, taking R’s capital as 40,000 30,00 20,00
0 0
base (B)
(i)
Excess of P’s Capital and Q’s Capital (A – B) 12,000 10,50
(i) 0
Profit Sharing Ratio 4 3
Capital / Profit sharing Ratio 3,000 3,500
Capital in profit sharing ratio taking P’s capital as base (ii) 12,000 9,000
Excess of Q’s Capital over P’s Capital (i – ii) - 1,500
Payment ₹ 1500 (C) (1,50
0)
Balance of Excess Capital 12,000 9,000
(i –C)
Payment ₹ 21000 (D) (12,00 (9,00
0) 0)
Balance due (A – C – D) 40,000 30,00 20,00
0 0
Balance cash Payment (₹ 89,300 – ₹ 22,500) = (29,68 (22,2 (14,8
9) 6 4
7) 4)
₹ 66,800 (E)
Total Payment (₹ 89,000) (C + D +E) (iii) 41,689 32,76 14,84
7 4
Loss (A – iii) 10,311 7,733 5,156
Question 3
(a) ZED Ltd. had 25,000, 10% Debentures of ₹ 100 each outstanding as on 1st April, 2013, redeemable on 31st March, 2014. On 1st April,
2013, Sinking Fund was ₹ 24 lakhs represented by 3,000 own Debentures purchased at the average price of ₹ 98 and 8% Stocks of
face value of ₹ 22 lakhs. The annual installment towards Sinking Fund was
₹ 90,000.
On 31st March, 2014, the investments were realized at ₹ 97 and the Debentures were redeemed.
Draw the following Accounts for the year ended 31st March, 2014:
(i) 10% Debenture Account,
(ii) Debenture Redemption Sinking Fund Account,
(iii) Show the necessary working notes. (8 Marks)
(b) A company made a public issue of 2,00,000 equity shares of ₹ 10 each at a premium of
₹ 2 per share. The entire issue was underwritten by the underwriters L, M, N and O in the ratio of 4:3:2:1 respectively with the provision of
firm underwriting of 5,000, 4,000, 2,000 and 2,000 shares respectively.
The company received application for 1,50,000 shares (excluding firm underwriting) from public, out of which applications for 55,000, 40,000,
42,000 and 8,000 shares were marked in favour of L, M, N and O respectively.
Calculate the liability of each underwriter as regards the number of shares to be taken up assuming that the benefit of underwriting is not given
to the individual underwriter.
(8 Marks)
Answer
(a) 10% Debentures Account
Date Particulars ₹ Date Particulars ₹

31.03. To Own Debentures 3,00,000 01.04.1 By Balance 25,00,00
14 To Bank 22,00,00 3 b/d 0
0
25,00,00 25,00,00
0 0

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Debenture Redemption Sinking Fund Account
Date Particulars ₹ Date Particulars ₹

31.03. To General 27,30,0 01.04 By Balance b/d 24,00,0
1 Reserve 00 .1 00
4 (See Note) 3 By Profit & Loss a/c
By Interest on Sinking 90,000
31.03 Fund (W.N. 3) 2,06,00
.1 By Own 0
4 Debentures (W.N.
31.03 4) 6,000
.1 By 8% Stock (Profit)
4 (W.N. 5) 28,000
27,30,0 31.03 27,30,0

00 .1 00
4
31.03
.1
4
Working Notes:
1. Stock as on 1st April, 2013

₹
Sinking Fund Balance as on 1st April, 2013 24,00,00

0
Less: Own Debentures
2,94,
000
8% Stock 21,06,00
0
2. Sale Value of 8% Stock
Number of Stock = ₹ 22 lakhs / ₹ 100 = 22,000 no. Sale Value = 22,000 X ₹ 97 = ₹ 21,34,000
3. Interest credited to Sinking Fund Account
₹
Interest on 8% Stock (₹ 22 Lakh x 8 / 100) 1,76,000
Interest on own Debentures (3,000 x ₹ 100 x 10 / 100) 30,000
2,06,000
4. Own Debentures Account
Date Particuars ₹ Date Particuars ₹

01.04.13 To Balance b/d 2,94, 31.0 By 10% 3,00,
31.03.14 To Sinking Fund 0 3 Debentures 0
A/c 0 . 0
0 1 0
6,000 4
3,00, 3,00,
0 0
0 0
0 0

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5. 8% Stock Account
Date Particuars ₹ Date Particuars ₹

01.04.1 To Balance b/d 21,06,0 31.03. By Bank 21,34,0
3 00 14 A/c 00
To Sinking Fund A/c (W.N.
31.03.1 (Profit) 28,000 2)
4
21,34,0 21,34,0
00 00
Note: Since the balance of Debenture Redemption Sinking Fund Account is more than the nominal value of debentures redeemed, the
amount equal to the amount of debentures redeemed may be transferred to General Reserve Account i.e. ₹ 25,00,000 and excess of
fund i.e. ₹ 2,30,000 may be transferred to Capital Reserve Account on the assumption that it is a capital profit received on the
appreciation in the value of investment or settlement of liability for a lesser amount that was usually payable.
(b) Calculation of liability of each underwriter assuming that the benefit of firm underwriting is not given to individual underwriter
Particulars No. of shares

L M N O Total
Gross underwriting 80,00 60,00 40,00 20,0 2,00,00
0 0 0 0 0
0
Less: Marked (55,0 (40,0 (42,0 (8,0 (1,45,00
Application 0 0 0 0 0)
0) 0) 0) 0
)
(excluding firm underwriting)
Balance 25,00 20,00 (2,00 12,0 55,000
Less: Surplus of N allotted to L, 0 0 0) 0 -
(1,00 (750) 2,000 0
M & O in the ratio of 4:3:1
0) (250
)
Balance 24,00 19,25 - 11,7 55,000
Less: Unmarked 0 0 (3 5 (18,000
application (7,20 (5,40 ,6 0 )
including firm underwriting(WN) 0) 0) (1,8
0
0
0) 0
)
Net Liability 16,80 13,85 (3,60 9,95 37,000
Less: Surplus of N allotted to L, 0 0 0) 0 -
(1,80 (1,35 3,600 (450
M & O in the ratio of 4:3:1 0) 0) )
Balance 15,00 12,50 - 9,50 37,000
0 0 0
Add: Firm Underwriting 5,000 4,000 2,000 2,00 13,000
0
Net Liability 20,00 16,50 2,000 11,5 50,000
0 0 0
0
Working Note:
Particulars No. of shares

Application received from public 1,50,000
Add: Firm underwriting 13,000
Total Applications 1,63,000
Less: Marked application (1,45,000)
Unmarked application including firm underwriting 18,000

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Question 4
P Ltd. and Q Ltd. were carrying on the business of manufacturing of auto components. Both the companies decided to amalgamate and a
new company PQ Ltd. is to be formed with an Authorized Capital of ₹ 10,00,000 divided into 1,00,000 equity shares of ₹ 10 each. The
Balance Sheet of the companies as on 31.03.2014 were as under:
P Limited
Balance Sheet as at 31.03.2014
Particulars Amount (₹)

I. Equity and Liabilities
1. Shareholder’s Fund
(a) Share Capital 1,40,000
(b) Reserves & Surplus Profit & Loss A/c
30,000
2. Non Current Liabilities
8 % Secured Debentures
1,10,000
3. Current Liabilities
Trade Payable
54,000
Total
3,34,000
II. Assets
1. Non-current Assets
(a) Fixed Assets
Building at cost less Depreciation
1,00,000
Plant & Machinery at cost less Depreciation
25,000
2. Current Assets
(a) Inventories 1,35,000
(b) Trade Receivables 44,000
(c) Cash at bank 30,000
Total
3,34,000
Q Limited
Balance Sheet as at 31.03.2014
Particulars Amount (₹)

1. Shareholder’s Fund
(a) Share Capital 2,50,000
(b) Reserves & Surplus General Reserve Profit & Loss A/c
2. Current Liabilities 1,20,000
Trade Payables 35,000
Total
II. Assets 1,40,000
5,45,000
1. Non-current assets
(a) Fixed Assets
Building at cost less depreciation
Plant & Machinery at cost less depreciation Furniture & Fixture at cost less 1,90,000
depreciation 80,000
2. Current Assets 25,000
(a) Inventories
(b) Trade Receivables 50,000
(c) Cash at bank 1,42,000
Total 58,000
5,45,000
The assets and liabilities of the existing companies are to be transferred at book value with the exception of some items detailed below:
(i) Goodwill of P Ltd. was worth ₹ 50,000 and of Q Ltd. was worth ₹ 1,50,000.
(ii) Furniture & Fixture of Q Ltd. was valued at ₹ 35,000.
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(iii) The debtors of P Ltd. are realized fully and bank balance of P Ltd. are to be retained by the liquidator and the sundry creditors are to
be paid out of the proceeds thereof.
(iv) The debentures of P Ltd. are to be discharged by issue of 8% debentures of PQ Ltd. at a premium of 10%.
You are required to:
(i) Compute the basis on which shares in PQ Ltd. will be issued at par to the shareholders of the existing companies.
(ii) Draw up a Balance Sheet of PQ Ltd. as at 1st April, 2014, the date of completion of amalgamation,
(iii) Write up journal entries including bank entries for closing the books of P Ltd. (16 Marks)
Answer
Calculation of Purchase Consideration
P Ltd. Q Ltd.
(₹ (₹
) )
Assets taken over:
Goodwill 50,000 1,50,000
Building 1,00,000 1,90,000
Plant & Machinery 25,000 80,000
Furniture & Fixtures - 35,000
Inventories 1,35,000 50,000
Trade Receivables - 1,42,000
Cash at Bank - 58,000
3,10,000 7,05,000
Less :Liabilities taken over
8% Debentures (1,21,000 -
)
Trade Payables - (1,40,000
)
Net Assets taken over 1,89,000 5,65,000
To be satisfied by issue of shares of PQ Ltd. of ₹ 10 each at par 18,900 56,500
PQ Limited
Balance Sheet as at 1st April, 2014
Particulars Note Amount (₹)

N
o.
(1) Shareholder’s Funds
(a) Share Capital 1 7,54,000
(b) Reserve & Surplus
(2) Non-current Liabilities 2 11,000
(a) Long term borrowings
(3) Current Liabilities 3 1,10,000
(a) Trade Payables
Total 1,40,000
II. Assets
(1) Non-current assets
10,15,000
(a) Fixed Assets Tangible Intangible
4 4,30,000
5 2,00,000
(2) Current Assets
a) Inventories 1,85,000
b) Trade Receivables 1,42,000
c) Cash at Bank 58,000
Total
10,15,000

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Notes to Accounts:
₹
1 Share Capital Authorized
1,00,000 shares of ₹ 10 each Issued, Subscribed and Paid up 75,400 shares
of ₹ 10 each 10,00,00
0
(All the above shares are allotted as fully paid up pursuant to scheme of
amalgamation without payments being received in cash) 7,54,000
Reserve & Surplus Securities Premium Account Long term borrowings -
8 % Debentures Tangible Fixed Assets Building
P Ltd. 1,00,000
2 Q Ltd. 1,90,000
Plant & Machinery 11,000
P Ltd. 25,000
3 Q Ltd. 80,000
Furniture & Fixture Q Ltd. 1,10,000
4
Intangible Asset
Goodwill
P Ltd. 50,000
2,90,000
Q. Ltd. 1,50,000
1,05,000
35,000
4,30,000
5
2,00,000
Working Note:
Computation of Securities Premium
Debentures issued by PQ Ltd. to the existing debenture holders of P Ltd. at 10% premium.
Securities Premium = ₹ 1,10,000 x 10% = ₹ 11,000.

In the books of P Ltd. (Journal Entries)
₹ ₹
1 Realization Account To Building D 3,04,00
To Plant & Machinery To Inventories r 0
To Trade Receivables .
(Being all assets except cash transferred to Realization 1,00,000
Account) 25,000
1,35,000
44,000
2 8% Debentures Account Trade Payables D 1,10,00

To Realization Account r 0
(Being all liabilities transferred to Realization Account) .
D 54,000
r
.
1,64,000
3 Equity Share Capital Profit & Loss Account D 1,40,00

To Equity Shareholder’s Account r 0
.

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(Being Equity transferred to Equity Shareholders’ Account) D 30,000

r
.
1,70,000
4 PQ Ltd D 1,89,00
To Realization Account r 0
(Being Purchase consideration due) .
1,89,000
5 Bank Account D 44,000

To Realization Account r
(Being Cash received from trade receivables in full) .
44,000
6 Realization Account To Bank Account D 54,000

(Being payment made to Trade Payables) r
.
54,000
7 Shares in PQ Ltd. To PQ Ltd. D 1,89,00

(Being purchase consideration received in the form of Equity r 0
Shares of PQ Ltd.) .
1,89,000
8 Realization Account (balancing figure) D 39,000

To Equity Shareholders’ Account r
(Being profit on realization transferred to Equity .
Shareholders’ Account) 39,000
9 Equity Shareholders’ Account 2,09,00

0 1,89,000
Dr. 20,000
To Shares in PQ Ltd.
To Bank Account
(Being final payment made to shareholders)
Question 5
(a) Jay Electricity Company keeps accounts under the Double Accounts System. It decides to replace its old Plant with a new Plant. The
Plant when installed in 2004 cost the company ₹ 75 lakhs, the components of materials, labour and overheads being in the ratio of 4 :
4 : 2. It is ascertained that the cost of materials has gone up by 250% and the cost of the labour has gone up by 200%. The proportion of
material, labour and overheads has changed to 5 : 4 : 4.
The cost of the new plant is ₹ 250 lakhs. In addition, goods worth ₹ 38 lakhs have been used in the construction of the new Plant. The old
Plant was sold as scrap for ₹ 15 lakhs.
You are required to calculate:
(i) The amount to be capitalized,
(ii) The amount to be charged to Revenue.
Necessary Ledger Accounts are to be drawn as working notes. (8 Marks)
st
(b) From the following information of XYZ Marine Insurance Ltd. for the year ending 31 March, 2014, find out the
(i) Net Premium earned
(ii) Net Claims Incurred
Particulars Direct Business (₹) Re-insurance (₹)

Premium Received 92,00,000 7,86,000
Premium Receivable as on 01.04.2013 4,59,000 37,000
Premium Receivable as on 31.03.2014 3,94,000 33,000
Premium Paid 6,36,000

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Premium Payable as on 01.04.2013 28,000

Premium payable as on 31.03.2014 20,000
Claims Paid 73,00,000 5,80,000
Claims payable as on 01.04.2013 94,000 16,000
Claims payable as on 31.03.2014 1,01,000 12,000
Claims received 2,10,000
Claims receivable as on 01.04.2013 42,000
Claims receivable as on 31.03.2014 39,000
(8 Marks)
Answer 5
(a) Jay Electricity Company
Old Cost of Old Plant % Current Cost New

R increa Rati
ati se o
o
(₹ in lakhs) (₹ in lakhs)
Material 4 30 250% 75 5
s
Labour 4 30 200% 60 4
Overhe 2 15 60 4
ads
75 195
Amount to be Capitalized
₹ in lakhs
Cost of New Plant 250
Add: Cost of Materials used 38
288
Less: Estimated Current Cost of Replacing the Plant Amount to be (195)
Capitalized
93
Amount to be charged to Revenue
₹ in lakhs
Estimated Current Cost of Replacement 195
Less: Cash Sales of Scrap (15)
Less: Materials used (38)
Amount to be Charged to Revenue 142

Working Notes:
Plant Account (₹ in lakhs)
Amount Amount
To Balance b/d 75 By Balance c/d 168
To Bank A/c (250-195) 55
To Replacement A/c 38
168 168
Replacement Account (₹ inlakhs)
Amount Amount
To Bank A/c 195 By Bank A/c 15
By Plant A/c 38
By Revenue A/c 142
195 195
It is assumed that materials worth ₹ 38 lakhs, used in the construction of the new plant, are taken out from the old plant.
Note: It is pertinent to note that the Electricity Act, 2003 does not deal with Replacement Accounting based on ‘Double Accounting System’.

13
(b) In the books of XYZ Marine Insurance Ltd.
Amount (₹)
(I) Net Premium earned
Premium from Direct Business received 92,00,000
Add: Receivable as on 31.03.2014 3,94,000
Less: Receivable as on 01.04.2013 (4,59,000)
Sub Total (A) 91,35,000
Premium on reinsurance accepted 7,86,000
Add: Receivable as on 31.03.2014 33,000
Less: Receivable as on 01.04.2013 (37,000)
Sub Total (B) 7,82,000
Premium on reinsurance Ceded 6,36,000
Add: Payable as on 31.03.2014 20,000
Less: Payable as on 01.04.2013 (28,000)
Sub Total (C) 6,28,000
Premium Earned (A+B-C) 92,89,000
(II) Net Claims Incurred
Claims paid on direct business 73,00,000
Add: Outstanding as on 31.03.2014 1,01,000
Less: Outstanding as on 01.04.2013 (94,000)
Sub Total (A) 73,07,000
Reinsurance claims 5,80,000
Add: Outstanding as on 31.03.2014 12,000
Sub Total (B) 5,76,000
Claims received from reinsurance 2,10,000
Add: Outstanding as on 31.03.2014 39,000
Sub Total (C) 2,07,000
Net Claim Incurred (A+B-C) 76,76,000
Question 6
(a) Pass necessary Journal entries in the books of an independent Branch of a Company, wherever required, to rectify or adjust the
following:
(i) Income of ₹ 2,800 allocated to the Branch by Head Office but not recorded in the Branch books.
(ii) Provision for doubtful debts, whose accounts are kept by the Head Office, not provided earlier for ₹ 1,000.
(iii) Branch paid ₹ 3,000 as salary to a Head Office Manager, but the amount paid has been debited by the Branch to Salaries Account.
(iv) Branch incurred travelling expenses of ₹ 5,000 on behalf of other Branches, but not recorded in the books of Branch.
(v) A remittance of ₹ 1,50,000 sent by the Branch has not received by Head Office on the date of reconciliation of Accounts.
(vi) Head Office allocates ₹ 75,000 to the Branch as Head Office expenses, which has not yet been recorded by the Branch.
(vii)Head Office collected ₹ 30,000 directly from a Branch Customer. The intimation of the fact has been received by the Branch only now.
(viii) Goods dispatched by the Head office amounting to ₹ 10,000, but not received by the Branch till date of reconciliation.
The Goods have been received subsequently.
(8 Marks)
(b) Department P sells goods to Department S at a profit of 25% on cost and to Department Q at a profit of 15% on cost. Department S
sells goods to P and Q at a profit of 20% and 30% on sales respectively. Department Q sells goods to P and S at 20% and 10% profit
on cost respectively.
Departmental Managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated.
Departmental profits after charging Manager's commission, but before adjustment of unrealized profits are as below:
₹
Department P Department S 90,000
Department Q 60,000
45,000

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Stock lying at different Departments at the end of the year are as below:
Figures in ₹
DEPARTMENTS
P S Q
Transfer from P - 18,000 14,000
Transfer from S 48,000 - 38,000
Transfer from Q 12,000 8,000 -
Find out correct Departmental Profits after charging Managers' Commission. (8 Marks)
Answer
(a) Books of Branch
Journal Entries
Amount
in ₹
Dr. Cr.
(i) Head Office Account D 2,8
To Income Account A/c 0 2,80
(Being the income allocated by the Head office not 0 0
recorded earlier, now recorded)
(ii) Provision for Doubtful Debts A/c To Head Office D 1,0

Account 0 1,00
(Being the provision for doubtful debts not provided 0 0
earlier, now provided for)
(iii) Head Office Account To Salaries Account D 3,0
(Being rectification of salary paid on behalf of Head 0 3,00
Office) 0 0
(iv) Head Office Account To Cash Account D 5,0
(Being expenditure incurred on account of other 0 5,00
branch, now recorded in books) 0 0
(v) No entry in Branch Books is required.

(vi) Expenses Account D 75,
To Head Office Account 0 75,0
(Being allocated expenses of Head Office recorded) 0 0
0 0
(vii) Head Office Account To Debtors Account D 30,
(Being adjustment entry for collection from Branch 0 30,0
Debtors directly by Head Office) 0 0
0 0
(viii) Goods –in- transit Account 10,

0 10,0
Dr. 0 0
To Head Office Account 0 0
(Being goods sent by Head Office still in-transit)

15
(b) Calculation of correct Departmental Profits
Department Departmen Department

P tS Q
(₹) (₹) (₹)
Profit after charging 90,000 60,000 45,000
Manager’s
Commission
Add: Manager’s Commission (1/9) 10,000 6,667 5,000
1,00,000 66,667 50,000
Less: Unrealised profit on Stock (WN) (5,426) (21,000) (2,727)
Profit Before Manager’s Commission 94,574 45,667 47,273
Less: Manager’s Commission 10% (9,457) (4,567) (4,727)
Correct Profit after 85,117 41,100 42,546
Manager’s
Commission
Working Notes:
Department P Department Department Q Total

(₹) S (₹) (₹)
(₹)
Unrealized Profit
of:
Department P - 25/125X18,0 15/115X14,000 5,426
00
=3,600 =1,826
Department S 20/100X48,00 - 30/100X38,000 21,00
0 0
=9,600 =11,400
Department Q 20/120X12,00 10/110X8,00 2,727
0 0
=2,000 =727
Question 7
Answer any four of the following:
(a) A loan account remains out of order as on the date of Balance Sheet of a Bank. The account has been classified as doubtful assets (up
to 3 years). Detail of the account is:
Outstanding ₹ 7,24,000
ECGC Cover 30% of outstanding (Subject to
maximum of ₹ 1,50,000)
Value of security
As per valuation on the date of grant of loan 2,25,000
As per realizable value as on date of Balance Sheet 1,75,000
Compute the necessary provision to be made by bank as per applicable rate.
(b) State under which head these accounts should be classified in Balance Sheet, as per Schedule VI of the Companies Act:
(i) Share application money received in excess of issued share capital.
(ii) Share option outstanding account.
(iii) Unpaid matured debenture and interest accrued thereon.
(iv) Uncalled liability on shares and other partly paid investments.
(v) Calls unpaid.
(vi) Intangible Assets under development.
(vii) Money received against share warrant.
(viii) Long term maturity of finance lease obligation.
(c) Explain in brief the treatment of Refund of Government Grants in line with AS 12 in the following three situations:
(i) When Government Grant is related to revenue,
(ii) When Government Grant is related to specific fixed assets,
(iii) When Government Grant is in the nature of Promoter's contribution.
(d) W paid a premium to other partners of the firm at the time of his admission to the firm, with a condition that the will not be dissolved
before expiry of five years. The firm is dissolved after three years. W claims refund of premium.
(i) List the criteria for the calculation of the amount of refund.
(ii) Also list any two conditions when no claim in this respect will arise.
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(e) Give four conditions to be fulfilled by a Joint Stock Company to buy back its equity Shares.
(4x 4 = 16 Marks)
Answer
(a) Computation of provision to be made by a Bank
₹
Outstanding Value of Doubtful Asset (up to 3 years) 7,24,000
Less :Value of security (excluding ECGC cover) (₹
1,75,000
)
Sub Total ₹ 5,49,000
Less :ECGC Cover (subject to ₹ 1,50,000 maximum) (₹
1,50,000
)
Unsecured Portion ₹ 3,99,000
Provision:
For unsecured portion @ 100% of ₹ 3,99,000 ₹ 3,99,000
For secured portion @ 40% of ₹ 1,75,000 ₹ 70,000
Total Provision ₹ 4,69,000
(b) Classification of following accounts for the presentation in Schedule VI to the Companies Act, 1956
Sl. Accounts Head

No.
(i) Share application money received in Other Current Liabilities
excess of issued share capital
(ii) Share option outstanding account Reserve & Surplus
(iii) Unpaid matured debenture and interest Other Current Liabilities
accrued thereon
(iv) Uncalled liability on shares and other partly Contingent Liabilities and
paid investments commitments-commitments
to the extent not provided
for
(v) Calls unpaid Share Capital
(vi) Intangible Assets under development Fixed Assets
(vii) Money received against share warrant Shareholders' Fund
(viii) Long term maturity of finance lease Long Term Borrowings
obligation
(c) As per AS 12, refund of Government Grant is treated in the following manner:
(a) When Government Grant is related to Revenue:
(i) The amount of refund is first adjusted against any unamortized deferred credit balance still remaining in respect of the Grant
(ii) Any excess refund over such deferred credit balance or where no deferred credit exists, is immediately charged to Profit & Loss
Account.
(b) When Government Grant is related to specific Fixed Asset:
(i) The amount of refund will increase the Book Value of the Asset, if at the time of receipt of Grant, the cost of asset was reduced by
the amount of Grant.
(ii) If at the time of receipt, the Grant amount was credited to Deferred Grant Account, then the amount of refund will first reduce the
unamortized balance of Deferred Grant Account, any excess refund will reduce the Capital Reserve.
(c) When the Government Grant is in the nature of Promoter’s Contribution: Capital Reserve will be reduced by the amount of refund.
(d) If the firm is dissolved before the term expires, as is the case, W being a partner who has paid premium on admission will have to be
repaid / refunded
The criteria for calculation of refund amount are:
(i) Terms upon which admission was made,
(ii) The time period for which it was agreed that the firm will not be dissolved,
(iii) The time period for which the firm has already been in existence. No claim for refund will arise if:
(i) The firm is dissolved due to death of a partner,
(ii) If the dissolution of the firm is basically because of misconduct of W,
(iii) If the dissolution is through an agreement and such agreement does not have a stipulation for refund of premium.
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(e) As per section 77A of the Companies Act, 1956, a joint stock company has to fulfill the following conditions to buy back its own equity
shares:
1. Buy back is authorized by its articles.
2. A special resolution has been passed in general meeting of the shareholders of the company, authorizing the buy back.
3. The buyback does not exceed 25% of the total paid up capital and free reserves of the company.
4. All the shares proposed for buyback are fully paid up.
5. The ratio of the debts owed by the Company is not more than twice the capital and its free reserves after such buyback.
6. The buyback of listed shares is in accordance with the regulation of SEBI.
7. The buy back is made out of free reserves (which includes securities premium) or out of the proceeds of a fresh issue of any shares or
other specified securities.
8. The buy back is completed within 12 months of the passing of the special resolution or resolution passed by the Board.
9. Before making such buy back, a listed company has to file with the Registrar of the Companies and SEBI a declaration of solvency in
the prescribed form.
Note: All important conditions have been given in the above answer. However, any four conditions may be given in the answer as required in
the question.

18
PAPER – 6 : AUDITING AND ASSURANCE

Question No.1 is compulsory.
Attempt any five questions from the remaining six questions
Questions 1
Discuss the following:
(a) "Statements" and "Guidance Notes" of ICAI-whether mandatory or recommendatory?

(5 Marks)
(b) As an auditor what are the essential points to be borne in mind while examining a voucher? (5 Marks)
(c) Payment of interest out of capital during construction period. (5 Marks)
(d) What is Modified Reports? Discuss disclosure pattern when the auditor includes an Emphasis of Matter paragraph in the Auditor's
Report. (5 Marks)
Answer
(a) Statements and Guidance Notes of ICAI –whether mandatory or recommendatory:
(i) Statements: The ‘Statements’ have been issued with a view to securing compliance by members on matters which, in the opinion of the
Council, are critical for the proper discharge of their functions. ‘Statements’ therefore are mandatory.
Accordingly, while discharging their attest function, it will be the duty of the members of the Institute to ensure that statements are
followed and complied with.
(ii) Guidance Notes: ‘Guidance Notes’ are primarily designed to provide guidance to members on matters which may arise in the course
of their professional work and on which they may desire assistance in resolving issues which may pose difficulty. Guidance Notes are
recommendatory in nature. A member should ordinarily follow recommendations in a guidance note relating to an auditing matter
except where he is satisfied that in the circumstances of the case, it may not be necessary to do so.
Similarly, while discharging his attest function, a member should examine whether the recommendations in a guidance note relating to an
accounting matter have been followed or not. If the same have not been followed, the member should consider whether keeping in view
the circumstances of the case, a disclosure in his report is necessary.
There are, however a few guidance notes in case of which the Council has specifically stated that they should be considered as mandatory
on members while discharging their attest function.
(b) Examining a Voucher: The essential points to be borne in mind while examining a voucher are:
(i) that the date of the voucher falls within the accounting period;
(ii) that the voucher is made out in the client’s name;
(iii) that the voucher is duly authorised;
(iv) that the voucher comprised all the relevant documents which could be expected to have been received or brought into existence on the
transactions having been entered into, i.e., the voucher is complete in all respects; and
(v) that the account in which the amount of the voucher is adjusted is the one that would clearly disclose the character of the receipts or
payments posted thereto on its inclusion in the final accounts.
After the examination is over, each voucher should be either impressed with a rubber stamp or initialed so that it may not be presented again
in support of another entry.
(c) Payment of Interest out of Capital during Construction: Under the provisions of section 208 of the Companies Act, 1956, a
company which has raised money by issue of shares to meet the cost of construction of any work or building or provision of any plant
which cannot be made profitable for a long time, can pay interest on paid-up capital for a period and subject to conditions specified in
section 208. Accordingly, the payment of interest should be verified as follows:—
(i) Authorisation: Ascertain that payment is authorised by the articles or special resolution.
(ii) Approval: Verify that prior sanction of the Central Government has been obtained.
(iii) Payment Period: Verify that interest has been paid only for the period authorized by the Central Government.
(iv) Rate of Interest: Verify that rate of interest does not exceeds such rate as notified by the Central Government.
(v) Presentation in Financial Statements: Verify that interest paid has been added to the cost of assets created out of capital.
(d) Modified Reports: As per SA 705 “Modifications to the Opinion in the Independent Auditor’s Report”, an auditor’s report is considered
to be modified when it includes:
(i) Matters That Do Not Affect the Auditor’s Opinion
 emphasis of matter
 Other Matter
(ii) Matters That Do Affect the Auditor’s Opinion
 qualified opinion
 disclaimer of opinion
 adverse opinion
Therefore, Modified Reports can be of two types (a) Matters that affect auditor’s opinion
(b) Matters that do not affect auditor’s opinion.
The auditor shall modify the opinion in the auditor’s report when the auditor concludes that, based on the audit evidence obtained, the
financial statements as a whole are not free from material misstatement; or the auditor is unable to obtain sufficient appropriate audit
evidence to conclude that the financial statements as a whole are free from material misstatement.
Further, as per SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report”, the inclusion of
an Emphasis of Matter paragraph in the auditor’s report does not affect the auditor’s opinion. When the auditor includes an Emphasis of
Matter paragraph in the auditor’s report, the auditor shall:
(i) Include it immediately after the Opinion paragraph in the auditor’s report;
19
(ii) Use the heading “Emphasis of Matter”, or other appropriate heading;

(iii) Include in the paragraph a clear reference to the matter being emphasised and to where relevant disclosures that fully describe the
matter can be found in the financial statements; and
(iv) Indicate that the auditor’s opinion is not modified in respect of the matter emphasised.
Examples:
 An uncertainty relating to the future outcome of an exceptional litigation or regulatory action.
 Early application (where permitted) of a new accounting standard that has a pervasive effect on the financial statements in advance of its
effective date.
 A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.
Question 2
State with reasons (in short) whether the following statements are correct or incorrect. (Answer any eight)
(i) The Revised Schedule VI is applicable only to Public Limited Companies from the Financial Year 2012-13.
(ii) Specific disclosure is required of the fundamental accounting assumptions followed in the financial statements.
(iii) The Whole Time Director of a public company is automatically entitled for remuneration.
(iv) Companies (Auditor's Report) Order, 2003 shall not apply to a Private Limited Company whose paid up capital and reserves are not
more than rupees fifty lakhs.
(v) Errors of commission' is where a transaction has been omitted either wholly or partially.
(vi) There is no difference in terms "Audit Procedure" and "Audit Technique".
(vii) Maintenance of internal control system is responsibility of Auditor.
(viii) ABC Ltd. declared dividends without providing depreciation for the current year.
(ix) ABC Ltd., a government company came into existence in year 2012, donated ₹ 50,000 to a political party.
(x) The Board of Directors can fill the casual vacancy caused by the resignation of an auditor, who shall hold office until the conclusion of
the next annual general meeting.
(8 x 2 = 16 Marks)
Answer
(i) Incorrect, the Revised Schedule VI is applicable to all the companies (other than banking companies, electricity companies and
insurance companies), registered under the Companies Act, 1956, from the financial year commencing on or after 1.4.2011.
(ii) Incorrect, as per AS 1, “Disclosure of Accounting Policies”, specific disclosure of the fundamental accounting assumption is required if
they are not followed in the financial statements.
(iii) Correct, in case of a public company the whole time directors may be paid remuneration either by way of a monthly payment or at a
specified percentage of the net profits of the company or partly by one way and partly by other, subject to the provisions of the
Companies Act, 1956.
(iv) Companies which are not covered under Companies (Auditor’s Report) Order, 2003 includes a private limited company with a paid-up
capital and reserves not more than rupees fifty lakh and which does not have outstanding loan exceeding rupees twenty five lakhs from
any bank or financial institution and does not have a turnover exceeding rupees five crores at any point of time during the financial
year.
Though question is silent about other information, therefore, both the answers are possible subject to their assumption. Thus statement is
Correct, assuming all other conditions related to outstanding loan and turnover are satisfied or Incorrect, assuming failure of fulfillment
of any condition.
(v) Incorrect, when a transaction has been omitted either wholly or partially it is known as “Error of Omission” whereas “Error of
Commission” is where a transaction has been mis- recorded either wholly or partially.
(vi) Incorrect, there is distinction between Audit Procedure and Audit Technique. Audit Procedure may comprise a number of techniques and
represents the broad frame of the manner of handling the audit work; Audit techniques stand for the methods employed for carrying out
the procedure.
(vii)Incorrect, it is the responsibility of the management for the maintenance of internal control system rather than of the Auditor. Because,
Internal control is the process designed, implemented and maintained by those charged with governance, management to provide
reasonable assurance about the achievement of entity’s objectives.
(viii) Incorrect, no dividend shall be declared or paid by a company for any financial year except out of the profits of the company
for that year arrived at after providing for depreciation or out of the profits of the company for any previous financial year or years arrived
at after providing for depreciation.
Alternatively, Correct, assuming it is approved by Central Government as per section 205 of the Companies Act, 1956.
(ix) Incorrect, no government company is allowed to contribute any amount or amounts directly or indirectly to any political party or for any
political purpose to any person.
(x) Incorrect, in case of a casual vacancy arising on account of resignation, only the company in general meeting can fill the vacancy by
appointing another auditor, who shall hold office till the conclusion of the next annual general meeting.
Question 3
How will you vouch/verify the following?
(a) Preliminary expenses
(b) Building
(c) Recovery of bad debts written off
(d) Cut-off arrangement/procedures. (4 x 4 = 16 Marks)
Answer

20
(a) Preliminary Expenses: The auditor takes following steps to vouch/verify preliminary expenses:
(i) Expenditure incidental to creation and floating of a company includes stamp duties, registration fees, legal costs, accountant’s fees, cost
of printing, etc. All such kind of expenses should be related to the formation of the enterprise.
(ii) Contracts relating to preliminary expenses should be examined with all preliminary expenses, relevant supporting documents should be
there.
(iii) He should examine company’s minute’s book to determine the pattern of writing off of the preliminary expenses over the period.
(iv) He must check that if such kinds of expenses are incurred by the promoters or they have been reimbursed to the promoters, it is as per
the instructions of the BOD and the powers in AOA.
(v) He should make a cross check of the amount of preliminary expenses with that of amount mentioned in the prospectus, statutory report
and balance sheet. Any amount in excess should be approved by the shareholders.
(b) Buildings:
(i) Examine the title deeds of buildings to see whether the client holds the title on the balance sheet date. If the property has been
mortgaged, the title deeds will be in the possession of the mortgagee, from whom a certificate should be obtained to that effect.
(ii) Verify the original cost of buildings by reference to the deed of conveyance. If the building is constructed by the client, verify the original
cost by reference to the cost as recorded in the books of account of the year in which the construction was completed.
(iii) Verify that appropriate depreciation has been provided against the buildings. In case no depreciation is provided on the buildings, a
note to this effect should be given in the profit and loss account.
(iv) See the appropriate lease deed, if the building is leasehold, to ascertain the cost, amortisation, etc. Also ensure that all the covenants in
the lease deed have been fulfilled by the client.
(v) See that the buildings have been valued at cost less depreciation. If any revaluation has taken place, see the basis of revaluation and
ensure that the disclosure of the same has been made. In case of a company, the requirements of Schedule VI to the Companies Act,
1956, have been complied with.
(vi) See that the relevant particulars of buildings have been entered in the fixed assets record maintained by the client.
(c) Recovery of Bad Debts written off:
(i) Check all correspondence and proper authorization of bad debts written off earlier and ensure that the decision of writing off of bad
debts was recorded properly.
(ii) Ascertain total bad debts and see whether all recovery of bad debts is recorded properly in the books of account and deposited into
bank.
(iii) Check all notifications from Court or bankruptcy trustee and all correspondence from debtors and collecting agencies.
(iv) Check Credit Manager’s files for amount recovered and confirm acknowledgement receipts issued to trustee/debtors.
(v) Vouch acknowledgement receipts issued to debtors or trustees.
(d) Cut-off arrangement: Accounting is a continuous process because the business never comes to halt. It is, therefore, necessary that
transactions of one period would be separated from those in the ensuing period so that the results of the working of each period
can be correctly ascertained. The arrangement that is made for this purpose is technically known as “cut-off arrangement”. It essentially
forms part of the internal control system of the organisation. Accounts, other than sales, purchase and stock are not usually affected
by the continuity of the business and therefore, this arrangement is generally applied only to sales, purchase and stock. The auditor
satisfies by examination and test-checks that the cut-off procedures are adequately followed and ensure that:
(i) Goods purchased, property in which passed on to the client, have in fact been included in the inventories and that the liability has been
provided for in case credit purchase.
(ii) Goods sold have been excluded from the inventories and credit has been taken for the sales. If the value of sales is to be received, the
concerned party has been debited.
The auditor may examine a sample of documents, evidencing the movement of stock into and out of stores, including documents pertaining to
period shortly before and after the cut-off date and check whether stocks represented by those documents were included or excluded as
appropriate during stock taking for perfect and correct presentation in the financial statements.
Question 4
Discuss with reference to SAs:
(a) What do you mean by "Written Representations"? As an auditor, how you will deal if management does not provide requested written
representations? (5 Marks)
(b) "Operating Conditions" that may cast doubt about going concern assumption. (5 Marks)
(c) The auditor is responsible for maintaining an attitude of professional skepticism throughout the audit. Do you agree with the
statement?(6 Marks)
Answer
(a) Written Representations: As per SA 580, “Written Representation”, is a written statement by management provided to the auditor to
confirm certain matters or to support other audit evidence. These representations are an important source of audit evidence. If
management modifies or does not provide the requested written representations, it may alert the auditor to the possibility that one or
more significant issues may exist. Further, a request for written, rather than oral, representations in many cases may prompt
management to consider such matters more rigorously, thereby enhancing the quality of the representations.
Requested Written Representations not provided by Management: If management does not provide one or more of the requested
written representations,
(i) the auditor shall discuss the matter with management;
(ii) re-evaluate the integrity of management and evaluate the effect that this may have on the reliability of representations (oral or written)
and audit evidence in general; and
(iii) take appropriate actions, including determining the possible effect on the opinion in the auditor’s report.

21
The auditor shall disclaim an opinion on the financial statements if management does not provide the written representations.
(b) Operating Conditions casting doubt about going concern assumption: The following are examples of operating events or conditions
that, may cast significant doubt about the going concern assumption.
(i) Management intentions to liquidate the entity or to cease operations.
(ii) Loss of key management without replacement.
(iii) Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
(iv) Labour difficulties.
(v) Shortages of important supplies.
(vi) Emergence of a highly successful competitor.
(c) Professional Skepticism: As per SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance
with Standards on Auditing”, Professional skepticism is an attitude that includes a questioning mind, being alert to conditions which may
indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.
Therefore, professional skepticism is necessary to the critical assessment of audit evidence. This includes questioning contradictory audit
evidence and the reliability of documents and responses to inquiries and other information obtained from management and those
charged with governance. It also includes consideration of the sufficiency and appropriateness of audit evidence obtained in the light of
the circumstances, for example in the case where fraud risk factors exist and a single document, of a nature that is susceptible to fraud,
is the sole supporting evidence for a material financial statement amount.
Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the risks of overlooking unusual
circumstances, over generalising when drawing conclusions from audit observations or using inappropriate assumptions in determining
the nature, timing, and extent of the audit procedures and evaluating the results thereof.
Further, while obtaining reasonable assurance, the auditor is responsible for maintaining professional skepticism throughout the audit,
considering the potential for management override of controls and recognizing the fact that audit procedures that are effective for detecting
error may not be effective in detecting fraud. This requirement is also designed to assist the auditor in identifying and assessing the
risks of material misstatement due to fraud and in designing procedures to detect such misstatement.
Therefore, we do agree with the statement.
Question 5
(a) You are the auditor of a company. What precautions you will suggest in adopting test checking technique for audit work? (8 Marks)
(b) State the background of "Local Bodies". Draft an audit programme for audit of local bodies. (8 Marks)
Answer
(a) Precautions for adopting test checking technique: While adopting test check technique, an auditor should take following
precautions:-
(i) Classification: The transactions of the concern should be classified under appropriate heads and may be stratified in case of wide
variations between the transactions of the same kind.
(ii) System study in sequential order: Authorisations, documentations, recording of the transactions should be studied right from the
beginning to end.
(iii) Evaluation of internal control: Evaluating the system of internal control for its efficiency, soundness and capability to produce reliable
accounting and financial data.
(iv) Clarity of test check plan: Preparation of test check plan with clear audit objective understood by the audit staff.
(v) Scientific sample selection: Un-biased selection of the transactions with reference to the random number tables or other statistical
methods.
(vi) Test check, not applicable prohibited areas: Identification of the areas where test check may not be done.
(vii)Sample size: Based on degree of reliance and the confidence level required in the audit, the number of transactions to be selected for
each test plan should be pre- determined.
(viii) Materiality: Setting up criteria to judge what constitute material or immaterial errors. Further investigation of only
material errors be carried out and all immaterial errors may be avoided.
(b) Background of Local Bodies: A municipality can be defined as a unit of local self- government in an urban area. By the term ‘local self-
government’ is ordinarily understood the administration of a locality – a village, a town, a city or any other area smaller than a state
– by a body representing the local inhabitants, possessing fairly large autonomy, raising at least a part of its revenue through local
taxation and spending its income on services which are regarded as local and, therefore, distinct from state and central services.
Municipal government in India covers five distinct types of urban local authorities, viz., the municipal corporations, the municipal councils,
the notified area committees, the town area committees and the cantonment committees.
Audit Programme for local bodies:
(i) The Local Fund Audit Wing of the State Govt. is generally in charge of the audit of municipal accounts. Sometimes bigger municipal
corporations e.g. Delhi, Mumbai etc have power to appoint their own auditors for regular external audit. So the auditor should ensure
authenticity of his appointment.
(ii) The auditor while auditing the local bodies should report on the fairness of the contents and presentation of financial statements, the
strengths and weaknesses of system of financial control, the adherence to legal and/or administrative requirements; upon whether
value is being fully received on money spent. His objective should be to detect errors and fraud and misuse of resources.
(iii) The auditor should ensure that the expenditure incurred conforms to the relevant provisions of the law and is in accordance with the
financial rules and regulations framed by the competent authority.
(iv) He should ensure that all types of sanctions, either special or general, accorded by the competent authority.
(v) He should ensure that there is a provision of funds and the expenditure is incurred from the provision and the same has been authorized
by the competent authority.
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(vi) The auditor should check that the different schemes, programmes and projects, where large financial expenditure has been incurred,
are running economically and getting the expected results.
Question 6
(a) Describe "Analytical Review Procedures" in Audit. Briefly discuss analytical procedures for verification of debtors. (8 Marks)
(b) Mention any eight important points which an auditor will consider while conducting the audit of hospital. (8 Marks)
Answer
(a) Analytical Review Procedure: As per SA 520, Analytical Procedure means analysis of financial information through analysis of
relationship among financial and non-financial data. It includes comparison of the entity’s financial information with comparable
information with prior period, anticipated results of the entity like budgets etc or expectations of auditor and similar industry information.
Therefore, an analytical review procedure assists the auditor in planning the nature, timing and extent of other audit procedures. It is an
auditing procedure based on ratios among accounts and tries to identify significant changes. Analytical review procedures can be used
in the consideration of risks and/or as direct tests of balances. When deciding whether to incorporate analytical review procedures into
the examination program as substantive tests of balances, the examiner should consider the extent to which the underlying data should
be tested.
Analytical Procedures in case of debtors: Following are the analytical review procedures which may often be helpful as a means of
obtaining audit evidence regarding the various assertions relating to debtors:
(i) comparison of closing balances of debtors with the corresponding figures for the previous year;
(ii) comparison of the relationship between current year debtor balances and the current year sales with the corresponding budgeted
figures, if available;
(iii) comparison of actual closing balances of debtors with the corresponding budgeted figures, if available;
(iv) comparison of current year’s ageing schedule with the corresponding figures for the previous year;
(v) comparison of significant ratios relating to debtors with similar ratios for other firms in the same industry, if available;
(vi) comparison of significant ratios relating to debtors with the industry norms, if available.
(vii) Check whether there is any change in credit policy of the organization.
(viii) Check the percentage of bad debts of previous years and current year.
(ix) Find the reasons of major variations in the estimated values and actual values.
These are only an illustrative list of analytical review procedures which an auditor may employ in carrying out an audit of debtors. The exact
nature of analytical review procedures to be applied in specific situation is a matter of professional judgment of the auditor.
(b) Audit of Hospital: The 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.
(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 Stock 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.
Question 7
Write short notes on any four of the following:
(a) Indicate expenses which are essentially of a revenue nature, if incurred for creating an asset, are also regarded as expenditure of a
capital nature.

23
(b) Conditions for issue of shares at a discount.

(c) Advantages of Statistical Sampling in Auditing.
(d) Auditing through the computer.
(e) Introductory Paragraph in the Auditor's Report. (4 x 4 = 16 Marks)
Answer
(a) Expenses which are essentially of a revenue nature, if incurred for creating an asset or adding to its value for achieving higher
productivity, are also regarded as expenditure of a capital nature.
Examples:
(i) Material and wages: capital expenditure when expended on the construction of a building or erection of machinery.
(ii) Legal expenses: capital expenditure when incurred in connection with the purchase of land or building.
(iii) Freight: capital expenditure when incurred in respect of purchase of plant and machinery.
(iv) Repair: Major repairs of a fixed asset that increases its productivity.
(v) Wages: Wages paid on installation costs incurred in Plant & Machinery.
(vi) Interest: Interest paid for the qualification period as per AS-16 i.e. before the asset is constructed.
Whenever, therefore, a part of the expenditure, ostensibly of a revenue nature, is capitalised it is the duty of the auditor not only to examine
the precise particulars of the expenditure but also the considerations on which it has been capitalised.
(b) Conditions for issue of Shares at a Discount: According to Section 79 of the Companies Act, 1956, a company can issue shares at a
discount on the following conditions:
(i) The issue should be authorised by an ordinary resolution of the company sanctioned by the Central Government.
(ii) No such issue of shares at discount can be sanctioned by the Central Government in case the maximum rate of discount should exceed
10% unless the Central Government is of the opinion that a higher rate for discount is justified by the special circumstances of the case.
(iii) The issue should be made within two months of the sanction by the Central Government and not earlier than one year after the date of
commencement of business.
(iv) The issue should be a class already issued by the company.
(v) It is the duty of the auditor to confirm that the conditions given above have been complied with by the company at the time the allotment
was made.
(c) Advantages of statistical sampling in Auditing: The advantages of using statistical sampling technique in auditing are:
(i) Sample size does not increase in proportion to the increase in the size of population.
(ii) Sample selection is more objective and based on law of probability.
(iii) This provides a means of estimating the minimum sample size associated with a specified risk and precision level.
(iv) It also provides a means for deriving a calculated risk and corresponding precision.
(v) It may provide a better description of a large mass of data than a complete examination of all the data, since non-sampling errors such as
processing and clerical mistake are not large.
(d) ‘Auditing through the computer approach’: Following are several circumstances where auditing through the
computer approach must be used:
(i) The application system processes large volumes of input and produces large volumes of output that make extensive direct examination
of the validity of input and output difficult.
(ii) Significant parts of the internal control system are embodied in the computer system. For example, in an online banking system a
computer program may batch transactions for individual tellers to provide control totals for reconciliation at the end of the day’s
processing.
(iii) The logic of the system is complex and there are large portions that facilitate use of the system for efficient processing.
(iv) Because of cost-benefit considerations, there are substantial gaps in the visible audit trail.
The primary advantage is that the auditor has increased power to effectively test a computer system. The range and capability of tests that
can be performed increases and the auditor acquires greater confidence that data processing is correct. By examining the system’s
processing the auditor also can assess the system’s ability to cope with environment change.
The primary disadvantage of the approach are the high costs sometimes involved and the need for extensive technical expertise when
system are complex. However, these disadvantages are really spurious if auditing through computer is the only viable method of
carrying out the audit.
(e) Introductory Paragraph: As per SA 700, “Forming an Opinion and Reporting on Financial Statements”, the introductory paragraph in
the auditor’s report shall:
(i) Identify the entity whose financial statements have been audited;
(ii) State that the financial statements have been audited;
(iii) Identify the title of each statement that comprises the financial statements;
(iv) Refer to the summary of significant accounting policies and other explanatory information; and
(v) Specify the date or period covered by each financial statement comprising the financial statements.

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PAPER – 7 : INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT SECTION – A : INFORMATION TECHNOLOGY

Question No. 1 is compulsory Answer any five questions from the rest.
Question 1
Answer all the following questions briefly:
(a) What are device drivers? Name any two devices that require drivers.
(b) Define "Bit" and "Byte”.
(c) What is the difference between backup and recovery?
(d) What are the functions of Transport Layer and Internet Layer in Transmission Control Protocol/Internet Protocol (TCP/IP)?
(e) What is the difference between Integrity and Authenticity with reference to E-Commerce?
(2 x 5 =10 Marks)
Answer
(a) Device Drivers: Device drivers are small files that act as interfaces between hardware in a computer system and the Operating System
(OS). Hardware requires device drivers so that the OS can “see” the devices and handle them effectively and efficiently.
The common devices that require drivers include:
 Keyboards;
 Mice;
 Controllers;
 Graphics cards;
 Audio hardware;
 Ethernet hardware;
 Wireless cards;
 Ports;
 Card readers;
 Card slots and
 CD/DVD drives.
(b) Bit: Bit is defined as the smallest basic unit of storage in the computer memory that is an abbreviation of binary digit 0 or 1.
Byte: A byte is a basic grouping of 8 bits that the computer operates on as a single unit and is used to represent a character by the
American Standard Code of Information Interchange (ASCII) and Extended BCD Interchange Code (EBCDIC) systems.
(c) Backup: Backup is a utility program used to make a copy of the contents of database files and log files. The database files consist of
a database root file, log file, mirror log file, and other database files called “dbspaces”.
Recovery: Recovery is a sequence of tasks performed to restore a database at some point-in-time. It is performed when either hardware such
as a disk drive/controller card failure or media failure like unexpected database error while data processing occurs.
(d) Transport Layer: The Transport Layer in TCP/IP provides end-to-end communication between applications and verifies correct packet
arrival.
Internet Layer: The Internet Layer in TCP/IP provides packet routing for error checking and addressing and integrity.
(e) With reference to E-commerce -
Integrity is defined as the ability to ensure that information being displayed on a web site or transmitted or received over the internet has not
been altered in any way by an unauthorized party.
Authenticity is the ability to identify the identity of a person or entity with whom we are dealing in the internet.
Question 2
(a) Describe any four benefits of database management solution for an organization.
(4 Marks)
(b) Explain in brief the following features of an Operating System:
(i) Multi programming
(ii) Multi processing
(iii) Multi tasking
(iv) Multi threading (4 Marks)
Answer
(a) The benefits of DBMS solution for an organization are as follows:
(i) It reduces data redundancy and inconsistency.
(ii) It enhances data integrity and security.
(iii) It provides logical and physical data independence.
(iv) It provides application data independence.
(v) It reduces complexity of the organization’s Information System environment.
(vi) It provides faster data accessibility and improved data sharing.
(vii) It increases productivity of application development.
(viii) It provides low cost of developing and maintaining system.
(ix) It provides systematic storage of data in the form of table.
(x) It provides multiple simultaneous usages by good number of users.
(xi) Different privileges can be given to different users.
(xii) It provides backup & recovery.

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(b) (i) Multi programming: Multi programming is defined as an execution of two or more programs that all reside in primary storage. Since
the CPU can execute only one instruction at a time, it cannot simultaneously execute instructions from two or more programs. The
purpose of multiprogramming is to increase the utilization of the computer system as a whole.
(ii) Multi processing: Multi processing (or parallel processing) refers to the use of two or more central processing units, linked together, to
perform coordinated work simultaneously.
(iii) Multi tasking: Multi tasking refers to the operating system’s ability to execute two or more of a single user’s tasks concurrently.
(iv) Multi threading: Multi threading allows a process to keep running even if some threads within the process are stalled, working on a
lengthy task, or awaiting user interaction, thus improve the performance of processing the task.
Question 3
(a) What is a 'threat'? Explain any three types of Network Security threat? (4 Marks)
(b) What do you mean by distributed database? Also briefly explain the two methodologies of distribution of a database. (4 Marks)
Answer
(a) Threat: A threat is anything that can disrupt the operation, functioning, confidentiality, integrity, or availability of a network or system.
Network security threats can be categorized into four broad themes:
 Unstructured threats - These originate mostly from inexperienced individuals using easily available hacking tools from the Internet.
These tools include port-scanning tools, address-sweeping tools, and many others.
 Structured threats - These originate from individuals who are highly motivated and technically competent and usually understand
network systems design and the vulnerabilities of those systems. An individual who presents a structured threat typically targets a
specific destination or group.
 External threats - These originate from individuals or organizations working outside an organization, which does not have authorized
access to organization’s computer systems or network. They usually work their way into a network from the Internet or Dialup Access
servers.
 Internal threats - These threats originate from individuals who have authorized access to the network. These users either have an
account on a server or physical access to the network. An internal threat may come from a discontented former or current employee or
contractor.
(b) Distributed Database: An organization may require decentralizing its database by scattering it with computing resources to several
locations so that running of applications programs and data processing are performed at more than one site. This refers to Distributed
Database and its processing facilitate savings in time and costs by concurrent running of application programs at various sites. When
processing is distributed, the database needs to be distributed fully or partly, depending on the organizational requirements.
There are two methodologies of distribution of a database which are given as under:
 Replicated Database: In this, duplicates of data are provided to the sites so that the sites can have frequent access to the same data
concurrently. But this method of replication is costly in terms of system resources and also maintaining the consistency of the data
elements.
 Partitioned Database: In this, a database is divided into parts or segments that are required and appropriate for the respective sites so
that only those segments are distributed without costly replication of the entire data.
Question 4
(a) Describe briefly any four features of Application Servers.
(b) List the two advantages and two disadvantages of 3 tier architecture.
Answer
(a) Features of the Application Servers are as follows:
 Component Management: This provides the manager with tools for handling all the components and runtime services like session
management, and synchronous/ asynchronous client notifications, as well as executing server business logic.
 Fault Tolerance: It is an ability of an application server with no single point of failure, defining policies for recovery and fail-over
recovery in case of failure of one object or group of objects.
 Load Balancing: It is the capability to send the request to different servers depending on the load and availability of the server.
 Transaction Management: It is an ability to process one or more logical unit of work requested by the client. The server ensures that
the transaction processes completely.
 Management Console: It refers to the single point graphical management console for remotely monitoring clients and server clusters.
 Security: The accessibility of data and application is restricted through user authentication at first tier of application server for security
measures.
(b) Advantages of three-tier architecture are as follows:
 Clear separation of user-interface-control and data presentation from application logic: Through this separation, more clients are
able to have access to a wide variety of server applications. The two main advantages for client- applications are quicker development
through the reuse of pre-built business-logic components and a shorter test phase.
 Dynamic load balancing: If bottlenecks in terms of performance occur, the server process can be moved to other servers at runtime.
 Change management: It is easy and faster to exchange a component on the server than to furnish numerous PCs with new program
versions.
Disadvantages of three-tier architecture are as follows:
 Creates an increased need for network traffic management, server load balancing, and fault tolerance.
 Current tools are relatively immature and are more complex.
 Maintenance tools are currently inadequate for maintaining server libraries. This is a potential obstacle for simplifying maintenance and
promoting code reuse throughout the organization.
Question 5

26
(a) Explain the following with regard to Internet connection:

(i) SDSL connection
(ii) Satellite connection (4 Marks)
(b) Explain step by step online transaction processing in an e-commerce environment.
(4 Marks)
Answer
(a) SDSL Connection: Symmetric Digital Subscriber Line (SDSL) is a technology that allows more data to be sent over existing copper
telephone lines. Symmetric Digital Subscriber Line (SDSL) works by sending digital pulses in the high-frequency area of telephone
wires and cannot operate simultaneously with voice connections over the same wires. It requires a special SDSL modem and supports
data rates up to 3 Mbps. It is called symmetric because it supports the same data rates for upstream and downstream traffic.
Satellite Connection: Internet over Satellite (IoS) allows a user to access the Internet via a satellite that orbits the earth. A satellite is
placed at a static point above the earth's surface, in a fixed position. Because of the enormous distances signals must travel from the
earth up to the satellite and back again, IoS is slightly slower than high-speed terrestrial connections over copper or fiber optic cables.
(b) Following is a step by step online transaction processing in an e-commerce environment:
(i) Order Placed: Customer places order through secure connection on website, or merchant manually keys in transaction.
(ii) Authorization Request: Payment Gateway receives the transaction through the secure internet connection, encrypts it, and submits an
authorization to the credit card issuing bank.
(iii) Authorization Response: Credit card issuing bank either approves or declines the request and sends a response back through the
payment gateway to the website.
(iv) Order Fulfilled: Once approved the merchant processes and ships the customer's order.
(v) Settlement Request: The Payment Gateway sends a settlement request to the merchant account provider each day that transactions
are processed.
(vi) Settlement Deposited: The merchant account provider deposits the amount for each settlement into the merchant's bank account
that usually takes 24 - 48 hours.
Question 6
A Housing Society in a newly developed Smart City has provided several advanced security systems to each house in that city. Based on the
value of these advanced security systems installed in each house, the Society has divided all the houses in four categories and fixed the
criteria for annual maintenance charges as under:
House Category Maintenance charges as % o v o advan secur

systems installed at a ce it
house l d y
u
e
ABC 8%
D 6%
4%
3%
In addition to above there is a service tax @ 12.36% on the amount of maintenance charges. Considering house number and value of
advanced security system installed, as input, draw a flow chart to have printed output as house number, maintenance charges, service
tax and the total amount to be paid by each house owner.

27
46 INTERMEDIATE (IPC) EXAMINATION: MAY, 2014
Answer
Let us define the variables first:
HNO: House Number HC: House Category VAL_ASS: Value of Advanced Security
Systems MC: Maintenance Charges ST: Service Tax TA: Total
Amount
The desired flowchart is given as follows:
Start
Read HNO, VAL ASS

A
Yes
If HC= A?
MC = 0.08 * VAL_ASS
No
If HC= B? Yes MC = 0.06 * VAL_ASS
No
Yes
If HC= C? MC = 0.04 * VAL_ASS
No
MC = 0.03 * VAL_ASS
ST = 0.1236 * MC
TA = MC + ST
Print HNO, MC, ST, TA
Yes
More HNO? A
No
Stop

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Question 7
Write short notes on any four of the following:
(a) Firewall
(b) Data Mining
(c) VoIP
(d) Object Oriented Programming (OOP)
(e) Front End Communication Processors: (2 x 4 = 8 Marks)
Answer 7
(a) Firewall: Firewall is a system which controls the flow of traffic between the Internet and the firm’s internal LANs and systems. They are
usually packaged as turnkey hardware/software packages and are set up to enforce the specific security policies that are desired. A
firewall is a proven, effective means of protecting the firm’s internal resources from unwanted intrusion.
(b) Data Mining: The process of recognizing patterns among data contained in a data warehouse or a data mart is called a process of Data
Mining. Data mining tools are software that allows users to perform detailed mathematical and statistical calculations on detailed data
warehouse data to detect trends, identify patterns and analyze data. Data Mining is responsible for finding the patterns by identifying
the underlying rules and features in the data and picking out relevant information. Examples of Data mining Software’s are SPSS, SAS,
Think Analytics and G-Stat etc.
(c) VoIP: Voice over Internet Protocol (VoIP) commonly refers to the communication protocols, technologies, methodologies, and
transmission techniques involved in the delivery of voice communications and multimedia sessions over Internet Protocol (IP) networks,
such as the Internet. Other terms commonly associated with VoIP are IP telephony, Internet telephony, Voice over BroadBand (VoBB),
broadband telephony, and broadband phone. This allows delivery of voice communications over IP networks, for example, phone calls.
(d) OOP: In Object-Oriented Programming (OOP), objects are combined and small amount of code is written instead of writing a program
line by line. The advantages of OOP are its graphical interface; ease of use; faster program development; enhanced programmer
productivity and more reliable programs that contain fewer errors. The disadvantages of OOP are its steep initial development costs;
more extensive start-up time and power PCs and workstations requirement. Some common object-oriented languages are small talk,
C++, Visual Basic and Java.
(e) Front End Communication Processors: These are programmable devices which control the functions of communication system.
They support the operations of a mainframe computer by performing functions, which it would otherwise be required to perform itself.
These functions include code conversions, editing and verification of data, terminal recognition and control of transmission lines. The
mainframe computer is then able to devote its time to data processing rather than data transmission.
SECTION – B
Question No. 8 is compulsory Answer any five questions from the rest
Question 8
(a) Mission statement of a company focuses on the question:
‘Who we are’ and ‘What we do’. Explain briefly. (3 Marks)
(b) State the factors of human resource that influence on employees competence. (3 Marks)
(c) Assume that you are an entrepreneur who has an intense desire to get into the business. What types of information relating to macro
environment would you need to determine external opportunities and threats? (3 Marks)
(d) What does corporate strategy ensure? Explain. (3 Marks)
(e) Briefly describe the impact of corporate culture on an organization. (3 Marks)
Answer
(a) A company’s 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 organisation’s
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 firm to this business or why it is there, what existence it seeks and what purpose it seeks to achieve as a
business firm.
In other words, the mission serves as a justification for the firm's very presence and existence; it legitimizes the firm's presence.
(b) Human resource management has been accepted as a strategic partner in the formulation of organization’s strategies and in the
implementation of such strategies through human resource planning, employment, training, appraisal and reward systems. The following
points should be kept in mind as they can have a strong influence on employee competence:
i. Recruitment and selection: The workforce will be more competent if a firm can successfully identify, attract, and select highly competent
applicants.
ii. Training: The workforce will be more competent if employees are well trained to perform their jobs properly.
iii. Appraisal of performance: The performance appraisal is to identify any performance deficiencies experienced by employees due to lack
of competence. Such

29
deficiencies, once identified, can often be solved through counselling, coaching or training.
iv. Compensation: A firm can usually increase the competency of its workforce by offering pay, benefits and rewards that are not only
attractive than those of their competitors but also recognizes merit.
(c) Macro environment mainly consists of economic, technological, political, legal and socio- cultural elements. For an entrepreneur it is
important to identify those factors that are likely to affect the new business. Each of the elements can have a bearing on the
opportunities and the threats.
Particularly, he should scan the relevant changes that have happened in recent past that can provide competitive edge. For example, a
technological innovation in the production process can be opportunity. Incentives such as cheaper land, tax free periods can be other
form of opportunities. Entrepreneur has to identify such opportunities that can be capitalized to enter markets or provide an edge over
the competitors. Entrepreneur has to also take care as these opportunities can also act as threats when competitors are able to
exploit them.
(d) Corporate strategy in the first place ensures the growth of the firm and ensures the correct alignment of the firm with its environment. It
serves as the design for filling the strategic planning gap. It also helps build the relevant competitive advantages. It works out the right
fit between the firm and its external environment. Basically the purpose of corporate strategy is to harness the opportunities available in
the environment, countering the threats embedded therein.
Corporate strategy brings methodical responses to the environment. Strategy is the opposite of adhoc responses to the changes in the
environment in competition, consumer tastes, technology and other variables. It amounts to long-term, well thought-out and prepared
responses to the various environment forces.
(e) Corporate culture refers to values, beliefs, business principles, traditions, ways of operating, and internal work environment. An
organization’s culture is either an important contributor or an obstacle to successful strategy execution. The beliefs, vision, objectives,
business approaches and practices underpinning a company's strategy may be compatible with its culture or not. When they are, the
culture becomes a valuable ally in strategy implementation and execution. When the culture is in conflict with some aspect of the
company's direction, performance targets or strategy, the culture becomes a stumbling block that impedes successful strategy
implementation and execution.
A culture grounded in values, practices, and behavioural norms that match what is needed for good strategy execution helps energize
people throughout the company to do their jobs in a strategy-supportive manner, adding significantly to the power and effectiveness of
strategy execution.
Question 9
(a) State with reasons which of the following statements are correct or Incorrect.
(i) Stability strategy is not a 'do-nothing' strategy.
(ii) Six sigma efforts target following main areas:
(x) Improving customer satisfaction.
(y) Reducing wastage
(z) Reducing defects (2 x 2 = 4 Marks)
(b) What are the major stages in the strategicmanagement process? (3 Marks)
Answer
(a) (i) Correct: Stability strategies are implemented by approaches wherein few functional changes are made in the products or markets. It is
not a ‘do nothing’ strategy. It involves keeping track of new developments to ensure that the strategy continues to make sense. This
strategy is typical for mature business organizations. Some small organizations will also frequently use stability as a strategic focus to
maintain comfortable market or profit position.
(ii) Correct: Primarily Six Sigma means maintenance of the desired quality in processes and end products. It is a highly disciplined
process that helps in developing and delivering near-perfect products and services. Improvements in these areas usually represent
dramatic cost savings to businesses, as well as opportunities to retain customers, capture new markets, and build a reputation for top
performing products and services.
(b) The major stages in the strategic management process are:
(i) Develop vision and mission statements
(ii) Perform internal and external audit
(iii) Establish long-term objectives
(iv) Generate, evaluate, and select strategies
(v) Implement strategies considering management issues
(vi) Implement strategies marketing, finance, accounting, R&D, MIS issues
(vii) Measure and evaluate performance
Question 10
What is the rationale behind Business Process Reengineering (BPR)? What steps would you recommend to implement BPR inan
organization? (7 Marks)
Answer
Business Process Reengineering (BPR) is an approach to unusual improvement in operating effectiveness through the redesigning of critical
business processes and supporting business systems. It is revolutionary redesign of key business processes that involves examination
of the basic process itself.
It looks at the minute details of the process, such as why the work is done, who does it, where is it done and when it is done. BPR refers to the
analysis and redesign of workflows and processes both within the organization and between the organization and the external entities like
suppliers, distributors, and service providers. The orientation of redesigning efforts is basically radical. In other words, it is a total
deconstruction and rethinking of business process in its entirety.

30
BPR involves the following steps:

i. Determining objectives and framework: Objectives are the desired end results of the redesign process which the management and
organization attempts to achieve. This will provide the required focus, direction, and motivation for the redesign process.
ii. Identify customers and determine their needs: The designers have to understand customers – their profile, their steps in acquiring,
using and disposing a product. The purpose is to redesign business process that clearly provides added value to the customer.
iii. Study the existing process: The existing processes will provide an important base for the redesigners. The purpose is to gain an
understanding of the ‘what’, and ‘why’ of the targeted process. However, some companies go through the reengineering process with
clean perspective without laying emphasis on the past processes.
iv. Formulate a redesign process plan: Formulation of redesign plan is the real crux of the reengineering efforts. Customer focused
redesign concepts are identified and formulated. Alternative processes are considered and the optimum is selected.
v. Implement the redesign: It is easier to formulate new process than to implement them. It is the joint responsibility of the designers
and management to operationalise the new processes.
Question 11
(a) Discuss the leadership role played by the managers in pushing for good strategy execution.
(4 Marks)
(b) What do you understand by functional structure? (3 Marks)
Answer
(a) A strategy manager has many different leadership roles to play: visionary, chief entrepreneur and strategist, chief administrator, culture
builder, resource acquirer and allocator, capabilities builder, process integrator, crisis solver, spokesperson, negotiator,
motivator, arbitrator, policy maker, policy enforcer, and head cheerleader. Managers have five leadership roles to play in pushing for
good strategy execution:
1. Staying on top of what is happening, closely monitoring progress, working through issues and obstacles.
2. Promoting a culture that mobilizes and energizes organizational members to execute strategy and perform at a high level.
3. Keeping the organization responsive to changing conditions, alert for new opportunities and remain ahead of rivals in developing
competitively valuable competencies and capabilities.
4. Ethical leadership and insisting that the organization conduct its affairs like a model corporate citizen.
5. Pushing corrective actions to improve strategy execution and overall strategic performance.
(b) Functional structure is widely used because of its simplicity and low cost. A functional structure groups tasks and activities by business
function.
The functional structure consists of a chief executive officer or a managing director and limited corporate staff with functional line managers
in dominant functions such as production, accounting, marketing, R&D, engineering, and human resources. Disadvantages of a
functional structure are that it forces accountability to the top, minimizes career development opportunities, etc.
Question 12
(a) How would you argue that modem enterprises pursue multiple objectives and not a single objective? (4 Marks)
(b) Explain the significance of SWOT analysis. (3 Marks)
Answer
(a) Objectives are organizations performance targets – the results and outcomes it wants to achieve. They function as yardstick for tracking
an organizations performance and progress.
Today, organizations are capable of achieving multiple objectives and they focus on different objectives rather than a single objective. In
general, we may identify a set of business objectives being pursued by the business. These may relate to profitability, productive
efficiency, growth, technological dynamism, stability, self-reliance, survival, competitive strength, customer service, financial solvency,
product quality, diversification, employee satisfaction and welfare, and so on. Organizations need to balance these objectives in an
appropriate manner.
(b) An important component of strategic thinking requires the generation of a series of strategic alternatives, or choices of future strategies
to pursue, given the company's internal strengths and weaknesses and its external opportunities and threats. The comparison of
strengths, weaknesses, opportunities, and threats is normally referred to as SWOT analysis. SWOT analysis helps managers to craft
business model that will allow a company to gain a competitive advantage. Key reasons for SWOT analyses are:
 It provides a logical framework for systematic identification of issues having bearing on the business situation, generation of alternative
strategies and the choice of a strategy.
 It presents a comparative account of both external and internal environment in a structured form where it is possible to compare external
opportunities and threats with internal strengths and weaknesses.
 It guides the strategist in strategy identification. It guides the strategist to think of overall position of the organization that helps to identify
the major purpose of the strategy under focus.
Question 13
Distinguish between the following:
(a) Cost Leadership and Differentiation Strategies (4 Marks)
(b) Social Marketing and Service Marketing (3 Marks)
Answer
(a) According to Porter, strategies allow organizations to gain competitive advantage from three different bases: cost leadership,
differentiation, and focus. 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.
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. Different strategies offer different degrees of differentiation. A

31
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. A successful differentiation strategy allows a firm to charge a
higher price for its product and to gain customer loyalty.
(b) Social Marketing and Service Marketing are marketing strategies primarily with different orientations. Social Marketing refers to the
design, implementation, and control of programs seeking to increase the acceptability of a social ideas, cause, or practice among a
target group. For instance, the publicity campaign for prohibition of smoking or encouraging girl child, etc.
On the other hand, service marketing is applying the concepts, tools, and techniques, of marketing to services. Service is any activity or
benefit that one party can offer to another that is essentially intangible and non-perishing. These may be from business to consumer
and from business to business.
Question 14
Write short notes on the following:
(a) Experience Curve (4 Marks)
(b) Production System (3 Marks)
OR
Characteristics of Strategic Business Unit (SBU) (3 Marks)
Answer
(a) Experience curve is similar to learning curve which explains the efficiency gained by workers through repetitive productive work.
Experience curve is based on the commonly observed phenomenon that unit costs decline as a firm accumulates experience in terms of
a cumulative volume of production.
The implication is that larger firms in an industry would tend to have lower unit costs as compared to those of smaller organizations, thereby
gaining a competitive cost advantage. Experience curve results from a variety of factors such as learning effects, economies of scale,
product redesign and technological improvements in production.
(b) Production System is concerned with the capacity, location, layout, product or service design, work systems, degree of automation,
extent of vertical integration, and such factors. Strategies related to production system are significant as they deal with vital issues
affecting the capability of the organisation to achieve its objectives.
Strategy implementation would have to take into account the production system factors as they involve decisions which are long-term in
nature and influence not only the operations capability of an organisation but also its ability to implement strategies and achieve
objectives.
or
Strategic Business Unit (SBU) is a unit of the company that has a separate mission and objectives and which can be planned independently
from other businesses of the orgnanisation. The three most important characteristics of SBU are:
 It is a single business or a collection of related businesses which offer scope for independent planning and which might feasibly stand
alone from the rest of the organization.
 Has its own set of competitors.
 Has a manager who has responsibility for strategic planning and profit performance. He has control of profit-influencing factors.

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1

Particulars Amount (₹ in lakhs)

Net profit for ₹

No of shares outstanding prior to right issue 10,00,000 shares.

period in which they are incurred.

Sr. Particulars Nature of assets Interest to be Interest to be charged to Profit

i Construction of Qualifying 9,00,000x40/100 NIL

Year Lease Payments (₹) Disc. Factor Present Value (₹)

Year Lease Payments (₹) Disc. Factor Present Value (₹)

© The Institute of Chartered Accountants of India

(d) Computation of Basic Earnings per Share

Year 2012-13 Year 2013-14

(i) EPS for the year 2012-13 as originally reported

Liabilities Amount ₹ Assets Amount ₹

© The Institute of Chartered Accountants of India

Particulars Cash Creditors Capitals

P (₹) Q (₹) R (₹)

© The Institute of Chartered Accountants of India

(ii) Scheme of distribution of available cash for March:

P (₹) Q (₹) R (₹)

Date Particulars ₹ Date Particulars ₹

© The Institute of Chartered Accountants of India

Debenture Redemption Sinking Fund Account

Date Particulars ₹ Date Particulars ₹

27,30,0 31.03 27,30,0

1. Stock as on 1st April, 2013

Sinking Fund Balance as on 1st April, 2013 24,00,00

Date Particuars ₹ Date Particuars ₹

© The Institute of Chartered Accountants of India

Date Particuars ₹ Date Particuars ₹

Particulars No. of shares

Particulars No. of shares

© The Institute of Chartered Accountants of India

Particulars Amount (₹)

Particulars Amount (₹)

Particulars Note Amount (₹)

© The Institute of Chartered Accountants of India

Securities Premium = ₹ 1,10,000 x 10% = ₹ 11,000.

2 8% Debentures Account Trade Payables D 1,10,00

3 Equity Share Capital Profit & Loss Account D 1,40,00

© The Institute of Chartered Accountants of India

(Being Equity transferred to Equity Shareholders’ Account) D 30,000

5 Bank Account D 44,000

6 Realization Account To Bank Account D 54,000

7 Shares in PQ Ltd. To PQ Ltd. D 1,89,00

8 Realization Account (balancing figure) D 39,000

9 Equity Shareholders’ Account 2,09,00

Particulars Direct Business (₹) Re-insurance (₹)

© The Institute of Chartered Accountants of India

Premium Payable as on 01.04.2013 28,000

Old Cost of Old Plant % Current Cost New

Amount to be Charged to Revenue 142

© The Institute of Chartered Accountants of India

(b) In the books of XYZ Marine Insurance Ltd.

© The Institute of Chartered Accountants of India

(ii) Provision for Doubtful Debts A/c To Head Office D 1,0

(v) No entry in Branch Books is required.

(viii) Goods –in- transit Account 10,

© The Institute of Chartered Accountants of India

(b) Calculation of correct Departmental Profits

Department Departmen Department

Department P Department Department Q Total

Sl. Accounts Head