GCAA. 1. (a) Compute Basic Earnings Per Share. Net profit for the year 2010

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1 GCAA No. of Pages: 4 Total Marks: 100 No of Questions: 7 Time Allowed: 3 Hrs Question No.1 is compulsory. Answer any 5 questions from the remaining 6 questions. Working notes should form part of the answers Wherever necessary suitable assumptions may be made by Students 1. (a) Compute Basic Earnings Per Share. Net profit for the year ,00,000 Net profit for the year ,00,000 No. Of shares outstanding prior to rights issue 5,00,000 shares Right issue price 15 Last date to exercise rights 1 st March 2011 Rights issue is one new share for each five outstanding (i.e. 1,00,000 new shares) Fair value of one equity share immediately prior exercise of rights on 1 st March 2011 was 21. (b) A Limited Company closed its Accounting Year on and the accounts for that period were considered and approved by the board of directors on 20 th Aug, The company was engaged in laying pipe line for an oil company deep beneath the earth. While doing the boring work on it had met a rocky surface for which it was estimated that there would be an extra cost to the tune of 80 lakhs. You are required to state with reasons, how the event would be dealt with in the financial statements for the year ended (c) Kalim Ltd. borrowed US $4,50,000 on , which will be repaid on X Ltd. prepares financial statement ending on Rate of exchange between reporting currency (INR) and foreign currency (USD) on different dates as under: US $ = US $ = US $ =49.50 (d) Cost of a machine acquired on was 1,00,000. The machine is expected to realise 5000 at the end of its working life of 10 years. Straight-line depreciation of 9500 per year has been charged upto For and from , the company switched over to 17% p.a. reducing balance method of depreciation in respect of the machine. The new rate of depreciation is based on revised useful life of 13 years. The new rate shall apply with retrospective effect from discuss the implications of such change. (4x5 = 20 Marks) 2. A, B and C carry on business in partnership sharing profits and losses in the proportions of 1/2, 3/8 and 1/8 respectively. On 31 st March 2011, they agreed to sell their business to a limited company. Their position on that date was as follows: A s Capital 40,000 Freehold Property 48,000 B s Capital 30,000 Machinery 42,000 C s Capital 26,000 Book Debts 15,000 Loan on Mortgage 16,000 Stock 23,000 Sundry Creditors 18,000 Cash 2,000 1,30,000 1,30,000 PRIME / ME33/ IPCC 1

2 The company took the following assets at the valuation shown below: Freehold Property 61,000 Machinery 31,800 Book Debts 14,000 Stock 22,000 Goodwill 10,000 The company also agreed to pay the creditors which was agreed at 17,700. The company paid 67,000 in fully paid shares of 10 each and the balance in cash. The expenses amounted to Prepare Ledger Accounts in the books of the firm. (16 Marks) 3 The Balance Sheet of A Limited and B Limited as at 31 st March, 2011 are as follows: Liabilities A Ltd. B Ltd. Assets A Ltd. B Ltd. Equity share of Rs. 20,00,000 12,00,000 Sundry Assets 30,00,000 14,00, each General reserve 4,00,000 2,20,000 40,000 Equity - 4,00,000 shares in A Ltd. Creditors 6,00,000 3,80,000 30,00,000 18,00,000 30,00,000 18,00,000 A Ltd. absorbed B Ltd. on the basis of intrinsic value of the shares. The purchase consideration is to be discharged in fully paid-up equity shares. A sum of 1,00,000 is owed by A Ltd. to B Ltd., also included in the stock of A Ltd. is 1,20,000 goods supplied by B Ltd. at cost plus 20%. Give Journal entries in the books of both the companies, if entries are made at intrinsic value. Also prepare Balance Sheet of A Ltd. after absorption. (16 Marks) 4 (a) A Ltd. has a retail branch at Kanpur. Goods are sold to customers at cost plus 100%. The wholesale price is cost plus 80%. Goods are invoiced to Kanpur at wholesale price. From the following particulars, find out the profit made at Head Office and Kanpur for the year ended 31 st March Head office Kanpur Stock on April 1, ,25,000 - Purchases 21,50,000 - Goods sent to branch (at invoice value) - 9,54,000 Sales 28,53,000 9,50,000 Stock on March 31, ,60,000 99,000 Sales at Head Office are made only on wholesale basis and that at Branch only to customers. Stock at branch is valued at invoice price. (8 Marks) PRIME / ME33/ IPCC 2

3 (b) A firm had two departments, cloth and readymade clothes. The clothes were made by the firm itself out of cloth supplied by the cloth department at its usual selling price. From the following figures prepare departmental Trading and Profit and Loss Accounts for the year ended 31 st March, 2011: Cloth Department Readymade Clothes Opening stock on 1 st April, ,00,000 50,000 Purchases 20,00,000 15,000 Sales 22,00,000 4,50,000 Transfer to Readymade Clothes Department 3,00,000 - Expenses Manufacturing - 60,000 Selling 20,000 6,000 Stock on 31 st March,2011 2,00,000 60,000 The stocks in the readymade clothes department may be considered as consisting of 75% cloth and 25% other expenses. The Cloth Department earned gross profit at the rate of 15% in General Expenses of the business as a whole came to 1,01,000. (8 Marks) 5 From the following balances extracted from the books of Perfect General Insurance Company Limited as on you are required to prepare Revenue Accounts in respect of Fire and marine Insurance business for the year ended and a Profit and Loss Account for the same period: Director s Fees 80,000 Interest Received 19,000 Dividend Received 1,00,000 Fixed Assets ( ) 90,000 Provision for Taxation (as on Income-tax paid during the ) 85,000 Year 60,000 Fire Marine Outstanding claims on ,000 7,000 Claims paid 1,00,000 80,000 Reserve for Unexpired Risk on ,00,000 1,40,000 Premiums Received 4,50,000 3,30,000 Agent s Commission 40,000 20,000 Expenses of Management 60,000 45,000 Re-insurance Premium(Dr.) 25,000 15,000 The following additional points are also to be taken into account: (a) Depreciation on Fixed Assets to be provided at 10% p.a. (b) Interest accrued on investments 10,000. (c) Closing provision for taxation on be maintained at 1,24,138. (d) Claims outstanding on were Fire Insurance 10,000; Marine Insurance 15,000. (e) Premium outstanding on were Fire Insurance 30,000; Marine Insurance 20,000. (f) Reserve for unexpired risk to be maintained at 50% and 100% of net premiums in respect of Fire and Marine Insurance respectively. (g) Expenses of management due on were 10,000 for Fire Insurance and 5000 in respect of Marine Insurance. (16 Marks) PRIME / ME33/ IPCC 3

4 6 (a) A Electricity Company laid down a Main at a cost of 16,00,000. Some years later the company laid down an auxiliary Main for 1/4 th of the old Main at a cost of 6,00,000. It also replaced the rest of the length of the old Main at a cost of 18,00,000 the cost of material and labour gone up by 15%. Sale of old materials realised 40,000. Old materials valued at 40,000 were used in renewal and those valued at 60,000 were used in auxiliary Main. Show the Journal Entries for recording the above transactions. Show workings. (8 Marks) (b) On 31 st March 2010, Uncertain Bank Ltd. had a balance of 9 crores in rebate on bills discounted account. During the year ended 31 st March 2011, Uncertain Bank Ltd. discounted bills of exchange of 4000 crores charging interest at 18% p.a. the average period of discount being for 73 days. Of these, the bills of exchange of 600 crores were due for realisation from the acceptors/ customers after 31 st March 2011, the average period outstanding after 31 st March 2011, being 36.5 days. Uncertain Bank Ltd. asks you to pass journal entries and show the ledger accounts pertaining to: (a) Discount of bills of exchange and (b) Rebate on bills discounted. (8 Marks) 7 Answer any Four: (a) S Ltd. decides to absorb T Ltd. The balance Sheet of T Ltd. is as follows: Liabilities Assets 3,000 equity shares of 100 each 3,00,000 Sundry net Assets 2,90,000 (fully paid) Preference shares 60,000 Profit and Loss A/c 70,000 3,60,000 3,60,000 S Ltd. agrees to take over the net assets of T Ltd. An equity share in T Ltd. for purposes of absorption is 70. S Ltd agrees to pay 60,000 in cash for payment to preference shareholders and the balance in the form of its equity shares valued at 120 each. Ascertain the purchase consideration. (b) 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 (c) What are prior period items? (d) Explain dilute earnings per share. (e) What are intangible assets? (5x4 = 20 Marks) PRIME / ME33/ IPCC 4

5 PRIME ACADEMY 33 RD SESSION MODEL EXAM - IPCC - ADVANCED ACCOUNTING SUGGESTED ANSWERS 1. a. Fair value of shares immediately prior to exercise of rights + Total amount received from exercise Number of shares outstanding prior to exercise + number of shares issued in the exercise (21* 5,00,000 shares) + (15*1,00,000 shares) 5,00,000 shares + 1,00,000 shares Theoretical ex-rights fair value per share = 20 Computation of adjustment factor: Fair value per share prior to exercise of rights Theoretical ex-rights value per share 21 = Computation of earnings per share: EPS for the year 2010 as originally reported: 11,00,000 / 5,00,000 shares = 2.20 EPS for the year 2011 restated for rights issue: 11,00,000 / (5,00,000 shares*1.05) = 2.10 EPS for the year 2011 including effects of rights issue: (5,00,000*1.05*2/12) + (6,00,000*10/12) = 5,87,500 shares EPS = 15,00,000/5,87,500 =2.55 b. c. d. Para 3.2 of AS 4 (Revised) on Contingencies and Events Occurring after the Balance Sheet Data defines events occurring after the balance sheet date as significant events, both favourable and unfavourable, that occur between the balance sheet date and the date on which financial statements are approved by the Board of Directors in the case of a company. The given case is discussed in the light of the above mentioned definition and requirements given in paras of the said AS 4 (Revised). In this case the incidence, which was expected to push up cost became evident after the date of approval of the accounts. So that was not an event occurring after the balance sheet date. However, this may be mentioned in the Directors Report. Journals in the Books of Kalim Ltd Date Particulars (Dr.) (Cr.) Bank Account (4,50,000 * 48) Dr. 21,60,000 To Foreign Loan Account 21,60, Foreign Exchange Difference Account Dr. 4,50,000 To Foreign Loan Account[4,50,000*(49-48)] 4,50, Foreign Exchange Difference Account Dr. 2,25,000 Foreign Loan Account Dr. 26,10,000 To Bank Account 28,35,000 WDV of asset at the end of = 1,00,000 9,500*2 = 81,000 WDV of asset at the end of (by reducing balance method) = 1,00,000(1-0.17)^2 = 68,890 PRIME / ME33/ IPCC 5

6 Depreciation to be charged in = 81,000-68,890) + 17% of 68,890 = 23,821 PRIME / ME33/ IPCC 6

7 2. Dr. Cr. Realisation Account Mar. To Sundry Assets: Mar. 31 By Loan on 16, Mortgage Freehold 48,000 Mar. 31 By Sundry Creditors 18,000 Property Machinery 42,000 Mar. 31 By Ltd. Company s A/c Book Debts 15,000 F. Property 61,000 Stock 23,000 1,28,000 Machinery 31,800 Mar. To Cash 1,500 Book Debts 14, Expenses Mar. 31 To Cash Loan paid 16,000 Stock 22,000 Mar. To Profit Goodwill 10, transferred : A s Capital, 1/2 4,800 1,38,800 B s Capital, 3/8 3,600 Less: Creditors 17,700 C s Capital, 1/8 1,200 9,600 1,21,100 1,55,100 1,55,100 Limited Company s Account Mar. 31 To Realisation A/c 1,21,100 Mar. 31 By Shares in Ltd. 67,000 Purchase consideration By Cash 54,100 1,21,100 1,21,100 Cash Account Mar. 31 To Balance b/fd 2,000 Mar. 31 By Realisation A/c Mar. 31 To Ltd Company 54,000 Expenses 1,500 Loan 16,000 By Capital Accounts A 16,380 B 12,280 C 9,940 38,600 56,100 56,100 Share in Ltd. Co Mar. 31 To Ltd. Company 67,000 Mar. 31 By A s Capital A/c 28,420 Mar. 31 By B s Capital A/c 21,320 Mar. 31 By C s Capital A/c 17,360 67,000 67,000 PRIME / ME33/ IPCC 7 Capital Account A B C A B C

8 To Shares in Ltd Co 28,420 21,320 17,360 By Balance b/d 40,000 30,000 26,000 To Cash (balance) 16,380 12,280 9,940 By Realisation A/c Profit 4,800 3,600 1,200 44,800 33,600 27,200 44,800 33,600 27,200 Note: Total number of shares received from the limited company is 6,700. These have been divided among A, B and C in the ratio of 448, 336 and 272 or 28, 21 and 17 respectively, namely, in the ratio of the amount finally due to them. Hence, A gets 6,700/66 *28 or 2,842 shares of 28,420 B gets 6,700/66 *21 or 2,132 shares of 21,320 C gets 6,700/66 *17 or 1,736 shares of 17, In the Books of B Ltd. Journal Entries Dr. () Cr. () i. Realisation A/c Dr. 14,00,000 To Sundry assets A/c 14,00,000 (Being assets transferred to realisation account on sale of business of A Ltd.) ii. Creditors A/c Dr. 3,80,000 To Realisation A/c 3,80,000 (Being creditors transferred to realisation account on sale of business of A Ltd.) iii. Equity Share Capital A/c Dr. 12,00,000 General Reserve A/c Dr. 2,20,000 To Equity Shareholders A/c 14,20,000 (Being transfer of share capital and general reserve to shareholders account) iv. A Ltd Dr. 10,20,000 To Realisation A/c 10,20,000 (Being purchase consideration due W.N.2) v. Equity shares in A Ltd. Dr. 10,20,000 To A Ltd 10,20,000 (Being purchase consideration received by A Ltd.) vi. Equity shares in A Ltd. A/c Dr. 80,000 To Realisation A/c 80,000 (Being appreciation in the value of shares of A Ltd. brought into books as entries are to be made at intrinsic value) vii. Realisation A/c Dr. 80,000 To Equity shareholders a/c 80,000 (Being profit on realisation transferred to shareholders account) viii. Equity shareholders A/c Dr. 15,00,000 To Equity shares in A Ltd. A/c 15,00,000 (Being 85, ,000= 1,25,000 shares distributed to equity shareholders of B Ltd.) Journal Entries in the Books of A Ltd. Dr. () i. Business Purchase A/c Dr. 10,20,000 PRIME / ME33/ IPCC 8 Cr. ()

9 To Liquidators of B Ltd A/c 10,20,000 (Being amount payable at B Ltd. A/c) ii. Sundry Assets Dr. 14,00,000 To Creditors A/c 3,80,000 To Business Purchase A/c 10,20,000 (Being assets & liabilities taken over and purchase consideration due) iii. Liquidators of B Ltd. A/c Dr. 10,20,000 To Equity share capital A/c 8,50,000 To Securities Premium A/c 1,70,000 (Being shares allotted in full payment of purchase consideration) iv. Creditors A/c Dr. 1,00,000 To Debtors (0f B Ltd.) A/c 1,00,000 (Being cancellation of mutual liability of debtors & creditors of 1,00,000) v. General Reserve A/c Dr. 20,000* To Stock A/c 20,000 (Being elimination of unrealised profit on unsold stock of 1,20,000, bought from B Ltd.) * Unrealised profit = 1,20,000 * 20/120 = 20,000 Balance Sheet of A Ltd. as on 31 st March, 2011 Liabilities Assets Share Capital Sundry Assets 42,80,000 2,85,000 Equity shares of 10 each 28,50,000 (30,00, ,00,000 1,00,000 20,000) (of the above, 85,000 equity shares of 10 each are issued for consideration other than cash) Securities premium 1,70,000 General Reserve 3,80,000 Creditors 8,80,000 (6,00, ,80,000 1,00,000) 42,80,000 42,80,000 Working Notes: 1. Calculation of Intrinsic Value of shares of A Ltd. Sundry Assets of A ltd 30,00,000 Less: Creditors 6,00,000 Net Assets 24,00,000 Number of equity shares 2,00,000 shares Intrinsic value per equity share = 24,00,000/2,00,000 shares 12 per share 2. Calculation of Purchase Consideration: Sundry Assets of B Ltd. 14,00,000 Add: Investments in shares of A ltd.(40,000 shares* 12) 4,80,000 18,80,000 Less: Creditors 3,80,000 Net Assets 15,00,000 Shares PRIME / ME33/ IPCC 9

10 Total number of equity shares to be issued by A 12 per share ( 15,00,000/ 1,25,000 12) Less: Number of equity shares of A ltd. which are already with B Ltd. 40,000 Number of shares to be issued to outsiders 85,000 Equity share capital(85,000 shares * 10) 8,50,000 Securities Premium(85,000 shares * 2) 1,70,000 Purchase Consideration 10,20, a. Trading and Profit and Loss for the year ended 31 st March, 2011 Head Office Kanpur Head Office Kanpur To Opening Stock 2,25,000 - By Sales 28,53,000 9,50,000 To Purchases 21,50,000 - By Goods sent to 5,30,000 - To Goods Sent to Branch at cost( 9,45,000 * 100 / 180) To Gross Profit Carried down branch (at cost) - 5,30,000 By Closing Stock(at cost) 12,68,000 4,75,000 2,60,000 55,000 36,43,000 10,05,000 36,43,000 10,05,000 The total profit at head office and at branch comes to 17,43,000. b. Departmental Trading and Profit and Loss for the year ended 31 st March, 2011 Cloth Readymade Total Cloth Readymade Total Clothes Clothes To Opening 3,00,000 50,000 3,50,000 By Sales 22,00,000 4,50,000 26,50,000 Stock To Purchases 20,00,000 15,000 20,15,000 By Transfer to readymade Clothes 3,00,000 3,00,000 To Transfer from Clothes Department To Manufacturing Expenses To Gross Profit c/d PRIME / ME33/ IPCC 10 3,00,000 3,00,000 By Closing Stock 60,000 60,000 4,00,000 85,000 4,85,000 2,00,000 60,000 2,60,000 27,00,000 5,10,000 32,10,000 27,00,000 5,10,000 32,10,000 To Selling 20,000 6,000 26,000 Expenses To Profit c/d 3,80,000 79,000 4,59,000 To Gross Profit 4,00,000 85,000 4,85,000 c/d 4,00,000 85,000 4,85,000 4,00,000 85,000 4,85,000 To General 1,10,000 By Profit b/d 4,59,000 Expenses To Stock 1,575

11 Reverse(Note s) To Net Profit ,59,000 4,59,000 Note: Stock Reserve has been calculated as follows: Rate of Gross Profit on Sales in cloth department 4,00,000/25,00,000 * 100 = 16% Element of cloth in closing stock of readymade clothes: 75% of 60,000 45,000 Reserve required for unrealised 16% of 45, Reserve already existing in Opening Stock- (15/100) * (75/100) * 50,000 5,625 Additional Reserve Required 1,575 PRIME / ME33/ IPCC 11

12 5. FORM B RA (Prescribed by IRDA) - Perfect General Insurance Co. Ltd Revenue Account for the Year Ended Fire and Marine Insurance Businesses Schedule Fire Current Year Marine Current Year Premiums earned(net) 1 4,55,000 3,35,000 Change in provision for unexpired risk -27,500-1,95,000 Interest, Dividends and Rent Gross - - Double Income Tax Refund - - Profit on sale of motor car - - Total (A) 4,27,500 4,27,500 Claims incurred(net) 2 82,000 88,000 Commission 3 40,000 20,000 Operating expenses related to insurance business 4 70,000 50,000 Bad debts - - Indian and Foreign Taxes - - Total (B) 1,92,000 1,58,000 Profit from Marine Insurance business(a-b) 2,35,500 (18000) Schedules forming part of Revenue Account Schedule 1 Premiums earned(net) Fire Current Year Marine Current Year Rs Premiums from direct business written 4,80,000 3,50,000 Less: Premium on reinsurance ceded 25,000 15,000 Total Premium earned(net) 4,55,000 3,35,000 Schedule 2 Claims incurred (net) 82,000 88,000 Schedule 4 Operating expenses related to insurance business Expenses of Management 70,000 50,000 FORM B PL Perfect General Insurance Co. Ltd Profit and Loss Account for the Year Ended PRIME / ME33/ IPCC 12 Current Year Operating Profit / Loss a. Fire insurance 2,35,500 b. Marine Insurance (18,000) c. Miscellaneous Insurance - Income from Investments a. Interest, Income & Rent Gross 1,29,000 b. Profit on sale of investments Previous Year Rs

13 6. a. Less: Loss on sale of investments Other Income(To be specified) Total (A) 3,46,500 Provisions (Other than taxation) - Depreciation 9,000 Other Expenses Director s Fee 80,000 Total B 89,000 Profit Before Tax 2,57,500 Provision for Taxation 99,138 Profit After Tax 1,58,362 Working Notes: PRIME / ME33/ IPCC 13 Fire Marine 1. Claims under policies less reinsurance Claims paid during the year 1,00,000 80,000 Add: Outstanding on 31 st March, ,000 15,000 1,10,000 95,000 Less: Outstanding on 1 st April, ,000 7,000 82,000 88, Expenses of Management 60,000 45,000 Expenses paid during the year 10,000 5,000 Add: Outstanding on 31 st March, ,000 50, Premiums less reinsurance Premium received during the year 4,50,000 3,30,000 Add: Outstanding on 31 st March, ,000 20,000 4,80,000 3,50,000 Less: Reinsurance premiums 25,000 15,000 4,55,000 3,35, Reserve for unexpired risks is 50% of net premium for fire insurance and 100% of net premium for marine insurance. 5. Provisions for taxation account To Bank A/c (Taxes paid) 60, By Balance b/d 85, To Balance c/d 1,24, By P & L A/c 99,138 1,84,138 1,84,138 Journal of Electricity Co. Dr. () Cr. () Replacement Account Dr. 13,80,000 To Bank Account 13,80,000 (Current cost of replacement of ¾ Main charged to Replacement Account) New Main Account Dr. 6,00,000 To Bank Account 5,40,000 To Replacement Account 60,000 (Cost incurred on laying auxiliary main including old material worth 60,000) New Main Account Dr. 4,20,000 To Bank Account 3,80,000

14 To Replacement Account 40,000 (Additional Cost of New Main Capitalised including cost of old material used 40,000) Bank A/c Dr. 40,000 To Replacement A/c 40,000 (Sale of old materials) Revenue Account Dr. 12,40,000 To Replacement A/c 12,40,000 (Net current cost of replacement transferred) Working Notes: Amount of additional cost to be capitalised Cost of ¾ of Old Main 12,00,000 Add : Increase in cost by 15% 1,80,000 13,80,000 Cost of replacement 18,00,000 Additional cost of New Main( to be capitalised) 4,20,000 Less : Cost of old material 40,000 Additional cash cost of replacement 3,80,000 b. Dr. ( in crores.) Cr. ( in crores) Rebate on bills discounted A/c Dr. 9 To Discount on bills A/c 9 (Being the transfer of opening balance in rebate on bills discounted account to discount on bills account) Bills purchased and discounted A/c Dr To Discount on bills A/c [ 4000 crores *18/100 *73/365] 144 To Clients A/c 3856 (Being the discounting of bills of exchange during the year) Discount on bills A/c Dr To Rebate on bills discounted A/c (Being the unexpired portion of discount in respect of the discounted bills of exchange carried forward) Discount on bills A/c Dr To Profit and Loss A/c (Being the amount of income for the year from discounting of bills of exchange transferred to Profit and loss A/c) 2011 March 31 Ledger Accounts Discount of bills A/c To Rebate on bills discounted A/c April 1 By Rebate on bills discounted A/c To Profit and loss a/c By bills purchased and 144 discounted a/c PRIME / ME33/ IPCC 14 9

15 Rebate on bills discounted A/c 2010 April 1 To Discount on bills A/c April 1 By Balance b/d March 31 To Balance c/d March 31 By Discount of bills A/c a. Purchase Consideration Form Amount Cash 60,000 Equity Shares (1, ) 2,10,000 2,70,000 PRIME / ME33/ IPCC 15

16 Net Assets of T Ltd. taken over by S Ltd. Value of 3000 equity shares Liability towards preference shareholders 3, = 2,10,000 Paid in cash 60,000 No. Of Shares of T Ltd. to be issued = 2,10,000/120 = 1,750 b. Assets (in lakhs) % of Provision Provision ( s in lakhs) Standard 4, Sub-standard 2, Doubtful upto one year Doubtful upto three years Doubtful more than three years * 300 Loss Assets ,316 ** Doubtful assets are taken fully secured c. Prior period items are income and expenses which are recognised in the current period as a result of errors or omissions in the preparation of financial statements of one or more prior periods. d. Dilutive earnings per share is calculated by dividing the net profit or loss for the period attributable to equity shareholders is adjusted for any dividends or interest or any other change in expenses or income including tax by the weighted average number of equity shares outstanding during the period. e. An intangible asset is an identifiable non monetary asset, without physical substance,held for use in the production or supply of goods or services or rental to others,or for administrative purposes. PRIME / ME33/ IPCC 16

17 ESAA No. of Pages: 3 Total Marks: 100 No of Questions: 9 Time Allowed: 3Hrs Answer all the questions 1. State with reasons (in short) whether the following statements are true or false. (i) An auditor is considered to lack independence, if the partner of the audit firm owns the building in which the client s business is situated. (ii) Procedural error arises as a result of transactions having been recorded in a fundamentally incorrect manner. (iii) When the auditor uses more Professional Judgement, the Degree of Inherent risk is lower. (iv) Interest accrued but not due on "Secured loans" is required to be shown under appropriate sub-heads under the head "Secured loans". (v) CARO '2004 is also applicable to the audit of branch of a company, except where the company is exempt from the applicability of the order. (vi) Mr. X, a Chartered Accountant, is an employee of M/s M & N Co., a firm of Chartered Accountants of India. The firm is the Auditors of ABC & Co. Ltd. After auditing the accounts of the Company the Auditor firm allowed Mr. X, their employee, to sign the audit report; which he did. (vii) The term 'fund' and 'reserve' can be used interchangeably. (viii) An unexplained decrease in the Gross profit ratio may result due to fictitious sales. (ix) While auditing the accounts of a company, it is obligatory that the auditor must adopt sampling technique. (x) If the auditor appointed at the AGM refuses to accept the same, the Company can appoint another person by holding General Meeting. (10x2=20 Marks) 2. Comment as an auditor on the following situations: (a) Strong Ltd. holding 60% of the equity shares in Weak Ltd. purchased goods worth 50 Lakhs from Weak Ltd. during the financial year The Managing Director of Strong Ltd. is of the opinion that it is normal business activity and there is no need to disclose the same in the final accounts of the Company. (b) TT Ltd. has suffered recurring losses due to steep fall in production and has negative net worth. Its production head, an expert, have also left the company. Reply of the management is PRIME / ME33 / IPCC 1

18 inadequate to these developments and there is no sound action plan to mitigate these situations. (c) A company has 60 lakh of paid up Capital and 3 crore of average Annual Turnovers of past three years preceding the financial year under Audit. The company does not have any Internal Audit system because the Management does not think it necessary. (d) Sri Limited charged depreciation on its plant and machinery comprised in fixed assets at rates different from what had been specified in schedule XIV, to the Companies Act, The auditor insisted that the rates of depreciation adopted should be mentioned in the notes to the account; else, he would make qualification in his audit report. The Management of the company contended that there is no impact in profits due to its omission to disclose the fact and hence on considerations of principle of materiality, the auditor is wrong in mentioning this omission in his report by way of qualification. (e) XYZ Ltd. has purchased plant and machinery costing 1 crore in the month of October, 2008 out of working capital limits sanctioned by Bank. What are reporting requirements by Statutory Auditors of the Company in this regard, keeping in mind the provisions of CARO (5x4=20 Marks) 3. Explain the following in brief: (a) Relationship between materiality and audit risk. (b) Management Representations 4. What are EDP general controls? 5. How do you audit/vouch the following: (a) Sale of scrap (b) Bank Overdraft (c) Contingent Liabilities (6 Marks) (5 Marks) (3x4=12 Marks) 6. Write short note on Government Expenditure Audit. (7 Marks) 7. State the basic elements of the Auditor s Report with illustration of Opening and opinion paragraphs. 8. What steps would you take in to consideration in auditing a Hospital? 9. (a) Under what circumstances the retiring Auditor cannot be reappointed? (5 Marks) (9 Marks) (4 Marks) (b) P, the first auditor of XYZ Ltd. resigned as auditors of the Co. Board of Directors appointed Mr. Q as statutory auditors in their place. Comment. (4 Marks) PRIME / ME33 / IPCC 2

19 (c) A, B & C Company Ltd. removed its first Auditor before the expiry of his term without obtaining approval of the Central Government. (4 Marks) (d) XYZ Co. Ltd. reappointed A and B as their joint auditors in the Annual General Meeting. The AGM authorised the Board for fill up the vacancy on their own in the event of both or either of auditors declined to accept the assignment. The Board passed a resolution to appoint C if any of the auditors declined to accept the assignment. B declined to accept the assignment and Board of Directors appointed C in place of B as per its resolution. (4 Marks) PRIME / ME33 / IPCC 3

20 PRIME ACADEMY 33 RD SESSION MODEL EXAM - FINAL - AUDITING AND ASSURANCE SUGGESTED ANSWERS 1. (i) False: According to the Guidance Note issued by the ICAI on Independence of Auditors, Independence implies that the judgment of a person is not subordinate to the wishes or directions of another person who might have engaged him or to his own self interest. In this case of Renting of building to the client does not affect the independence. (ii) False: Procedural error arises when there is error in implementation of the procedure. If transaction has been recorded in a fundamentally incorrect manner it will result in error of principle. (iii) True: The auditor uses his professional judgment to assess inherent risk by evaluating different factor relating to the organization. On this basis he tries to ensure lower level of inherent risk. (iv) False: As per Part-I, Schedule VI to the Companies Act, 1956 interest accured but not due on secured loans is required to be shown under current liabilities. (v) True: CARO 2004 is also applicable to the audit of branch of a company since sub- section 3(a) of the section 228 of the Companies Act clearly specifies that a branch auditor has the same duties as the company s auditor. (vi) False: An employee Chartered Accountant cannot sign the auditor s report on behalf of the auditing firm. Only a partner in the firm can sign the audit report in compliance with the provisions of Section 229. (vii) False: The term fund in relation to any reserve should be used only where such reserve is specifically represented by earmarked investments. (viii) False: A fictitious sale will increase the gross profit ratio instead of decreasing it. G.P. Ratio normally comes down if there are unrecorded sales or fictitious purchase or decrease in closing stock. (ix) False: It is not obligatory that the auditor must adopt sampling technique in auditing the accounts. But he should ensure that the relevant standards on auditing have been followed. It is in the interest of the auditor if he decides to form his opinion on the basis of audit sample using standards and techniques which are widely followed and recognised. (x) False: This is not a casual vacancy. Since the newly appointed auditor has refused to accept the appointment, no appointment can be said to have been made at the AGM. U/s 224(3) of the Companies Act, 1956, the power vests with the Central Govt.to make the appointment. 2. (a) As per definition given in the AS 18 Related Party Disclosure parties are considered to be related PRIME / ME33 / IPCC 4

21 if at any time during the reporting period one party has the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions. Related party transaction means a transfer of resources or obligations between related parties, regardless of whether or not a price is charged. Strong Ltd. is the holding company of weak Ltd. as it holds more than 50% of the voting power of weak Ltd. and thus should be treated as related parties as per AS-18. According to AS-18, in the case of related party transactions, following facts should be disclosed: (i) Related party relationship, name and nature of relationship. (ii) If there is transaction between the related parties then descriptions of the nature of transaction, volume of the transaction outstanding at the balance sheet date etc. In the instant case since there is related party transaction the contention of Managing Director of strong Ltd is not correct and the auditor should insist to make proper disclosure as required by AS-18 and if the management refuses, the auditor as per SA 550 Related Parties, should express a qualified opinion. (b) As per SA 570 on going concern, when planning and performing audit procedures and in evaluating the results thereof, the auditor should consider the appropriateness of the going concern assumption. The auditor should evaluate the risk that the going concern assumption may no longer be appropriate. If in the auditor s judgement, the going concern is not satisfactory resolved, he should consider various appropriate options. To judge and evaluate the continuance as a going concern, he should evaluate and gather indications from financial, operating and other resources. In the instant case, TT ltd. has suffered continuous losses and having negative net worth also. Besides, its production head have also left the company resulting in steep fall in production. Thus there are clear indications that there is danger to entity s ability to continue in future. Considering the fact that there is no sound plan of action from the management to mitigate these factors and to put the company back on the recovery, the going concern assumption does not hold appropriate. Therefore, the auditor should ask the management for its adequate disclosure in the financial statement and include the same in his report. However, if the management fails to make adequate disclosure, the auditor should express a qualified or adverse opinion. If the result of the inappropriate assumption used in the preparation of financial statements is so material and pervasive as to make the financial statements misleading, the auditor should express an adverse opinion. (c) As per CARO provisions, an auditor is required to comment on the Company s internal audit system if its paid up capital and reserves exceeds.50 lakh as at the commencement of the financial year or its average annual turnover exceeds.5 crore for consecutive three financial years preceding the financial year concerned, whether the company has an internal audit system commensurate with size and nature of the business. Therefore, in the above case, because company s paid up capital and reserves exceeds.50 lakh, the auditor has to comment under CARO that the company does not have an internal audit system. (d) (i) It is permissible for the entity to charge depreciation on its assets at rate different from schedule XIV rates provided those rates are higher than the schedule rates based on technical estimation or otherwise allowed under Section 205 of the Act. PRIME / ME33 / IPCC 5

22 (ii) When the rates adopted are different from the principal rates specified in the schedule, the same need to be disclosed in the notes to the accounting. (iii) The non-disclosure of rates is a violation of AS 1 which requires the accounting policies to be disclosed in the accounts and also schedule XIV requirement which too requires such disclosure. (iv) The auditor hence, is right in his approach to qualify the same in his report. (v) The contention of the management that it does not meddle with the profit is not founded. (vi) The materiality of an item is not always measured in terms of quantitative factors alone. (vii) The qualitative factors also reckon the judgment of auditors in opining the true and fair view of accounts. (viii) If the management does not correct the situation, the auditor is justified in qualifying his audit report. (e) Annexure to Audit Report includes matters specified in Paragraphs 4 and 5 of the CARO, (i) The company has maintained proper records showing full particulars including quantitative details of fixed assets. (ii) All the assets have been physically verified by the management at regular intervals. No material discrepancies were noticed on such verification. (iii) If company has disposed off substantial part of plant and machinery the sales of such plant and machinery has not affected going concern status of the company. In obtaining audit evidence from substantive procedures, the auditor concerned with the following assertions: (i) Existence - that an assets or liability exists at a given date. (ii) Rights and obligations - that an asset is a right of the entity and a liability is an obligation at a given date. (iii) Occurrence - that a transaction or event took place which pertains to the entity. (iv) Completeness - that there are no unrecorded assets, liabilities or transaction. (v) Valuation - that an asset or liability is recorded at an appropriate carrying value. (vi) Measurement - that a transaction is recorded in the proper amount and revenue or expenses are allocated to proper period. (vii) Presentation & disclosure - that an item is disclosed, classified and described in accordance with recognized accounting policies, practices and statutory requirements.basic Concepts in Auditing 3.(a) Relationship between materiality and audit risk. SA 320 on Materiality in Planning and Performing an Audit requires that the auditor should consider materiality and its relationship with audit risk when conducting an audit. Materiality depends on the size and the nature of the items judged in the particular circumstances of its misstatement.the audit should be planned so that audit risk is kept at an acceptably low level. There isan inverse relationship between Materiality and the degree of audit risk. Higher the materiality level, the lower the audit risk and vice-versa. After the auditor has assessed the inherent and control risks, he should consider the level of detection risk that he is prepared to accept and, based upon his judgment, select appropriate substantive audit procedures. If the auditor does not perform any substantive procedures, detection risk, that is, the risk that the auditor will fail to detect a misstatement, will be high. The auditor s assessment of audit risk may change during the course of an audit according to the need and development of the circumstances. (b) Management Representations PRIME / ME33 / IPCC 6

23 SA-580 on Representation by Management establishes standards on the use of management representations as audit evidence,the procedure to be applied in evaluating and documenting management representations and the action to be taken if management refers to provide appropriate representations. Management Representation is of great use to the auditor when other sufficient appropriate audit evidence cannot reasonably be expected to exist. Representation by management sometimes may constitute only evidence with the auditor where matter is principally of intention.it cannot be substitute for normal audit procedure. Auditor should seek the corroborative audit evidence supporting representation by the management. Auditor should evaluate the representation as to its reasonability. Cases where management representation is normally obtained includes accounting policies, cost and physical existence of assets, investments, compliance of relevant laws, capital commitments etc. Computer Assisted audit techniques (CAAT) may be required in a CIS environment in the following circumstances: The absence of input documents (e.g. order entry in on-line systems) or the generation of accounting transactions by computer programs (e.g. automatic calculation of discounts) may preclude the auditor from examining documentary evidence. The lack of a visible audit trail will preclude the auditor from visually following transactions through the computerized accounting system. The lack of visible output may necessitate access to data retained on files readable only by the computer. The effectiveness and efficiency of auditing procedures may be improved through the use of computer-assisted audit techniques in obtaining and evaluating audit evidence, for example: (i) Some transactions may be tested more effectively for a similar level of cost by using the computer to examine all or a greater number of transactions than would otherwise be selected. (ii) In applying analytical review procedures, transactions or balance details may be reviewed and reports printed of unusual items more efficiently by using the computer than by manual methods. b. Letter of weakness (1) The auditor does compliance procedure to ascertain that the internal control system exist n the entity; it works effectively; it work continuously in the entity during review period. (2) When he comes across any weakness in the control points, he issues letter of weakness. (3) Letter of weakness is a report issued by auditor stating the weakness in internal control mechanism. It also suggests measures by which the weakness in the system be corrected and the control system be made better protected. (4) Lapses in operation of internal control too are reported in the communication of weakness. (5) The communication of weakness is reporting to management of such weakness in design and operation of internal control as have come to notice of auditor during his auditing and it should not be taken to be a review and comment on adequacy of the control mechanism for management purpose. c. Cut-off procedure: It refers to segregation of transaction of one period from the other so that the result of working of each period can be correctly ascertained. The arrangement that is made to ensure such separation is technically known as cut- off procedure. It is part of the internal check of the organization. This procedure is generally applied to transactions affected by the continuity of business like sales, purchase and stock. This procedure ensures that goods purchased during a year have been included in inventory and the liability has been provided in the case of credit purchase. Similarly PRIME / ME33 / IPCC 7

24 goods sold have been excluded from the inventories and credit has been taken for the sales. Cutoff procedures are also relevant in other areas, such as determining the cut offs for cash and bank balances. The auditor satisfies by examination and test checks that the cut-off procedures adequately ensure that: (i) goods purchased, property in which has passed to the client, have in fact been included in the inventories and that the liability has been provided for in case of credit purchase; and (ii) goods sold have been excluded from the inventories and credit has been taken for the sales; if the value of sales is to be received, the concerned party has been debited. 4. EDP general controls: It seeks to establish an overall control over the EDP activities and provide a reasonable level of assurance that the overall objectives of internal control are achieved. These include: 1. Organisation& management controls: To establish an organizational framework over EDP activities. It includeso Policies and procedures relating to control functions. o Appropriate segregation of incompatible functions (eg. Preparation of input transactions, programming and computer operations.) 2. Application systems development and maintenance controls: To provide reasonable assurance that systems are developed and maintained in an authorized and efficient manner. It includes designs to establish controls over o Testing, conversion, documentation and implementation of new or revised systems. o Changes to application systems o Access to systems documentation o Acquisition of application systems from third parties 3. Computer operation controls: To control operation of systems and provide reasonable assurance thato The systems are used for authorized purposes only. o Access to computer operations is restricted to only authorized personnel. o Only authorized programs are used. o Processing errors are detected and immediately corrected. 4. System software controls: To provide reasonable assurance that systems software are developed and acquired in an authorized and efficient manner. It includes: o Authorisation, approval, testing, implementation and documentation of new systems software and systems software modifications. o Restriction of access to systems software and documentation to authorized personnel. 5. Data entry and program controls: To provide reasonable assurance that: o An authorization structure is established over transactions entered into the system. o Access to data and programs is restricted to authorized personnel. 6. Continuity controls: To contribute to the continuity of EDP processing. These includeo Offsite backup of data and computer programs. o Procedures to redeem data in case of theft, loss, intentional or accidental destruction. o Procedures for offsite processing in the event of a disaster. PRIME / ME33 / IPCC 8

25 (a) (a) Sale of scrap: (i) Review the internal control as regards generation, storage and disposal of scrap. (ii) Check whether the organization is maintaining reasonable record for generation of Scrap. (iii) Analyze the raw material used, production and generation pattern of scrap and compare the same with figures of earlier year. (iv) Check the rates at which scrap has been sold and compare the rate with previous year. (v) Vouch sales, with invoices raised, advertisement for tender, rate contract with scrap dealers. (vi) Ensure that there exists a proper control procedure to identify scrap and good units and they are not mixed up and sold as scrap. (vii) Make an overall assessment of the value of realization from scrap as to its reasonableness. 1. Bank Overdraft (i) The auditor should ensure that the facility of overdraft is authorised by the Board s resolution / partner s resolution. (ii) Pursue the agreement with the bank and see whether the overdraft is clean or against hypothecation or pledge of company s property. (iii) Verify the register of charges and ensure that the charge has been registered with Registrar of Companies. (iv) Verify the rate of interest and other terms and conditions from the agreement. (v) Verify the amount of overdraft from the books of accounts and compare it with the passbook. (vi) If the overdraft is against hypothecation of assets like stocks, a certificate from the bank should be obtained. (vii) If the overdraft is against hypothecation of assets or pledge of company s property, see that overdraft is properly shown under secured loans and nature of security has been property disclosed. 2. Contingent Liabilities (i) Review minutes of the meetings of the Board of Directors or other similar bodies. (ii) Review contracts, agreements and arrangements. (iii) Review list of pending law suits and obtain a certificate and opinion of the lawyer dealing with the cases. (iv) Review of records relating to contingent liabilities maintained by the company. (v) Review of terms and condition of grants and subsidy availed. (vi) Obtain representation from the management. (vii) Ensure that proper disclosure is made of all the contingent liabilities 6. Government Expenditure Audit: It is one of the major components of Government audit. The mains aim is to ensure that: (i) The expenditure incurred conforms to the relevant provisions of the statutory enactments and is also in accordance with the financial rule and regulation. This is called audit against rules and orders. (ii) There is proper sanction either special or general accorded by the competent authority for all expenditure. This is known as audit of sanctions. (iii) There are provisions or budget of funds out of which expenditure can be met. This is called audit against provisions of fund. (iv) The expenditure is incurred with due regard to broad and general principle of propriety. This is called propriety audit. PRIME / ME33 / IPCC 9

26 (v) That the programmes, schemes and projects where large expenditure has been incurred are being run economically and yielding results. This is known as performance audit. 7. Basic elements of the Auditor s Report: The auditor s reports include the following basic elements: (i) Title: The report should have an appropriate title. It is appropriate to use the term Auditor s Report. (ii) Addressee: It should be addressed appropriately like appointing authority. (iii) Opening paragraph: It should identify the financial statement of the entity that have been audited with date and period covered and responsibility of auditor and management. Illustration of opening paragraph is:- We have audited the attached Balance Sheet of M/s as at 31 st March and also the profit and loss account for the year ended on that date annexed thereto. These financial statements are the responsibility of the entity s management. Our responsibility is to express an opinion on these financial statements based on our audit (iv) Scope Paragraph: It describes the scope of audit and assurance that the audit has been carried out in accordance with established standards. Illustration of these matter is:- (v) In our opinion and to the best of our information and according to the explanations given to us, the financial statement gives a true and fair view in conformity with the accounting principles generally accepted in India:- (a) in the case of Balance Sheet, of the state of affairs of the M/s as at 31st March. (b) in the case of Profit and Loss Account of the profit/loss for the year ended on that date. (vi) Date of Report: Date on which the auditor signs the report. (vii) Place of Signature: Location, where the audit report is signed. (viii) Auditor s Signature: Report should be signed by the auditor in his personal name. 8. (i) Examine the internal check system as regards the receipts of bills from the patients. (ii) Vouch the register of patients with copy of bills issued to them. (iii) Verify bills for a selected period with the patient s attendance record to see that the bills have been correctly repaired. (iv) See that bills have been issued to all the patients according to the rules of the hospital. (v) Check cash collections as entered in the cash book with the receipts, counterfoils and other evidence. (vi) Compare the total income with the amount budgeted for the same and report to the management for significant variations which have been taken place. 9. (a) In the following circumstances, the retiring auditor cannot be reappointed: (1) A specific resolution has not been passed to reappoint the retiring auditor. (2) The auditor proposed to be reappointed does not possess the qualificationprescribed under section 226. (3) The proposed auditor suffers from the disqualifications under section 226(3) and226(4). (4) He has given to the company notice in writing of his unwillingness to be reappointed. (5) A resolution has been passed in AGM appointing somebody else or providingexpressly that the retiring auditor shall not be reappointed. (6) A written certificate has not been obtained from the proposed auditor to the effectthat the appointment or reappointment, if made, will be in accordance within thelimits specified under section 224(1B). PRIME / ME33 / IPCC 10

27 (b) The first auditor appointment by the Board holds the office till the conclusion of the firstannual general meeting. If P, the first auditor resigns, the board of directors has stillpower to appoint Mr. Q as auditor till conclusion of first annual general meeting. Thecompany at the AGM may remove auditor so appointed and appoint another auditor. (c) Removal of first auditor As per provision of Sub-section (7) of Section 224, an auditor may be removed fromhis office before the expiry of his term by the company in general meeting afterobtaining prior approval of the Central Government in that behalf, except that suchapproval is not required for the removal of first auditor appointed by the directorsunder the proviso to sub-section (5) of Section 224. This is a very stringent provisionto ensure that any auditor who is inconvenient to the management cannot beremoved so easily. This provision goes a long way to ensure independence ofauditor.however, the first auditor appointed by the Board of Directors can be removed bymerely passing an ordinarily resolution in General Meeting of the company withoutthe prior approval of the Central Government. (d) Filling up the vacancy of an auditor In the present case B is one of the joint auditors who was appointed in Annual GeneralMeeting, but declined to accept the appointment. The Board of Directors as per theirresolution, appointed C as a joint auditor in his place.in this case, the vacancy created by B is neither caused by resignation of B nor is it acasual vacancy because B s appointment had not become effective. Hence, appointment of C as joint auditor by the Board is not valid. C can only be appointed as joint shareholders in the General Meeting. PRIME / ME33 / IPCC 11

28 TMSI No. of Pages: 2 Total Marks: 100 No of Questions: 14 Time Allowed: 3 Hrs Section A Question No. 1 is compulsory. Answer any 5 from the remaining 6 questions 1. Describe briefly the following terms: 1. TCP/IP 2. Primary Storage 3. System software 4. Fire wall 5. Web Casting (5x2=10 Marks) 2. (a) What do you mean by object oriented programming and what are its advantages (b) Limitations of Data Management System (2x4=8 Marks) 3 (a) What are the features of software? (b) Explain the Various input devices (2x4=8 Marks) 4 (a) Benefits of E-commerce? (b) Explain Star Topology (2x4=8 Marks) 5 A company offers discounts to customers on the following basis: Quantity ordered Normal discount Less than 101 5% From 101 to % From 501 to 1,000 15% More than 1,000 20% The normal discount as given above is admissible only if the Customer s account balance in below 1,000 and the order value is 10,000 or more. If the account does not satisfy both of these conditions, the discount is reduced by 2% and if only one condition is violated, the discount is reduced by 1%. Draw a Flow Chart to print customer name, discount offered and net amount payable for 25 customers. (8 Marks) 6. Distingish between (a) LAN and WAN (b) Circuit switching and Packet switching (2x4=8 Marks) 7. Answer any four of the following: 1. Electronic mail 2. Flow Chart 3. Client server technology 4. Operating System 5. Relational Data base (4x2=8 Marks) Section B PRIME / ME33 / IPCC 1

29 Question 8 is compulsory. Attempt any five from the rest 8. Answer the following: (a) What is Kieretsus? (b) What are the Components of a Value chain. (c) Discuss Ansoff s product market growth matrix (d) Is logistic management same as supply chain management? (e) How is Strategy Formulation different from strategy Implementation? (5x3=15 marks) 9. Answer the following: (a) Strategic groups (b) Swot analysis Or (c) Conglomerate diversification (4 marks) (3 marks) 10. Attempt any two (a) State with reasons which of the following statements is correct/incorrect (i) Business functions in isolation (ii) Strategies are perfect, flawless and optimal organizational plans (iii) B in BCG matrix stands for balance (iv) Corporate strategy is basically the growth design of the firm (2x2=4 Marks) (b) Fill in the blanks in the following statements with the most appropriate word: (i) promote better strategy execution (ii) are organizations performance targets the results and outcomes it wants to achieve. (iii) The environment includes all the factors outside the organization which provide opportunity or pose threats to the organization. (3x1=3 Marks) 11. What do you mean by strategy? Explain the four generic strategies as discussed by Glueck & Jauch (7 Marks) 12. What do you mean by turnaround strategy? Under what circumstances you would recommend with a suitable action plan. (7 Marks) 13. Answer the following: (a) Elements of Micro Environment Or (b) Components of Marketing Mix (c) Write short not on Six sigma Or (d) Functional Structure (4 Marks) (3 Marks) 14. Define Business Process Re-engineering. Briefly outline the steps therein. (7 Marks) PRIME / ME33 / IPCC 2

30 PRIME ACADEMY 33 RD SESSION MODEL EXAM - IPCC INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT SUGGESTED ANSWERS 1. (1) TCP/IP: TCP stands for Transmission Control Protocol and IP for internet Protocol. These protocols are used in Internet. They have two parts and four layers. (2) Primary Storage: It is directly connected to CPU of the Computer. It must be present for the CPU to function correctly, just as in a biological analogy; the lungs must be present for the heart to function. It primarily consists of three kinds viz., Processor register, Main Memory and cache memory. (3) System software: is a computer program which manages and supports a computer system and its information activities. They manage the resources of a computer and provide a set of standard services to its users. Generally they are developed and written by the vendor and sold to the end user along with the system. (4) Firewall: These are systems that control the flow of traffic between the Internet and the firm s internal LANs and systems. They are usually packaged as turnkey hardware/software packages, and are set up to enforce the specific security policies that are desired.a firewall is a proven, effective means of protecting the firm s internal resources from unwanted intrusion. (5) Webcasting or push technology is web-based technology. This allows users to passively receive broadcast information rather than actively search the Web for information. Push technology allows users to choose from a menu of sources, specifying what kind of information they want to receive. Once selected, the information is automatically forwarded to the user. Internet news services, which deliver the day s activities to the user s desktop, are an example of push technology. 2. (a) Object oriented programming: With traditional programming may approach, developing a new program means writing entirely new codes which may take years to complete, yet not meeting the desired quality standards. Since each program is written from scratch, quality is often poor, productivity of programmers is low, and programs are usually behind schedule. When program modifications are needed, the code must be rewritten and tested. As programs become longer and more complex, achieving a reasonable quality level becomes a formidable task. The solution to this problem is a new way of developing software using an object oriented language. An object is a predefined set of program code that, after having been written and tested, will always behave the same way, so that it can be used for other applications. All programs consist of specific task such as saving or retrieving data and calculating tools. In object-oriented programming, an object is written for each specific task and saved in a library so that anyone can use it. In OOP, object is selected by pointing to a representative icon. A small amount of code necessary for finishing the program is written and then linking these objects together creates a new program. Object can be modified, reused, copied, or created. When an object is updated, all programs using that object can be automatically updated as well. OOP offers the following advantages: Allows graphical user interface Ease of use Faster program development Enhanced programmer productivity More reliability and contains fewer errors PRIME / ME33 / IPCC 3

31 When an object is updated, all programs using that object updated automatically. However, large programs produced using OOP are slower and expensive since they require more computer resources. (b) Limitation of Database management system - Refer SM (a) Features of software Mailbox Mailbox is used in to store in-coming message. The receiver is not necessarily being present when the is delivered to him. His entire message will be stored in the mail box. Mail Server Mail server basically sends a mail to the address of the receiver. It does the following: It maintains list of account It allows composing message. It sends the message when send button is clicked. It arranges the messages of the receiver in the order they are received etc. Address book An address book is a place where addresses of people with whom frequent Communications are made are kept. New addresses can be added to it or some existing addresses may be deleted. File Attachment The major drawback in is that the formatted text cannot be sent. If a word file containing graphics picture or bulleted list etc is sent, only text will be available and all other things will be lost. The solution for this is to send the document as attachment file to the address. It also saves time and money. Activities under 1. Composition: Composition of message preparation may be on-line or off-line. On-line means it done when internet is active. In case of big message, the same is prepared off-line and is sent afterwards according to convenience of the sender. Files can be sent along with the message as attachment. 2. Sending / Receiving: Sending or receiving message means transmission of message from sender to receiver. The sender puts the address of the receiver and the message is transferred to receiver s address through the server. Receiver receives it whenever he logs in at his internet address with the password. If the receiver address is wrong, will be bounced back to sender. 3. Reporting: Reporting means giving the sender the status of message sent. 4. Display / Download: Receiver can see the message on the computer or he can download the contents in a file or on printer. 5. Replying and Forwarding massages This is very good option provided by program. By pressing the button, the option can be availed. The advantages are: Address of the person to whom reply is being made, will automatically come Subject also be written automatically with prefix Re: Information System Original massage can be sent back with proper option for ready reference Reply to author or Reply to all option is exclusively for author or all to which copy was sent respectively. 6. Deletion Messages after receiving may be deleted to arrange space in the mailbox. PRIME / ME33 / IPCC 4

32 (b) Input devices are the machine used for feeding data into a computer. Example: Keyboard, floppy disk, terminal etc Different Types of Input Devices Key- Entry Device: It is a device like a type-writer called Key board for data entry. The standard keyboard is QWERTY Key Board. Most of the key-entry system is off-line device i.e. not connected to the central computer. Punch Card System: This was very popular data entry system in 70 s. This system became obsolete Now. Hollerith cards were used in electric Punch Machine and the coding used there is called Hollerith code. Punching means making holes on the punch card. Floppy Diskette System: The floppy diskette is used for data entry and data storage. This system of Data entry device is very popular today. Data is entered through the keyboard, video screen displays the information. The advantage of the system is: Input data can be edited in the floppy. Floppy is reusable Validation of input data can be done at the data entry through programming. Messages on the screen are helpful for operators. It is electronic device whereas the punch card system is mechanical one and thus more reliable. The system is faster and gives high productivity. Terminal: This system has become very popular today. Most of the computers have terminals. These Terminals are used for data entry. Every terminal has a visual display unit with it. The input data are Information System displayed on the terminals. Now a days, data entry is done with the help of userfriendly program. The program displays menu and options can be selected according to the choice of the operator. Data is validated on-line and with the help of master file, typing load can be minimized. Advantages: Relatively inexpensive. During entry, data is visual. Data goes directly to the computer i.e. no intermediate storage. Have advantage of operation from widely dispersed geographical areas. Disadvantages: If the computer goes down, terminals become useless. Dumb Terminals and Intelligent Terminals: A dumb terminal is used for data entry only. It has the facility to communicate data to and from CPU. An intelligent terminal, on the other hand, has the following facilities: It has a CPU to control the function. It has buffer memory. It has the ability to attach the peripherals i.e. floppy disk, printer etc. Point of sale (POS) Terminal: These are very small terminals like cash register. Under POS data Collection system, sales data are entered at retailer place. Retailer s requirements are entered and the same information reaches to the warehouse immediately so that distribution of the product can be made faster. Advantage of POS data collection: PRIME / ME33 / IPCC 5

33 Facilitate faster transaction. Standard procedure of calculation of sales price, tax etc. can be performed readily and the same can be made to the retailer. Update of inventory position can be known to the salesman instantly. Mouse: Mouse is not in true sense a input device. Mouse is kept on a rubber pad called mouse pad. Mouse has a rubber ball at the bottom and two or three switches. Movement of cursor can be controlled with the help of mouse and switches are used for different options. The operator can operate faster by reaching a particular point on the screen and pressing the button. Pressing button is called clicking. Nowadays, the user friendly software or even operating system gives the menu on the screen and operator can activate the required program by choosing the particular option of the menu or a box by simply bringing the cursor to the appropriate point on the screen with the help of mouse and clicking it. Punched Paper Tape: This system consists of long roll of one inch wide paper. A vertical column of the tape is used to represent a single character. It is rarely used. Track Ball: Its function is same as mouse. The difference is that, it is not required to move to control the movement of cursor. What is required is to rotate a ball on the device with the help of thumb to control the movement of cursor. Joystick: This is device is similar to mouse. The difference is the cursor continues to move in the direction joystick points. To stop the pointer, joystick has to brought back in upright position. Light pen: Light pen consists of photocells which activates some desired action when the user touches the PC screen with it. Magnetic Ink Character Recognition (MICR): MICR code is developed by American Banking Association (ABA). The advantage of MICR code is that any document having MICR character can be Read by a computer because both manual entry data and data through reading devices are checked to ensure correctness. Another advantage of MICR is that it reduces or eliminates the amount of coding unnecessarily. Optical Character Recognition (OCR) Device: It is a reading device used to interpret printed, Handwritten data directly from source documents. OCR device make use of light-sensing mechanism and laser technology to interpret recorded data. The essence of OCR is pattern recognition. For this reason, the simpler the character front, the more reliable the OCR system. OCR capability of an OCR device is very high i.e. in the range of 2000 documents per minutes. Machine is costly. It is costeffective only where 10,000 or more documents have to be read per day. Scanner: Scanner is a very useful device for reading text or documents. The scanner digitizes the image of the document. Now a days, the optical scanner system supports a software OCR package (Optical Character Recognition Software). The software translates the image into ASCII characters. Types of Scanner: (i) Optical Scanner It reads text or data with the help of light source and light sensors.optical scanners are Optical Character Reader ( OCR) and Optical Mark Reader (OMR). (ii) Magnetic Ink Character Recognition (MICR) Scanner It reads character imprinted on a document using magnetic ink containing iron oxide. It is generally used in Banking Industry for clearing of cheques. PRIME / ME33 / IPCC 6

34 4. (a) Benefits of E-commerce is that the Consumers can have access to global market, Advantage to choose the best, Free -option to explore the terms and conditions for procurement of an item from different vendors etc. These can be done sitting at home or office without having the painful exercise of visiting market and negotiating terms and conditions. The instantaneous gathering of information and providing decision based on pre-determined criteria are to be taken by the system. Reduced costs, faster processing,.easy access optimization of resources reduced advertisement costs etc. For detailed answer refer SM pg.4.19 (b) Star topology In Star topology, terminals (end nodes) are connected to a central node or hub node. The features of this kind of topology are: Performance of this kind of topology depends much depends on the processing power of the central hub Terminals have very little active role in network processing and less processing overhead Failure of central hub makes the whole system down It has the flexibility to accommodate any additional terminals. PRIME / ME33 / IPCC 7

35 5.Flow Chart: PRIME / ME33 / IPCC 8

36 6. (a) Difference between LAN and WAN: 1. A LAN is restricted to a limited geographical coverage of a few kilometres, but a WAN span greater distance and may operate nationwide or even worldwide. 2. The cost to transmit data in a LAN is negligible since the transmission medium is usually owned by user organisation. However in case of WAN, this cost may be very high because the transmission medium used is leased lines or public systems such as telephone lines, microwave and satellite links. 3. In a LAN the computer, terminals and peripheral devices are usually physically connected with wires and coaxial cables. Whereas in a WAN there may not be a direct physical connection between Various computers. 4. Data transmission speed is much higher in LAN than in a WAN. 5. Fewer data transmission errors occur in case of a LAN as compared to a WAN. This is mainly because in case of a LAN, the distance covered by the data is negligible as compared to a WAN PRIME / ME33 / IPCC 9

37 (b) Circuit switching: Circuit dedicated for transmission. Example Telephone Exchange. Packet switching: Under it the massage is split into three parts. Header contains information on data in the packet. Body is the actual data. Footer holds information of error, if any Electronic Mail: This refers to transfer of information from one computer to another. The full expansion is electronic mail. It means that two computers, whatever may the distance between them, can be connected together through communication technology. enables one user to transfer information, receive information and hold a dialogue with the other. The advantage is low cost high speed communication. 2. Flow Chart A diagram that shows by means of symbols and interconnecting lines the structure and general sequence of operations of a program or a system of processing 3. Client Server Technology: Client/Server Technology refers to computing technologies in which the hardware and software components (i.e., client and servers) are distributed through network. Client/Server is defined as the provision of information that is required by a user, which is easily accessed despite the physical location of data within the organization 4. Operating System: Operating System is defined as an integrated system of programs which supervises the operation of the CPU, controls the input/output functions of the computer system, translates the programming languages into the machine languages and provides various support services. 5. Relational Database: The relational structure is the most popular, (particularly with PCs), and is possibly, the most flexible type of data organization for database construction. This type of database is built around the concept that data contained in the conventional files can, with some duplication, be transformed into two dimensional tables. Each such table may have any number of rows, but may have only few columns. Data in each column has to be of uniform size, residing a field in a record, for example customers' name. PRIME / ME33 / IPCC 10 Section B 8. (a) KIERETSUS Large cooperative networks of business are known as KIERETSUS. These are formed by companies in related industries, in order to enhance the abilities of individual member business to compete in their respective industries. Kieretsus members are peers and may own significant amounts of each other s capital and may have board members in common. In Kieretsus, members remain independent companies in their own right. The only strategy they have in common, is to prefer to do business with other Kieretsus members, both when buying and when selling Kieretsus are different from conglomerates where in all members are lineated through ownership pattern. (b).components of a Value Chain. Value chain refers to separate activities which are necessary to underpin an organization's strategies and are linked together both inside and outside the organization. Organizations are much more than a random collection of machines, money and people. Value chain of a manufacturing organization comprises of primary and supportive activities. The primary ones are inclusive of inbound logistics, operations, outbound logistics, marketing and sales, and services. The supportive activities relate to Procurement, human resource management, technology development and infrastructure. Value chain analysis helps in maintaining the long-term competitive position of an organization to sustain value for-money in its products or service. It can be helpful in identifying those activities which the organization must undertake at a threshold level of competence and those which represent the core competences of the organization

38 (c).ansoff s product market growth matrix The product/market growth matrix is a portfolio planning tool for identifying company growth opportunities. Market penetration refers to a growth strategy where the business focuses on selling existing products into existing markets Market development refers to a growth strategy where the business seeks to sell its existing products into new markets# Product development refers to a growth strategy where the business aims to introduce new products into existing markets Diversification refers to a growth strategy where a business markets new products in new markets. (d) Supply chain management is an extension of logistic management. However there is a difference between the two. Logical activities typically include management of inbound and outbound goods, transportation, warehousing, and handling of material, fulfillment of orders, inventory management, and supply/demand planning. Supply chain management includes more aspects apart from the right product at the right time to the right place and at the right price; it reduces costs of organizations and enhances customer service.. 9 Conglomerate diversification -R efer SM chap 4 In conglomerate diversification, no such linkages exist, the new businesses/products are disjointed from the existing businesses/products in every way; it is a totally unrelated diversification. In process/technology/function, there is no connection between the new products and the existing ones. Conglomerate diversification has no common thread at all with the firm s present position e) Distinction between strategy formulation and strategy implementation: Although inextricably linked, strategy implementation is fundamentally different from strategy formulation in the following ways: 1. Strategy formulation is positioning forces before the action. Strategy implementation is managing forces during the action. 2. Strategy formulation focuses on effectiveness whereas strategy implementation focuses on efficiency. 3. Strategy formulation is primarily an intellectual process whereas implementation of strategy is primarily an operational process. 4. Strategy formulation requires good intuitive and analytical skills while strategy implementation requires special motivation and leadership skills. 5. Strategy formulation requires coordination among a few individuals while strategy implementation requires organization wide coordination. 9. (a) Strategic groups are conceptually defined clusters of competitors that share similar strategies and therefore compete more directly with one another than with other firms in the same industry. Strong economic compulsions often constrain these firms from switching one competitive posture to another. Any industry contains only one strategic group when all firms essentially have identical strategies and have comparable market positions. At the other extreme, there are as many strategic groups as there are competitors when each rival pursues a distinctively different competitive approach and occupies a substantially different competitive position in the market place. (b) SWOT analysis is a tool used by organizations for evolving strategic options for the future. The term SWOT refers to the analysis of strength, weaknesses, opportunities and threats facing a company. Strengths and weaknesses are identified in the internal environment, whereas opportunities and threats are located in the external environment. Strength: Strength is an inherent capability of the organization which it can use to gain strategic advantage over its competitor. PRIME / ME33 / IPCC 11

39 Weakness: A weakness is an inherent limitation or constraint of the organization which creates strategic disadvantage to it. Opportunity: An opportunity is a favorable condition in the external environment which enables it to strengthen its position. Threat: An unfavorable condition in the external environment which causes a risk for, or damage to the organization s position. (c) Conglomerate diversification -Refer SM chap (a) (i) (ii) (iii) (iv) Business functions in isolation Incorrect Strategies are perfect, flawless and optimal organizational plans-incorrect B in BCG matrix stands for balance- Incorrect Corporatestrategy is basically thegrowthdesignof the firm - Correct (b) (i) (ii) (iii) Culture Objectives External 11. Strategy and the generic strategies as discussed by Glueck and Jauch. Businesses have to respond to a dynamic and often hostile environment for pursuit of their mission. Strategies provide an integral framework for management and negotiate their way through a complex and turbulent external environment. Strategy seeks to relate the goals of the organization to the means of achieving them. A company s strategy is the game plan management is using to stake out market position and conduct its operations. A company s strategy consists of the combination of competitive moves and business approaches that managers employ to please customers compete successfully and achieve organizational objectives. Strategy may be defined as a long range blueprint of an organization s desired image, direction and destination what it wants to be, what it wants to do and where it wants to go. Strategy is meant to fill in the need of organizations for a sense of dynamic direction, focus and cohesiveness. The Generic Strategies According to Glueck and Jauch there are four generic ways in which strategic alternatives can be considered. These are stability, expansion, retrenchment and combinations. (i) Stability strategies: One of the important goals of a business enterprise is stability to safeguard its existing interests and strengths, to pursue well established and tested objectives, to continue in the chosen business path, to maintain operational efficiency on a sustained basis, to consolidate the commanding position already reached, and to optimize returns on the resources committed in the business. (ii) Expansion Strategy: Expansion strategy is implemented by redefining the business by adding the scope of business substantially increasing the efforts of the current business. Expansion is a promising and popular strategy that tends to be equated with dynamism, vigor, promise and success. It is often characterized by significant reformulation of goals and directions, major initiatives and moves involving investments, exploration and onslaught into new products, new technology and new PRIME / ME33 / IPCC 12

40 markets, innovative decisions and action programmes and so on. Expansion includes diversifying, acquiring and merging businesses. (iii) Retrenchment Strategy: A business organization can redefine its business by divesting a major product line or market. Retrenchment or retreat becomes necessary or expedient for coping with particularly hostile and adverse situations in the environment and when any other strategy is likely to be suicidal. In business parlance also, retreat is not always a bad proposition to save the enterprise's vital interests, to minimize the adverse environmental effects, or even to regroup and recoup the resources before a fresh assault and ascent on the growth ladder is launched. (iv) Combination Strategies: Stability, expansion or retrenchment strategies are not mutually exclusive. It is possible to adopt a mix to suit particular situations. An enterprise may seek stability in some areas of activity, expansion in some and retrenchment in the others. Retrenchment of ailing products followed by stability and capped by expansion in some situations may be thought of. For some organizations, a strategy by diversification and/or acquisition may call for a retrenchment in some obsolete product lines, production facilities and plant locations. 12. Turnaround strategy: Rising competition, business cycles and economic volatility have created a climate where no business can take viability for granted. Turnaround strategy is a highly targeted effort to return an organization to profitability and increase positive cash flows to a sufficient level. Organizations those have faced a significant crisis that has negatively affected operations requires turnaround strategy. Turnaround strategy is used when both threats and weaknesses adversely affect the health of an organization so much that its basic survival is a question. When organization is facing both internal and external pressures making things difficult then it has to find something which is entirely new, innovative and different. Being organization s first objective is to survive and then grow in the market; turnaround strategy is used when organization s survival is under threat. Once turnaround is successful the organization may turn to focus on growth. Conditions for turnaround strategies When firms are losing their grips over market, profits due to several internal and external factors, and if they have to survive under the competitive environment they have to identify danger signals as early as possible and undertake rectification steps immediately. These conditions may be, inter alia cash flow problems, lower profit margins, high employee turnover and decline in market share, capacity underutilization, low morale of employees, recessionary conditions, mismanagement, raw material supply problems and so on. Action plan for turnaround strategy Stage One Assessment of current problems: The first step is to assess the current problems and get to the root causes and the extent of damage the problem has caused. Once the problems are identified, the resources should be focused toward those areas essential to efficiently work on correcting and repairing any immediate issues 13. (a) Various elements of micro environment Micro environment affects business and marketing at routine and operating levels. Whereas the changes in the macro environment affect business in the long run, the effect micro environment changes are noticed immediately. Organizations Have to closely analyze and monitor all the elements of micro environment in order to stay competitive. Micro environment can be broadly classified as: PRIME / ME33 / IPCC 13

41 Consumers/customers Competitors Organization Market Suppliers Intermediaries (b) Marketing mix is a systematic way of classifying the key decision areas of marketing management. It is the set of controllable marketing variables that the firm blends to produce the response it wants in the target market. The original framework of marketing mix comprises of 4Ps- product, price, place and promotion. These are subsequently expanded to highlight certain other key decision areas like people, processes, and physical evidence. The elements of original framework are: Product: It stands for the goods-and-service combination the company offers to the target market. Price: It stands for the amount of money customers have to pay to obtain the product. Place: It stands for company activities that make the product available to target consumers and include marketing channel, distribution policies and geographical availability. Promotion: It stands for activities that communicate the merits of the product and persuade target consumers to buy it. (c) Meaning of Six Sigma : Primarily Six sigma means maintenance of the desired quality in processes and end products. It means taking systemic and integrated efforts toward improving quality and reducing cost. It is a highly disciplined process that helps in developing and delivering near-perfect products and services. It strives to meet and improve organizational goals on quality, cost, scheduling, manpower, new products and so on. It works continuously towards revising the current standards and stabilizing higher ones. Six sigma has its base in the concept of probability and normal distribution in statistics. Six sigma strives that % of products manufactured are defect free. Six sigma efforts target three main areas: Improving customer satisfaction Reducing cycle time Reducing defects Six sigma and other quality programs Six sigma is improvement over other quality programmes: (i) Six sigma is customer focused. It strives to provide better satisfaction to the customer owning the product. (ii) Six sigma is a total management commitment and philosophy of excellence, process improvement and the rule of measurement. (iii) Six sigma induces changes in management operations - new approaches to thinking, planning and executing to achieve results. (iv) Six sigma combines both leadership and grassroots energy and involvement for its success. It has six themes. PRIME / ME33 / IPCC 14

42 (d) 14. Business Process Reengineering (BPR) is an approach to unusual improvement in operating effectiveness through the redesigning of critical business processes and supporting business systems. It is revolutionary redesign of key business processes that involves examination of the basic process itself. It looks at the minute details of the process, such as why the work is done, who does it, where is it done and when it is done. BPR refers to the analysis and redesign of workflows and processes both within the organization and between the organization and the external entities like suppliers, distributors, and service providers. The orientation of redesigning efforts is basically radical. In other words, it is a total deconstruction and rethinking of business process in its entirety, unconstrained by its existing structure and pattern. Its objective is to obtain quantum jump in process performance in terms of time, cost, output, quality, and responsiveness to customers. BPR is a revolutionary redesigning of key business processes. BPR involves the following steps: 1. Determining objectives and framework: Objectives are the desired end results of the redesign process which the management and organization attempts to achieve. This will provide the required focus, direction, and motivation for the redesign process. It helps in building a comprehensive foundation for the reengineering process. PRIME / ME33 / IPCC 15