THE SOCIETY OF AUDITORS AND 46 th SESSION - IPC - MODEL PRACTICE EXAM PAPER 5 - ADVANCED ACCOUNTING No. of Questions: 7 Total Marks: 100 No. of Pages: 7 Time Allowed: 3 Hrs Question No. 1 is compulsory. Answer any 5 from the rest of the questions. 1. A. A Company has its share capital divided into shares of INR 10 each. On 1st April, 2016, it granted 10,000 employees stock options at INR 40, when the market price was INR 130. The options were to be exercised between 16th December, 2016 and 15th March, 2017. The employees exercised their options for 9,500 shares only; the remaining options lapsed. The company closes its books on 31st March every year. Show Journal Entries. (5 Marks) B. During 2016-17, an enterprise incurred costs to develop and produce a routine, low risk computer software product, as follows: Amount(INR) Completion of detailed programme and 25,000 design Coding and Testing 20,000 Other coding costs 42,000 Testing costs 12,000 Product masters for training materials 13,000 Packing the product (1,000 units) 11,000 What amount should be capitalized as software costs in the books of the company, on Balance Sheet date? (5 Marks) C. M/s. Zen Bridge Construction Limited obtained a loan of INR 64 crores to be utilized as under: (i) Construction of Hill link road in Kedarnath: (work was held INR 50 crores up totally for a month during the year due to heavy rain which are common in the geographic region involved) (ii) Purchase of Equipment and Machineries INR 6 crores (iii) Working Capital INR 4 crores (iv) Purchase of Vehicles INR 1 crore (v) Advances for tools/cranes etc. INR 1 crore (vi) Purchase of Technical Know how INR 2 crores (vii) Total Interest charged by the Bank for the year ending 31st March, 2016 INR 1.6 crores Show the treatment of Interest according to Accounting Standard by M/s. Zen Bridge Construction Limited. (5 Marks) PRIME/46 th ME/N/IPC 1
D. The following is the Summarized Balance Sheet of M/s. Vriddhi Infra Ltd. as on 31st March, 2016: Equity & Liabilities Amount (INR) Assets Amount (INR) Shareholders Fund 1. (a) Share Capital: 1. Non current assets: 1,00,000 Equity Shares of 10,00,000 (a) Fixed (Tangible INR 10 each fully paid up Assets: (b) Reserve & Surplus: Land & Building 21,50,000 Securities Premiums 3,00,000 Plant & Machinery 15,00,000 General Reserve 2,50,000 (b) Non- current Investment 2,00,000 Profit & Loss Account Surplus 1,50,000 2. Non-Current Liabilities 2. Current Assets Long-Term Borrowings: (a) Trade 5,50,000 Receivables 10% Debentures (Secured by 20,00,000 (b) Inventories 1,80,000 floating charge on all assets) Unsecured Loans 8,00,000 (c) Cash and Cash 40,000 Equivalents 3. Current Liability & Provisions Trade Payables Total 1,20,000 46,20,000 46,20,000 On 21st April, 2016 the Company announced the buyback of 25,000 of its equity shares @ INR 15 per share. For this purpose, it sold all its investment for INR 2.50 lakhs. On 25th April, 2016, the company achieved the target of buy back. On 1st May, 2016 the company issued one fully paid up share of INR 10 each by way of bonus for every five equity shares held by the equity shareholders. You are requested to pass necessary Journal Entries for the above transactions. All necessary workings should form part of your answer. (5 Marks) 2. A. On the basis of the following information, calculate the value of goodwill of Gee Ltd. at three years purchase of super profits, if any, earned by the company in the previous four completed accounting years. B. Summarized Balance Sheet of Gee Ltd. as at 31st March, 2015 Liabilities INR in lakhs Assets INR in lakhs Share Capital: Goodwill 310 Authorized 7,500 Land and Buildings 1,850 Issued and Machinery 3,760 Subscribed 5 crore equity Furniture and Fixtures 1,015 shares of INR 10 each, fully paid up 5,000 Patents and Trade Marks 32 PRIME/46 th ME/N/IPC 2
Capital Reserve 260 9% Non-trading 600 Investments General Reserve 3,293 Inventory 873 Surplus i.e. credit Trade receivable 614 balance of Profit and 457 Loss (appropriation) A/c Trade payables 568 Cash in hand and at bank 546 Provision for 22 Taxation (net) 9600 9600 The profits before tax of the four years have been as follows: Year ended 31st March Profit before tax in lakhs of INR 2011 3,190 2012 2,500 2013 3,108 2014 2,900 The rate of income tax for the accounting year 2010-2011 was 40%. Thereafter it has been 38% for all the years so far. But for the accounting year 2014-2015 it will be 35%. In the accounting year 2010-2011, the company earned an extraordinary income of INR 1 crore due to a special foreign contract. In August, 2011 there was an earthquake due to which the company lost property worth INR 50 lakhs and the insurance policy did not cover the loss due to earthquake or riots. 9% Non-trading investments appearing in the above mentioned Balance Sheet were purchased at par by the company on 1st April, 2012. The normal rate of return for the industry in which the company is engaged is 20%. Also note that the company s shareholders, in their general meeting have passed a resolution sanctioning the directors an additional remuneration of INR 50 lakhs every year beginning from the accounting year 2014-2015. (8 Marks) C. Variety Ltd. holds 46% of the paid-up share capital of VR Ltd. The shares were acquired at a market price of INR 17 per share. The balance of shares of VR Ltd. is held by a foreign collaborating company. A memorandum of understanding has been entered into with the foreign company providing for the following: (a) The shares held by the foreign company will be sold to Variety Ltd. The price per share will be calculated by capitalizing the yield at 15%. Yield, for this purpose, would mean 40% of the average of pre-tax profits for the last 3 years, which were INR 30 lakhs, INR 40 lakhs and INR 65 lakhs. (b) The actual cost of the shares to the foreign company was INR 5, 40,000 only. The profit that would accrue to them would be taxable at an average rate of 30%. The tax payable will be deducted from the proceeds and Variety Ltd. will pay it to the Government. (c) Out of the net consideration, 50% would be remitted to the foreign company immediately and the balance will be an unsecured loan repayable after two years. All concerned for being given effect to on 1.4.2017 approved the above agreement. The total assets of VR Ltd. as on 31.3.2017 were INR 1,00,00,000. It was decided to write down fixed assets by INR 1, 75,000. Current liabilities of VR Ltd. as on the same date were INR 20, 00,000. The paid-up share capital of VR Ltd. was INR 20, 00,000 divided into 2,00,000 equity shares of INR 10 each. Find out goodwill/capital reserve to Variety Ltd. on acquiring wholly the shares of VR Ltd. (8 Marks) PRIME/46 th ME/N/IPC 3
3. Given below are the Profit & Loss Accounts of H Ltd. and its subsidiary Ltd. for the year ended 31st March, 2017: H Ltd. (INR in lacs) S Ltd. (INR in lacs) Incomes: Sales and other income Increase in Inventory Expenses: Raw material consumed Wages and Salaries Production expenses Administrative Expenses Selling and Distribution Expenses Interest Depreciation 5,000 1,000 6,000 800 800 200 200 200 100 100 2,400 1,000 200 1,200 Profit before tax 3,600 500 Provision for tax 1,200 200 Profit after tax 2,400 300 Dividend paid 1,200 150 Balance of Profit 1,200 150 Other Information: H Ltd. sold goods to S Ltd. of INR 120 lacs at cost plus 20%. Inventory of S Ltd. includes such goods valuing INR 24 lacs. Administrative expenses of S Ltd. include INR 5 lacs paid to H Ltd. as consultancy fees. Selling and distribution expenses of H Ltd. include INR 10 lacs paid to S Ltd. as commission. H Ltd. holds 80% of equity share capital of INR 1,000 lacs in S Ltd. prior to 2015-2016. H Ltd. took credit to its Profit and Loss Account, the proportionate amount of dividend declared and paid by S Ltd. for the year 2015-2016.Prepare a consolidated profit and loss account. (16 Marks) 4. The following were the summarized Balance Sheets of P Ltd. and V Ltd. as at 31-3-20X1: Liabilities P Ltd. (INR in lacs) V Ltd. (INR in lacs) Equity Share Capital (Fully 15,000 6,000 paid shares of INR 10 each) Securities Premium 3,000 - Foreign Project Reserve - 310 General Reserve 9,500 3,200 Profit and Loss Account 2,870 825 12% Debentures - 1,000 Trade payables 1,200 463 Provisions 1,830 33,400 702 12,500 Assets P Ltd. (INR in lacs) V Ltd. (INR in lacs) Land and Buildings 6,000 - Plant and Machinery 14,000 5,000 Furniture, Fixtures and Fittings 2,304 1,700 Inventory 7,862 4,041 Trade receivables 2,120 1,100 Cash at Bank 1,114 609 Cost of Issue of Debentures - 33,400 50 12,500 200 150 100 100 50 50 50 700 PRIME/46 th ME/N/IPC 4
All the bills receivable held by V Ltd. were P Ltd. s acceptances. On 1st April 20X1, P Ltd. took over V Ltd in an amalgamation in the nature of merger. It was agreed that in discharge of consideration for the business P Ltd. would allot three fully paid equity shares of INR 10 each at par for every two shares held in V Ltd. It was also agreed that 12% debentures in V Ltd. would be converted into 13% debentures in P Ltd. of the same amount and denomination. Details of trade receivables and trade payables as under: Assets P Ltd. (INR in lacs) V Ltd. (INR in lacs) Trade payables Bills Payable Creditors Trade receivables Debtors Bills Receivable 120 1,080 1,200 2,120-2,120-463 463 1,020 80 1,100 Expenses of amalgamation amounting to INR 1 lakh were borne by P Ltd. You are required to: (i) Pass journal entries in the books of P Ltd. and (ii) Prepare P Ltd. s Balance Sheet immediately after the merger considering that the cost of issue of debentures shown in the balance sheet of the V Ltd. company is not transferred to the P Ltd. company. (16 Marks) 5. A. Balance Sheets of X Ltd. As on 31st March 2014 and 31st March 2015 (INR in lakhs) Liabilities 31.3.14 31.3.15 Assets 31.3.14 31.3.15 Share Capital 18,00 18,00 Fixed assets 24,00 26,00 General Reserve 6,00 6,00 Investments 1,00 2,00 Profit &Loss A/c 6,80 9,40 Inventory 6,00 5,50 12% Debentures 2,00 2,00 Trade 3,00 3,50 receivables 18% Term Loan 3,00 3,20 Cash and 4,00 3,40 Bank Cash Credit 1,20 80 Trade payables 70 60 Tax Provision 30 38,00 40 40,40 38,00 40,40 Non-trade investments were 75% of the total investments. Find capital employed as on 31.3.14 and as on 31.3.15 and average capital employed. (6 Marks) B. The following is the summarized Balance Sheet of Shah Ltd. Co. which is in the hands of the liquidator: Balance Sheet as at 31.3.2017 Liabilities INR Assets INR Share Capital: Fixed assets 2,00,000 1,000, 6% Preference Shares of Inventory 1,20,000 INR 100 each, fully paid 1,00,000 2,000 Equity shares of INR 100 each, fully paid 2,00,000 Book Debt 2,40,000 PRIME/46 th ME/N/IPC 5
2,000 Equity shares of INR 100 1,50,000 Cash in hand 240,000 each INR 75 paid up Loan from bank (on security of 1,00,000 Profit and loss A/c 300,000 stock) Trade Payables 3,50,000 900,000 900,000 The assets realized the following amounts (after all costs of realization and liquidator s commission amounting to INR 5,000 paid out of cash in hand). INR Fixed assets 1,68,000 Inventory 1,10,000 Trade Receivables 2,30,000 Calls on partly paid shares were made but the amounts due on 200 shares were found to be irrecoverable. You are required to prepare Liquidator s Final Statement of Receipts and Payments. (10 Marks) 6. A. Templeton Finance Ltd. is a non-banking finance company. The extracts of its balance sheet are given below: Liabilities Amount Assets Amount INR in 000 INR in 000 Paid-up equity capital 100 Leased out assets 800 Free reserves 500 Investment: Loans 400 In shares of subsidiaries and Deposits 400 group companies 100 In debentures of subsidiaries 100 and group Companies Cash and bank balances 200 Deferred expenditure 200 1,400 1,400 You are required to compute 'Net owned Fund' of Templeton Finance Ltd. as per Non-Banking Financial Company - Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016. (8 Marks) B. Calculate the year-end NAV of the Mutual Fund scheme on the basis of the information given below: (i) UTI launched a new Fund scheme for INR 6,000 crore. (ii) Underwriting Commission is 1% of the fund shared equally by SBI, PNB, Syndicate Bank and UTI Bank. (iii) The Fund was launched on 1.4.2016 with a face value of INR1000 per unit. (iv) Underwriting Commission was paid in full. (v) Management Expense was allowed by SEBI @ 1% of the Fund raised. However, during the year management expense was of INR 45 crore only. The management decided to defer the payment of INR 5 crore to the next financial year. (vi) On 1.5.2016, the total fund received was invested after deduction of underwriting commission and INR 100 crore to meet the day to day management expenses. The investment fund received yielded 10% interest per annum. The interest was received for 3 quarters and the interest of last quarter is yet to be received. The interest realized in cash has been distributed to the unit holders @ 80%. The financial year runs from April to March. The quarter starts from the date of investment i.e. 1.5.2016. (8 Marks) PRIME/46 th ME/N/IPC 6
7. A. A fund purchased 10,000 debentures of a company on June 1, 2016 for INR 10.7 lakh and further 5,000 debentures on Nov 1, 2016 for INR 5.45 lakh. The debentures carry fixed annual coupon of 12%, payable on every 31 March and 30 September. On Feb 28, 2017 the fund sold 6,000 of these debentures for INR 6.78 lakh. Nominal value per debenture is INR 100. Show Investment in Debentures A/c in books of the fund. (4 Marks) B. PPX Ltd. gives the following information about past profits: Year Profits (INR 000) 2011 21,70 2012 22,50 2013 23,70 2014 24,50 2015 21,10 On scrutiny it is found (i) that upto 2013, PPX Ltd. followed FIFO method of finished inventory valuation thereafter adopted LIFO method, (ii) that upto 2014 it followed straight line depreciation and thereafter adopted written down value method. Given below the details of Inventory valuation: (Figures in INR 000) Year Opening Inventory Closing Inventory FIFO LIFO FIFO LIFO 2011 40,00 39,80 46,00 41,20 2012 46,00 41,20 49,20 47,90 2013 49,20 47,90 38,90 39,10 2014 38,90 39,10 42,00 38,50 2015 42,00 38,50 45,00 43,10 Straight line and written down value depreciation were as follows: Year Straight Line (INR 000) W.D. V(INR 000) 2011 12,10 17,00 2012 14,15 18,10 2013 15,00 19,25 2014 16,70 19,60 2015 18,00 19,40 Determine future maintainable profits that can be used for valuation of goodwill. (4 Marks) C. Difference between the wholly owned and partly owned subsidiaries? (4 Marks) D. Newton Limited incorporated on 1st January, 20X1 issued a prospectus inviting applications for 20,000 equity shares of INR10 each. The whole issue was fully underwritten by Adams, Benzamin and Clayton as follows: Adams 10,000 shares Benzamin 6,000 shares Clayton 4,000 shares Applications were received for 16,000 shares, of which marked applications were as follows: Adams 8,000 shares Benzamin 2,850 shares Clayton 4,150 shares You are required to find out the liabilities of individual underwriters (4 Marks) PRIME/46 th ME/N/IPC 7
1. A. THE SOCIETY OF AUDITORS AND 46 TH SESSION - IPC - MODEL PRACTICE EXAM PAPER 5 - ADVANCED ACCOUNTING - SUGGESTED ANSWERS 2016 Particulars Dr.(INR) Cr.(INR) April 1 Employee Compensation Expense Dr. 9,00,000 To Employee Stock Options Outstanding 9,00,000 (Being grant of 10,000 stock options to employees at INR 40 when market price is INR 130) 2017 16th Dec. Dr. 3,80,000 to 15 th March Dr. 8,55,000 March 16 March 31 Bank Employee stock options outstanding To Equity share capital To Securities premium (Being allotment to employees of 9,500 equity shares of INR 10 each at a premium of INR 120 per share in exercise of stock options by employees) Employee stock options outstanding To Employee compensation expense (Being entry for lapse of stock options for 500 shares) Profit and Loss A/c To Employee compensation expense (Being transfer of employee compensation expense to profit and loss account) Dr. 45,000 Dr. 8,55,000 95,000 11,40,000 45,000 8,55,000 Note: The students are advised to refer Chapter 3 Accounting for Employee Stock Option Plan for the practical problems based on this Guidance Note. B. As per para 44 of AS 26, costs incurred in creating a computer software product should be charged to research and development expense when incurred until technological feasibility/asset recognition criteria has been established for the product. Technological feasibility/asset recognition criteria have been established upon completion of detailed programme design or working model. In this case, INR 45,000 would be recorded as an expense (INR 25,000 for completion of detailed program design and INR 20,000 for coding and testing to establish technological feasibility/asset recognition criteria). Cost incurred from the point of technological feasibility/asset recognition criteria until the time when products costs are incurred are capitalized as software cost (INR 42,000 + INR 12,000 + INR 13,000) INR 67,000. C. According to AS 16 Borrowing costs, qualifying asset is an asset that necessarily takes substantial period of time to get ready for its intended use. As per the standard, borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset should be capitalized as part of the cost of that asset. Other borrowing costs should be recognized as an expense in the period in which they are incurred. Capitalization of borrowing costs is also not suspended when a temporary delay is a necessary part of the process of getting an asset ready for its intended use or sale. The treatment of interest by Zen Bridge Construction Ltd. can be shown as: PRIME/46 th ME/N/IPC 1
Qualifying Interest to be Interest to be Asset capitalized INR charged to Profit & in crores Loss A/c INR in crores Construction of hill road* Yes 1.25 1.6/64 x 50 Purchase of equipment and machineries No 0.15 1.6/64 x 6 Working capital No 0.10 1.6/64 x 4 Purchase of vehicles No 0.025 1.6/64 x 1 Advance for tools, cranes etc. No 0.025 1.6/64 x 1 Purchase of technical No 0.05 1.6/64 x 2 knowhow Total 1.25 0.35 *Note: It is assumed that construction of hill road will normally take more than a year (substantial period of time), hence considered as qualifying asset. D. In the books of Vriddhi Infra Ltd. Journal Entries Date 2016 Particulars Dr. Cr. April 21 Bank A/c Dr. To Investment A/c To Profit on sale of investment April 25 Equity share capital A/c Dr. Securities premium A/c Dr. To Equity shares buy back A/c Equity shares buy back A/c Dr. To Bank A/c* (Being the payment made on account of buy back of 25,000 Equity Shares) General Reserve A/c / P&L A/c Dr. To Capital redemption reserve A/c (Being amount equal to nominal value of buy back shares from free reserves transferred to capital redemption reserve account as per the law) 1st May Capital redemption reserve A/c Dr. To Bonus shares A/c (W.N.1) (Being the utilization of capital redemption reserve to issue bonus shares) Bonus shares A/c Dr. To Equity share capital A/c (Being issue of one bonus equity share for every five equity shares held) INR 2,50,000 2,50,000 1,25,000 3,75,000 2,50,000 1,50,000 1,50,000 INR 2,00,000 50,000 3,75,000 3,75,000 2,50,000 1,50,000 1,50,000 PRIME/46 th ME/N/IPC 2
2. A. Working Note: Amount of bonus shares = = 15,000 x INR 10 = INR 1, 50,000 (1) Capital employed as on 31st March, 2015 (Refer to Note ) INR in lakhs Land and Buildings 1,850 Machinery 3,760 Furniture and Fixtures 1,015 Patents and Trade Marks 32 Inventory 873 Trade receivables 614 Cash in hand and at Bank 546 Less: Trade payables 568 Provision for taxation (net) 22 590 8,100 (2) Future maintainable profit (Amounts in lakhs of INR) 2010-2011 INR 2011-2012 INR 2012-2013 INR 2013-2014 INR Profit before tax 3,190 2,500 3,108 2,900 Less: Extraordinary (100) income due to foreign contract Add: Loss due to 50 earthquake Less: Income from nontrading investments 3,090 2,550 54 3,054 As there is no trend, simple average profits will be considered for calculation of goodwill. Total adjusted trading profits for the last four years = INR (3,090 + 2,550 + 3,054 + 2,846) = INR 11,540 lakhs Average trading profit before tax = 54 2,846 Less: Additional remuneration to directors Less: Income tax @ 35 %( approx.) (50) Lakh 2,835 Lakh (992) (Approx.) 1,843 Lakh PRIME/46 th ME/N/IPC 3
B. (3) Valuation of Goodwill on Super Profits Basis INR in lakh Future maintainable profits 1,843 Less: Normal profits (20% of ` 8,100 lakhs) (1,620) Super profits 223 Goodwill at 3 years purchase of super profits = 3 x INR 223 lakhs = INR 669 lakhs Note: In the above solution, goodwill has been calculated on the basis of closing capital employed (i.e. on 31st March, 2015). Goodwill should be calculated on the basis of average capital employed and not actual capital employed as no trend is being observed in the previous years profits. The average capital employed cannot be calculated in the absence of details about profits for the year ended 31st March, 2015. Since the current year s profit has not been given in the question, goodwill has been calculated on the basis of capital employed as on 31st March, 2015. (1) Computation of purchase consideration: (a) (b) Yield of VR Ltd. Price per share of VR Ltd. INR 18 Lakhs INR 120 lakhs Capitalized yield 2 lakhs Total number of shares of VR Ltd INR 60 Price per share (120 /2) (c) Purchase consideration for 54% shares in VR Ltd. INR 64.80 lakhs (d) Discharge of purchase consideration: Tax deducted at source (INR 64.80 lakhs INR 5.40 lakhs) 50% of purchase consideration (net of tax) in cash INR(64.80 17.82) x 50% Balance Unsecured Loan INR 17.82 lakhs INR 23.49 lakhs INR 23.49 lakhs (2) Goodwill/Capital Reserve to Variety Ltd. INR in lakhs Total Assets 100.00 Less: Reduction in value of Fixed Assets (1.75) 98.25 Less: Current Liabilities (20.00) Net Assets 78.25 Purchase consideration (refer section 1) 64.80 Investments (Total no of shares X % share held X Acquisition price) [2 lakhs X 46 % X INR 17] Goodwill (Investment less purchase consideration) 15.64 80.44 2.19 PRIME/46 th ME/N/IPC 4
3. Consolidated Profit & Loss Account of H Ltd. and its subsidiary S Ltd. for the year ended on 31st March, 2017 Particulars Note No. INR in lakhs I. Revenue from operations 1 II. Total revenue III. Expenses Cost of Material purchased/consumed Changes of Inventories of finished goods Employee benefit expense Finance cost Depreciation and amortization expense Other expenses 3 2 4 6 7 5 Total expenses IV. Profit before Tax(II-III) V. Tax Expenses VI. Profit After Tax Profit transferred to Consolidated Balance Sheet Profit After Tax Dividend paid H Ltd. S Ltd. Less: Share of H Ltd. in dividend of S Ltd. 80% of INR 150 lakhs Profit to be transferred to consolidated balance sheet Notes to Accounts INR in lakhs 1. Revenue from Operations Sales and other income H Ltd. 5,000 S Ltd. 1,000 6,000 Less: Inter-company Sales (120) Consultancy fees received by H Ltd. from S Ltd. (5) 8 1,200 150 1,350 (120) INR in lakhs 5,865 5,865 1,180 (1,196) 950 150 150 535 1769 4,096 1,400 2,696 2,696 (1,230) 1,466 Commission received by S Ltd. from H Ltd. (10) 5,865 2. Increase in Inventory H Ltd. S Ltd. 1,000 200 1,200 Less: Unrealized profits INR 24 lakhs 3. Cost of Material purchased/consumed H Ltd. S Ltd. Less: Purchases by S Ltd. from H Ltd. Direct Expenses H Ltd. (4) 1,196 7,061 800 200 1000 (120) 200 880 PRIME/46 th ME/N/IPC 5
S Ltd. 100 300 1,180 4. Employee benefits and expenses Wages and Salaries: H Ltd. S Ltd. 5. Other Expenses Administrative Expenses H Ltd. S Ltd. Less: Consultancy fees received by H Ltd. from S Ltd. Selling and Distribution Expenses: H Ltd. S Ltd. Less: Commission received from S Ltd. from H Ltd. 6. Finance Cost Interest: H Ltd. S Ltd. 7. Depreciation and Amortization Depreciation: H Ltd. H Ltd. 8. Provision for tax H Ltd. S. Ltd. 800 150 950 200 100 300 (5) 200 50 250 (10) 295 240 535 100 50 150 100 50 150 1,200 200 1,400 Note: Since the amount of dividend received by H Ltd. for the year 2015-2016 is not given, it has not been deducted from sales and other income in consolidated profit and loss account and not added to consolidated opening retained earnings (which is also not given). 4. Books of P Ltd. Journal Entries Business Purchase A/c To Liquidator of V Ltd. (Being business of V Ltd. taken over for consideration settled as per agreement) Dr. INR in lakhs Cr. INR in lakhs Dr. 9,000 9,000 Plant and Machinery Dr. 5,000 Furniture & Fittings Dr. 1,700 Inventory Dr. 4,041 Debtors Dr. 1,020 Cash at Bank Dr. 609 Bills Receivable Dr. 80 To Foreign Project Reserve 310 To General Reserve (3,200-3,000) 200 To Profit and Loss A/c (825 50*) 775 PRIME/46 th ME/N/IPC 6
To Liability for 12% Debentures 1,000 To Creditors 463 To Provisions 702 To Business Purchase 9,000 (Being assets & liabilities taken over from V Ltd.) Liquidator of V Ltd. A/c Dr. 9,000 To Equity Share Capital A/c 9,000 (Purchase consideration discharged in the form of equity shares) Profit & loss A/c Dr. 1 To Bank A/c 1 (Liquidation expenses paid by P Ltd.) Liability for 12% Debentures A/c To 13% Debentures A/c Dr. 1,000 (12% debentures discharged by issue of 13% 1,000 debentures) Bills Payable A/c Dr. 80 To Bills Receivable A/c 80 (Cancellation of mutual owing on account of bills) Balance Sheet of P Ltd. as at 1st April, 20X1 (after merger) Particulars Notes INR (in lakhs) Equity and Liabilities 1 Shareholders' funds A Share capital B Reserves and Surplus 2 Non-current liabilities A Long-term borrowings 3 Current liabilities A Trade Payables (1,543 + 40) B Short-term provisions Total Assets 1 Non-current assets A Fixed assets Tangible assets 2 Current assets A Inventories B Trade receivables C Cash and cash equivalents Total 1 2 3 4 24,000 16,654 1,000 1,583 2,532 45,769 29,004 11,903 3,140 1,722 45,769 PRIME/46 th ME/N/IPC 7
Notes to accounts 1. Share Capital Equity share capital Authorized, issued, subscribed and paid up 24 crores equity shares of INR 10 each (Of the above shares, 9 crores shares have been issued for consideration other than cash) Total 2. Reserves and Surplus General Reserve Securities Premium Foreign Project Reserve Profit and Loss Account Total INR 24,000 24,000 9,700 3,000 310 3,644 10,654 3. Long-term borrowings Secured 13% Debentures 1,000 4. Tangible assets Land & Buildings Plant & Machinery Furniture & Fittings Total 6,000 19,000 4,004 29,004 Working Note: Computation of purchase consideration The purchase consideration was discharged in the form of three equity shares of P Ltd. for every two equity shares held in V Ltd. Purchase consideration = * Cost of issue of debenture adjusted against P & L Account of V Ltd. 5. A. Computation of capital employed (INR in lakhs) 31.3.14 31.3.15 Total Assets as per Balance Sheet 38,00 40,40 Less: Non-trade Investments (75) 37,25 (1,50) 38,90 Less: Outside Liabilities: 12% Debentures 18% Term Loan Cash Credit 2,00 3,00 1,20 2,00 3,20 80 Trade payables 70 60 Tax Provision 30 7,20 40 7,00 Capital employed 30,05 31,90 Average capital employed = PRIME/46 th ME/N/IPC 8
B. Liquidator s Final Statement of Receipts and Payments A/c INR INR INR To Cash in hand 40,000 By Liquidator s remuneration and 5,000 expenses To Assets realised: Fixed assets Inventory (1,10,000 1,00,000) Book debts To Cash - proceeds of call on 1,800 equity shares @ INR 15 1,68,000 10,000 2,30,000 4,08,000 27,000 4,75,000 By Trade Payables By Preference shareholders By Equity shareholders @ INR 10 on 2,000 shares Working Note: Return per equity share INR Cash available before paying preference shareholders (INR 93,000 4,48,000 INR 3,55,000) Add: Notional calls 1,800 shares (2,000-200) INR 25 45,000 1,38,000 Less: Preference share capital (1,00,000) Available for equity shareholders 38,000 Return per share= and Loss per Equity Share INR (100-10) = INR 90 *Calls to be made @ INR 15 per share (INR 90-75) on 1,800 shares. 3,50,000 1,00,000 20,000 4,75,000 6. A. Statement showing computation of 'Net Owned Fund' Paid up Equity Capital Free Reserves Less: Deferred expenditure Investments In shares of subsidiaries and group companies A INR in 000 100 500 600 (200) 400 100 PRIME/46 th ME/N/IPC 9
In debentures of subsidiaries and group companies 10% of A Excess of Investment over 10% of A (200-40) Net Owned Fund [(A) - (C)] (400-160) B C 100 200 40 160 240 B. Calculation of Net Asset Value of a fund Total Assets: Investment (6,000-60 -100) Add: Closing Cash Balance (Refer W.N.) Add: Interest for two months due to be received INR in crores 5,840.00 147.60 97.33 6,084.93 No. of Units = NAV per unit = Working Note: Less: Outstanding Management Expenses Total value of the fund Cash received during the year for the fund Sale of units Add: Interest for 3 quarters on investment Less: Underwriting commission Management expenses paid in cash Investment Dividend paid (438 x 80%) 7. A. Investment in Debentures A/c June 1,2016 Nov 1, 2016 Feb 28,2017 Feb 28,2017 INR lakhs To Bank 10.70 June 1,2016 To Bank 5.45 Nov 1, 2016 To Interest Recoverable To Profit on disposal (Note 4) INR in crores 60 40 5,840 350.40 0.30 Feb 28,2017 0.12 Mar 31, 2017 16.57 By Interest Recoverable (Note 1) By Interest Recoverable (Note 2) (5.00) 6,079.93 6,000 438 (6,290.40) 147.60 INR lakhs 0.20 0.05 By Bank 6.78 By Balance c/d 9.54 16.57 PRIME/46 th ME/N/IPC 10
Working Notes: Note 1: 10,000 x 100 x 12/100 x 2/12 = INR 0.20 Lakhs Note 2: 5,000 x 100 x 12/100 x 1/12 = INR 0.05 Lakhs Note 3: 6,000 x 100 x 12/100 x 5/12 = INR 0.30 Lakhs Note 4: Cost of investments (per unit) = [(10, 70,000-20,000) + (5, 45,000 5,000)]/15,000 units = [10, 50,000+ 5, 40,000]/15,000 = INR 106 Cost of investments sold = INR 106 x 6,000 = INR 6, 36,000 Sale proceeds = INR 6, 78,000 - INR 30,000(interest) = INR 6, 48,000 Profit = INR 6, 48,000 - INR 6, 36,000 = INR 12,000 B. Past profits of PPX Ltd. showed an increasing trend excepting in year 2015. But the effects of changes in accounting policies should be eliminated to ascertain the true nature of trend. Since the company has adopted LIFO method of Inventory valuation and W.D.V method of depreciation, profits may be recomputed applying these policies consistently in all the past years. Re computation of profits following uniform accounting policies are shown below: (Figures in 000) Year Book Profits Effect of LIFO on Effect of Profits after elimination of the Valuation of W.D. V effect of change in Accounting Inventory. Depreciation policies 2011 21,70 4,60 4,90 12,20 2012 22,50 + 3,50 3,95 22,05 2013 23,70 + 1,50 4,25 20,95 2014 24,50 20 2,90 21,40 2015 21,10 21,10 After elimination of the effect of change in accounting policies, increasing trend disappeared. Rather profits were oscillating during the last four years excepting 2011. So a simple average may be taken of the last 4 years profits to arrive at the future maintainable profits: Future Maintainable Profit ( 000) = Working Note: Effect of LIFO Valuation: 2011 Increase in Inventory as per FIFO valuation Less: Increase in Inventory per LIFO valuation Reduction in profit 2012 Increase in Inventory as per FIFO valuation Less: Increase in Inventory as per LIFO valuation Increase in profit 2013 Decrease in Inventory as per FIFO valuation Less: Decrease in Inventory as per LIFO valuation Increase in profit 2014 Opening Inventory as per FIFO valuation Less: Opening Inventory as per LIFO valuation Reduction in profit 6,00 (1,40) 4,60 3,20 (6,70) 3,50 10,30 (8,80) 1,50 38,90 (39,10) 20 PRIME/46 th ME/N/IPC 11
C. S. No. Wholly owned subsidiary company Partly owned subsidiary company 1.. A wholly owned subsidiary company is one in which all the shares are owned by the holding company. In a partly owned subsidiary, all the shares of subsidiary company are not acquired by the holding company i.e. only the majority of shares (i.e., more than 50%) are owned by the holding company. 2. 100% voting rights are vested by the Voting rights of more than 50% but less than holding company. 3. There is no minority interest because all the shares with voting rights are held by the holding company. 100% are vested by the holding company. There is a minority interest because less than 50% shares with voting rights are held by outsiders other than the holding company. D. Statement of Net Liability of Underwriters Gross Marked Number of Share Surplus of Total Ne liability liability applications unmarked applications in Total Clayton in the ratio of the ratio of 10:6 gross liability (1) (2) (3) (4) (5) (6) (7) Adams 10,000 8,000 500 8,500 219 8,719 1,281 Benzamin 6,000 2,850 300 3,150 131 3,281 2,719 Clayton 4,000 20,000 4,150 15,000 200 1,000 4,350 16,000-350 4,000 16,000 Note: The applications are for 16,000 shares out of which 15,000 are marked. Hence unmarked applications are for 1,000 shares. 4,000 PRIME/46 th ME/N/IPC 12
THE SOCIETY OF AUDITORS AND 46 th SESSION - IPC - MODEL PRACTICE EXAM PAPER 6 - AUDITING & 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 rest 1) 1.According to the Engagement and Quality control standards please define the following: a. Access Control (2 Marks) b. Assurance engagement (3 Marks) c. Experienced Auditor (2 Marks) d. Related party (3 Marks) 2. i. As per SA 500 write a short note on the Information produced by the entity and used for the Auditors purposes. (5 Marks) ii. Give the circumstances in which an emphasis of matter paragraph may be necessary. ( 5 Marks) 2) State with reasons (in short) whether the following statements are correct or incorrect : (Answer any eight) i. External confirmation procedures are the more reliable procedures to obtain audit evidence. ii. There are no differences between the corresponding figures and comparative financial statements approach in respect of auditors reporting responsibilities in respect of comparative information. iii. An arms length transaction is between related parties. iv. A Chartered Accountant holding securities of S Ltd. having face value of ` 950 is qualified for appointment as an auditor of X Pharma Ltd. v. A cost accountant is eligible for appointment as an Auditor of a company. vi. Audit risk, is the risk that an auditor may fail to express an appropriate opinion in an audit assignment. vii. As per section 138 of the Companies Act, 2013 private companies are not required to appoint internal auditor. viii. As per SA 230 on Audit Documentations, the working papers are not the property of the auditor. (8*2=16 Marks) 3) i. How will the auditor document the audit plan? (6 Marks) ii. The auditor of XYZ Ltd, engaged in FMCG (Fast Moving Consumable Goods) obtains an understanding of the control environment. As part of obtaining this understanding, the auditor evaluates whether: (a) Management has created and maintained a culture of honesty and ethical behavior; and (b) The strengths in the control environment elements collectively provide an appropriate foundation for the other components of internal control. Advise what is included in control environment. Also explain the elements of control environment. (6 Marks) PRIME/46 th ME/N/IPC 1
iii. Arpana Hospitals Ltd having Gross Professional Charges of ` 50 crores is engaged in providing healthcare services. STP & Co., a firm of auditors is appointed as its auditors. Advise what special points to be kept in mind for the purpose of construction of an Audit programme. Explain. (4 Marks) 4) i. ii. After the completion of statutory audit of ABC Ltd., a fraud was detected at the office of the auditee. The management of the company alleged that there is a failure on the part of the auditor to detect fraud and that auditor would be responsible for not detecting fraud in the company. Discuss. (8 Marks) What is the auditors responsibility for reporting on Internal Financial Controls over reporting? (8 Marks) 5) 6) i. Write a short note on the manner of Rotation of auditors by the company on the expiry of their term. ( 8 Marks) ii. Write a short note on Auditors Report under Companies Auditors Report order, 2016 (CARO 2016) ( 8 Marks) i. Write a note on conducting the audit of a Bank. (10 Marks) ii. Give the form and content of the Auditors when the opinion is modified. (6 Marks) 7) Write short notes on any 4 of the following: i. Reserve bank of India ii. Difference between Reserves and Surplus iii. Inherent Risk iv. Powers of C&AG v. Division of responsibilities between the principal auditor and other auditors (4*4=16 Marks) PRIME/46 th ME/N/IPC 2
THE SOCIETY OF AUDITORS AND 46 TH SESSION - IPC - MODEL PRACTICE EXAM PAPER 6 AUDITING & ASSURANCE - SUGGESTED ANSWERS 1. Access controls - Procedures designed to restrict access to on-line terminal devices, programs and data. Access controls consist of user authentication and user authorization. User authentication typically attempts to identify a user through unique logon identifications, passwords, access cards or biometric data. User authorization consists of access rules to determine the computer resources each user may access. Specifically, such procedures are designed to prevent or detect: i. Unauthorized access to on-line terminal devices, programs and data; ii. Entry of unauthorized transactions; iii. Unauthorized changes to data files; iv. The use of computer programs by unauthorized personnel; and v. The use of computer programs that have not been authorized. 1. Assurance engagement - An engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the evaluation or measurement of a subject matter against criteria. The outcome of the evaluation or measurement of a subject matter is the information that results from applying the criteria (also see Subject matter information). Under the Framework for Assurance Engagements issued by the Institute of Chartered Accountants of India there are two types of assurance engagement a practitioner is permitted to perform: a reasonable assurance engagement and a limited assurance engagement. Reasonable assurance engagement The objective of a reasonable assurance engagement is a reduction in assurance engagement risk to an acceptably low level in the circumstances of the engagement as the basis for a positive form of expression of the practitioner s conclusion. Limited assurance engagement The objective of a limited assurance engagement is a reduction in assurance engagement risk to a level that is acceptable in the circumstances of the engagement, but where that risk is greater than for a reasonable assurance engagement, as the basis for a negative form of expression of the practitioner s conclusion. 2. Experienced auditor - An individual (whether internal or external to the firm) who has practical audit experience, and a reasonable understanding of: i. Audit processes; ii. SAs and applicable legal and regulatory requirements; iii. The business environment in which the entity operates; and iv. Auditing and financial reporting issues relevant to the entity s industry. 3. Related party - A party that is either: i. A related party as defined in the applicable financial reporting framework; or ii. Where the applicable financial reporting framework establishes minimal or no related party requirements: A person or other entity that has control or significant influence, directly or indirectly through one or more intermediaries, over the reporting entity; Another entity over which the reporting entity has control or significant influence, directly or indirectly through one or more intermediaries; or Another entity that is under common control with the reporting entity through having: Common controlling ownership; Owners who are close family members; or Common key management. PRIME/46 th ME/N/IPC 1
However, entities that are under common control by a state (that is, a national, regional or local government) are not considered related unless they engage in significant transactions or share resources to a significant extent with one another. i) Information Produced by the Entity and Used for the Auditor s Purposes In order for the auditor to obtain reliable audit evidence, information produced by the entity that is used for performing audit procedures needs to be sufficiently complete and accurate. For example, the effectiveness of auditing revenue by applying standard prices to records of sales volume is affected by the accuracy of the price information and the completeness and accuracy of the sales volume data. Similarly, if the auditor intends to test a population (for example, payments) for a certain characteristic (for example, authorisation), the results of the test will be less reliable if the population from which items are selected for testing is not complete. Obtaining audit evidence about the accuracy and completeness of such information may be performed concurrently with the actual audit procedure applied to the information when obtaining such audit evidence is an integral part of the audit procedure itself. In other situations, the auditor may have obtained audit evidence of the accuracy and completeness of such information by testing controls over the preparation and maintenance of the information. In some situations, however, the auditor may determine that additional audit procedures are needed. In some cases, the auditor may intend to use information produced by the entity for other audit purposes. For example, the auditor may intend to make use of the entity s performance measures for the purpose of analytical procedures, or to make use of the entity s information produced for monitoring activities, such as internal auditor s reports. In such cases, the appropriateness of the audit evidence obtained is affected by whether the information is sufficiently precise or detailed for the auditor s purposes. For example, performance measures used by management may not be precise enough to detect material misstatements. ii) Circumstances in Which an Emphasis of Matter Paragraph May Be Necessary These circumstances include: When a financial reporting framework prescribed by law or regulation would be unacceptable but for the fact that it is prescribed by law or regulation. To alert users that the financial statements are prepared in accordance with a special purpose framework When facts become known to the auditor after the date of the auditor s report and the auditor provides a new or amended auditor s report (i.e., subsequent events ) Examples of circumstances where the auditor may consider it necessary to include an Emphasis of Matter paragraph are: An uncertainty relating to the future outcome of exceptional litigation or regulatory action. A significant subsequent event that occurs between the date of the financial statements and the date of the auditor s report.6 Early application (where permitted) of a new accounting standard that has a material effect on the financial statements. A major catastrophe that has had, or continues to have, a significant effect on the entity s financial position. However, a widespread use of Emphasis of Matter paragraphs may diminish the effectiveness of the auditor s communication about such matters. 2. a) Correct Any or all of the following can be given as a reason SA 500 indicates that the reliability of audit evidence is influenced by its source and by its nature, and is dependent on the individual circumstances under which it is obtained Audit evidence is more reliable when it is obtained from independent sources outside the entity. PRIME/46 th ME/N/IPC 2
Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference. Audit evidence is more reliable when it exists in documentary form, whether paper, electronic or other medium. b) Incorrect: The essential audit reporting differences between the approaches are: For corresponding figures, the auditor s opinion on the financial statements refers to the current period only; whereas For comparative financial statements, the auditor s opinion refers to each period for which financial statements are presented. c) A transaction conducted on such terms and conditions as between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests. d) Incorrect: As per the provisions of the Companies Act, 2013, a person is disqualified to be appointed as an auditor of a company if he is holding any security of or interest in the company. e) Incorrect: A person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant. It may be noted that a firm whereof majority of partners practising in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company. f) Correct: Audit risk means the risk that the auditor gives an inappropriate audit opinion when the financial statement are materially misstated. Thus, it is the risk that the auditor may fail to express an appropriate opinion in an audit assignment. g) Incorrect - Section 138 of the Companies Act, 2013 requires every private company to appoint an internal auditor having turnover of ` 200 crore or more during the preceding financial year; or outstanding loans or borrowings from banks or public financial institutions exceeding ` 100 crore or more at any point of time during the preceding financial year. h) Incorrect - As per SA 230 on Audit Documentations the working papers are the property of the auditor and the auditor has right to retain them. He may at his discretion can make available working papers to his client. The auditor should retain them long enough to meet the needs of his practice and legal or professional requirement. 3. a) The auditor shall document: i. The overall audit strategy; ii. The audit plan; and iii. Any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes. The documentation of the overall audit strategy is a record of the key decisions considered necessary to properly plan the audit and to communicate significant matters to the engagement team. The documentation of the audit plan is a record of the planned nature, timing and extent of risk assessment procedures and further audit procedures at the assertion level in response to the assessed risks. It also serves as a record of the proper planning of the audit procedures that can be reviewed and approved prior to their performance. The auditor may use standard audit programs and/or audit completion checklists, tailored as needed to reflect the particular engagement circumstances. A record of the significant changes to the overall audit strategy and the audit plan, and resulting changes to the planned nature, timing and extent of audit procedures, explains why the significant changes were made, and the overall strategy and audit plan finally adopted for the audit. It also reflects the appropriate response to the significant changes occurring during the audit. PRIME/46 th ME/N/IPC 3
The following things should form part of auditor s documentation: A summary of discussions with the entity s key decision makers. Documentation of audit committee pre-approval of services, where required. Audit documentation access letters. Other communications or agreements with management or those charged with governance regarding the scope, or changes in scope, of our services. Auditor s report on the entity s financial statements. Other reports as specified in the engagement agreement (e.g., debt covenant compliance letter). b) Control Environment Component of Internal Control: The auditor shall obtain an understanding of the control environment. As part of obtaining this understanding, the auditor shall evaluate whether: i. Management has created and maintained a culture of honesty and ethical behaviour; and ii. The strengths in the control environment elements collectively provide an appropriate foundation for the other components of internal control. The control environment includes: the governance and management functions and the attitudes, awareness, and actions of those charged with governance and management. The control environment sets the tone of an organization, influencing the control consciousness of its people. Elements of the Control Environment: Elements of the control environment that may be relevant when obtaining an understanding of the control environment include the following: i. Communication and enforcement of integrity and ethical values These are essential elements that influence the effectiveness of the design, administration and monitoring of controls. ii. Commitment to competence Matters such as management s consideration of the competence levels for particular jobs and how those levels translate into requisite skills and knowledge. iii. Participation by those charged with governance Attributes of those charged with governance such as: Their independence from management. Their experience and stature. The extent of their involvement and the information they receive, and the scrutiny of activities. The appropriateness of their actions, including the degree to which difficult questions are raised and pursued with management, and their interaction with internal and external auditors. i. Management s philosophy and operating style Characteristics such as management s: Approach to taking and managing business risks. Attitudes and actions toward financial reporting. Attitudes toward information processing and accounting functions and personnel. ii. Organisational structure The framework within which an entity s activities for achieving its objectives are planned, executed, controlled, and reviewed. iii. Assignment of authority and responsibility - Matters such as how authority and responsibility for operating activities are assigned and how reporting relationships and authorisation hierarchies are established. iv. Human resource policies and practices Policies and practices that relate to, for example, recruitment, orientation, training, evaluation, counselling, promotion, compensation, and remedial actions PRIME/46 th ME/N/IPC 4