PRIME ACADEMY 47 th SESSION IPC - MODEL EXAM PAPER 5 - ADVANCED ACCOUNTING No. of Questions: 7 Total Marks: 100

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1 47 th SESSION IPC - MODEL EXAM PAPER 5 - ADVANCED ACCOUNTING No. of Questions: 7 Total Marks: 100 No. of Pages: 5 Time Allowed: 3 hrs Question 1 is compulsory. Answer any 5 of the other 6. Your answers should be supported by working notes and assumptions where required. 1) a) M/s X Ltd s main buyer is M/s Y Ltd. As on 31 March 2016, there is an outstanding of ` 5 crores from M/s Y Ltd. M/s X Ltd has suspended selling to Y Ltd since Nov 15 as it was brought to its notice that Y Ltd maybe filing for bankruptcy. On 15 April 2016, Y Ltd filed for bankruptcy. X Ltd had not made any provision for non-receipt from Y Ltd. Now providing this would mean that X Ltd will have to show a loss and the directors of the company do not want to do that. What should be the treatment? (4 Marks) b) A special wage board appointed at the direction of a court granted retrospective increase in salaries to all employees of the industry in which N Ltd operates. The award was given on 15 July The award is with retrospective effect from 1 April The management wants to know if it can restate its financial statements for the all the years, as it feels that showing it as an expense in the current year will have a big hit on its profitability. Discuss. (4 Marks) c) A Ltd imports raw materials and exports finished products. The cost of raw material was 50$ per kg. Each unit of the product it sells requires 10 kgs of the imported raw material, apart from other locally sourced materials. The selling price is 1000$. 1000kgs of raw materials were imported on 15- January when the exchange rate was `69 to a dollar. The finished products were exported on 1 March 2016, when the exchange rate was `65 to a dollar. All payments and receipts are outstanding, except for a part payment of 25% of the amount to the supplier on 31 Jan. The rate on the day was 68 ` To a dollar. Compute the impact on the financial statements based on the treatment as per AS-11. Assume the closing rate is R.67 to a dollar. (6 Marks) d) D Ltd began constructing a new plant on 1 April It took a loan of ` 4 crores to finance the construction. The loan carried interest at a rate of 11% per annum. 15% of the money borrowed was used immediately, while 15% was used every month for 5 months starting 1 May 2016, while a final 10% payment was made on completion on 1 November The company also had a nonspecific loan of ` 5 crores at an interest rate of 12%, but no amount was used from it for the construction of the plant. Compute borrowing cost and pass the capitalisation journal entry. (6 Marks) 2) A, B, C and D are sharing profits and losses in the ratio 5 : 5 : 4 : 2. Frauds committed by C during the year were found out and it was decided to dissolve the partnership on 31 st March, 2016 when their Balance Sheet was as under: Liabilities Amount (`) Assets Amount (`) Capital Building 1,20,000 A 90,000 Stock 85,500 B 90,000 Investments 29,000 C - Debtors 42,000 D 35,000 Cash 14,500 General reserve 24,000 C 15,000 Trade creditors 47,000 PRIME/47 TH ME /IPC 1

2 Bills payable 20,000 3,06,000 3,06,000 Following information is given to you: (i) A cheque for ` 4,300 received from debtor was not recorded in the books and was misappropriated by C. (ii) Investments costing `5,400 were sold by C at `7,900 and the funds transferred to his personal account. This sale was omitted from the firm s books. (iii) A creditor agreed to take over investments of the book value of `5,400 at `8,400. The rest of the creditors were paid off at a discount of 2%. (iv) The other assets realized as follows: Building 105% of book value Stock ` 78,000 Investments The rest of investments were sold at a profit of ` 4,800 Debtors The rest of the debtors were realized at a discount of 12% (v) The bills payable were settled at a discount of `400. (vi) The expenses of dissolution amounted to `4,900 (vii) It was found out that realization from C s private assets would only be ` 4,000. Prepare the necessary Ledger Accounts. (16 Marks) 3) a) Sunlife General Insurance Company submits the following information for the year ended 31 st March 2016: Particulars Direct Business Reinsurance ` ` Premium received 65,75,000 9,50,000 Premium paid --- 4,75,000 Claims paid during the year 42,50,000 5,00,000 Claims payable 1st April, ,25,000 87,000 31st March, ,18,000 60,000 Claims received --- 3,25,000 Claims receivable 1st April, ,000 31st March, ,10,000 Expenses of management 2,30,000 Commission On insurance accepted 1,50,000 11,000 On insurance ceded 14,000 The following additional information is also available: (1) Expenses of management include `35,000 surveyor s fee and `45,000 legal expenses for settlement of claims. (2) Reserve for unexpired risk is to be 40%. The balance of reserve for unexpired risk as on was `24,50,000. You are required to prepare the Revenue Account for the year ended 31 st March, (8 Marks) PRIME/47 TH ME /IPC 2

3 b) Write short note on Classification of advances in the case of a Banking Company. (4 Marks) c) From the following information find out the amount of provisions to be shown in the Profit and Loss Account of a Commercial Bank: Assets (` in lakhs) Standard 4,000 Sub-standard 2,000 Doubtful upto one year 900 Doubtful upto three years 400 Doubtful more than three years 300 Loss Assets 500 (4 Marks) 4) a) Siva Ltd. has two departments X and Y. From the following particulars prepare departmental trading accounts and general profits and loss account for the year ending 31 st March, 2016: Department X Department Y ` ` Opening stock (at cost) 80,000 48,000 Purchases 3,68,000 2,72,000 Carriage inward 8,000 8,000 Wages 48,000 32,000 Sales 5,60,000 4,48,000 Purchased goods transferred By department Y to X 40,000 - By department X to Y - 32,000 Finished goods transferred By department Y to X 1,40,000 - By department X to Y - 1,60,000 Return of finished goods By department Y to X 40,000 - By department X to Y - 28,000 Closing stock Purchased goods 18,000 24,000 Finished goods 96,000 56,000 Purchased goods have been transferred mutually at their respective departmental purchase cost and finished goods at departmental market price and that 25% of the closing finished stock with each department represents finished goods received from the other department. b) M/s W invoices goods to its branch at cost plus 20%. The branch sells goods for cash as well as on credit. The branch meets its expenses out of cash collected from its debtors and cash sales and remits the balance of cash to head office after withholding ` 10,000 necessary for meeting immediate requirements of cash. On 31st March, 2015 the assets at the branch were as follows: PRIME/47 TH ME /IPC 3

4 ` ( 000) Cash in Hand 10 Trade Debtors 384 Stock, at Invoice Price 1,080 Furniture and Fittings 500 During the accounting year ended 31st March, 2016 the invoice price of goods dispatched by the head office to the branch amounted to `132 lakhs. Out of the goods received by it, the branch sent back to head office goods invoiced at ` 72,000. Other transactions at the branch during the year were as follows: (` 000) Cash Sales 9,700 Credit Sales 3,140 Cash collected by Branch from Credit Customers 2,842 Cash Discount allowed to Debtors 58 Returns by Customers 102 Bad Debts written off 37 Expenses paid by Branch 842 On 1st January, 2016 the branch purchased new furniture for Rs 1 lakh for which payment was made by head office through a cheque. On 31st March, 2013 branch expenses amounting to `6,000 were outstanding and cash in hand was again `10,000. Furniture is subject to 16% per annum on diminishing balance method. Prepare Branch Account in the books of head office for the year ended 31st March, (2 x 8= 16 Marks) 5) Exe Limited was wound up on and its summarized Balance Sheet as on that date was given below: Balance Sheet of Exe Limited as on Liabilities ` Assets ` Share capital: Fixed assets 9,64,000 1,20,000 Equity shares of `10 each 12,00,000Current assets: Reserves and surplus: Inventory 7,75,000 Profit prior to incorporation 42,000Trade Contingency reserve 2,70,000receivables 1,82,000 Profit and loss A/c 2,52,000Cash at bank 3,29,000 12,86,000 Current liabilities: Trade payables 2,66,000 Provisions: Provision for income tax 2,20,000 22,50,000 22,50,000 The details of Trade receivables and trade payables are as under: Trade receivables Sundry debtors 1,60,000 Less: Provision for bad and doubtful debts (8,000) 1,52,000 Bills receivable 30,000 Trade payables 1,82,000 PRIME/47 TH ME /IPC 4

5 Bills payable 40,000 Sundry creditors 2,26,000 2,66,000 Wye Limited took over the following assets at values shown as under: Fixed assets `12,80,000, Inventory `7,70,000 and Bills Receivable `30,000. Purchase consideration was settled by Wye Limited as under: ` 5,10,000 of the consideration was satisfied by the allotment of fully paid 10% Preference shares of `100 each. The balance was settled by issuing equity shares of `10 each at ` 8 per share paid up. Trade receivables realised `1,50,000. Bills payable was settled for `38,000. Income tax authorities fixed the taxation liability at `2,22,000. Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting to `8,000. You are required to: (i) Calculate the number of equity shares and preference shares to be allotted by Wye Limited in discharge of purchase consideration. (ii) Prepare the Realisation account, Cash/Bank account, Equity shareholders account and Wye Limited account in the books of Exe Limited. (iii) Pass journal entries in the books of Wye Limited. (16 Marks) 6) a) A company issued 1,50,000 shares of ` 10 each at a premium of ` 10. The entire issue was underwritten as follows: X shares (Firm underwriting shares) Y shares (Firm underwriting 4500 shares) Z shares (Firm underwriting shares) Total subscriptions received by the company (excluding firm underwriting and marked applications) were shares. The marked applications (excluding firm underwriting) were as follows: X shares Y shares Z 7500 shares Commission payable to underwriters is at 5% of the issue price. The underwriting contract provides that credit for unmarked applications be given to the underwriters in proportion to the shares underwritten and benefit of firm underwriting is to be given to individual underwriters. Determine the liability of each underwriter (number of shares); (i) Compute the amounts payable or due from underwriters; and (ii) Pass Journal Entries in the books of the company relating to underwriting. (12 Marks) b) S Ltd. grants 1,000 options to its employees on at ` 60. The vesting period is two and a half years. The maximum exercise period is one year. Market price on that date is `90. All the options were exercised on Journalize, if the face value of equity share is ` 10 per share. (4 Marks) 7) a) What is employee stock option plan? Explain the importance of such plans in the modern time. b) What are the different types of foreign branch operations? Discuss how currency translation on the balance sheet date is done for them. c) What are the different types of bonus with respect to a life insurance policy? What is reinsurance? d) Write short note on Classification of investments by a banking company. (4 x 4= 16 Marks) PRIME/47 TH ME /IPC 5

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7 47 TH SESSION - IPC MODEL EXAM PAPER 5 - ADVANCED ACCOUNTING - SUGGESTED ANSWERS 1. a) As per AS-4, adjustments are required for an event occurring after the balance sheet date only if such events provide additional information to a condition existing on the balance sheet date and if it materially affects the financial statements. As given in the question, the company was aware that Y Ltd was in difficulty and had even stopped selling goods to them. The bankruptcy filed in April 2016 adds to the condition already existing on the balance sheet date, hence the directors request cannot be allowed. b) As per AS-5, revision of prior period financial statements is allowed only when there has been an omission or an error. In this case there has been no error or omission, only a retrospective award. This can be treated as expenses from ordinary activities. However since the quantum of the amount will be big, and its impact on the performance of N Ltd significant, a separate disclosure is needed. The management cannot revise the previous years financial statements. c) As per AS-11, a foreign currency transaction is initially recognised at the prevailing rate on the date of the transaction. Subsequently, the difference in exchange rate on settlement is treated as a gain or loss. On the balance sheet date, all receivables and payables are restated based on the closing rate and difference is taken to the profit and loss account. In the current case of A Ltd, for purchases: On 15 Jan: kgs * 50$/kg * 69 Rs/$ = Rs.34,50,000 Initially recognised as payable. On 31 Jan:- (25%(1000*50))*68= Rs.8,50,000 The value recognised for this 25% - 8,62,500 Rs. Exchange gain- 12,500 Rs. On the year closing- 25,12,500 Rs. Gain Rs25,87,500 Rs.25,12,500 = Rs. 75,000. For Sales: Total quantity sold= 100 units. Sale value on 1 March= 100 units * 1000$ * 65 = Rs. 65,00,000 On the year closing- 100 * 1000 * 67= 67,00,000 Rs. Gain- Rs. 200,000 d) Cost of plant = 4 crores lakhs Interest(WN 1) = crores On 1 November Plant A/C Dr To Bank A/C The interest from non-specific loan since not utilised for this project will not be capitalised. (WN 1) Avg loan amount- (60 lakhs* 12/12)+ (60 lakhs * 11/12) + (60 lakhs* 10/12) + (60 lakhs *9/12)+ (60 lakhs * 8/12) + (60 lakhs *7/12) + (40 lakhs* 5/12) = lakhs. Interest = 2.42 crores * 11% = lakhs. PRIME/47 th ME /IPC 1

8 2. Realisation account Particulars Rs Particulars Rs To Building 1,20,000By Trade creditors 47,000 To Stock 85,500By Bills payable 20,000 To Investment 29,000By Cash To Debtors 42,000Building 1,26,000 To Cash-creditors paid (W.N.1) 37,828Stock 78,000 To Cash-expenses 4,900Investments (W.N.2) 23,000 To Cash-bills payable (20, ) 19,600Debtors (W.N. 3) 33,176 2,60,176 To Partners Capital A/cs By Debtors-unrecorded 4,300 A 171 By Investments-unrecorded 7,900 B 171 C 137 D ,39,376 3,39,376 Cash Account Particulars Amount Particulars Amount Rs Rs To Balance b/d 14,500 By Realisation-creditors paid 37,828 To Realisation assets realised By Realisation-bills payable 19,600 Building 1,26,000 By Realisation-expenses 4,900 Stock 78,000 By Capital account Investments 23,000 A 90,528 Debtors 33,176 2,60,176 B 90,528 To C s capital A/c 4,000 D 35,292 2,78,676 2,78,676 PRIME/47 th ME /IPC 2

9 Partners Capital Accounts Particulars A B C D Particulars A B C D Rs. Rs. Rs. Rs. Rs. Rs. Rs. Rs. To Balance b/d 15,000 By Balance b/d 90,000 90,000-35,000 To Debtors-misappropriation 4,300 By General reserve 7,500 7,500 6,000 3,000 To Investmentmisappropriation 7,900 By Realisation profit To C s capital A/c (W.N. 4) 7,143 7,143 2,777By Cash A/c 4,000 To Cash A/c 90,528 90,528 35,292By A s capital A/c 7,143 Working Notes: 1. Amount paid to creditors By B s capital A/c 7,143 By D s capital A/c 2,777 97,671 97,671 27,200 38,069 97,671 97,671 27,200 38,069 Rs Book value 47,000 Less: Creditors taking over investments ( 8,400) 38,600 Less: 2% (772) 2. Amount received from sale of investments 37,828 Book value 29,000 Less: Misappropriated by C (5,400) Rs 23,600 Less: Taken over by a creditor (5,400) 18,200 Add: Profit on sale of investments 4,800 23,000 PRIME/47 th ME /IPC 3

10 3. Amount received from debtors Rs Book value 42,000 Less: Unrecorded receipt (4,300) 37,700 Less: 12% (4,524) 33, Deficiency of C Balance of capital as on 31 st March, ,000 Debtors-misappropriation 4,300 Investment-misappropriation 7,900 Rs 27,200 Less: Realisation Profit (137) General reserve (6,000) Contribution from private assets (4,000) Net deficiency of capital 17,063 This deficiency of Rs.17,063 in C s capital account will be shared by other partners A, B and D in their capital ratio of 90 : 90 : 35.by Accordingly, A s share of deficiency =[17,063 x (90/215)] = Rs 7,143 B s share of deficiency =[17,063 x (90/215)] = Rs 7,143 D s share of deficiency =[17,063 x (35/215)] = Rs 2,777 PRIME/47 th ME /IPC 4

11 3. a) Form B-RA (Prescribed by IRDA) Sunlife General Insurance Company Revenue Account for the year ended 31 st March, 2016 Particulars Schedule Amount Rs`) Premium earned (net) 1 66,80,000 Profit / Loss on sale / redemption of investments Others (to be specified) Interest, dividend and rent Total (A) 66,80,000 Claims incurred (Net) 2 45,26,000 Commission 3 1,47,000 Operating expenses related to insurance business 4 1,50,000 Total (B) 48,23,000 Operating profit from insurance business (A-B) 18,57,000 Schedules forming part of revenue account Schedule 1 : Premium Earned (Net) Particulars Rs Premium from direct business 65,75,000 Add: Premium on reinsurance accepted 9,50,000 Less: Premium on reinsurance ceded (4,75,000) Net premium 70,50,000 Adjustment for change in reserve for unexpired risks (W.N.2) (3,70,000) Total premium earned (net) 66,80,000 Schedule 2 : Claims Incurred (Net) Particulars Rs Claims paid on direct business (W.N.1) 43,30,000 Add: Re-insurance accepted (W.N.1) 4,73,000 Less: Re-insurance ceded (W.N.1) (3,70,000) Net claims paid 44,33,000 Add: Claims outstanding at the end of the year 7,18,000 Less: Claims outstanding at the beginning of the year (6,25,000) Total claims incurred 45,26,000 PRIME/47 th ME /IPC 5

12 Schedule 3 : Commission Particulars Rs ` Commission paid on direct business 1,50,000 Add: Commission on reinsurance accepted 11,000 Less: Commission on reinsurance ceded (14,000) 1,47,000 Schedule 4 : Operating Expenses related to Insurance Business Particulars Rs Expenses of management (2,30,000 35,000 45,000) 1,50,000 1,50,000 Working Notes: 1. Claims incurred Particulars Direct Re-insurance Re-insurance business (Rs) accepted (Rs) ceded (Rs) Paid/received 42,50,000 5,00,000 3,25,000 Add: Outstanding at the end of the 60,000 1,10,000 year Expenses in connection with settlement of claim (35, ,000) 80,000 Less: Outstanding at the beginning of the year (87,000) (65,000) 43,30,000 4,73,000 3,70,000 Note: Commission & Claims on reinsurance ceded represent income as the business is passed on to the reinsurer. 2. Change in reserve for unexpired risk Rs Opening reserve as on 31st March, ,50,000 Less: Closing reserve as on 31st March, 2013 (` 70,50,000 x 40%) (28,20,000) Additional provision required (3,70,000) b) Banks have to classify their advances into four broad groups: (i) Standard Assets Standard assets are those which do not disclose any problems and which do not carry more than normal risk attached to the business. Such an asset is not a NPA as discussed earlier. (ii) Sub-standard Assets Sub-standard asset is one which has been classified as NPA for a period not exceeding 12 months. In the case of term loans, those where installments of principal are overdue for period exceeding one year should be treated as sub-standard. In other words, such an asset will have well-defined credit weaknesses that jeopardize the liquidation of the debt PRIME/47 th ME /IPC 6

13 and are characterized by the distinct possibility that the bank will sustain some loss, if deficiencies are not corrected. (iii) Doubtful Assets A doubtful asset is one which has remained sub-standard for a period of at least 12 months. A loan classified as doubtful has all the weaknesses inherent in that classified as sub-standard with added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. (iv) Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspectors but the amount has not been written off, wholly or partly. In other words such assets are considered uncollectable or if collected of such low value that their being shown as bankable assets is not warranted even though there may be some salvage or recoverable value. The classification of advances should be done taking into account (i) Degree of well defined credit weakness and (ii) Extent of dependence on collateral security for the recovery of dues. The above classification is meant for the purpose of computing the amount of provision to be made in respect of advances. c) Computation of provision in the Profit & Loss Account of the Commercial Bank: Assets Amount % of Provision Provision (Rs in lakhs) (Rs in lakhs) Standard 4, Sub-standard* 2, Doubtful upto one year* Doubtful upto three years* Doubtful more than three years* Loss ,501 * Sub-standard and doubtful assets are assumed as fully secured as it is logical for a commercial bank to cover itself by adequate security in the making of loans and advances in the ordinary course of business. 4. a) Amount(Rs) Particulars Dept X Dept Y Particulars Dept X Dept Y To Opening stock 80,000 48,000 By Sales 5,60,000 4,48,000 To Purchases 3,68,000 2,72,000 By Transfers: To Carriage inward 8,000 8,000 Purchased goods 32,000 40,000 To Wages 48,000 32,000 Finished goods 1,20,000 1,12,000* To Transfers: By Closing stock: Purchased goods 40,000 32,000 Purchased goods 18,000 24,000 Finished goods 1,12,000 1,20,000 Finished goods 96,000 56,000 PRIME/47 th ME /IPC 7

14 To Gross profit c/d 1,70,000 1,68,000 8,26,000 6,80,000 8,26,000 6,80,000 Profit and Loss A/c for the year ended 31 st March, 2016 Particulars ` Particulars ` To Provision for unrealized profit By Gross profit b/d included in closing stock Department X (W.N. 3) 7,200Department X 1,70,000 Department Y (W.N. 3) 3,500Department Y 1,68,000 To Net profit 3,27,300 Working Notes: 1. Calculation of rates of gross profit margin on sales 3,38,000 3,38,000 Department X Department Y Rs Rs` Sales 5,60,000 4,48,000 Add: Transfer of finished goods 1,60,000 1,40,000 7,20,000 5,88,000 Less: Return of finished goods (40,000) (28,000) 6,80,000 5,60,000 Gross Profit 1,70,000 1,68,000 Gross profit margin = 1,70,000 1,68, =25% 100 = 30% 6,80,000 5,60, Finished goods from other department included in the closing stock Department X Department Y Rs Rs Stock of finished goods 96,000 56,000 Stock related to other department (25% of finished goods) 24,000 14, Unrealized profit included in the closing stock Department X = 30% of ` 24,000 = Rs7,200 PRIME/47 th ME /IPC 8

15 Department Y = 25% of ` 14,000 = Rs3,500 b) To Balance b/d In the Head Office Books Branch Account for the year ended 31st March, 2016 PRIME/47 th ME /IPC 9 Rs 000 Rs 000 By Balance b/d Cash in hand 10 Stock reserve ` 1, Trade debtors Stock 1,080 By Goods sent to branch A/c 72 Furniture and fittings 500 (Returns to H.O.) To Goods sent to branch A/c 13,200 By Goods sent to branch A/c 2,188 To Bank A/c (Payment for 100 (Loading on net goods sent furniture) 1 to branch 13,128 To Balance c/d Stock reserve (Remittanc 1 By Bank A/c e from 1,470 6 To Outstanding expenses branch to H.O.) 11,700 6By Balance c/d To Profit and loss A/c (Net Profit) 1,096 Cash in hand 10 Trade debtors 485 Working Notes: 1. Invoice price and cost Let cost be 100 So, invoice price 120 Loading 20 Loading: Invoice price = 20 : 120 = 1 : 6 2. Invoice price of closing stock in branch Branch Stock Account Stock 1,470 Furniture and fittings ,621 16,621 Rs 000 Rs 000 To Balance b/d 1,080 By Goods sent to branch 72 To Goods sent to branch 13,200 By Branch Cash 9,700 To Branch debtors 102 By Branch debtors 3,140 By Balance c/d 1,470

16 14,382 14, Closing balance of branch debtors Branch Debtors Account Rs 000 Rs 000 To Balance b/d 384 By Branch cash 2,842 To Branch stock 3,140 By Branch expenses discount 58 By Branch stock (Returns) 102 By Branch expenses (Bad debts) 37 By Balance b/d 485 3,524 3, Closing balance of furniture and fittings Branch Furniture and Fittings Account ` 000 ` 000 To Balance b/d 500By Depreciation (80+4) 84 To Bank 100By Balance c/d Note: Since the new furniture was purchased on 1 st Jan 2013 depreciation will be for 3 months. 3. Remittance by branch to head office Branch Cash Account ` 000 ` 000 To Balance b/d 10By Branch expenses 842 To Branch stock 9,700By Remittances to H.O. 11,700 To Branch debtors 2,842By Balance b/d 10 12,552 12,552 Note: the branch trading A/C will show the following profit: ` 000 Net Profit as per Branch Account 1,096 Less: Cash Expenses 842 Less: Discount to Debtors 58 Less: Bad Debts 37 Net Profit Transferred to General P / L Account 159 PRIME/47 th ME /IPC 10

17 5. (i) Purchase consideration Fixed assets 12,80,000 Inventory 7,70,000 Bills receivable 30,000 Purchase consideration 20,80,000 Amount discharged by issue of preference shares = Rs 5,10,000 No. of preference shares to be allotted = 5,10,000 5,100 shares 100 Amount discharged by allotment of equity shares = 20,80,000 5,10,000 Paid up value of equity share = Rs 8 Hence, number of equity shares to be issued Rs 10 each with Rs 8 paid up. (ii) Realisation Account In the books of Exe Ltd. =Rs15,70,000 Rs = 15,70,000 = 1,96,250 shares of 8 Rs Rs To Fixed assets Provision for bad and doubtful 9,64,000By debts 8,000 To Inventory 7,75,000By Bills payable 40,000 To Sundry debtors 1,60,000By Sundry creditors 2,26,000 To Bank account: By Wye Ltd. account Liquidation 8,000 (Purchase consideration) 20,80,000 expenses Bills payable 38,000 By Bank account: Sundry debtors 1,50,000 Tax liability 2,22,000 Sundry creditors 2,11,000 To Equity shareholders (profit transferred) 3,16,000 27,24,000 27,24,000 PRIME/47 th ME /IPC 11

18 Cash/Bank Account Rs ` Rs` To Balance b/d 3,29,000 By Realisation account: Realisation To account: Liquidation expenses 8,000 Sundry debtors 1,50,000 Bills payable 38,000 Tax liability 2,22,000 Sundry creditors (Bal.fig.) 2,11,000 4,79,000 4,79,000 Equity Shareholders Account Rs ` Rs To 10% Preference By Equity share capital account 12,00,000 shares in Wye Ltd. 5,10,000 By Profit prior to incorporation 42,000 To Equity shares in Wye 15,70,000 By Contingency reserve 2,70,000 Ltd. By Profit and loss account 2,52,000 By Realisation account (Profit) 3,16,000 20,80,000 20,80,000 Rs To Realisation account 20,80,000 Wye Limited Account B y 10% Preference shares in Wye Ltd. 5,10,000 B y Equity shares in Wye Ltd. 15,70,000 20,80,000 20,80,000 Rs PRIME/47 th ME /IPC 12

19 (iii) Journal Entries in the books of Wye Ltd. Particulars Dr. Cr. Amount Rs Business purchase account Dr. 20,80,000 Amount Rs To Liquidator of Exe Ltd. account 20,80,000 (Being the amount of purchase consideration payable to liquidator of Exe Ltd. for assets taken over) Fixed assets account Dr. 12,80,000 Inventory account Dr. 7,70,000 Bills receivable account Dr. 30,000 To Business purchase account 20,80,000 (Being assets taken over) Liquidator of the Exe Ltd. account Dr. 20,80,000 To 10% Preference share capital account 5,10,000 To Equity share capital account 15,70,000 (Being the allotment of 10% fully paid up preference shares and equity shares of ` 10 each, ` 8 each paid up as per agreement for discharge of purchase consideration) 6. a) (i) Computation of total liability of underwriters in shares (In shares) X Y Z Total Gross liability 90,000 37,500 22,500 1,50,000 Less: Marked applications (excluding firm underwriting) (15,000) (30,000) (7,500) (52,500) Less: Unmarked applications in the 75,000 7,500 15,000 97,500 ratio of gross liabilities of 12:5:3 (excluding firm underwriting) (13,500) (5,625) (3,375) (22,500) 61,500 1,875 11,625 75,000 Less : Firm underwriting (12,000) (4,500) (15,000) (31,500) 49,500 (2,625) (3,375) 43,500 Less: Surplus of Y and Z adjusted in X s balance (2,625+3,375) (6,000) 2,625 3,375 PRIME/47 th ME /IPC 13

20 Net liability 43, ,500 Add: Firm underwriting 12,000 4,500 15,000 31,500 Total liability 55,500 4,500 15,000 75,000 (ii) Calculation of amount payable to or due from underwriters X Y Z Total Total Liability in shares 55,500 4,500 15,000 75,000 Amount ` 20 from 11,10,000 90,000 3,00,000 15,00,000 underwriter (in `) Underwriting Less: Commission (90,000) (37,500) (22,500) (1,50,000) 5% of ` 20 (in `) Net amount receivable (in `) 10,20,000 52,500 2,77,500 13,50,000 (iii) Journal Entries in the books of the company (relating to underwriting) Rs Rs 1. X Dr. 11,10,000 Y Dr. 90,000 Z Dr. 3,00,000 To Share Capital A/c 7,50,000 To Securities Premium A/c 7,50,000 (Being allotment of shares to underwriters) 2. Underwriting commission A/c Dr. 1,50,000 To X 90,000 To Y 37,500 To Z 22,500 (Being amount of underwriting commission payable) 3. Bank A/c Dr. 13,50,000 To X 10,20,000 To Y 52,500 To Z 2,77,500 (Being net amount received by underwriters for shares allotted less underwriting commission) b) Books of S Ltd. Journal Entries Date Particulars Debit Credit Rs Rs Employees Compensation Expense Account Dr. 12,000 To Employees Stock Option Outstanding Account 12,000 PRIME/47 th ME /IPC 14

21 (Being compensation expense recognized in respect of 1,000 options granted to employees at discount of Rs 30 each, amortized on straight line basis over 2½ years) Profit and Loss Account Dr. 12,000 To Employees Compensation Expense Account 12,000 (Being employees compensation expense of the year transferred to P&L A/c) Employees Compensation Expense Account Dr. 12,000 To Employees Stock Option Outstanding Account 12,000 (Being compensation expense recognized in respect of 1,000 options granted to employees at discount of Rs 30 each, amortized on straight line basis over 2½ years) Profit and Loss Account Dr. 12,000 To Employees Compensation Expense Account 12,000 (Being employees compensation expense of the year transferred to P&L A/c) Employees Compensation Expense Account Dr. 6,000 To Employees Stock Option Outstanding Account 6,000 (Being balance of compensation expense amortized ` 30,000 less ` 24,000) Profit and Loss Account Dr. 6,000 To Employees Compensation Expense Account 6,000 (Being employees compensation expense of the year transferred to P&L A/c) Bank Account (Rs 60 1,000) Dr. 60,000 To Equity Share Capital Account 10,000 To Securities Premium Account 50,000 (Being exercise of 1,000 options at an exercise price of ` 60) Stock Option Outstanding A/c (Rs30 x 1,000) Dr. 30,000 To Securities Premium Account 30,000 (Being the balance in the Employees Stock Option Outstanding Account transferred to Securities Premium A/c) Working Notes: PRIME/47 th ME /IPC 15

22 (ii) (iii) Total employees compensation expense = 1,000 x (Rs90 Rs60) = Rs.30,000 Employees compensation expense has been written off during 2½ years on straight line basis as under: I year = Rs.12,000 (for full year) II year = Rs.12,000 (for full year) III year = Rs.6,000 (for half year) 7) a) Employee Stock Option Plan: It is a plan under which the company grants employee stock options. Employee stock option is a contract that gives the employees of the enterprise the right, but not the obligation, for a specified period of time to purchase or subscribe the shares of the company at a fixed or determinable price which is generally lower than the prevailing market price of its shares. The importance of these plans lies in the following advantages which accrue to both the company and the employees: 1. Stock options provide an opportunity to employees to participate and contribute in the growth of the company. 2. Stock option creates long term wealth in the hands of the employees. 3. They are important means to attract, retain and motivate the best available talent for the company. 4. It creates a common sense of ownership between the company and its employees. b) Integral Foreign Operation (IFO): It is a foreign operation, the activities of which are an integral part of those of the reporting enterprise. Non-Integral Foreign Operation (NFO): It is a foreign operation that is not an Integral Foreign Operation. The business of a NFO is carried on in a substantially independent way by accumulating cash and other monetary items, incurring expenses, generating income and arranging borrowing in its local currency. Non-Integral Foreign Operation -translation Balance sheet items i.e. Assets and Liabilities both monetary and non-monetary apply closing exchange rate. Items of income and expenses At actual exchange rates on the date of transactions Resulting exchange rate difference should be accumulated in a foreign currency translation reserve until the disposal of net investment in non-integral foreign operation. Integral Foreign Operation (IFO) translation at the rate prevailing on the date of transaction c) The profit of LIC is distributed among the shareholders and policy holders. The policy holders get 95% of the profit of LIC by way of bonus. The bonus may be of following types: Cash Bonus: paid on declaration of bonus in cash. Revisionary Bonus: it is paid with the policy value at the time of maturity instead of cash at the time of declaration. This bonus is added in the amount of claims. Bonus in reduction of Premium: Bonus is not paid in cash but adjusted against the future premiums. Interim Bonus: it refers to bonus paid on the maturity of policy in the year for which the profit has not yet been determined. Such a bonus is included in claims. Reinsurance:- If an insurer is not willing to bear the entire risk under insurance cover, it gets itself reinsured with another insurer for a part of the risk thereby reducing his risk itself. Some risk retains with some other insurer. PRIME/47 th ME /IPC 16

23 d) The investment portfolio of a bank would normally consist of both approved securities (predominantly government securities) and other securities (shares, debentures, bonds etc.). Banks are required to classify their entire investment portfolio into three categories: a. Held-to-maturity: Securities acquired by banks with the intention to hold them upto maturity should be classified as held-to-maturity. b. Held-for-trading: Securities acquired by banks with the intention to trade by taking advantage of short term price interest rate movements should be classified as held-for trading. These investments are to be sold within 90 days. c. Available-for-sale Securities which do not fall within the above two categories should be classified as available-for-sale. Banks may shift investments to / from held to maturity category with the approval of the Board of Directors once a year. Banks may shift investments to / from held for sale category to held for trading category with the approval of the Board of Directors. In case of exigency if the shift has been approved by the Chief Executive of the Bank or by the head of ALCO, the same must be ratified by the Board of Directors. Shifting of investments from held for trading category to available for sale category is generally not allowed. However, in case such investments are not sold within the stipulated time of 90 days due to exceptional circumstances such as tight liquidity conditions in the market, extreme volatility etc, the same may be shifted to the available for sale category with the approval of the Board of Directors. PRIME/47 th ME /IPC 17

24 47 th SESSION IPC - MODEL EXAM PAPER 6 - AUDITING AND ASSURANCE No. of Questions: 7 Total Marks: 100 No. of Pages: 2 Time Allowed: 3 hrs Question 1 is compulsory. Answer any 5 from the remaining 6 questions 1) a. inquiry is one of the procedures to obtain audit evidence b. Disclosure requirements of Reserves and Surplus as per the Companies Act 2013 c. As an auditor how will you verify application and allotment money received on shares issued for cash. d. Your firm of Chartered Accountants has been allotted Information Systems Audit of 7 branches of Money Bank Ltd. How would you assess the reliability of the internal Control System in a computerized information system. (4x5= 20 Marks) 2) State with reason (in short) whether the following statements are true or false: (Answer any 8) i. Sales invoice is an example of external evidence. ii. An auditor appointed under Companies Act 2013 shall provide to the company only such other services as are approved by the company in general meeting. iii. Selling and distribution cost is included in the cost of inventories. iv. Confirmations received by the auditor directly from third parties are conclusive evidence of a transaction. v. AS 10 Accounting for Fixed Assets is also applicable to wasting assets like quarries, minerals, oil and natural gases. vi. Internal check is a part of Internal Control system. vii. The whole time director of a Public company is automatically entitled for remuneration viii. Extracts and copies of important legal documents, agreements and minutes relevant to the audit is part of current audit file. ix. Emphasis of Matter paragraph in the auditors report is a substitute for Disclaimer of Opinion. x. As per section 138 of the Companies Act 2013, private companies are not required to appoint an internal auditor. (8x2=16 Marks) 3) How will you vouch for the following? i. Customs and excise duty ii. Preliminary expenses iii. Income from Investments iv. Purchase returns (4x4=16 Marks) PRIME/47 th ME /IPC 1

25 4) i. How would you identify and assess the risk of material misstatement as per SA 540. (6 Marks) ii. Discuss the methods of sampling in the light of SA 530 (6 Marks) iii. Explain the directors responsibility statement in brief. (4 Marks) 5) 6) a. You are approached by a partnership firm to list out the advantages that will accrue to them, if accounts are audited. State five important advantages. (4 Marks) b. As an auditor, comment on the following situations/statements: i. The sale and purchases of investments of A ltd., was controlled through a committee. Mr.Ram sold some investments without discussing the same with the other members of the committee as they were out of station and Mr.Ram believed that its price would fall and the company would suffer a loss if it is not sold. A Ltd made a profit of Rs.1 lakh from such sale. (4 Marks) ii. The company due to liquidity crises sold and leased back the same vehicles from leasing companies. In the notes to accounts, the company stated Vehicles taken on lease repayable in 46 instalments of Rs.26,650/- each (4 Marks) iii. No depreciation provided on a machinery costing Rs.50 Lakhs imported 3 years back, since it is yet to be put in use. (4 Marks) a. Why are Computer Aided Audit techniques (CAAT) required in EDP audit. (6 Marks) b. What role is played by the Comptroller and Auditor General of India in the audit of a Government company? (4 Marks) c. Mention any ten special points to be examined by you in the audit of the Income and Expenditure of a Charitable Institution running a hospital. (6 Marks) 7) Write short notes on any 4 of the following: a Audit against rules and orders in the context of Government Audit. b Joint audit and advantages of joint audit c Circumstances under which a retiring auditor cannot be reappointed. d Self revealing errors e Companies exempted from reporting under Companies (Auditors Report) Order 2016 (4x4= 16 Marks) PRIME/47 th ME /IPC 2

26 47 TH SESSION - IPC MODEL EXAM PAPER 6 - AUDITING AND ASSURANCE SUGGESTED ANSWERS 1. a) Inquiry Audit Procedure to Obtain Audit Evidence: Inquiry consists of seeking information of knowledgeable persons, both financial and non- financial, within the entity or outside the entity. Inquiry is used extensively throughout the audit in addition to other audit procedures. Inquiries may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process. Responses to inquiries may provide the auditor with information not previously possessed or with corroborative audit evidence. Alternatively, responses might provide information that differs significantly from other information that the auditor has obtained, for example, information regarding the possibility of management override of controls. In some cases, responses to inquiries provide a basis for the auditor to modify or perform additional audit procedures. Although corroboration of evidence obtained through inquiry is often of particular importance, in the case of inquiries about management intent, the information available to support management s intent may be limited. In these cases, understanding management s past history of carrying out its stated intentions, management s stated reasons for choosing a particular course of action, and management s ability to pursue a specific course of action may provide relevant information to corroborate the evidence obtained through inquiry. In respect of some matters, the auditor may consider it necessary to obtain written representations from management and, where appropriate, those charged with governance to confirm responses to oral inquiries. b) Schedule III to the Companies Act, 2013 requires that company shall disclose Reserves and Surplus in notes to accounts as follows- Reserves and Surplus shall be classified as: (i) Capital Reserves; (ii) Capital Redemption Reserve; (iii) Securities Premium Reserve; (iv) Debenture Redemption Reserve; (v) Revaluation Reserve; (vi) Share Options Outstanding Account; (vii) Other Reserves (specify the nature and purpose of each reserve and the amount in respect thereof); (viii) Surplus i.e. balance in Statement of Profit and Loss disclosing allocations and appropriations such as dividend, bonus shares and transfer to/from reserves etc. (Additions and deductions since last balance sheet to be shown under each of the specified heads) c) Verification of application and allotment money received on Shares Issued for Cash shall be carried out as under: On Application: Verify the amount received along with the applications for shares in the following manner: (i) Check entries in the Application and Allotment Book (or Sheets) with the original applications; (ii) Check entries in the Application and the Allotment Book as regards deposits of money, received with the applications, with those in the Cash Book; (iii) Vouch amounts refunded to the unsuccessful applicants with copies of Letters of Regret; (iv) Check the totals columns in the Application and Allotment Book and confirm the journal entry debiting Share Application Account and crediting Share Capital Account. On Allotment (i) Examine Director s Minutes Book to verify approval of allotments. (ii) Compare copies of letters of allotment with entries in the Application and Allotment Book. (iii) Trace entries in the Cash book into the Application and Allotment Book for the verification of amounts collected on allotment. PRIME/47 th ME /IPC 1

27 (iv) Trace the amount collected on application as well as those on allotment from the Application and Allotment Book into the Share Register. (v) Check whether the amount stated in the prospectus as the minimum amount has been subscribed and the sums payable on such application have been received by the company. (vi) Check that the amount payable on the application on every security is not less than five percent of the nominal amount of security or such other percentage or amount as may be prescribed by the SEBI. (vii) If the stated minimum amount has not been subscribed and the sum payable on subscription is not received within a period of thirty days from the date of issue of the prospectus or such period as my be specified by the SEBI, check that the amount received above is returned within a period of fifteen days from the closure of the issue and if in case the amount is not repaid within such period, the directors in default shall jointly and severally be liable to repay that amount with interest at the rate of fifteen percent per annum. (viii) Check totals of amounts payable on allotment and verify the journal entry debiting Share Allotment Account and crediting Share Capital Account. d) Reliability of Internal Control System in CIS: For evaluating the reliability of internal control system in CIS, in the given instance of 7 branches of Money Bank Ltd., the following will be considered (i) That authorized, correct and complete data is made available for processing. (ii) That it provides for timely detection and corrections of errors. (iii) That in case of interruption due to mechanical, power or processing failures, the system restarts without distorting the completion of entries and records. (iv) That it ensures the accuracy and completeness of output. (v) That it provides security to application software s & data files against fraud etc. (vi) That it prevents unauthorized amendments to programs 2. i. Incorrect: External evidence is the evidence that originates outside the clients organization. Since sales invoice originates within the organization being audited, therefore, it is an example of internal evidence and not external evidence. ii. Incorrect: According to section 144 of the CA 2013, an auditor appointed undr the act shall provide to the company only such other services as are approved by the Board of Directors or the audit committee. iii. Incorrect: As per AS-2 on Valuation of Inventories, in determining the cost of inventories, it is appropriate to exclude selling and distribution costs and recognize them as expense in the period in which they are incurred. Therefore, it is not appropriate to include selling and distribution costs in the cost of inventories. iv. Incorrect: Conformations received directly from third parties by the auditor are more reliable but same cannot be treated as conclusive evidence. v. Incorrect: AS 10 Accounting for Fixed Assets clearly states that this Accounting Standard is not applicable to wasting assets like quarries, mineral, oiland natural gases. vi. Correct: Internal check has been defined as checks on day-to-day transactions which operate continuously as part of the routine system whereby the work of one person is proved independently or is complementary to the work of another, the object being the prevention or early detection of errors or fraud. Internal check is a part of the overall internal control system and operates as a built-in device as far as the staff organisation and job allocation aspects of the control system are concerned. vii. Correct: In the case of a public limited 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 the other, subject to the provisions of the Companies Act PRIME/47 th ME /IPC 2

28 viii. Incorrect: Extracts and copies of important legal documents, agreements and minutes relevant to the audit is part of a permanent audit file. Current audit file contains information, documents, statements etc. relevant only for current period audit assignment. ix. Incorrect: As per SA 706 Emphasis of Matter para and other matter paras in the Independent Auditors report the inclusion of an EOM para in the auditors report does not affect the auditors opinion. Whereas the auditor shall disclaim an opinion when he is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements could be both material and pervasive. Therefore, an emphasis of matter para is not a substitute for the auditor expressing a disclaimer of opinion. x. Incorrect: Section 138 of the Companies Act 2013, requires every private company to appoint an internal auditor having to of 200 crores or more during the preceding financial year; or outstanding loans and borrowings from banks or public institutions exceeding 100 crore or more at any point of time during the preceding financial year. 3. a. Customs and Excise Duties: The audit procedures for custom duties are listed below- (i) Examine Cash Book: Examine the payment of custom duties in the cash book with reference to bill of entry. (ii) Examine the Bill of Entry: Check the amount of custom duty was calculated correctly, i.e., in accordance with the applicable rate for dutiable goods. If the duty has been paid by dealing and forwarding agent, examine bill of entry with reference to agent s bill. If the duty has been paid by the client directly, examine bill of entry together with receipt evidencing payment of customs duty. (ii) Examine Disputed Cases Carefully: In case of a dispute about the amount of duty payable, a provisional payment may have been made. The auditor should determine the duty payable and ensure any additional duty to be paid or refund expected should have been adjusted. (iii) Verify for Duty Drawback: Duty drawback refers to a scheme under which central excise and customs duties paid for raw-materials and other inputs used in the manufacture of the product prior to its export are refunded to the exporter. The auditor should verify the claim of duty drawback with reference to acknowledgement issued by the Directorate of duty drawback. Excise duty becomes payable at the time of releasing of excisable goods from the factory/godown to the manufacturer. Normally, the excise duty payable is deposited with the designated bank to the credit of the controller of excise and one copy of the challan is forwarded to him for obtaining the permit and another copy is sent to the dispatch department evidencing payment of required duty. The auditor may adopt the following procedures to vouch the payment of excise duties: (i) Verify payment of excise duties by examining the duly paid as per Challans with reference to the quantity of goods in respect of which issue permits have been received. (ii) Test check the accuracy of the amount of duty paid by multiplying the rate of excise duty with the value of goods issued as per the client s inventory register. (iii) In respect of excisable goods manufactured but remaining to be released, ensure that necessary provision for unpaid excise duty has been made. (iv) Ensure that in every case CENVAT credit has been adjusted and only net excise duty has been paid. PRIME/47 th ME /IPC 3

29 b. Preliminary Expenses: The expenditure incidental to the creation and floating of a company includes stamp duties, registration fees, legal costs, accountant s fees, cost of printing, etc. The contracts relating to preliminary expenses should be examined. If preliminary expenses incurred by promoters have been reimbursed to them by the company, the resolution of the Board of Directors and the power in the Articles to make such re- imbursement should be seen. The bills and statements supporting each item of preliminary expenses should be checked. It should be seen that no expenses other than those which constitutes preliminary expenses are booked under this head. The auditor can cross check the amount of preliminary expenses with that disclosed in the prospectus, statutory report and the balance sheet. Any amount paid in excess of the amount disclosed in the prospectus should have been approved by the shareholders. Expenditure in connection with the preliminary expenses should be treated as an expense in the year of incurring and not to be carry forwarded for writing off in future years as per the compliance of AS 26. Underwriting commission and brokerage paid for shares and debentures should not be included under the head preliminary expenses. c. Income from Investments: If the investments are many, the client generally would have an Investment Register. In such a case, the dividend income is first vouched by reference to the counterfoils of Dividend Warrants and the interest on securities by reference to the tax-deduction certificates, issued by the Reserve Bank. Afterwards the amounts collected are traced into the Investment Register; it is scanned to find out whether interest or dividend, relating to any investment, has remained unrealized. If so, the reasons thereof are ascertained. In order that the gross amount of interest are disclosed in the Statement of Profit and Loss, the tax deducted out of interest is debited to the Income-tax Account and credited to Interest Account. The auditor should verify that this has been done. The auditor should examine the separate ledger accounts kept for each investment or loan given. The dates on which dividends or interest payments generally fall due should also be noted. The counterfoil of dividend warrants should be seen. These should be tallied with the records of investment. Where investments are sold ex-dividend, it should be seen that the dividends are subsequently received. Similarly when a purchase is on cum dividend basis, the receipt of dividend should be checked. In case of interest on deposit with banks, verification should be done by reference to the bank statement and the agreed rate of interest. The receipts of dividends and interest should be addressed to the bank statement for encashment. It should be ensured that the interest and dividend received are credited to the respective account in full i.e., before deduction of tax at source and the tax deducted at source should be debited to an appropriate account. It should be further seen that the certificate for tax deducted at source exists in each case. d. Purchases Returns: If a part or whole of a consignment of goods found to be defective or of a poor quality, the goods sometime are returned to the supplier and his account is debited. The debit is raised in the Purchase Returns Books, on the basis of Debit Note. The supplier, on receiving the Debit Note, issues Credit Note indicating his acceptance of the debit. Thus, on receipt it is attached to Debit Note. All these entries should be verified by reference to the record kept in the Goods Outwards Book or the Stores Record. The original invoices through which the purchases were made also should be referred to for confirming that the nominal account, which was originally debited on the purchases being made, has been subsequently credited on a part or whole of the goods contained in the consignment having been returned. Where the purchase returns are large, either at the beginning or at the close of the year, these might be fictitious, entered to cover bogus purchases recorded earlier. On such a consideration the nature thereof should be ascertained. The rebate in price and allowances granted by the suppliers should be adjusted through the journal on the basis of Credit Notes received from the suppliers. These should be verified by reference to the original invoices. PRIME/47 th ME /IPC 4

30 4. a) Identifying and Assessing the Risks of Material Misstatement Estimation Uncertainty: The degree of estimation uncertainty associated with an accounting estimate may be influenced by factors such as: The extent to which the accounting estimate depends on judgment. The sensitivity of the accounting estimate to changes in assumptions. The existence of recognised measurement techniques that may mitigate the estimation uncertainty (though the subjectivity of the assumptions used as inputs may nevertheless give rise to estimation uncertainty). The length of the forecast period, and the relevance of data drawn from past events to forecast future events. The availability of reliable data from external sources. The extent to which the accounting estimate is based on observable or unobservable inputs. The degree of estimation uncertainty associated with an accounting estimate may influence the estimate s susceptibility to bias. Matters that the auditor considers in assessing the risks of material misstatement may also include: The actual or expected magnitude of an accounting estimate. The recorded amount of the accounting estimate (that is, management s point estimate) in relation to the amount expected by the auditor to be recorded. Whether management has used an expert in making the accounting estimate. The outcome of the review of prior period accounting estimates. High Estimation Uncertainty and Significant Risks. Examples of accounting estimates that may have high estimation uncertainty include the following: Accounting estimates that are highly dependent upon judgment, for example, judgments about the outcome of pending litigation or the amount and timing of future cash flows dependent on uncertain events many years in the future. Accounting estimates that are not calculated using recognised measurement techniques. Accounting estimates where the results of the auditor s review of similar accounting estimates made in the prior period financial statements indicate a substantial difference between the original accounting estimate and the actual outcome. Fair value accounting estimates for which a highly specialised entity-developed model is used or for which there are no observable inputs. A seemingly immaterial accounting estimate may have the potential to result in a material misstatement due to the estimation uncertainty associated with the estimation; that is, the size of the amount recognised or disclosed in the financial statements for an accounting estimate may not be an indicator of its estimation uncertainty. In some circumstances, the estimation uncertainty is so high that a reasonable accounting estimate cannot be made. The applicable financial reporting framework may, therefore, preclude recognition of the item in the financial statements, or its measurement at fair value. In such cases, the significant risks relate not only to whether an accounting estimate should be recognised, or whether it should be measured at fair value, but also to the adequacy of the disclosures. With respect to such accounting estimates, the applicable financial reporting framework may require disclosure of the accounting estimates and the high estimation uncertainty associated with them. Where the auditor determines that an accounting estimate gives rise to a significant risk, the auditor is required to obtain an understanding of the entity s controls, including control activities. In some cases, the estimation uncertainty of an accounting estimate may cast significant doubt about the entity s ability to continue as a going concern. SA 570 establishes requirements and provides guidance in such circumstances. PRIME/47 th ME /IPC 5

31 b) Methods of Sampling: There are many methods of selecting samples. The principal methods are as follows - (i) Random selection (applied through random number generators, for example, random number tables). Stratified Sampling is one of the methods of Random Sampling. This method involves dividing the whole population to be tested in a few groups called strata and taking a sample from each of them. Each stratum is treated as if it were a separate population and if proportionate items are selected from each of the stratum. The groups into which the whole population is divided is determined by the auditor on the basis of his judgement e.g. entire expense vouchers may be divided into: (1) Vouchers above ` 1,00,000 (2) Vouchers between ` 25,000 and ` 1,00,000 (3) Vouchers below ` 25,000 The auditor can then decide to check all vouchers above ` 1,00,000, 50% between ` 25,000 and ` 1,00,000 and 25% of those below ` 25,000. The reasoning behind the stratified sampling is that for a highly diversified population, weights should be allocated to reflect these differences. This is achieved by selecting different proportions from each strata. It can be seen that the stratified sampling is simply an extension of simple random sampling. (ii) Systematic selection, in which the number of sampling units in the population is divided by the sample size to give a sampling interval, for example 50, and having determined a starting point within the first 50, each 50th sampling unit thereafter is selected. Although the starting point may be determined haphazardly, the sample is more likely to be truly random if it is determined by use of a computerised random number generator or random number tables. When using systematic selection, the auditor would need to determine that sampling units within the population are not structured in such a way that the sampling interval corresponds with a particular pattern in the population. (iii) Monetary Unit Sampling is a type of value-weighted selection in which sample size, selection and evaluation results in a conclusion in monetary amounts. (iv) Haphazard selection, in which the auditor selects the sample without following a structured technique. Although no structured technique is used, the auditor would nonetheless avoid any conscious bias or predictability (for example, avoiding difficult to locate items, or always choosing or avoiding the first or last entries on a page) and thus attempt to ensure that all items in the population have a chance of selection. Haphazard selection is not appropriate when using statistical sampling. (v) Block selection involves selection of a block(s) of contiguous items from within the population. Block selection cannot ordinarily be used in audit sampling because most populations are structured such that items in a sequence can be expected to have similar characteristics to each other, but different characteristics from items elsewhere in the population. Although in some circumstances it may be an appropriate audit procedure to examine a block of items, it would rarely be an appropriate sample selection technique when the auditor intends to draw valid inferences about the entire population based on the sample. c) Director s Responsibility statement: The provisions related to Director s Responsibility Statement are provided under section 134(5) of the Companies Act, According to it, the report of board of directors on annual accounts shall also include a Director s Responsibility Statement indicating therein: (i) in the preparation of the annual accounts, the applicable accounting standards had been followed along with proper explanation relating to material departures; PRIME/47 th ME /IPC 6

32 (ii) the directors had selected such accounting policies and applied them consistently and made judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period; (iii) the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities; (iv) the directors had prepared the annual accounts on a going concern basis; and (v) the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively. For the purposes of this clause, the term internal financial controls means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. (vi) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively. 5. a) Advantages of audit of accounts of a partnership firm: Advantages are as follows: (i) Audited accounts provide a convenient and reliable means of settling accounts between the partners and thereby possibility of dispute among them is mitigated. (ii) On the retirement/death of a partner, audited accounts constitutes a reliable evidence for computing the amount due to the retiring partner or representative of deceased partner. (iii) Audited accounts are generally accepted by the Income tax authorities for computing the assessable income. (iv) Audited accounts are relied upon by banks for advancing loan. (v) Audited accounts can be helpful in the negotiation for sale or admission of a new partner. (vi) It is an effective safeguard against any undue advantage being taken by a working partner as against the non working partners. b) (i) Sale of Investments without Proper Authorisation: There should be proper authority for sale of investments. Detailed records regarding disposal of investments should be maintained along with proper documentation. In the instant case, Mr. Ram had sold the investments without discussing the matter with the other committee members. This matter, therefore, needs to be addressed by the auditor as purchase and sale can only be authorised by the Committee. The fact that Mr. Ram believed that the prices would fall and the company would suffer a loss if the investments are not sold is not good enough for Mr. Ram to act as per his discretion. A profit of ` 1 lakh from such sale is also not a sufficient reason to act since one cannot rule out the possibility of earning higher profits. The formation of the Committee by A Ltd, to control sale and purchase of investments is, perhaps, one of the best aspects of internal control system to eliminate the possibility of manipulation, if any, in sale and purchase of investments. The statutory auditor may however, examine whether there have been any other instances involving non-observance of internal control system and procedures. In any case, the Committee must approve the transaction and authorise the same from the view point of the statutory auditor. (ii) Sale and Leaseback of Vehicles: Under a lease agreement, the lessee acquires the right to use an asset for an agreed period of time in consideration for payment of rent to the lessor. The legal ownership of the asset remains with the lessor. In the instant case, the company had sold vehicles to two leasing companies to meet its liquidity crises and took them back on lease. In the notes to the accounts it had disclosed about instalments payable to different leasing companies, but without disclosing the true nature of the transaction as covered by AS 19, Leases. The PRIME/47 th ME /IPC 7

33 transaction entered into by the company is a classic case of sale and leaseback transaction. In case of such transactions, the sale price of assets and lease rentals normally do not represent fair value since the same are negotiated as a package. In case such a transaction is an operating lease and it is clear that the rentals and the sale price are established at fair value, then in effect it is a normal sale transaction and any profit or loss is normally recognised immediately. If the sale price is below fair value, any profit or loss is recognised immediately, except that, if the loss is compensated by future rentals at below market price, it is deferred and amortized in proportion to the rental payments over the useful life of the asset. If the sale price is above fair value, the excess over fair value is deferred and amortized over the useful life or the asset. Therefore, it would be important for the auditor to determine whether the amount of instalments payable is fair having regard to sale price of assets. In case the leaseback is a finance lease, it is not appropriate to regard an excess of sales proceeds over the carrying amount as income. Such excess is deferred and amortised over the lease term in proportion to the depreciation of the leased asset. Similarly, it is not appropriate to regard a deficiency as loss. Such deficiency is deferred and amortised over the lease term. Further, disclosure shall have to be made separately of such transaction in terms of AS 5. The auditor should, therefore, suitably qualify his report since proper disclosures have not been made as per the requirement of accounting standards. (iii) Non-provision of depreciation: As per AS 6 on "Depreciation Accounting", depreciation is a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Thus, depreciation has to be charged even in case of these assets which are not used at all during the year but by mere effluxion of time provided such assets qualify as depreciable assets. When the machinery has been imported by one entity, it means it was intended to be used for the purpose of business. Depreciation in respect of this machinery ought to have been provided in the accounts for all the previous years. If there is an intention to use an asset, though it may not have actually been used, it is a 'constructive' or 'passive' use and eligible for claim of depreciation. Thus, the auditor should ensure compliance with all these requirements and in case of failure he should qualify the report. 6. a) Computer Aided Audit Techniques (CAATs): The use of computers may result in the design of systems that provide less visible evidence than those using manual procedures. CAATs are such techniques applied through the computer which are used in the verifying the data being processed by it. System characteristics resulting from the nature of EDP processing that demand the use of Computer Aided Audit Techniques (CAAT) are: (i) Absence of input documents: Data may be entered directly into the computer systems without supporting documents. In on-line transaction systems, written evidence of individual data entry authorization, e.g., credit limit approval may not be available. (ii) Lack of visible transaction trail: Certain data may be maintained on computer files only. In a manual system, it is normally possible to follow a transaction through the system by examining source documents, books of account, records, files and reports. In an EDP environment, however, the transaction trail may be partly in machine-readable form, and it may exist only for a limited period of time. (iii) Lack of visible output: In a manual system, it is normally possible to examine visually the results of processing. In EDP systems, the results of processing may not be printed or only a summary data may be printed. Thus, the lack of visible output may result in the need to access data retained on machine readable files. (iv) Ease of Access to data and computer programmes: Data and computer programmes may be altered at the computer or through the use of computer equipment at remote locations. Therefore, in the absence of appropriate controls, there is an increased potential for unauthorized access to, and allocation of, data and programmes by persons inside or outside the entity. PRIME/47 th ME /IPC 8

34 (v) Role of C&AG in the Audit of a Government company : Role of C&AG is prescribed under sub section (5), (6) and (7) of section 143 of the Companies Act, In the case of a Government company, the comptroller and Auditor-General of India shall appoint the auditor under sub-section (5) or sub-section (7) of section 139 i.e. appointment of First Auditor or Subsequent Auditor and direct such auditor the manner in which the accounts of the Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the audit report to the Comptroller and Auditor-General of India which, among other things, include the directions, if any, issued by the Comptroller and Auditor- General of India, the action taken thereon and its impact on the accounts and financial statement of the company. The Comptroller and Auditor-General of India shall within sixty days from the date of receipt of the audit report have a right to, (i) conduct a supplementary audit of the financial statement of the company by such person or persons as he may authorize in this behalf; and for the purposes of such audit, require information or additional information to be furnished to any person or persons, so authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General of India may direct; and (ii) comment upon or supplement such audit report. It should be noted that any comments given by the Comptroller and Auditor General of India upon, or supplement to, the audit report shall be sent by the company to every person entitled to copies of audited financial statements under sub-section (1) of section 136 i.e. every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled and also be placed before the annual general meeting of the company at the same time and in the same manner as the audit report. Test Audit : Further, without prejudice to the provisions relating to audit and auditor, the Comptroller and Auditor- General of India may, in case of any company covered under sub-section (5) or sub-section (7) of section 139, if he considers necessary, by an order, cause test audit to be conducted of the accounts of such company and the provisions of section 19A of the Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit. (vi) Audit of Hospital: While auditing the Income and Expenditure Account of a charitable institution running a hospital, following special points may be examined: (i) Verify the register of patients with duplicate copy of bills and patients admission record to see that bills have been properly and correctly prepared for all the services, tests and treatments. (ii) Check cash collections from patients by tracing the receipt issued into cash book. (iii) Check receipt of interest, rent, dividend etc., with receipt counterfoil into cash book and bank book and ensure that all such income has been duly accounted for. (iv) Check collection of subscription, donations from the receipt issued, correspondence etc., into cash book. (v) Verify that all grants from government and other bodies have been duly accounted for and have been applied in the manner as specified. (vi) Verify all recurring nature of revenue expenditure, with necessary evidence like bill, authority, period etc. (vii) Examine the internal check as regards the receipt and issue of stores, medicines, linen etc., to ensure that these have been properly recorded and issued/consumed only on proper authorisation. (viii) See that depreciation has been written off in respect of all the assets at appropriate rate and method as in the earlier year. PRIME/47 th ME /IPC 9

35 (ix) Verify the receipts from supply of food and canteen receipts and compare the same with previous year as regards number of patients. (x) Ensure that all outstanding liabilities have been adequately provided for and similarly all accrued incomes and receipts have been duly accounted for. (xi) Obtain inventory of stock and stores as at the end of the year and physically check a percentage of items. 7. a. Government Expenditure Audit: Audit of government expenditure is one of the major components of government audit conducted by the office of C&AG. The basic standards set for audit of expenditure are to ensure that there is provision of funds authorised by competent authority fixing the limits within which expenditure can be incurred. Audit against Rules & Orders is one such standard. For this, the auditor has to see that the expenditure incurred conforms to the relevant provisions of the statutory enactment and is in accordance with the financial rules and regulations framed by the competent authority. b. Joint Audit: The practices of appointing chartered accountants as joint auditors is quite widespread in big companies and corporations, joint audit basically implies pooling together the resources and expertise of more than one firm of auditors to render an expert job in a given time period which may be difficult to accomplish acting individually. It essentially involves sharing of the total work. When more than one auditor is appointed to audit large entities, such auditors are called joint auditors. Joint auditors have a collective responsibility to report on the financial statements. SA 299, Joint Audit deals with duties, rights and professional responsibilities of joint auditors. The joint auditors should follow the principles of division of work and coordination while conducting joint audits. Advantages of Joint Audit (i) Pooling and sharing of expertise (ii) Advantage of mutual consultation. (iii) Lower work load (iv) Better quality of work performance. (v) Improved service to the client. (vi) Displacement of the auditor of the company in a take-over often obviated. (vii) In respect of multinational companies, the work can be spread using the expertise if the local firms which are in a better position to deal with detailed work and the local laws and regulations. (viii) Lower staff development costs. (ix) Lower costs to carry out the work. (x) A sense of healthy competition towards a better performance. Disadvantages of Joint Audit: (i) The fees being shared. (ii) Psychological problem where firms of different standing are associated in the joint audit. (iii) General superiority complexes of some auditors. (iv) Problems of coordination of the work. (v) Areas of work of common concern being neglected. (vi) Uncertainty about the liability for the work done. (vii) Lack of clear definition of responsibility. c. Circumstances where Retiring Auditor cannot be Reappointed: In the following circumstances, the retiring auditor cannot be reappointed- (i) A specific resolution has not been passed to reappoint the retiring auditor. PRIME/47 th ME /IPC 10

36 (ii) The auditor proposed to be reappointed does not possess the qualification prescribed under section 141 of the Companies Act, (iii) The proposed auditor suffers from the disqualifications under section 141(3), 141(4) and 144 of the Companies Act, (iv) He has given to the company notice in writing of his unwillingness to be reappointed. (v) A resolution has been passed in AGM appointing somebody else or providing expressly that the retiring auditor shall not be reappointed. (vi) A written certificate has not been obtained from the proposed auditor to the effect that the appointment or reappointment, if made, will be in accordance within the limits specified under section 141(3) (g) of the Companies Act, d. Self-Revealing Errors: These are such errors the existence of which becomes apparent in the process of compilation of accounts. A few illustrations of such errors are given hereunder, showing how they become apparent- (i) Omission to post a part of a journal entry to the ledger. Trial balance is thrown out of agreement. (ii) Wrong totaling of the Purchase Register. Control Account (e.g., the Sundry Creditors Account) balances and the aggregate of the balances in the personal ledger will disagree. (iii) A failure to record in the cash book amounts paid into or withdrawn from the bank. Bank reconciliation statement will show up error. (iv) A mistake in recording amount received from X in the account of Y. Statements of account of parties will reveal mistake. From the above, it is clear that certain apparent errors balance almost automatically by double entry accounting procedure and by following established practices that lie within the accounting system but not being generally considered to be a part of it, like bank reconciliation or sending monthly statements of account for confirmation e. CARO does not apply to the following classes of Companies (a) Banking Company as defined u/s 5(c) of the Banking Regulation Act,1949, (b) Insurance Company as defined Insurance Act, 1938, (c) Company licensed to operate u/s 8, (d) One Person Company as per Sec.2 (62) and a Small Company as per Sec.2(85), (e) Private Limited Companies which satisfy all the following conditions Should not be a Subsidiary or Holding Company of a Public Company, Aggregate of Paid Up Capital and Reserves & Surplus ` 1 Crore, as on the Balance Sheet date, Total Borrowings from any Bank or Financial Institution at any point of time during the Fin. Year ` 1 Crore, Total Revenue (including Revenue from Discontinuing Operations) as disclosed in the Financial Statements as per Schedule III of the Companies Act, ` 10 Crores. [Note: Total Revenue includes Other Income also.] CFS: CARO 2016 reporting shall not apply to the Auditor s Report on Consolidated Financial Statements. PRIME/47 th ME /IPC 11

37 47 th SESSION IPC - MODEL EXAM Paper 7 - INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT No. of Questions: 7 Total Marks: 100 No. of Pages: 3 Time Allowed: 3 hrs Information Technology Section A Question 1 is compulsory and Answer any four from the rest 1. Define the following terms in brief i. Multiplexer ii. Cache memory iii. ER diagram iv. purpose of BPA v. Electronic purse (10 Marks) 2. Distinguish between the following: (a) RISC and CISC (b) MAN and WAN (c) Application Software and System Software (5 + 5=10 Marks) 3. (a) What are Decision Support Systems? Describe various characteristics of a DSS. (b) State the merits and demerits of DBMS (5 + 5=10 Marks) 4. (a) State the characteristics of grid computing. (b) Briefly explain the layers of OSI model 5. A University has 300 students. These students are divided in four categories: (i) Technical (ii) Arts (iii) Science (iv) Others Draw a flow chart for finding the percentage of the students in each category ACADEMY 6. Write Short notes on the following (I) Virtual memory (ii) EFT (iii) Database controlsprime (5 + 5=10 Marks) (10 Marks) (7 Marks) PRIME/47 th ME /IPC 1

38 Strategic Management Section-B Question number 7 is compulsory. Attempt any five questions from the rest. 7. Answer the following questions in brief a) The PESTLE framework is used for analyzing both macro and micro environment. b) Strategic vision and mission statements are needed only by large business houses. c) How is TOWS Matrix an improvement over the SWOT Analysis? Describe the construction of TOWS Matrix. d) Define concentric diversification. e) Difference between strategy formulation and strategy implementation. (5 x 3=15 Marks) 8. a) State with reasons which of the following statement is correct or incorrect: i. The main focus of six sigma is on the shareholders. (2 Marks) ii. Total Quality Management (TQM) focuses on preventing rather than detecting defects. (2 Marks) b) Distinguish between Transformational leadership style and Traditional leadership style. (3 Marks) 9. Match the following S.No Technique Meaning 1 Social Marketing Special benefits to select customers to build bond. 2 Augmented Marketing To reduce demand temporarily or permanently. 3 Direct Marketing To create, maintain or change attitudes towards particular person. 4 Relationship Marketing Applying the concepts, tools, and techniques of marketing to services. 5 Person Marketing Interact directly with customers. 6 Place Marketing Programs seeking to increase the acceptability of a social idea. 7 Differential Marketing To create, maintain or change attitudes and behavior of target audience towards an organization. 8 De-Marketing Provision of additional customer services built around actual products. 9 Services Marketing Target different market segments and design separate offers for each. 10 Organization Marketing To create, maintain or change attitudes towards particular place. (7 Marks) 10. (a) Match the following S.No INDUSTRY KEY SUCCESS FACTOR 1 Real estate development User involvement industry 2 Computer software market Capacity utilization is the key. A seat lost is lost forever. 3 Strategy consulting Acquiring land and maintaining liquidity. business 4 Information Technology project Communicating with decision makers and helping managers think more deeply about their enterprise. 5 Airline industry Providing after-sales support. (4 Marks) PRIME/47 th ME /IPC 2

39 (b) Distinguish between Vision and Mission. (3 Marks) 11. (a) Plot the following products on the Product Life Cycle (PLC). 4 o Radio o Pager o Telex o Mobile o Telephone o I-Pad (4 Marks) (b) What is six sigma? How is it different from other quality programs? Explain in brief themes of six sigma. (3 Marks) 12. (a) Distinguish between Social Marketing and Service Marketing (b) Distinguish between Top-down and Bottom-up strategic planning. 13. (4 Marks) (3 Marks) (a) In the context of Ansoff s Product-Market Growth Matrix. Identify with reasons, the type of growth strategies followed in the following cases: i. A leading producer of tooth paste, advises its customers to brush teeth twice a day to keep breath fresh. ii. A business giant in hotel industry decides to enter into dairy business. iii. One of India s premier utility vehicles manufacturing company ventures to foray into foreign markets. iv. A renowned auto manufacturing company launches ungeared scooters in the market. (Nov 14) (4 Marks) (b) Write short notes on importance of corporate culture. (3 Marks) PRIME/47 th ME /IPC 3

40 47 TH SESSION - IPC MODEL EXAM PAPER 7 - INFORMATION TECHNOLOGY & STRATEGIC MANAGEMENT SUGGESTED ANSWERS INFORMATION TECHNOLOGY SECTION A 1. i) Multiplexer A device used to share one communication line among many devices. Each device is periodically scanned at regular intervals, to collect and transmit data to and from cpu. The devices are polled periodically to check are there any data to be transmitted from each device. ii) Cache memory It is a high speed temporary memory that sits between processor and primary memory. It is used to compensate the speed difference between primary memory and CPU. It is roughly 10 times faster than primary memory (RAM) iii) ER Diagram A data model that uses basic graphical symbols to show the organization of and relationships among entities Rectangles = entities Ellipses = attributes Diamonds = relationships iv) Purpose of BPA To automate the business process such that there is a considerable savings in cost and time To survive in the market, the business need to be automated To provide faster service to customers v) Electronic purse It is a way to make payment over the internet. It is similar to pre-paid card and the user can top up the card from their account at regular intervals. It can be used to make payments similar to ATM card or credit card. Used for small currency transactions 2. i) RISC It stands for reduced instruction set computing Emphasis on software Register to Register transfer Each instruction is executed in one clock cycle code size is very large CISC Complex instruction set computing Emphasis on hardware less compilation time memory to memory transfer less RAM needed since code is short ii) MAN Spread over a city Example: cable TV network Purpose: sharing of hardware and software resources WAN Network spread across countries Separated by larger distances Government permission is required Error rate is more PRIME/47 th ME /IPC 1

41 Trouble shooting is difficult Data transfer rate is low (less than 1 Mbps) Example: Railway reservation network iii) System software: It is used to improve the performance of computer hardware and also to provide a platform to run application programs of users. Its primary objective is to control the computer system operations. (Programming Languages, Operating System (OS), Language Translators, Utility programs) Application software: Software developed for a particular or/specific task / application (Payroll, Inventory) 3. a) Decision Support System (DSS) This is an advanced information system developed to help the top level management for decision making. It integrates all departments information, process it and then gives to the top management to assist them in decision making. Features DSS Helps Top Level Management Decision Making: DSS is especially developed to assist the top level management. Because this level management takes decisions mainly in futuristic nature, predictions can be given through computer program. It may not give the solution, but helps the top level management in finding out solution for a problem. DSS Helps To Solve Unstructured Problems: The decisions taken by top level management are unstructured. This means there is no information regarding the problem. There is more risk in this type of decisions. DSS gives information for unstructured problems also. It can reduce the risk of decisions regarding unstructured problems. DSS Has User Friendly Interface: The Users of DSS are top level management only. Mostly, top level management is non-technical persons. They have very less technical and operational knowledge. Therefore, the user interface of DSS should be very easy. It should mostly contain menus, options and graphical user interfaces. b) Database A database is a coherent collection of related data stored together with minimal redundancy to serve one or more applications. Advantages Reduction in data redundancy Shared rather than independent databases Maintenance of data integrity and quality Data are self-documented Data follows prescribed rules & standards Security tools to control access, especially for writing Disadvantages: Cost of the license Experts are rare to configure and maintain a) Characteristics of grid computing It is a special type of distributed computing where different computers with in the same network share one or more resources. As a matter of fact every resource in the network is shared making the computer as a powerful super computer. Its chief feature is whenever there is a need for a resource, instead of procuring it, analyse the grid structure to find the resourdes that are idle or less used and use that resource for the current situation irrespective of the geographical location of the resource as long as they are part of the grid network. PRIME/47 th ME /IPC 2

42 b) OSI Model PRIME/47 th ME /IPC 3

43 START CLEAR ALL WORKING LOCATIONS I = 1 READ ST I = 1+1 T T IF ST = T F IF ST = A F IF ST = S S4 = S4 + 1 IF I < 300 S1 = S1 + 1 S2 = S2 + 1 T S3 = S3 + 1 T PS1 = S1/300 PS2 = S2/300 PS3 = S3/300 PS4 = S4/300 PRINT PS1, PS2, PS3, PS4 PRIME/47 th ME /IPC 4 STOP ABBREVIATIONS: ST = Students PS1-PS4 = % T = True S1 to S4 = No. of Students F = False T = Technical A = Arts S = Science

44 6. i) Virtual Memory It allows the programmer to use secondary storage to store programs that requires more primary storage than that is available. Parts of the program in use are brought from secondary storage to primary storage when they are needed. These parts of program are referred to as page. Only those program pages that are currently to be used are needed in primary storage. When a page is no longer needed, the primary storage that it occupies can be reused for some other purpose. Virtual storage relieves the programmer of dividing his/her program to fit into an inadequately sized primary storage. 7. ii) Electronic funds transfer (EFT) It is the electronic exchange, transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems. ATM Automated Teller Machines is a computerized telecommunications device that enables the clients of a financial institution to perform financial transactions without the need for a cashier, human clerk or bank teller. These machines are used with a debit card / EFT card and the user has to insert the card into ATM and provide PIN (Personal Identification Number) to perform financial transaction. Point of Sale (POS) transaction Some debit card/eft allows the transfer of money from the consumer s account to the merchant s account while shopping. Telephone Transfers Customers can transfer funds from one account to another account through telephonic instructions Pre-authorized Transfer The account holder of a bank authorizes either the bank or a third party to deposit or withdraw money from his account. iii) Database controls Sequence check master and transaction file: Correct sequence of processing of the transaction and the corresponding master file record. This is mandatory otherwise the error created at this stage will lead to losing of critical data. Ensure all records in the file are processed: To ensure that all the records in the trasnaction file are processed till the eof condition is reached. The same is also applicable for master file-system Process multiple transaction for a single record : A single master record may lead to multiple transactions. For example dispatch of a product to different distribution centers. The order of processing of transaction codes is very important. STRATEGIC MANAGEMENT Section B a) Incorrect: The PEST Analysis is used to scan only the external macro-economic environment in which a firm operates. It involves identification of political, economic, socio-cultural, technological, legal and environmental influences on an organization. b) Incorrect: Every organization whether it is large or small requires strategic vision and mission statements. Organizations irrespective of their size face similar business environment and have to sail through competition. Small organizations have to plan strategies for their survival in the market where large organizations are also present. c) TOWS matrix, builds on the information developed for the SWOT analysis. The TOWS Matrix helps in matching the external threats and opportunities with the internal weaknesses and strengths of the PRIME/47 th ME /IPC 5

45 Organization and thus helps us make strategic choices. Once you have listed your SWOT, you need to match and convert. d) Concentric diversification is about getting into new products with technological synergies with existing product lines but the products themselves may appeal to a different group of customers. Example: Addition of tomato ketchup and sauce to the existing Maggi 2-minutes noodle brand processed items of Food Specialties Ltd. e) 8. a) b) S.No. Formulation Implementation a. Planning function Doing function b. Development of Strategy Converting strategy into action c. Positioning forces before action Managing forces during action d. Focuses on effectiveness Focuses on efficiency e. Intellectual process Operational process f. Requires analytical skills Requires leadership skills g. Requires co-ordination among few Requires co-ordination among many h. Precedes Implementation Follows Strategy Formulation i. Incorrect: Although any business action may ultimately create or erode shareholders wealth, the main focus of six-sigma is on delivering value to the customers. Six sigma aims in improving customer satisfaction. ii. Correct: TQM is a management philosophy that prevents poor quality products and services, rather than sorting out defects. The focus is on prevention, not on cure. S. No Transactional leadership style Transformational leadership style a) Leaders are aware of the link between the effort and reward Leaders motivate followers to act beyond the framework of effort and reward. b) Leadership is responsive and its basic orientation is dealing with present issues c) Leaders rely on standard forms of reward and punishment to control followers d) Leaders motivate followers by setting goals and promising rewards Leadership is proactive and forms new expectations in followers Leaders inspire and provide individualized intellectual stimulation to their followers Leaders create learning opportunities for their followers PRIME/47 th ME /IPC 6

46 e) Leadership depends on the leader s power to reinforce subordinates for their successful completion of the bargain Leaders have good visioning, rhetorical and management skills, to develop strong emotional bonds with followers 9. S.No Technique Meaning 1 Social Marketing Programs seeking to increase the acceptability of a social idea. 2 Augmented Marketing Provision of additional customer services built around actual products. 10. a) 3 Direct Marketing Interacts directly with consumer. 4 Relationship Marketing Special benefits to select customers to build bond. 5 Person Marketing 6 Place Marketing To create, maintain or change attitudes towards particular person. To create, maintain or change attitudes towards particular place. 7 Differential Marketing Target different market segments and design separate offers for each. 8 De-Marketing To reduce demand temporarily or permanently. 9 Services Marketing Applying the concepts, tools, and techniques of marketing to services. 10 Organization Marketing To create, maintain or change attitudes and behavior of target audience towards an organization. S.No INDUSTRY KEY SUCCESS FACTOR 1 Real estate development industry Acquiring land and maintaining liquidity 2 Computer software market Providing after-sales support. 3 Strategy consulting business Communicating with decision makers and helping managers think more deeply about their enterprise. 4 Information Technology project User involvement. 5 Airline industry Capacity utilization is the key. A seat lost is lost forever. b) Scope Vision Statement Mission Statement PRIME/47 th ME /IPC 7

47 Time Organization's future. Organization's present. Function Lists where the organization sees itself some years from now. Lists what the organization is doing now. Shapes What? Shapes customers understanding of why they should deal with the organization. Hence external in nature. Communicates both the purpose and values of the organization. Defines the key measure(s) of the organization s success. Hence internal in nature. Defines the organization's purpose and primary objectives. 11. a) b) Six-Sigma is, A management driven, scientific methodology for product and process improvement which creates breakthroughs in financial performance and customer satisfaction. Key characteristics unique about Six-sigma: Six sigma themes: 1. Genuine customer focus Six sigma initiative in organization is evaluated in terms of its perceived effect on the customer PRIME/47 th ME /IPC 8