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 In this edition
Questions Solutions
June - 2009 June - 2009
to to
December - 2018 June - 2018
Duly incorporated in Duly incorporated in
chapters. chapters.
December - 2018 on
companion.sauda.com

iv
 CMA Inter Gr. II
(2016 Syllabus)
Paper 12 - Company Accounts
and Audit
Editors:
Prof. Arun Kumar CS (Dr.) Himanshu Srivastava
M.Com., D.Phil., AMT (AIMA), M.Com., D.Phil, UGC-NET,
ISO Lead-Auditor (UK), CISA (USA) NSE (Certificate in Financial Market),
Professor, LLB, ACS, Assistant Professor,
Motilal Nehru Institute of Research Motilal Nehru Institute of Research
& Business Administration, & Business Administration,
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Allahabad Allahabad

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Preface to Scanner___________________________

It gives us great pleasure to present the Seventeenth edition of Scanner of

Company Accounts and Audit for CMA Inter students.
This book covers all theoretical and practical aspects. It is our endeavour
to make the book as much exhaustive as possible to make it useful to all
students.
We would also like to mention that the answers given in this book are the
suggested answers. So the students are advised to update themselves with
the knowledge of various legal enactments and accounting norms.
Our special thanks to our friends Mr. Kundan Pandey & Jayendra Dubey.
We are also thankful to all the members of Shuchita Prakashan for helping
us to complete this book. We welcome suggestions for improvement in our
book.

Best of Luck

Prof. Arun Kumar

CS (Dr.) Himanshu Srivastava

viii
Contents to Scanner_____________________________________
Paper - 12 Company Accounts and Audit

 Syllabus 12.1

 Examination Trend Analysis 12.5

 Line Chart Showing Relative Importance of Chapters 12.9

 Frequency Table Showing Distribution of Marks 12.10

 Frequency Table Showing Marks of Compulsory Questions 12.11

 Legends for the Graphs 12.12

Section A : Accounts of Joint Stock Companies

1. Accounting of Shares and Debentures 12.13

2. Presentation of Financial Statements 12.100

3. Cash Flow Statement 12.138

4A. Accounts of Banking Company 12.174

4B. Accounts of Electricity Company 12.197

4C. Accounts of Insurance Company 12.215

5. Accounting Standards 12.241

5A. Objective Questions 12.279

ix
 Section B : Auditing

6. Auditing Concepts 12.307

7. Types of Audit 12.316

8. Audit Engagement, Programme, Working Papers 12.334

9. Internal Check, Internal Control and Internal Audit 12.356

10. Vouching and Verification 12.377

11. Company Auditor 12.387

12. Cost Audit and Secretarial Audit 12.412

13. Audit Report 12.425

14. Miscellaneous Audit 12.453

15. Objective Questions 12.478

 Question Paper of June, 2018 12.487

 Question Paper of December, 2018 12.494

x
Dedicated To _______________________________________

Dedicated to My Parents

Shri J.P. Srivastava

Smt. Chanda Srivastava

wife

Smt. Aneesha Srivastava

and

Daughters

Saanvi and Kuhoo

xi
xii
xiii
 UNIQUE FEATURES OF THIS EDITION

 An Examination Trend Analysis for question paper based contents of

last five examinations before the paper.
 Questions are arranged according to the subject/topic in ascending
order of examinations/years.
 Graph for every chapter, showing marks allotment for last twenty
examinations amongst Short Notes, Distinguish Between, Descriptive
Questions and Practical Questions.
 Line Chart Showing Relative Importance of Chapters.
 Table Showing Marks of Compulsory Questions at the end of every
chapter.
 Analytical Classification of every Chapter in Four Categories:
(1) Short Notes,
(2) Distinguish Between,
(3) Descriptive Questions and
(4) Practical Questions.
 100% Correct Answers of Practical Questions.
 Complete list of Repeatedly Asked Questions at the end of every
chapter.
 Complete Question Paper of June 2018 and December 2018.
 Pleasant get-up.

xiv
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know the important chapters and topics having high ranks. This helps him to
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xv
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xxiv
 Syllabus
Paper 12
Company Accounts & Audit

A Accounts of Joint Stock Companies 50%

B Auditing 50%

Objective:
To gain in depth knowledge of the professional standards, principles and
procedures regarding preparation of financial accounting statements. To
provide basic knowledge of auditing.

Section A: Accounts of Joint stock companies (50 marks)

1. Accounting of Shares and Debentures
(a) Issue of shares, rights issue, bonus issue, sweat equity shares,
forfeiture of share, buy-back of shares
(b) Issue and redemption of preference shares, debentures
(c) Under writing of shares and debentures

2. Presentation of Financial Statements (as per Schedule III)

(a) Statement of Profit and Loss
(b) Balance Sheet

3. Cash Flow Statement (AS 3)

4. Accounts of Banking, Electricity and Insurance Companies

(a) Accounts of Banking Company
(b) Accounts of an Electricity Company
(c) Accounts of Insurance Company

5. Accounting Standards (AS - 11, 12, 15, 16, 17, 18 and 19)

12.1
 Section B – Auditing (50 marks)

6. Auditing Concepts
(a) Nature, Scope and Significance of Auditing
(b) Audit Engagement, Audit Program, Audit Working Papers, Audit
Note Book, Audit Evidence and Audit Report
(c) Internal Check, Internal Control, Internal Audit - Industry Specific.

7. Provision relating to Audit under Companies Act

(a) Auditor’s qualifications, disqualifications, appointment, remuneration,
removal, powers and duties
(b) Cost Audit, Secretarial Audit
(c) Reporting Requirements under Companies Act, Report vs.
Certificate, contents of the reports and qualifications in the report
(d) Miscellaneous Audit
(i) Branch Audit, Joint Audit
(ii) Audit of shares and debentures
(iii) Audit of divisible profits and dividends
(iv) Statutory Auditors vs. Internal Auditors
(v) Auditing and Assurance Standards relating to audit of
inventories and audit of fixed assets
(vi) Auditing of different types of undertaking – Education,
Hospitals, Cooperative Societies, Banks, Trusts, Municipalities,
Panchayats

12.2
Section A
 Accounts of
Joint Stock Companies
 Examination Trend Analysis
Paper 12
Company Accounts & Audit

Question Paper Based Contents of Last Five Examinations

Years Q. No. Chapter Page
No. Name No.

2016 1. (a) 5 Accounting Standards 273

Dec. (c) 5 " " 273
(d) 2 Presentation of Financial Statements 122
(e) 5 Accounting Standards 273
3. (a) 7 Types of Audit 332
(b) 7 " " 332
(c) 8 Audit Engagement, Programme, Working Papers 351
(e) 8 " " " 351
5. (a) 3 Cash Flow Statement 162
(b) 1 Accounting of Shares and Debentures 35
6. (b) 14 Miscellaneous Audit 472
7. (a) 1 Accounting of Shares and Debentures 91
8. (a) 14 Miscellaneous Audit 473
9. (a) 6 Auditing Concepts 314
(b) 12 Cost Audit and Secretarial Audit 420
10. (a) 9 Internal Check, Internal Control and Internal
Audit 373
(b) 13 Audit Report 433

2017 1. 5A Objective Questions 295

June 2. (a) 1 Accounting of Shares and Debentures 93
(b) 5 Accounting Standards 274
3. (a) 3 Cash Flow Statement 164
(b) 4B Accounts of Electricity Company 213
4. 2 Presentation of Financial Statements 122

12.5
 5. (a) 5 Accounting Standards 245
(b) 1 Accounting of Shares and Debentures 25
(c) 4B Accounts of Electricity Company 202
(d) 3 Cash Flow Statement 141
6. 15 Objective Questions 478
7. (a) 8 Audit Engagement, Programme, Working Papers 352
(b) 9 Internal Check, Internal Control and Internal
Audit 373
8. (a) 11 Company Auditor 403
(b) 11 " " 403
9. (a) 13 Audit Report 435
(b) 12 Cost Audit and Secretarial Audit 422
10. (a) 14 Miscellaneous Audit 454
(b) 14 " " 463
(c) 10 Vouching and Verification 381
(d) 14 Miscellaneous Audit 454

2017 1. 5A Objective Questions 298

Dec. 2. (a) 1 Accounting of Shares and Debentures 94
(b) 5 Accounting Standards 274
3. (a) 3 Cash Flow Statement 168
(b) 4A Accounts of Banking Company 194
4. 2 Presentation of Financial Statements 126
5. (a) 5 Accounting Standards 245
(b) 1 Accounting of Shares and Debentures 26
(c) 4A Accounts of Electricity Company 178
(d) 1 Accounting of Shares and Debentures 26
6. 15 Objective Questions 480
7. (a) 8 Audit Engagement, Programme, Working Papers 353
(b) 9 Internal Check, Internal Control and Internal
Audit 374
8. (a) 11 Company Auditor 405
(b) 11 " " 405
9. (a) 12 Cost Audit and Secretarial Audit 422
(b) 13 Audit Report 445

12.6
 10. (a) 14 Miscellaneous Audit 456
(b) 14 " " 456
(c) 14 " " 456
(d) 14 " " 456
2018 1. 5A Objective Questions 300
June 2. (a) 1 Accounting of Shares and Debentures 97
(b) 5 Accounting Standards 275
3. (a) 3 Cash Flow Statement 170
(b) 4A Accounts of Banking Company 195
4. 2 Presentation of Financial Statements 131
5. (a) 5 Accounting Standards 246
(b) 1 Accounting of Shares and Debentures 27
(c) 4C Accounts of Insurance Company 220
(d) 1 Accounting of Shares and Debentures 27
6. 15 Objective Questions 483
7. (a) 8 Audit Engagement, Programme, Working Papers 338
(b) 9 Internal Check, Internal Control and Internal
Audit 375
8. (a) 11 Company Auditor 407
(b) 11 " " 408
9. (a) 12 Cost Audit and Secretarial Audit 423
(b) 13 Audit Report 436
10. (a) 14 Miscellaneous Audit 458
(b) 14 " " 458
(c) 14 " " 458
(d) 14 " " 458
2018 1. 5A Objective Questions 302
Dec. 2. (a) 1 Accounting of Shares and Debentures 99
(b) 5 Accounting Standards 277
3. (a) 3 Cash Flow Statement 173
(b) 4B Accounts of Electricity Company 214
4. 2 Presentation of Financial Statements 136
5. (a) 5 Accounting Standards 246
(b) 4C Accounts of Insurance Company 220
(c) 1 Accounting of Shares and Debentures 28
(d) 2 Presentation of Financial Statements 107
12.7
6. 15 Objective Questions 485
7. (a) 8 Audit Engagement, Programme, Working Papers 355
(b) 9 Internal Check, Internal Control and Internal
Audit 361
8. (a) 11 Company Auditor 409
(b) 11 " " 409
9. (a) 12 Cost Audit and Secretarial Audit 424
(b) 13 Audit Report 446
10. (a) 14 Miscellaneous Audit 462
(b) 10 Vouching and Verification 382
(c) 14 Miscellaneous Audit 462
(d) 14 " " 463

12.8
12.9
 Frequency Table Showing Distribution of Marks
Chap. Years 14 14 15 15 16 16 17 17 18 18
Total Ave.
No. Chapter Name June Dec. June Dec. June Dec. June Dec. June Dec.
1. Accounting of Shares and... 24 28 12 20 15 16 12 17 14 11 169 16.9
2. Presentation of Financial 4 4 2 12 12 12 16 62 6.2
Statements
3. Cash Flow Statement 10 10 10 9 9 13 8 8 9 86 8.6
4A. Accounts of Banking 4 10 10 10 8 4 46 4.6
Company
4B. Accounts of Electricity 8 8 8 8 17 7 3 59 5.9
Company
4C. Accounts of Insurance 8 10 10 10 8 4 4 54 5.4
Company
5. Accounting Standards 18 4 18 16 11 6 8 7 10 9 107 10.7
5A. Objective Questions 14 14 14 14 56 5.6
6. Auditing Concepts 8 4 8 20 2.0
7. Types of Audit 6 12 8 4 4 34 3.4
8. Audit Engagement, 12 8 8 2 10 4 8 8 6 6 72 7.2
Programme,...
9. Internal Check, Internal 6 10 7 2 8 4 4 6 6 53 5.3
Control...
10. Vouching and Verification 4 6 5 7 4 4 30 3.0
11. Company Auditor 2 4 4 8 12 12 12 12 66 6.6
12. Cost audit and Secretarial 4 8 7 7 8 4 5 6 49 4.9
Audit
13. Audit Report 2 4 8 7 7 4 8 7 6 53 5.3
14. Miscellaneous Audit 10 12 8 6 12 12 12 12 12 96 9.6
15. Objective Questions 14 14 14 14 56 5.6

12.10
 Frequency Table Showing Marks of Compulsory Questions
Chap. Years 14 14 15 15 16 16 17 17 18 18
Total Ave.
No. Chapter Name June Dec. June Dec. June Dec. June Dec. June Dec.
1. Accounting of Shares and... 4 4 0.4
2. Presentation of Financial 4 4 0.4
Statements
3. Cash Flow Statement
4A. Accounts of Banking 2 2 0.2
Company
4B. Accounts of Electricity 2 2 0.2
Company
4C. Accounts of Insurance 2 2 0.2
Company
5. Accounting Standards 2 2 0.2
5A. Objective Questions
6. Auditing Concepts
7. Types of Audit 2 2 0.2
8. Audit Engagement,
Programme,...
9. Internal Check, Internal 2 2 0.2
Control...
10. Vouching and Verification
11. Company Auditor 2 2 0.2
12. Cost audit and Secretarial
Audit
13. Audit Report
14. Miscellaneous Audit 2 2 0.2
15. Objective Questions

12.11
 Short Notes

Distinguish Between

12.12
Legends for the Graphs

Descriptive

Practical
 1 ACCOUNTING OF SHARES
AND DEBENTURES
THIS CHAPTER INCLUDES
• Issue of Shares • Buy-back of Shares
• Rights Issue • Issue and Redemption of
• Bonus Issue Preference Shares and
• Sweat Equity Shares Debentures
• Forfeiture of Shares • Underwriting of Shares and
Debentures.
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical

For detailed analysis Login at www.scannerclasses.com

for registration and password see first page of this book.

12.13
 12.14 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

CHAPTER AT A GLANCE
S. Topic Important Highlights
No.
1. Share capital Share capital of a company can be classified as:
(a) nominal, authorized or registered capital;
(b) issued and subscribed capital;
(c) called up and uncalled capital.
2. Share A share is defined as a share in the share capital of
a company, including stock except where a
distinction between stock and shares is expressed or
implied.
3. Two classes of The Companies Act, 2013 permits a company
shares limited by shares to issue two classes of shares,
namely equity share capital and preference share
capital.
4. Preference A preference share or preference share capital is that
share part of share capital which carries a preferential right
with respect to both dividend and capital.
5. Types of Preference shares may be of various types, namely
preference participating and non-participating, cumulative and
shares non-cumulative shares, redeemable and
irredeemable preference shares.
6. Equity share Equity share capital means all share capital which is
capital not preference share capital.
7. Sweat equity Means equity shares issued by a company to its
shares employees or directors at a discount or for
consideration, other than cash for providing
know-how or making available rights in the nature of
intellectual property rights or value additions, by
whatever name called.
• Issue of sweat equity shares to be authorized by
special resolution at a general meeting.
 [Chapter  1] Accounting of Shares and... O 12.15

• The special resolution authorizing sweat equity

shares is not valid if the allotment is made after
12 months of passing the resolution. i.e., the
validity of special resolution is 12 months.
• The price of sweat equity shares is to be
determined by a registered valuer.
• The company shall maintain a Register of Sweat
Equity Shares in Form No. SH 3.
• Issue of sweat equity shares to employees and
directors at a discount under section 54 is
outside the scope of Section 53.
8. Rights issue Rights issue is an issue of capital to be offered to the
existing shareholders of the company through a letter
of offer.
• Listed companies to inform concerned stock
exchanges.
• Company to give notice to equity shareholder
giving him 15-30 days to decide.
• Company can issue shares to other than existing
share holder for cash or other than cash if a
special resolution is obtained.
• Price to be determined by the registered valuer’s
report.
• The provisions of Section 62 are applicable to all
type of companies.
9. Bonus share When a company is prosperous and accumulates
large distributable profits, it converts these
accumulated profits into capital and divides the
capital among the existing members in proportion to
their entitlements. Members do not have to pay any
amount for such shares. A company may, if its
Articles provide, capitalize its profits by issuing
fully-paid bonus shares.
 12.16 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

• Authorised by articles.
• Authorised on recommendation of the board in
general meeting.
• No default in payment of interest or principle in
respect of debt securities and fixed deposits and
in respect of payment to employees.
• Partly paid up shares to be made fully paid up on
allotment.
• Listed companies to follow SEBI regulations.
• Once announced by the board about bonus
issue no company shall withdraw the same.
10. Issue of • Share premium to be transferred to share
shares at premium account.
premium • Utilisation of share premium account should be
[Section 52] as prescribed in Section 52.
11. Issue of • Issue of shares at discount is prohibited except
shares at by issue of sweat equity shares.
discount • Any share issued by the company at a
[Section 53] discounted price shall be void.
In Section 53 of the Companies Act, 2013,—
(i) in sub-section (2), for the words "discounted
price", the word "discount" shall be substituted;
(ii) after sub-section (2), the following sub-section
shall be inserted, namely:—
(2A) Notwithstanding anything contained in
sub-sections (1) and (2), a company may issue
shares at a discount to its creditors when its
debt is converted into shares in pursuance of
any statutory resolution plan or debt
restructuring scheme in accordance with any
guidelines or directions or regulations specified
by the Reserve Bank of India under the
Reserve Bank of India Act, 1934 or the
Banking (Regulation) Act, 1949.
 [Chapter  1] Accounting of Shares and... O 12.17

12. Issue of • Articles to authorise the issue.

shares with • Ordinary resolution to be passed and if shares
differential are listed then approval through postal ballot.
voting rights • Not to exceed 26% of total post issue paid up
[Section 43(a) equity capital including shares with differential
(ii)] voting rights at any point of time.
• The company not to be penalised under
specified legislature in last 3 years.
• No default in filing financial statements in the last
3 years.
• No default in payment of dividend.
13. Issue / • Issue to be authorised by special resolution.
redemption of • Explanatory statement to be annexed to the
preference notice of general meeting containing the relevant
shares material facts.
[Section 55] • No company shall issue irredeemable preference
shares of redeemable preference shares with the
redemption period beyond 20 years.
• Infrastructural companies may issue preference
shares for a period exceeding 20 years but not
exceeding 30 years.
14. Surrender of Surrender of shares means surrender to the
shares company on part of shareholder of shares voluntarily.
It amount to reduction of capital.
15. Stock Stock is always fully paid-up. These are the
consolidated value of share capital. They comes into
existence after conversion of shares into stock and
there by the provisions of the Act governing the
shares shall cease to apply to the share capital as it
is converted into stock.
 12.18 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

16. Forfeiture of A company may if authorized by its articles, forfeit

shares shares for non-payment of calls and the same will not
require confirmation of the Tribunal and amounts to
reduction of capital.

17. Buy-back of The repurchase of shares by a company in order to

shares reduce the number of shares on the market.
Companies will buy back shares either to increase
the value of shares still available (reducing supply) or
to eliminate any threats by shareholders who may be
looking for a controlling stake.

18. Issue and 1. No company limited by shares shall, after the

Redemption of commencement of this Act, issue any preference
Preference shares which are irredeemable.
Shares 2. A company limited by shares may, if so
[Section 55] authorised by its articles, issue preference
shares which are liable to be redeemed within a
period not exceeding twenty years from the date
of their issue subject to such conditions as may
be prescribed.
Provided that a company may issue preference
shares for a period exceeding twenty years for
infrastructure projects, subject to the redemption
of such percentage of shares as may be
prescribed on an annual basis at the option of
such preferential shareholders.

19. Under writing Underwriting is an agreement, with or without

of shares and conditions, to subscribe to the securities of a body
debentures corporate when existing shareholders of the
corporate or the public do not subscribe to the
securities offered to them.
 [Chapter  1] Accounting of Shares and... O 12.19

When a company goes in for an Initial Public Offer

(IPO), it may face certain uncertainty about whether
its Offer of shares or other securities will be
subscribed in full or not. If the public issue does not
get fully subscribed, the project for which the funds
are being raised cannot be implemented. As per law,
it is required that if the company is not able to collect
90% of the offer amount, then it needs to
compulsorily return the money to those who have
subscribed to the shares.
20. Underwriting It may be paid in cash or in fully paid-up shares or
Commission debentures or a combination of all these. It is paid on
the issue price of the shares or debentures so
underwritten. As per the provision of Section 40 of
the Companies Act, 2013.

SHORT NOTES

2008 - Dec [8] Write a note on:

(c) Bonus shares. (3 marks)
Answer:
Bonus Shares: Bonus Shares are shares issued to existing Shareholders
free of Cost by Capitalizing Free Reserves. But Company can issue Bonus
Shares when Articles of Association authorize the same. In case the
Company issuing bonus shares is a Listed Company, the Guidelines issued
by SEBI must be complied with. Only existing Shareholders are entitled to
receive Bonus Shares. Bonus Shares are be issued to only those
Shareholders who hold fully paid up Shares. The bonus shares shall be
issued only after expiry of 12 month from the date of Public Issue or Right
Issue by the Company.
Space to write important points for revision
 12.20 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2009 - June [8] Write a short notes on:

(a) Escrow Account; (3 marks)
(e) Reserve Capital. (3 marks)
Answer:
(a) Escrow Account: An Escrow Account is an Account established by a
broker, under the provisions of license law, for the purpose of holding
funds on behalf of the broker’s principal or some other person until the
consummation or termination of a transaction, or a trust Account held in
the borrower’s name to pay obligations such as property taxes and
insurance premiums. An escrow Account is the money held by the
mortgage company to pay your yearly property taxes and insurance
premiums.
Answer:
(e) Reserve Capital : Reserve Capital is that part of Share Capital which is
not called up and will be called up only in the event of Liquidation of a
Company. It adds to the credibility of the Company and Lenders and
Creditors may feel comfortable with such Company.
Space to write important points for revision

2009 - Dec [8] Write a note on:

(a) Issue of Shares in consideration other than cash; (3 marks)
Answer:
Issue of shares for consideration other than cash:
Sometimes company issues fully paid shares to the vendors from whom it
buys assets. This type of issue is called issue of shares to vendors for
consideration other than cash. When such shares are issued then it must be
clearly stated in Balance sheet; and must be distinguished from the issue
made for cash. This may be further issued either at par or at a premium;
Journal entries are:-
(i) Assets A/c – Dr. 7,00,000
To Vendors A/c 7,00,000
(For purchase of assets)
 [Chapter  1] Accounting of Shares and... O 12.21

(ii) Vendors A/c – Dr. 7,00,000

To Share Capital A/c 7,00,000
(For issue of shares)
Often the company issues fully paid shares for consideration other than cash
to promoters or any other party for furnishing technical information
engineering services, plant layout, drawings and specifications; when shares
allotted in such a way the journal entry is as under:
Goodwill A/c Dr.
To Share Capital A/c
Space to write important points for revision

2010 - June [8] Write a short note on:

(b) Capital Redemption Reserve (5 marks)
Answer :
When a company seeks to redeem preference shares it can redeem them
either out of profit or by issue of new shares, or partly by one way and partly
by another way. To redeem the fully paid preference shares the company
has to transfer equivalent amount from general reserve or profit and loss
account to an account called Capital Redemption Reserve. The following
journal entry is passed to this effect:
P & L A/c or General Reserve A/c Dr.
To Capital Redemption Reserve A/c
Having been passed the above journal entry the company can redeem the
preference shares as follows:
Preference Share Capital A/c Dr.
To Preference Share Holders A/c
Preference Share Holders A/c Dr.
To Bank A/c
The Balance of capital redemption reserve after redemption of shares
becomes a free reserve and can be utilised to issue bonus shares etc.
Space to write important points for revision

2011 - June [8] Write a short note on:

(c) Source of Buy-back of shares; (5 marks)
 12.22 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer:
Sources to buy back:
A company may purchase its own shares or other specified securities out of-
(i) its free reserve; or
(ii) the Securities premium account; or
(iii) the proceeds of any shares or other specified securities.
However, no buy back of any kind of share or other specified securities
shall be made out of the proceeds of an earlier issue of the same kind of
shares or same kind of other specified securities.
In case shares are bought back out of free reserves, then a sum equal
to the nominal value of shares bought back shall be transferred to a reserve
account to be called as the Capital Redemption Reserve Account (Sec. 69
of Companies Act, 2013). The detail of such transfer shall be disclosed in
the balance sheet. This account, as per SEBI Guidelines, shall be allowed
to be used for the issue of fully paid bonus shares.
Space to write important points for revision

2011 - Dec [8] Write a short note on:

(c) Conditions for buy back of shares; (5 marks)
Answer:
Condition for Buy - back:
No company shall purchase its own shares or other specified securities as
referred to above unless :
(a) the buy back is authorised by its Articles.
(b) Pass a board resolution for buy back up to 10% of the total paid up
equity capital & for reserves or pass a special resolution of members of
company for buy back up to 25% of total paid up capital and free
reserves of the company.
(c) the ratio of the debt owed by the company is not more than twice the
capital and its free reserves after such buy-back.
The Central Government may prescribe a higher ratio of the debt for
a class or classes of companies.
(d) all the shares or other specified securities are fully paid-up.
 [Chapter  1] Accounting of Shares and... O 12.23

(e) the buy back of the shares or other specified securities listed on any
Stock Exchange is in accordance with the regulation made by the SEBI
in this behalf.
(f) Separate guidelines shall be issued with respect to unlisted specified
securities.
Notice of the meeting: The notice of the meeting at which special resolution
is proposes to be passed shall be accompanied by an explanatory statement
stating :
(a) a full and complete disclosure of all material fact.
(b) the necessity for the buy back :
(c) the class of security intended to be purchased under the buy back.
(d) the amount to be invested under the buy back,
(e) the time limit for completion of buy back [Sec. 68 (4) of Companies Act,
2013]
Period for completion of buy back : Every buy - back shall be completed
with in 12 month from the date of passing the special resolution.
Modes of buy back: The buy back of shares may be by any one or more
of the following modes:
(a) from the existing security holders on a proportionate basis through the
tender offer
(b) from the open market through
(i) Book Building Process,
(ii) Stock Exchange,
(c) from odd-lot holders
(d) by purchasing the securities issued to employees of the company
pursuant to scheme of Stock option or sweat equity, [Sec. 68(5)].
Filing of declaration of solvency :
A declaration of Solvency in the prescribed Form No. SH.9 verified by an
affidavit and along the declaration (signed by at least two directors of the
company, one of whom shall be the managing director, if any) shall be filed
with the Registrar of Companies in case of listed companies also with SEBI.
The declaration of solvency is not required to be filed by an unlisted
company [Sec. 68(6)]
 12.24 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Extinguishment and physical destruction of securities :

Where a company buys back its own securities, it shall extinguish and
physically destroy the securities so bought back with in 7 days of the last day
of completion of buy-back. [Sec. 68(7)]
Restriction on further issue of Securities within 6 months:
When a company complete a buy-back of its share or other specified
securities, the company shall not make a further issue of shares or other
specified securities for a period of six month. [Sec. 68(8)]
Maintenance of register :
The company has to maintain register of the securities bought back with
relevant particulars.
Space to write important points for revision

2012 - June [8] Write a short note on:

(e) Profit prior to Incorporation. (5 marks)
Answer:
Profit prior to incorporation:
 Sometimes a company purchases a running business from a date prior
to its incorporation.
 If the company has earned any profit from the date of purchase to the
date of incorporation such profit is called as profit prior to incorporation.
 Such profit cannot be said to have been earned by the company as it is
not available for distribution as dividend to the shareholders.
 Such profit is treated as capital profit and is transferred to Capital
Reserve Account.
 If there is any loss prior to incorporation such loss is in the nature of
capital loss and is debited to Goodwill Account.
 It should be noted that, the date of incorporation and not the date of
commencement of business should be taken into consideration for
calculating profit or loss prior to incorporation.
Space to write important points for revision
 [Chapter  1] Accounting of Shares and... O 12.25

2013 - June [8] Write a short note:

(a) Over/Under subscription; (5 marks)
Answer :
 Where the total number of shares for which applications are received is
less than the number of shares issued, it is a case of under subscription.
 If the actual applications received are more than the shares offered to
the public it is case of over subscription.
 In the case of under subscription as the applications received are less
than those required for minimum subscription, the company cannot
proceed with allotment. The entire application money has to be
refunded.
 If the subscription for shares is more than what is offered to the public
the Board of Directors may make allotment in full to required number of
applicants and reject the other applications.
 Alternatively, they may allot shares proportionately to the applications
received to all applicants which is known as pro-rata allotment.
 It is possible that they may resort to selective partial allotment by which
the pro-rata allotment may be different for various ranges of share
applications received.
Space to write important points for revision

2016 - June [5] (b) Write a short note on the sources of Buy Back of Shares.
(5 marks)
Answer:
Please refer 2011 - June [8] (c) on page no. 21
Space to write important points for revision

2017 - June [5] Write a short note:

(b) Sweat Equity Shares (4 marks)
Answer:
Issue of Sweat Equity Shares [Section 54]
Notwithstanding anything contained in Section 53, a company may issue
sweat equity shares of a class of shares already issued, if the following
conditions are fulfilled, namely:
 12.26 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(a) the issue is authorised by a special resolution passed by the company;

(b) the resolution specifies the number of shares, the current market price,
consideration, if any, and the class or classes of directors or employees
to whom such equity shares are to be issued;
(c) not less than one year has, at the date of such issue, elapsed since the
date on which the company had commenced business; and
(d) where the equity shares of the company are listed on a recognised stock
exchange, the sweat equity shares are issued in accordance with the
regulations made by the Securities and Exchange Board in this behalf
and if they are not so listed, the sweat equity shares are issued in
accordance with such rules as may be prescribed.
The rights, limitations, restrictions and provisions as are for the time
being applicable to equity shares shall be applicable to the sweat equity
shares issued under this section and the holders of such shares shall
rank pari passu with other equity shareholders.
Space to write important points for revision

2017 - Dec [5] Write short notes:

(b) Right Issue of Shares (4 marks)
(d) Money Received against Share Warrants (4 marks)
Answer:
(b) Right Issue of Shares
Where at any time, a company having a share capital proposes to
increase its subscribed capital by the issue of further shares, such
shares shall be offered to persons who, at the date of the offer, are
holders of equity shares of the company in proportion, as nearly as
circumstances admit, to the paid-up share capital on those shares by
sending a letter of offer subject to the following conditions, namely:—
(i) the offer shall be made by notice specifying the number of shares
offered and limiting a time not being less than fifteen days and not
exceeding thirty days from the date of the offer within which the
offer, if not accepted, shall be deemed to have been declined;
 [Chapter  1] Accounting of Shares and... O 12.27

(ii) unless the articles of the company otherwise provide, the offer
aforesaid shall be deemed to include a right exercisable by the
person concerned to renounce the shares offered to him or any of
them in favour of any other person; and the notice referred to in
clause (i) shall contain a statement of this right;
(iii) after the expiry of the time specified in the notice aforesaid, or on
receipt of earlier intimation from the person to whom such notice is
given that he declines to accept the shares offered, the Board of
Directors may dispose of them in such manner which is not
disadvantageous to the shareholders and the company.
(d) Money received against Share Warrants
• As per Sch. Ill Disclosure Requirements, it is to be shown as a
separate line item on the face of Balance Sheet.
• In case of Listed Companies, Share warrants are issued to
Promoters and others in terms of the Guidelines for Preferential
Issues viz. SEBI (Issue of Capital and Disclosure Requirements),
Guidelines, 2009.
• Effectively, Share Warrants are amounts which would ultimately form
part of the Shareholder's Funds. Since Shares are yet to be allotted
against the same, these are not reflected as part of Share Capital,
but as a separate line - item.
Space to write important points for revision

2018 - June [5] Write short notes:

(b) Advantages of buy-back of shares (4 marks)
(d) Share Application money pending allotment. (4 marks)
Answer:
(b) Buy-back of shares have the following advantages:
(i) A company with capital, which cannot be profitably employed, may
get rid of it by resorting to buy-back, and re-structure its capital.
(ii) Free reserves which are utilized for buy-back instead of dividend
enhance the value of the company's shares and improve earnings
per share.
 12.28 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(iii) Surplus cash may be utilized by the company for buy-back and
avoid the payment of dividend tax.
(iv) Buy - back may be used as a weapon to frustrate any hostile
take-over of the company by undesirable persons.
(d) Share application money pending allotment:
As per Schedule III it is to be shown as a separate line item on the face
of Balance Sheet. Other provisions in this respect are as follows:
(i) Share Application Money not exceeding the Issued Capital and to
the extent not refundable, is to be disclosed as a separate line item
after - Share Holders Funds and before - Non-Current Liabilities.
(ii) If the Company's Issued Capital is more than the Authorized Capital,
and approval of increase in Authorized Capital is pending, the
amount of Share Application Money received over and above the
Authorized Capital should be shown under the head - Other Current
Liabilities.
(iii) The amount shown as Share Application Money Pending Allotment
will not include Share Application Money to the extent refundable.
For example, the amount in excess of Issued Capita or where
Minimum Subscription requirement is not met. Such amount will
have to be shown separately under 'Other Current Liabilities'.
(iv) Calls Paid in Advance are to be shown under - Other Current
Liabilities. The amount of interest which may accrue on such
advance should also is to be reflected as a Liability.
Space to write important points for revision

2018 - Dec [5] Write short note:

(c) Forfeiture of Shares vis-a-vis reissue of Forfeited Shares (4 marks)

DISTINGUISH BETWEEN
2008 - Dec [1] {C} (a) Distinguish between shares and stock.
(3 marks)
 [Chapter  1] Accounting of Shares and... O 12.29

Answer:
Shares Stock
1. Shares may be fully or partly paid Stocks are fully paid up.
up.
2. Shares are serially numbered. Stocks are not numbered.
3. Shares are always registered and Stocks may be registered or
non-transferable by mere delivery. unregistered.
4. Shares are of equal nominal value. S t o c k s m a y b e d i v i d e d i n t o
nominal amount.
5. Shares are issued when a company Stocks are not issued when
is incorporated. companies are incorporated. Only
fully paid shares can be converted
into stock.
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DESCRIPTIVE QUESTIONS

2008 - Dec [2] (b) Mention any five purposes for which securities premium
account can be utilised. (5 marks)
Answer:
As per Section 52 of Companies Act, 2013, the Securities Premium
Account can be utilized for the following purposes.
(i) For writing off preliminary expenses of the Company.
(ii) For providing for premium payable on redemption of redeemable
preference shares or debentures of the Company.
(iii) For issuing fully paid bonus shares to the members of the Company.
(iv) For writing off expenses of commission paid or discount allowed on
issue of Sweat equity shares or debentures of the company.
Space to write important points for revision
 12.30 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2008 - Dec [7] (b) State the prerequisites to be complied with by a company
for issue of shares at a discount. (5 marks)
Answer:
Prohibition to Issue the Shares at Discount
Section 53 states that except as provided in Section 54 (i.e. issue of sweat
equity shares), a company shall not issue shares at a discount. Any share
issued by a company at a discounted price shall be void.
When a company contravenes the provisions of this section, the company
shall be punishable with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees and every officer who is in default shall
be punishable with imprisonment for a term which may extend to six months
or with fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees, or with both.
• Issue of shares at discount is prohibited except by issue of sweat equity
shares.
• Any share issued by the company at a discounted price shall be void.
In Section 53 of the Companies Act, 2013,—
(i) in sub-section (2), for the words "discounted price", the word "discount"
shall be substituted;
(ii) after sub-section (2), the following sub-section shall be inserted,
namely:—
(2A) Notwithstanding anything contained in sub-sections (1) and (2), a
company may issue shares at a discount to its creditors when its debt
is converted into shares in pursuance of any statutory resolution plan
or debt restructuring scheme in accordance with any guidelines or
directions or regulations specified by the Reserve Bank of India under
the Reserve Bank of India Act, 1934 or the Banking (Regulation)
Act, 1949.
Space to write important points for revision

2009 - June [1] {C} (e) Can dividend be declared out of Security Premium
Account? (3 marks)
Answer:
Dividend cannot be declared out of Security Premium Account. Any balance
in the Security Premium Account can be utilised only in the following four
ways:
 [Chapter  1] Accounting of Shares and... O 12.31

(i) By writing off Preliminary Expenses.

(ii) By writing off Discount on issue of Sweat equity shares and
debentures shares.
(iii) By writing off Premium paid on Redemption of Preference Shares.
(iv) By issue of Fully Paid Bonus Shares.
Space to write important points for revision

2009 - June [7] (b) Discuss the conditions of Companies Act with regard to
buy-back of shares. (5 marks)
Answer :
Please refer 2011 - Dec [8] (c) on page no. 22
Space to write important points for revision

2009 - Dec [4] (b) Enumerate the objectives of Buy back of shares.
(5 marks)
Answer:
The following are the objectives of buy back of shares:
1. To return surplus cash to investors. Companies want to have back their
shares since it facilitates them to manage their surplus cash. If it is paid
as dividend companies will have to pay dividend tax on the distribution
on the other hand; if cash is distributed through buy back, the tax burden
shifts to shareholders who have to pay capital gains tax.
2. To increase underlying share value. Buy back reduces equity and
enables the company to increase earnings per share, which would
result on enhancing the share value. A share buy back may also be
announced when share prices are depressed in the market.
3. To prevent hostile takeover bids. By eliminating surplus cash through
buy back such a bid can be avoided.
4. Buy – backs also facilitate a company to maintain a target capital
structure. Buy back aids a company to achieve an optimal debt equity
ratio.
 12.32 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

5. To profit from treasury operations. Companies can buy shares when the
prices are low and reissue later at attractive price thus making profit. In
India, treasury operation is not possible. This is because shares bought
will have to be extinguished.
Space to write important points for revision

2010 - June [1] {C} (f) What are the rates of interest in respect of the
following
(i) Calls in advance
(ii) Calls in arrear (1 mark)
(g) State any four purposes for which the Securities Premium Account
balance may be applied by a company. (4 marks)
Answer :
(f) (i) calls in advance – 12%
(ii) calls in arrears – 10%
Answer:
(g) Four purposes for which the securities premium A/c balance may be
applied by a company are :
1. In paying up un-issued securities of the company to be issued to
members of the company as fully paid bonus securities.
2. To write off preliminary Expenses.
3. To write off the expenses of or commission paid or discount allowed
on any of the securities or debentures of the company.
4. To pay premium on the redemption of preference securities or
debentures of the company.
Space to write important points for revision

2013 - Dec [3] {C} Answer the following:

(c) What are the sources available for buy-back of shares for a Company as
per Section 68 of Companies Act? (2 marks)
Answer:
Please refer 2011 - June [8] (c) on page no. 21
Space to write important points for revision
 [Chapter  1] Accounting of Shares and... O 12.33

2014 - June [3] {C} Answer the following:

(a) What is surrender of shares? What is the accounting treatment in the
books of a company for surrender of shares? (2 marks)
(d) State the objects of the issue of debentures according to the guidelines
issued by the Controller of Capital Issues. (2 marks)
Answer:
(a) Surrender of Shares:
 After the allotment of shares, sometimes a shareholder is not able
to pay the further calls and returns his shares to the company for
cancellation.
 Such voluntary return of shares to the company by the shareholder
himself is called surrender of shares.
 Surrender of shares has no separate accounting treatment but it will
be like that of forfeiture of shares.
 The same entries (as are passed in case of forfeiture of shares) will
be passed in case of surrender of shares.
Answer:
(d) According to the guidelines issued by the Controller of Capital Issues,
the objects of the issue can be among other things:
(1) Setting up of new projects;
(2) Expansion or diversification of existing projects;
(3) Normal capital expenditure for modernization;
(4) To augment long-term resources of the company for working capital
requirements;
(5) Merger /Amalgamation of companies in pursuance of schemes
approved by banks, financial institutions and/or any legal authority.
Space to write important points for revision

2014 - Dec [1] Answer the question:

(e) What are the various modes of buy-back of shares by a Limited
Company? (2 marks)
 12.34 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer:
Modes of Buy-Back
Buy-back is permissible:
(a) from the existing security holders on a proportionate basis through the
tender offer; or
(b) from the open market through
i. Book-building process,
ii. stock exchange;
(c) from odd lots, that is to say, where the lot of securities of a public
company whose shares are listed on a recognized stock exchange is
smaller than such marketable lot as may be specified by the stock
exchange: or
(d) by purchasing the securities issued to employees of the company
pursuant to a scheme of stock option or sweat equity.
Space to write important points for revision

2014 - Dec [3] Answer the question:

(a) (ii) State the conditions for issue of Sweat Equity Shares. (4 marks)
Answer:
Primary Market - Public Issues - Sweat Equity Shares
Securities and Exchange Board of India (Issue of Sweat Equity Share)
Regulations, 2002.
Section 2 (88) Companies Act, 2013 defines Sweat Equity Shares as
under: expression "sweat equity shares" means equity shares issued by the
company to employees or directors at a discount or for consideration other
than cash for providing know-how or making available rights in the nature of
intellectual property rights or value additions, by whatever name called.
The conditions for issue of such shares by a company are specified in the
section of Companies Act, 2013 as under:
(a) the issue of sweat equity shares is authorised by a special resolution
passed by the company in the general meeting;
(b) the resolution specifies the number of shares, current market price,
consideration, if any, and the class or classes of directors or employees
to whom such equity shares are to be issued;
 [Chapter  1] Accounting of Shares and... O 12.35

(c) not less than one year has, at the date of the issue elapsed since the
date on which the company was entitled to commence business;
(d) the sweat equity shares of a company whose equity shares are listed on
a recognised stock exchange are issued in accordance with the
regulations made by the Securities and Exchange Board of India in this
behalf.
Space to write important points for revision

2016 - Dec [5] (b) When Underwriting Commission is payable as per

Companies Act, 2013? (6 marks)
Answer:
It may be paid in cash or in fully paid-up shares or debentures or a
combination of all these. It is paid on the issue price of the shares or
debentures so underwritten. As per the provision of Section 40 of the
Companies Act, 2013, commission is payable if the following conditions are
satisfied:
(i) The payment of the commission is authorized by the articles;
(ii) The commission paid or agreed to be paid does not exceed in the
case of shares, five per cent of the price at which the shares are
issued or the amount or rate authorized by the articles, whichever is
less, and in the case of debentures, two and a half per cent of the
price at which the debentures are issued or the amount or rate
authorized by the articles, whichever is less;
(iii) The amount or rate per cent of the commission paid or agreed to be
paid is in the case of shares or debentures offered to the public for
subscription, disclosed in the prospectus, and in the case of shares or
debentures not offered to the public for subscription, disclosed in the
statement in lieu of prospectus, or in a statement in the prescribed
form signed in like manner as a statement in lieu of prospectus and
filled in before the payment of the commission with the Registrar and,
where a circular or notices not being a prospectus inviting subscription
for the shares or debentures, is issued, also disclosed in that circular
or notice;
 12.36 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(iv) The number of shares or debentures which persons have agreed for
a commission to subscribe absolutely or conditionally is disclosed in
the manner aforesaid; and
(v) A copy if the contract for the payment of the commission is delivered
to the Registrar at the time of delivery of the prospectus or the
statement in lieu of prospectus for registration.
Space to write important points for revision

PRACTICAL QUESTIONS

2008 - Dec [7] (a) The summarized balance sheet of A Co. Ltd. as on 30th
June 2008 is as under:
Share capital :
10% redeemable preference shares of ` 100 each 10,00,000
Equity shares of ` 10 each 15,00,000
12% Debentures 7,00,000
Revenue reserves 40,00,000
Total 72,00,000
Represented by Net assets 72,00,000
The redeemable preference shares were due for redemption on 31st
August 2008 and were redeemed and duly paid off. The company is
permitted to redeem the debentures at any time at a premium of 10% and did
so on 30th September 2008.
The company was in a reasonably liquid position but to assist in
providing funds for redemption of the redeemable preference shares, a rights
issue of equity shares was made. 20000 equity shares were issued for cash
at a premium of ` 20 per share, `12.50 payable on application on 15th July
2008 and the balance on allotment on 31st July 2008. All cash due was
received on the due dates.
During the three months ended 30th September 2008, the company
traded at a profit of ` 2,50,000.
 [Chapter  1] Accounting of Shares and... O 12.37

Required :
(i) Pass journal entries (including each transactions) showing the relevant
entries in respect of the above.
(ii) Prepare summarized balance sheet of the company as on 30th
September 2008. (10 marks)
Answer :
Journal Entries in the books of A Co. Ltd.
S.No. Particulars (`) (`)
1. Bank A/c (20,000 × 12.5) Dr. 2,50,000
To Share Application A/c 2,50,000
(Being share Application money received)
2. Share Application & Allotment A/c Dr. 6,00,000
(20,000 × 30)
To Equity Share Capital A/c 2,00,000
(2,000 × 10)
To Securities Premium A/c 4,00,000
(20,000 × 20)
3. Bank A/c 3,50,000
To Share Application Allotment A/c
(20,000 × 175) 3,50,000
(Being Share Allotment amount received)
4. 10% Preference shares A/c Dr. 10,00,000
To Preference shareholders A/c 10,00,000
(Being preference shares transferred to
preference Shareholders A/c)
5. Preference shareholders A/c Dr. 10,00,000
To Bank A/c 10,00,000
(Being amount of Preference Shareholders
Due paid to them.)
 12.38 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

6. Revenue Reserve A/c Dr. 8,00,000

To Capital redemption reserve A/c 8,00,000
(Being `10,00,000 to Preference Shares
redeemed with `2,00,000 of equity capital
and hence balance is net from reserved)
7. 12% Debentures A/c Dr. 7,00,000
Securities premium A/c Dr. 70,000
To Debentures Holders A/c 7,70,000
(Being debentures transferred to
debentures holders A/c)
8. Debentures holders A/c Dr. 7,70,000
To Bank A/c 7,70,000
(Being amount paid & debenture holders)
9. Net assets A/c Dr. 2,50,000
To Revenue Reserves A/c 2,50,000
(Being profits earned and invested in
assets)
Balance Sheet of A Co. Ltd. (As Per Revised Schedule III)
as on 30.09.2008
Particulars Note Figures as Figures as
No. at the end of at the end of
current previous
reporting reporting
period period
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 1 17,00,000
(b) Reserve and Surplus 2 45,80,000

(c) Money received against share

warrants
2. Share application money pending
allotment
 [Chapter  1] Accounting of Shares and... O 12.39

3. Non - Current Liabilities

(a) Long - term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long term provisions
4. Currents Liabilities
(a) Short - term borrowings
(b) Trade payables
(c) Other current liabilities
(d) Short - terms provisions
Total 62,80,000
II. Assets
1. Non Current Assets
(a) Fixed assets
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work - in - progress
(iv) Intangible assets under
development
(b) Non - current investments
(c) Deferred tax assets (net)
(d) Long term loans and advances
(e) Other Non Current Assets 62,80,000
2. Current Assets
(a) Current investments
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents

(e) Short - term loans and advances

(f) Other current assets
Total 62,80,000
 12.40 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Notes on Account:
1. Share Capital:
Subscribed, Issued & Paid up Capital:
1,70,000 Equity share of 10 each 17,00,000
17,00,000
2. Reserve & Surplus:
Security Premium A/c 3,30,000
Reserves 34,50,000
Capital Redemption Reserve 8,00,000
45,80,000
Space to write important points for revision

2009 - Dec [4] (a) The following is the balance sheet of Sachin Ltd. as on
31.03.2008:
Liabilities ` Assets `
Share Capital : Fixed Assets :
Authorised Gross Block 6,00,000
20,000, 10% redeemable Less: Depreciation 2,00,000 4,00,000
preference shares of ` Investments 2,00,000
10 each 2,00,000 Current Assets,
1,80,000 Equity Shares Loans & Advances :
of ` 10 each 18,00,000 Inventory 50,000
20,00,000 Debtors 50,000
Issued, Subscribed Cash & Bank
and paid up capital : balances 1,00,000 2,00,000
20,000, 10% redeemable Miscellaneous
preference share of Expenditure to the extent 40,000
` 10 each 2,00,000 not written off
20,000 equity shares
of ` 10 each 2,00,000
4,00,000

Reserve and Surplus :

General Reserve 2,40,000
Securities premium 1,40,000
Profit and Loss Account 37,000
Current Liabilities & Provision 23,000
Total 8,40,000 8,40,000
 [Chapter  1] Accounting of Shares and... O 12.41

For the year ended 31.3.2009, the company made a net profit of ` 30,000
after providing for ` 40,000 depreciation and writing off miscellaneous
expenditure of ` 40,000. The following additional information is available with
regard to company’s operation.
(1) The preference dividend for the year ended 31.3.2009 was paid before
31.3.2009.
(2) Except cash & bank balances, other current assets and current liabilities
on 31.3.2009, was the same as on 31.3.2008.
(3) The company redeemed the preference share at a premium of 10%.
(4) The company issued bonus shares in the ratio of 1 share for every two
equity shares held as on 31.3.2009.
(5) To meet the cash requirements of redemption, the company sold a
portion of the investments, so as to leave a minimum balance of
` 60,000 after such redemption.
(6) Investments were sold at 90% of cost as on 31.3.2009.
Prepare
(i) Necessary journal entries to record redemption and issue of shares.
(ii) Cash & Bank Account.
(iii) Balance Sheet as on 31.3.2009 (10 marks)
Answer :
Journal Entries in the books of Sachin Ltd.
10% Redeemable Preference share capital A/c Dr. 2,00,000
Premium on redemption of preference shares A/c Dr. 20,000
To Preference shareholders A/c 2,20,000
(Being the amount payable to preference shareholders
on redemption)
General Reserve A/c Dr. 2,00,000
To Capital Redemption Reserve A/c 2,00,000
(Being transfer to the latter A/c on redemption
of shares)
Bank A/c Dr. 90,000
Profit & Loss A/c Dr. 10,000
To Investments A/c 1,00,000
(Being amount realized on sale of investments of
loss thereon adjusted)
Preference Shareholders A/c Dr. 2,20,000
To Bank A/c 2,20,000
 12.42 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Security premium A/c Dr. 20,000

To Premium on redemption of preference shares 20,000
(Being amount of premium payable on redemption of
Preference shares)
Capital redemption reserve A/c Dr. 1,00,000
To Bonus to shareholders A/c 1,00,000
(Being amount adjusted for issuing bonus shares
in the ratio of 1 : 2)
Bonus to shareholders A/c Dr. 1,00,000
To Equity share capital A/c 1,00,000
(Being balance of farmer account transferred to latter)
Cash & Bank A/c
Particulars Amount Particulars Amount
To Balance b/d 1,00,000 By Preference dividends 20,000
" Cash from operations " Preference shareholders 2,20,000
Profit 30,000 " Balance c/d 60,000
Add : dep. 40,000
Add : misc. 40,000 1,10,000
To Investments (Bal. Fig) 90,000
3,00,000 3,00,000
Balance Sheet Sachin Ltd.
As on 31.03.09 (After Redemption)
Particulars Note Figures as at Figures as at
No. the end of the end of
current previous
reporting reporting
period period
EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 1 3,00,000
(b) Reserve and Surplus 2 2,97,000
(c) Money received against share
warrants I.
2. Share application money pending
allotment
 [Chapter  1] Accounting of Shares and... O 12.43

3. Non - Current Liabilities

(a) Long - term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long term provisions
4. Current Liabilities
(a) Short - term borrowings
(b) Trade payables 23,000
(c) Other current liabilities
(d) Short - term provisions
Total 6,20,000
II. Assets
1. Non Current Assets
(a) Fixed assets 3 3,60,000
(i) Tangible assets
(ii) Intangible assets
(iii) Capital work - in - progress
(iv) Intangible assets under
development 1,00,000
(b) Non - Current investment
(c) Deferred tax assets (net)
(d) Long term loans and advances
(e) Other Non Current Assets
2. Current Assets
(a) Current investment
(b) Inventories
(c) Trade receivables 50,000
(d) Cash and cash equivalents 50,000

(e) Short - term loans and advances 60,000

(f) Other current assets
Total 6,20,000
 12.44 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Notes on Accounts:
1. Share Capital:
Authorized share capital 20,00,000
20,00,000
Issued, Subscribed & Paid up
30,000 Equity share of ` 10 each 3,00,000
3,00,000
2. Reserved & Surplus:
General Reserve 40,000
Security Premium 1,20,000
Profit & Loss (Rel - WN - 2) 37,000
Capital Redemption Reserve 1,00,000
2,97,000
3. Tangible Assets:
Fixed Assets 6,00,000
Less : Dep 2,00,000
Less : For c/y 40,000 3,60,000
3,60,000
Space to write important points for revision

2009 - Dec [7] (a) The following balances appeared in the books of Gomex
Ltd. on 1.04.2008:
(i) Debenture Redemption Fund A/c—` 40,000 represented by
investment at cost of an equal amount (nominal value ` 50,000).
(ii) The 12% Debentures stood at ` 90,000.
The company sold ` 30,000 investments at ` 90 for the purpose of
Redemption of ` 25,000 Debentures at a premium of 2% during the
year.
Show (a) 12% Debentures account, (b) Debenture Redemption Fund
A/c, (c) Debenture Redemption Fund investment A/c. for the year
ending 31.3.2009.
Ignore interest and brokerage etc. (10 marks)
 [Chapter  1] Accounting of Shares and... O 12.45

Answer:
Debenture Redemption Fund A/c
Particulars Amount Particulars Amount
To General Reserve 25,000 By Balance b/d 40,000
" Premium redemption of " Debenture
debentures A/c 500 Redemption fund A/c 3,000
" Balance c/d 17,500
43,000 43,000

Debentures Redemption Fund

Investment A/c
Nominal Cost Nominal Cost
Value Value
To Balance b/d 50,000 40,000 By Bank A/c 30,000 27,000
To Debenture redemp- " Balance c/d 20,000 16,000
tion fund A/c– Profit
on sale (B/f) — 3,000
50,000 43,000 50,000 43,000

12 % Debentures A/c
Particulars Amount Particulars Amount
To Debenture holders A/c 25,000 By Balance b/d 90,000
To Balance c/d 65,000
90,000 90,000
Space to write important points for revision

2010 - June [6] (a) Adarsh Ltd., was formed with an authorized capital of
` 30,00,000 divided into equity shares of ` 10/- each. The company invited
applications for 2,00,000 equity shares of ` 10/- each at a premium of 20%.
The money was payable as follows:
On application ` 5/-, on allotment ` 4/- (including premium of ` 2/-), ` 2/- on
first call and rest on the final call.
 12.46 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Applications were received for 2,40,000 shares and allotment was made as
under:
(a) To applicants for 1,00,000 shares in full;
(b) To applicants for 80,000 shares—60,000 shares were allotted;
(c) To the applicants for 60,000 shares, the rest of the shares were allotted.
Applicants for 1,000 shares in the (a) category and applicants for 1,200
shares falling in category (b) failed to pay the allotment monies. These
shares were forfeited on their failure to pay the first call. Holders of 1,200
shares in category (c) failed to pay the first and final call and these shares
were also forfeited after the final call. Of the shares forfeited 1,300 shares
were re-issued @ of ` 8/- per share as fully paid up. The re-issued shared
included 1,000 shares of category (a).
Journalise the above transactions and also show the Cash Book.
(10 marks)
Answer :
Working Note
Capital Premium
Application 5 -
Allotment 2 2
First Call 2 -
Final Call 110 2

Category Applied Proportion Allotted

2,40,000 2,00,000
1,00,000 (1 : 1) 1,00,000
1,40,000 1,00,000
80,000 (4 : 3) 60,000
60,000 (3 : 2) 40,000
 [Chapter  1] Accounting of Shares and... O 12.47

Bank A/c Dr. 12,00,000

To Share Application A/c 12,00,000
(Being share application money received)
Share application A/c Dr. 12,00,000
To Equity share capital A/c 10,00,000
To Share Allotment A/c 2,00,000
(Being application money received on 2,40,000
shares transferred to Share capital and on
40,000 shares adjusted towards amount due on
allotment)
Share Allotment A/c Dr. 8,00,000
To Equity Share Capital A/c 4,00,000
To Securities Premium A/c 4,00,000
(Being allotment money of ` 4 per share
including premium of ` 2 per share)
Bank A/c (w.n.1) Dr. 5,93,900
Calls –in arrears A/c Dr. 6,100
To Share Allotment A/c 6,00,000
(Being allotment money is received in full,
after adjustment of excess application money)
Share first call A/c Dr. 4,00,000
To Equity share capital A/c 4,00,000
(Being first call money on 2,00,000 shares @
` 2 per share)
Bank A/c Dr. 3,93,800
Calls –in arrears A/c Dr. (W.N 2) 6,200
To Share first call A/c 4,00,000
(Being first call money received on 1,96,900
shares @ ` 2 per share)
Share Capital Dr. 17,100
Sec. Premium Dr. 3,800
To Calls in Arrear A/c 9,900
To Share forfeited A/c 11,000
(Being forfeiture of 1900 shares on which
first call & allotment was due as for Board’s
Resolution)
Share Second call A/c Dr. 1,98,100
To Equity share capital A/c 1,98,100
(Being second call money on 1,97,300 shares
@ ` 1 per share)
 12.48 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Bank A/c Dr. 1,96,900

Calls in arrears A/c Dr. 1,200
To Shares Second Call A/c 1,98,100
(Being second call money on 1,97,300 shares
@ ` 1 per share)
Bank A/c Dr. 10,400
Forfeited shares A/c Dr. 2,600
To Equity share capital A/c 13,000
(Being issue of 1300 forfeited shares at
` 8 fully paid up)
Forfeited shares A/c Dr. 4,400
To Capital Reserve A/c 4,400
(Being transfer of forfeited shares to Capital Reserve A/c)
Bank A/c
Particulars Amount Particulars Amount
To Share Application A/c 12,00,000 By Bal. c/d 23,95,000
To Share Allotment A/c 5,93,900
To Share first call A/c 3,93,800
To Share Second call A/c 1,96,900
To Equity share capital A/c 10,400
23,95,000 23,95,000

Working Note for call in arrear

1. Category (A) 100 x 4 = 4000
(No excess in Application full Allotment as made in 1:1)
Category (B) Applied 1200 shares
Allotted = 1200 x ¾ = 900 shares
Application money received on 1200 share x 5 = 6,000
(-) Application money Adjusted = 4,500
Excess Application money Adjusted in Allotment 1,500
Allotment due on 900 shares x 4 = 3,600
(-) Excess Adjusted 1,500
Call in arrear 2,100
 [Chapter  1] Accounting of Shares and... O 12.49

Total call in arrear

Category (A) + Category (B)
4000 + 2100 = 6100

W.N. 2 Call in Arrear on First call

Category
A = 1000 shares
B = 900 shares
C = 1200 shares
3,100 shares @ 2/- per share = 6,200/-

Call in Arrear
Allotment First Call Final Call
(a) 1000 1000 --
(b) 900 900 --
(c) -- 1200 1200
1900 3100 1200
Space to write important points for revision

2010 - Dec [3] (a) KC limited has declared 15 percent dividend on equity
share capital of ` 20,00,000 (divided into shares of ` 100 each) for the year
ending 31st March, 2010 and despatched dividend warrants on 18th July,
2010 by opening a separate bank account on the day. A person holding 800
equity shares did not claim the amount of his share of dividend.
What journal entries will be passed in the books of the company for
declaration and the despatch of dividend warrants and transferring the
unclaimed amount to Unclaimed Dividend Account? What further journal
entry will be passed in the books of the company when the unclaimed
amount is not claimed by the claimant within stipulated time U/S 123 of 7
years. Corporate dividend tax may be taken at 17 percent (gross)
(8 marks)
 12.50 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer:
Journal Entries in the books of KC Ltd.
Date Particulars L.F. Amount Amount
July 1 Proposed Equity dividend A/c Dr. 3,00,000
Provision for corporate dividend
tax A/c Dr. 51,000
To Equity dividend A/c
To Dividend tax A/c 3,00,000
(Being proposed dividend and provision 51,000
for corporate dividend tax transferred to
actual liability account on the date of
declaration of final dividend)
Separate Bank A/c Dr. 3,00,000
July 18 To Bank A/c
(Being transfer of divd. Amt. to separate 3,00,000
account)
Equity Dividend a/c Dr. 2,88,000
July 18 To Separate Bank A/c
(Being payment of Equity dividend on 2,88,000
19200 Equity shares @ 15/- each)
Dividend tax a/c Dr. 51,000
July 18 To Bank a/c
(Being payment of corporate dividend 51,000
tax)
Equity dividend a/c Dr. 12,000
Date of To Unclaimed dividend a/c
transfer i.e (Being transfer of unclaimed dividend) 12,000
17.8.10 Unpaid dividend Bank A/c Dr. 12,000
Date of To Separate Bank A/c
transfer i.e (Being transfer of unpaid dividend to 12,000
17.8.10 Separate Bank A/c)
At the time Unclaimed divd. A/c Dr. 12,000
of Expiry To unpaid dividend
i.e 7 years Bank A/c 12,000
(Being transfer of unclaimed dividend to
the central govt. account on expiry of 7
years as per sec 205(A) (5))
Space to write important points for revision
 [Chapter  1] Accounting of Shares and... O 12.51

2011 - June [6] (a) Following is the Balance Sheet of Madox Ltd. as at
31.3.2011 :
(Fig. in `)
Liabilities Assets
1 lakh Equity shares of ` 10 10,00,000 Fixed Assets 12,80,000
each fully paid
5,000, 12% Redeemable Current Assets 10,20,000
Preference Shares of `
100 each 5,00,000 Bank 3,30,000
Securities Premium 1,00,000
Profit & Loss A/c 5,50,000
Current Liabilities 4,80,000
26,30,000 26,30,000
On 1.4.2011, the company issued further 30,000 equity shares @ ` 10 per
share at a premium of ` 5 per share. The amount payable was ` 6 on
application, ` 7 on allotment including premium and the balance on First and
Final Call. Application were received for 45,000 shares. Application money
of 5,000 shares were refunded. Pro-rata allotment was made. The excess
application money were adjusted towards allotment. Mr. X holding 3,000
shares failed to pay the allotment money and his shares were forfeited after
final call and thereafter, out of these shares 2,000 shares were re-issued at
a discount of ` 3 per share. Preference shares were redeemed at a premium
of 10%. Considering the above transactions, show journal entries and the
Balance Sheet in the books of Madox Ltd. (12 marks)
Answer :
Application Allotment Adjustment of Excess Money

No. Amount Nos Allotment Application Excess Against Calls in Refund

@6 money money adj. application Allotment advance
money

45,000 2,70,000    90,000   30,000

30,000 2,10,000 1,80,000 60,000  

45,000 2,70,000 30,000 2,10,000 1,80,000 90,000 60,000  30,000

 12.52 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Allotment money received :

Amount x failed to pay
Share premium @ 5/- 1,50,000 Gross amount due from X 21,000
Share capital @ 2/- 60,000 (3000 x 7)
Total allotment dues 2,10,000 (-) Excess application money
(-) Excess Application money
Adjusted
adjusted 60,000 6,000
Net due 1,50,000 Net due from x which he failed
(-) not recd. from Mr. X 1,50,000 to pay
Allotment money received 1,35,000 15,000

Journal Entries in the Books of Madox Ltd.

Particulars Dr. ` Cr. `
Bank A/c Dr. 2,70,000
To Share Application A/c 2,70,000
(Application money received)
Share allotment A/c Dr. 2,10,000
Share Application A/c Dr. 1,80,000
To Share capital A/c 2,40,000
To Security premium A/c 1,50,000
(Shares allotted, allotment money due of application
money on the shares allotted adjusted)
Share Application A/c Dr. 90,000
To Bank A/c 30,000
To Share Allotment A/c 60,000
(Excess Application money adjusted/refunded)
Bank A/c Dr. 1,35,000
To Share Allotment A/c 1,35,000

(Share allotment money received from all except

x holding 3000 shares)
1st & Final Call A/c Dr. 60,000
To Share capital 60,000
(1st & Final Call @ 2 due)
 [Chapter  1] Accounting of Shares and... O 12.53

Bank A/c Dr. 54,000

To 1st & Final Call 54,000
(1st & Final call reed from all except Mr. X holding 3000 shares)
Share Capital A/c Dr. (3000 x 10) 30,000
Security Premium A/c Dr. (3000 x 5) 15,000
To Share Allotment A/c 15,000
To 1st & Final call A/c 6,000
To Share forfeiture A/c 24,000
(3000 shares of x forfeited for non payment of allotment
money & 1st & final call)
Bank A/c Dr. (2000 x 7) 14,000
Share forfeiture A/c Dr. (2000 x 3) 6,000
To Share Capital A/c 20,000
(2000 forfeited shares originally belonging to x
reissued at a discount of ` 3)
Share forfeiture A/c 10,000
To Capital Reserve A/c 10,000
(Balance of share forfeiture A/c 2000 of X reissued
(24000/3000) x 2000 = 16000 less discount allowed on
reissue ` 6000/- transferred to capital reserve)
12% Redeemable preference share A/c Dr. 5,00,000
Premium on redemption A/c Dr. 50,000
To Preference Share holder A/c 5,50,000
(Amount due on redemption of 5000, 12% redeemable
preference shares face value of ` 100 each at 10% premium)
Security Premium A/c 50,000
Profit & Loss A/c 5,00,000
To Premium on redemption A/c 50,000
To Capital redemption Reserve A/c 5,00,000
(Amount of face value of redeemable preference share
transferred to CRR A/c & premium on redemption transferred
to security premium A/c)
Preference shares holder A/c 5,50,000
To Bank A/c 5,50,000
(Amount paid to preference share holder)
 12.54 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(Balance Sheet of Madox Ltd.)

Particulars Note Figures Figures
No. as at the as at the
end of end of
current previous
reporting reporting
period period
EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 1 12,90,000
(b) Reserve and Surplus 2 7,53,000
(c) Money received against share
warrants
2. Share application money pending
allotment
3. Non - Current Liabilities
(a) Long - term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long term provisions
4. Current Liabilities
(a) Short - term borrowings
(b) Trade payables
(c) Other current liabilities 4,80,000
(d) Short - term provisions
Total 25,23,000
II. Assets
1. Non Current Assets
(a) Fixed assets
(i) Tangible assets 12,80,000
(ii) Intangible assets
(iii) Capital work - in - progress
(iv) Intangible assets under
development
 [Chapter  1] Accounting of Shares and... O 12.55

(b) Non - Current investment

(c) Deferred tax assets (net)
(d) Long term loans and advances
(e) Other Non Current Assets
2. Current Assets
(a) Current investment
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents 3 2,23,000
(e) Short - term loans and advances
(f) Other current assets 10,20,000
Total 25,23,000
Notes on Account:
1. Share Capital:
Issued, Subscribed & Paid up
1,29,000 Equity share of ` 10 each 12,90,000
12,90,000
2. Reserve & Surplus:
Capital Redemption Reserve 5,00,000
Capital Reserve 10,000
Share Forfeiture A/c 8,000
Security Premium 1,85,000
Profit & Loss 50,000
7,53,000
3. Cash & Cash Equivalent:
Bank ( 3,30,000 + 4,43,000 - 5,50,000) 2,23,000
2,23,000
Space to write important points for revision
 12.56 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2011 - Dec [5] (a) The following balances are appearing in the Books of All
Xerox Ltd. on 1-4-2011 :
`
Redeemable Preference Share Capital (Shares of ` 10 each) 2,00,000
Calls-in-Arrear 2,000
General Reserve 1,00,000
Share Premium 5,000
The preference shares are fully called up and due for redemption at a
premium of 10%. Calls-in-Arrear are in respect of final call at the rate of ` 4
per share and these shares are held by Mr. Rahul whose whereabouts are
not known.
The Board of Directors decided that 50% of the General Reserve is to be
utilized for the purpose of redemption of redeemable preference share
capital and to meet the further requirement of funds, further 14,500 numbers
of equity shares of ` 10 each were issued at a premium of 20%.
The redemption of preference shares were duly carried out and
subsequently the company utilized the balance of Capital Redemption
Reserve Account to issue equity shares at ` 10 each as bonus to
shareholders.
You are required to show necessary journal entries in the Books of All
Xerox Ltd. (10 marks)
Answer:
Book of All Xerox Ltd.
Journal Entries
Dr. Cr.
Date Particulars Amount (`) Amount (`)
Redeemable Preference Share Capital A/c Dr. 1,95,000
Premium on Redemption on Pref. Shares a/c Dr. 19,500
To Preference Shareholders A/c 2,14,500
(Being 19,500 fully paid Red, Pref. Shares along
with premium payable on redemption as per Board
resolution no. dt.)
 [Chapter  1] Accounting of Shares and... O 12.57

General Reserve A/c Dr. 50,000

To Capital Redemption Reserve A/c 50,000
(Being General Reserve transferred)
Bank A/c Dr. 1,74,000
To Equity Shares Capital A/c 1,45,000
To Equity Shares Premium A/c 29,000
(Being issue of 14,500 Equity shares at a premium
of 20%)
Share Premium A/c Dr. 19,500
To Premium on Redemption on P.V.
of Shares A/c 19,500
(Being premium payable adjusted)
Preference Shareholders A/c Dr. 2,14,500
To Bank A/c 2,14,500
(Being amount paid off to Pref. shareholders)
Capital Redemption Reserve A/c Dr. 50,000
To Bonus to Shareholders A/c 50,000
(Being Bonus declared and transferred to Capital
Redemption Reserve account)
Bonus to Shareholders A/c Dr. 50,000
To Equity Share capital A/c 50,000
(Being amount transferred to Equity Share capital)

Working Note:
Sources of redemption as per Sec. 55 of Companies Act, 2013

Space to write important points for revision

 12.58 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2012 - June [7] (a) Ashok Ltd. furnishes you with the following Balance
Sheet as at 31st March, 2012:
(` in crores)
Sources of Funds
Share Capital :
Authorised 100
Issued :
12% redeemable preference shares of ` 100 each fully paid 75
Equity shares of ` 10 each fully paid 25 100
Reserves and surplus:
Capital reserve 15
Securities Premium 25
Revenue reserves 260 300
400
Application of Funds
Fixed Assets : cost 100
Less: Provision for depreciation (100) Nil
Investments at cost (Market value ` 400 cr.) 100
Current Assets 340
Less: Current Liabilities (40) 300
400
st
The company redeemed preference shares on 1 April, 2012. It also bought
back 50 lakh equity shares of ` 10 each at ` 50 per share. The payments for
the above were made out of the huge bank balances, which appeared as a
part of current assets.
You are required to
(i) Pass Journal entries to record the above;
(ii) Prepare Balance Sheet as at 01.04.2012. (10 marks)
 [Chapter  1] Accounting of Shares and... O 12.59

Answer :
(i) Journal Entries in the books of Ashok Ltd.
(` in crores)
Date Particulars Dr. Cr.

1st April, 12% Preference share capital A/c Dr. 75

2012 To Preference shareholders A/c 75
(Being preference share capital account
transferred to shareholders account)

Preference share holders A/c Dr. 75

To Bank A/c 75
(Being payment made to shareholders)

Shares buy back A/c Dr. 25

To Bank A/c 25
(Being 50 Lakhs equity shares bought back
@ .` 50 per share)

Equity share capital A/c (50 Lakhs × ` 10) 5

Securities premium A/c (50 Lakhs × ` 40) 20
To Shares buy back A/c 25
(Being cancellation of shares bought back)

Revenue reserve A/c Dr. 80

To Capital Redemption Reserve A/c 80
(Being creation of capital redemption
reserve to the extent of the value of
preference shares redeemed and equity
shares bought back)
 12.60 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Balance Sheet of Ashok Ltd. as on 01.04.2012

Particulars Note Figures as Figures as
No. at the end at the end
of current of previous
reporting reporting
period period
EQUITY AND LIABILITIES (` in crore)
1. Shareholders’ Funds
(a) Share Capital 1 20
(b) Reserve and Surplus 2 280
(c) Money received against share
warrants
2. Share application money pending
allotment
3. Non - Current Liabilities
(a) Long - term borrowings
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long term provisions
4. Current Liabilities
(a) Short - term borrowings
(b) Trade payables
(c) Other current liabilities 40
(d) Short - term provisions
Total 340
II. Assets
1. Non Current Assets
(a) Fixed assets
(i) Tangible assets 3 Nil
(ii) Intangible assets
(iii) Capital work - in - progress
(iv) Intangible assets under
development 100
 [Chapter  1] Accounting of Shares and... O 12.61

(b) Non - Current investment

(c) Deferred tax assets (net)
(d) Long term loans and advances
(e) Other Non Current Assets
2. Current Assets
(a) Current investment
(b) Inventories
(c) Trade receivables
(d) Cash and cash equivalents 4 240
(e) Short - term loans and advances
(f) Other current assets
Total 340
Notes on Account:
1. Share Capital: (` in crore)
Issued, Subscribed & Paid up
200 Lakh equity share of ` 10 each 20
Preference share 75
Less: Redeemable 75 Nil
20
2. Reserve & Surplus:
Capital Reserve 15
Capital Redemption Reserve 80
Share Premium ( 25 - 20 ) 5
Revenue Reserve ( 260 - 80) 180
280
3. Tangible Assets:
Fixed Assets 100
Less: Provision for Dep. 100
Nil
4. Cash and Cash equivalent:
Current Assets 340
Less: Redemption & Buy Back (100)
240
Space to write important points for revision
 12.62 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2012 - Dec [6] (a) The following was the Balance Sheet of Wonder World
Ltd. as at 31.03.2012: (` in lakhs)
Liabilities Assets
1 lakh Equity Shares of ` 10 each fully paid 10.00 Plant & Machinery 13.50
Securities Premium 3.50 Furniture 2.40
General Reserves 3.10 Investments 1.80
Profit & Loss Account 1.10 Stock 7.20
14% Debentures 7.50 Sundry debtors 2.30
Sundry creditors 5.00 Bank 3.00
30.20 30.20
On 01.04.2012, the company decided to buy-back 20% of its equity shares
at a premium of ` 10 per share. For this purpose, the company sold its entire
investments for ` 2.30 lakhs and issued 15000, 12% Preference shares of
` 100 each at par. The amount payable was ` 60 on application and ` 40 on
allotment. The issue was fully subscribed. Thereafter the company issued
bonus shares of ` 10 at the rate of one bonus share for every five equity
shares held by the equity shareholders.
Show Journal entries and Balance Sheet after the above transactions were
completed. (10 marks)
Answer :
Journal Entries in the books of wonder world Ltd.
2012
April 1 Bank A/c Dr. 2.30
To Investments A/c 1.80
To P and L A/c 0.50
(Being Investments Sold)
April 1 Bank A/c Dr. 0.90
To Preference share application A/c 0.90
(Being application money @ 60/- each received on
1,500 Preference Shares)
April 1 Preference Share application A/c Dr. 0.90
To 12% PSC A/c 0.90
(Being allotment made)
 [Chapter  1] Accounting of Shares and... O 12.63

April 1 Preference share allotment A/c Dr. 0.60

To 12% PSC A/c 0.60
(Being allotment money due on 1,500 pref shares @
40/- each)
April 1 Bank A/c Dr. 0.06
To Preference Share Allotment A/c 0.06
April 1 ESC A/c Dr. 2.00
Security Premium A/c Dr. 2.00
To Equity Shareholders A/c 4.00
(Being 20%Eq. Shares bought back at a premium of
10/- each as per board resolution dated............)
April 1 Equity Shareholders A/c Dr. 4.00
To Bank A/c 4.00
(Being amount paid to equity shareholders against
buy back)
April 1 General Reserve A/c Dr. 0.50
To Capital Redemption Reserve A/c 0.50
(Being amount transferred from General Reserve to
CRR A/c) [Refer W.N.1]
April 1 Capital Redemption Reserve A/c Dr. 0.50
Security Premium A/c Dr. 1.10
To Bonus to Shareholders A/c 1.60
(Being profits transferred to issue bonus shares in
the ratio of 1:5 [Refer W.N.2]
April 1 Bonus to Shareholders A/c Dr. 1.60
To ESC A/c 1.60
(Being Bonus Shares issued in the ratio of 1:5 as per
board resolution dated........)
 12.64 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

W.N. (1)

W.N. (2) No. of Bonus Shares to be issued

= 80,000 × = 16,000 Shares

Balance Sheet of Wonder World Ltd. as on 1.4.12

Particulars Note Figures as at Figures as at

No. the end of the end of
current previous
reporting reporting
period period
EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 1 11.10
(b) Reserve and Surplus 2 4.60
(c) Money received against share
warrants
2. Share application money pending
allotment
3. Non - Current Liabilities
(a) Long - term borrowings 3 7.50
(b) Deferred tax liabilities (Net)
(c) Other Long term liabilities
(d) Long term provisions
 [Chapter  1] Accounting of Shares and... O 12.65

4. Current Liabilities
(a) Short - term borrowings
(b) T r a d e payables-(Sundry 5.00
Creditors)
(c) Other current liabilities
(d) Short - term provisions
Total 28.20
II. Assets
1. Non Current Asset
(a) Fixed assets
(i) Tangible assets 4 15.90
(ii) Intangible assets
(iii) Capital work - in - progress
(iv) Intangible assets under
development
(b) Non - Current investment
(c) Deferred tax assets (net)
(d) Long term loans and advances
(e) Other Non Current Assets
2. Current Assets
(a) Current investment
(b) Inventories 7.20
(c) Trade receivables 2.30
(d) Cash and cash equivalents 2.80
(e) Short - term loans and advances
(f) Other current assets
Total 28.20
Notes on Accounts:
(` in lakh)
1. Share Capital:
Issued, Subscribed & Paid up:
96,000 Equity share of ` 10 each 9.60
15,000 Preference of ` 100 each 1.50
11.10
 12.66 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Reconciliation of Share Capital:

Opening balance of equity 1,00,000
Less - Buy back 20,000
Add:- Issue bonus share 16,000
Add:- Issue Preference share 15,000
1,11,000

2. Reserve & Surplus:

Capital Redemption Reserve 0.50
Profit & Loss 1.10
General Reserve (3.1 - 0.5) 2.60
Security Premium (3.5 - 2- 1.1) 0.40

4.60

3. Long term borrowings:

14 % Debenture 7.50

7.50

4. Tangible Assets:
Plant & Machinery 13.50
Furniture 2.40

15.90
Space to write important points for revision

2013 - June [3] (c) X Co. Ltd. decided to buyback 10,000 equity shares of
` 10 each. It sold investments (Face value) ` 70,000 for ` 95,000. It bought
10,000 equity shares in the open market for ` 90,000 out of free reserves.
The shares bought back were cancelled. The expenses of buyback were
` 1,000.
Pass necessary journal entries in the books of X Co. Ltd. to record the above
transactions. (6 marks)
 [Chapter  1] Accounting of Shares and... O 12.67

Answer :
Journal of X Co. Ltd.
Particulars Dr. Cr.
` `
Bank A/c Dr. 95,000
To Investment A/c 70,000
To Profit on sale of investment 25,000
(Being Sale of investment)
Equity Share Capital Account Dr. 1,00,000
To Equity Shareholder account 90,000
To Capital reserve account 10,000
(Being transfer of equity share capital to shareholders
account and profit on purchase of own shares)
Free reserves account Dr. 1,00,000
To Capital Redemption reserve account 1,00,000
(Being the nominal value of shares purchased)
Buyback expenses account Dr. 1,000
To Bank 1,000
(Being Expenses of buyback)
Profit on sale of investment account Dr. 25,000
To Profit and Loss Account 25,000
(Being transfer of profit on sale of investment to P&L
account)
Profit and Loss Account Dr. 1,000
To Buyback expenses account 1,000
(Being transfer of buyback expenses to P&L Account)
Space to write important points for revision

2013 - Dec [4] (a) (i) The following is the Balance Sheet of Superstar Ltd. as
at 31.03.2013:
Liabilities Amount
(` in Lakhs)
10% Redeemable Pref. Shares of ` 10 each, fully paid 2,500
Equity Shares of ` 10 each, fully paid 8,000
Capital Redemption Reserve 1,000
 12.68 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Securities Premium 800

General Reserve 6,000
Profit and Loss A/c 300
9% Debentures 5,000
Sundry Creditors 2,300
Sundry Provisions 1,000
26,900
Assets Amount
(` in Lakhs)
Fixed Assets 14,000
Investments 3,000
Cash at Bank 1,650
Other Current Assets 8,250
26,900
On 1st April, 2013 the company redeemed all of its preference shares at a
premium of 10% and bought back 25% of its equity shares @ ` 20 per share.
In order to make cash available, the company sold all the investments for
` 3,150 lakh and raised a bank loan amounting to ` 2,000 lakhs on the
security of the company’s plant.
Pass Journal Entries for all the above mentioned transactions including Cash
transactions. The amount of securities premium has been utilised to the
maximum extent allowed by law. (8 marks)
(iii) ABC Ltd. issued 40,000 Equity shares. Three Underwriters were
appointed to underwrite the shares and the shares were underwritten
as under:
Underwriter No. of Shares Underwritten
X 24,000
Y 10,000
Z 6,000
The above Underwriters made application for ‘firm’ underwriting as under:
Underwriter X for 3,200 nos. shares, Underwriter Y for 4,000 nos. shares and
underwriter Z for 1,200 nos. shares.
 [Chapter  1] Accounting of Shares and... O 12.69

The Company received application for 20,000 nos. shares, excluding ‘firm’
underwriting but including marked applications which were as under:
Underwriter Marked application for No. of
Shares
X 4,000
Y 5,000
Z 2,000

You are required to calculate the allocation of liability of the respective

Underwriters.
(As per contract, the Underwriters are to be given credit for ‘firm’ applications
and that credit for unmarked applications be given in proportion to the shares
underwritten.) (4 marks)
Answer:
(i) Journal Entries
(Amount in Lakhs)
S.N. Particulars Debit Credit
(`) (`)
1. Bank A/c Dr. 3,150
To Investment A/c 3,000
To Profit & Loss A/c 150
(Being sale of investment & profit thereon)
2. Bank A/c Dr. 2,000
To Bank Loan A/c 2,000
(Being Loan taken from bank)
3. 10% Redeemable Pref. Share Capital A/c Dr. 2,500
Premium on redemption of Pref. Shareholder A/c Dr. 250
To Preference Shareholder A/c 2,750
(Being redemption of Pref. Share)
4. Preference Shareholder A/c Dr. 2,750
To Bank A/c 2,750
(Being payment of amount due to Preference Shareholder)
 12.70 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

5. Securities Premium A/c Dr. 250

To Premium on redemption of Pref. Shareholder A/c 250
(Being use of securities premium to provide premium on
redemption of Pref. Shares)
6. Equity Share Capital A/c Dr. 2,000
Securities Premium A/c Dr. 550
General Reserve A/c Dr. 1,450
[(200 x 20) - 2,000 - 550]
To Equity Shareholders A/c 4,000
(Being buy back of equity shares)
Note: Balance of General Reserve [6,000 - 1,450]
= ` 4,550
7. General Reserve A/c Dr. 4,500
To Capital Redemption Reserve A/c 4,500
[2,000 + 2,500]
(Being creation of capital redemption reserve to the extent
of the face value of preference share redeemed & equity
shares bought back.)
Note : Balance in General Reserve as on 1.4.2013 (4,550 -
4,500) = 50.
8. Equity Shareholders A/c Dr. 4,000
To Bank A/c 4,000
(Being payment of amount due to equity shareholders)
Note: Cash at Bank [1,650 + 3,150 + 2,000 - 2,750 - 4,000]
= 50

(iii) Calculation of allocation of liability of the respective

underwriters :
Particulars x y z Total
Gross Liability (No. of shares) 24,000 10,000 6,000 40,000
Marked Application (4,000) (5,000) (2,000) (11,000)
20,000 5,000 4,000 29,000
Unmarked Application [24:10:6] (5,400) (2,250) (1,350) 9,000
[20,000 - 11,000 = 9,000] 14,600 2,750 2,650 20,000
 [Chapter  1] Accounting of Shares and... O 12.71

Firm Underwriting (3,200) (4,000) (1,200) 8,400

Balance 11,400 (1,250) 1,450 11,600
Negative Adjustment [24:6] (1,000) 1,250 (250) -
Net Liability 10,400 - 1,200 11,600
Add : Firm Underwriting 3,200 4,000 1,200 8,400
Total Liability 13,600 4,000 2,400 20,000
Space to write important points for revision

2014 - June [4] (a) (i) The following was the summarized financial position
of Chanakya Ltd. as on 31st March, 2014:
Equity & Liabilities ` Lakhs Assets ` Lakhs
Share Capital: Fixed Assets 15,000
Equity Shares of ` 10 each 7,000 Investments 3,000
fully paid Up Cash at Bank 1,450
10% Redeemable Pref. Shares 3,000 Other Current
of ` 10 each fully Paid Up. Assets 7,550
Reserve & Surplus
Capital Redemption Reserve 1,100
Securities Premium 700
General Reserve 5,800
Profit & Loss Account 500
Secured Loans:
9% Debentures 4,000
Current Liabilities:
Trade payables 3,800
Sundry Provisions 1,100
27,000 27,000
st
On the 1 April, 2014 the Company redeemed all its Preference Shares at
Premium of 10% and bought back 10% of its Equity Shares at ` 11 per
Shares. In order to make funds available, the Company sold all the
investments for ` 3,200 lakhs and raised a Bank Term Loan for the balance.
 12.72 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

You are required to prepare the Balance Sheet of the Company after the
redemption/buy back of shares. Assume that the securities premium account
was utilised to the maximum possible extent. (10 marks)
Answer:
Balance Sheet of Chanakya Ltd. as on 1.4.2014
(after Redemption and Buyback)
as per Schedule III (Extracts)
Particulars Note No Amount
(` Lakhs)
(I) Equity and Liabilities
1 Shareholders’ Funds:
(a) Share Capital 1 6,300
(b) Reserves and Surplus 2 7,930
2 Non-Current Liabilities
(a) Long Term Borrowings 3 4,870
3 Current Liabilities
(a) Trade Payables 3,800
(b) Short Term Provisions 1,100
Total 24,000
(II) Assets
(1) Non Current Assets
Fixed Assets 15,000
Current Assets:
(a) Cash and Cash equivalents (W N) 1,450
(b) Other Current Assets 7,550
Total 24,000
 [Chapter  1] Accounting of Shares and... O 12.73

Notes of Accounts
(Related Notes)
` In Lakhs
1 Share Capital
630 lakh Equity Shares of `10 each Fully
Paid up (70 lakh Equity Shares bought
back) 6,300
2 Reserve and Surplus
General Reserve 5,800
Less: Transfer to CRR 3,700 2,100
Capital Redemption Reserve 1,100
Add: Transfer due to buy-back of
shares from Gen. res. 3,700 4,800
Securities premium 700
Less: Adjustment for premium paid on
redemption of preference shares (300)
Less: Adjustment for premium paid on
buy back 70 330
P&L A/c 500
Add: Profit of sale of investment 200 700 7930
3 Long-term borrowings
Secured
9% Debentures 4000
Terms Loans-From Banks 870 4870
 12.74 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Working Note:
Bank Account
Dr. Cr.
Particulars Amount Particulars Amount
(` Lakhs) (` Lakhs)
To balance b/d 1,450 By Preference Shareholders A/c 3,300
To Investment A/c By Equity Shareholders A/c 770
(Sale Proceeds) 3,200 By Balance C/d 1,450
To Bank Loan A/c
(Loan received) 870
5,520 5,520
Space to write important points for revision

2014 - June [4] (b) (i) On January 1, 2004 Vardhaman Ltd. allotted 20,000,
9% Debentures of ` 100 each at par, the total amount having been received
along with applications.
(1) On 1st Feb., 2005 the Company purchased in the open market 2,000 of
its own debentures @ ` 102 each and cancelled them immediately.
(2) On 1st January, 2008 the Company redeemed at per debentures for
` 3,00,000 by draw of a lot.
(3) On 1st June, 2010 the Company purchased debentures of the face value
of ` 2,00,000 for ` 1,97,800 in the open market, held them as
investments for one year and then cancelled them.
(4) Finally, as per resolution of the Board of Directors, the remaining
debentures were redeemed at a premium of 3% on 1st Feb., 2014 when
Securities Premium Account in the company’s ledger showed a balance
of ` 50,000.
Pass journal entries for the above mentioned transactions ignoring
debentures redemption reserve, debenture-interest and interest on own
debentures. (10 marks)
 [Chapter  1] Accounting of Shares and... O 12.75

Answer:
Journal Entries in The Books of Vardhman Ltd.
Date Particulars Amount Amount
Dr. Cr.
01-01- 2004 Bank A/c Dr. 20,00,000
To 9% Debenture Application A/c 20,00,000
01-01-2004 9% Debenture Application A/c Dr. 20,00,000
To 9% Debenture 20,00,000
01-02-2005 Own Debenture A/c Dr. 2,04,000
To Bank A/c 2,04,000
01- 02-2005 9% Debenture Dr. 2,00,000
Loss on Cancellation Dr. 4,000
To Own Debenture A/c 2,04,000
01-01- 2008 9% Debenture A/c Dr. 3,00,000
To Debentureholder 3,00,000
01-01- 2008 Debentureholder A/c Dr. 3,00,000
To Bank 3,00,000
01-06- 2010 Own Debenture A/c Dr. 1,97,800
To Bank A/c 1,97,800
01-06- 2010 9% Debenture Dr. 2,00,000
To Capital Reserve 2,200
To Own Debenture A/c 1,97,800
01-06-2010 Profit on cancellation of own
Debenture A/c Dr. 2,200
To Capital Reserve A/c 2,200
(Being transfer of profit on
cancellation of own debenture to
capital reserves)
01-02- 2014 9% Debenture A/c Dr. 13,00,000
Premium on redemption of debenture
Dr. 39,000
To Debentureholder 13,39,000
 12.76 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

01-02- 2014 Debentureholder A/c Dr. 13,39,000

To Bank 13,39,000
01-02- 2014 Securities Premium A/c Dr. 39,000
To Premium on redemption of
debenture 39,000
Space to write important points for revision

2014 - Dec [1] Answer the question:

(f) X Ltd. decides to redeem 650, 15% preference shares of ` 100 each at
10% premium. It has General Reserve of ` 45,500 and securities
premium of ` 1,000. The new equity shares of ` 10 each are to be
issued at 25% premium for the purpose of redemption of preference
shares. Calculate the minimum number of equity shares to be issued by
X Ltd. (2 marks)
Answer:
Nominal Value of Preference Shares +Premium on Redemption = Existing
Securities Premium + Divisible Profits available for redemption + Sale
Proceeds of fresh issue of New Shares.
65,000 + 6,500 = 1,000 + 45,500 + X
X = 25,000
Minimum number of equity shares to be issued for redemption of preference
share = Sale Proceeds of fresh issue of New Shares/ Issue Price
= 25,000/12.50
= 2000.
Space to write important points for revision

2014 - Dec [2] Answer the question:

(b) (i) Kachari Limited granted 25,000 employees stock options (face value
` 10) on 1st April, 2012 at ` 100, when the market price was ` 425.
The options were to be exercised between 16th October, 2012 and
15th March, 2014. The employees exercised their options for 22,500
shares only. The remaining options lapsed. The company closes its
books on 31st March every year. Pass Journal entries. (4 marks)
 [Chapter  1] Accounting of Shares and... O 12.77

Answer:
Journal of Kachari Limited
01/4/12 Employee Compensation Expense A/c Dr. 81,25,000
To Employee Stock Options Outstanding A/c 81,25,000
(Being grant of 25000 stock options to employees
at `100 when market price is ` 425)
(16/10/12 Bank A/c Dr. 22,50,000
to Employee stock options outstanding A/c Dr. 73,12,500
15/3/14) To Equity share capital A/c 2,25,000
To Security premium A/c 93,37,500
(Being allotment to employees of 22500 equity
shares of `10 each at a premium of `415 per
share in exercise of stock options by employees)
16/3/14 Employee stock options outstanding A/c Dr. 8,12,500
To Employee compensation expense A/c 8,12,500
(Being entry for lapse of stock options for 2500
Shares)
31/3/14 Profit & Loss A/c Dr. 73,12,500
To Employee compensation expense A/c 73,12,500
(Being transfer of employee compensation
Expense to profit and loss account)

Note: Employee stock options outstanding will appear in the Balance

Sheet as part of Net Worth or Shareholders’ Equity.
Space to write important points for revision

2014 - Dec [3] Answer the question:

(a) (i) Masood Ltd. came out with an issue of 45 lakh equity shares of ` 10
each at a premium of ` 2 per share. The promoters took 20% of the
issue and the balance was offered to the public. The issue was
equally underwritten by P, Q and R respectively.
Each underwriter took firm underwriting of 1,00,000 shares each.
Subscriptions for 31,00,000 equity shares were received with
marked forms for the underwriters as given below:
 12.78 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

P 7,25,000 shares
Q 8,40,000 shares
R 13,10,000 shares
28,75,000 shares
The underwriters are eligible for a commission of 5% on face value
of shares. The entire amount towards shares subscription has to be
paid along with application.
You are required to:
(1) Compute the underwriters’ liability (number of shares);
(2) Compute the amount payable as due to underwriters; and
(3) Pass necessary Journal Entries in the books of Masood Ltd.
relating to underwriters.
(Note: As per contract, the underwriters are to be given credit for ‘firm’
applications and that credit for unmarked applications be given in
proportion to the shares underwritten.) (8 marks)
(b) (ii) Mogari Limited has 10% Redeemable Preference share capital of
` 30,00,000 consisting of ` 10 shares fully paid up. The company
wants to redeem these shares at 25% premium. The ledger
accounts show the following balances:
Securities premium ` 1,00,000; General Reserve ` 13,00,000 and
Profit & Loss Account (Cr.) ` 7,00,000
In order to facilitate the redemption of preference shares, the
company decided the following:
1. 1,20,000 Equity shares of ` 10 each were issued at 50%
premium.
2. 10,000, 12% Debenture of `100 each were issued at par.
3. Investments of book value ` 5,00,000 were sold at ` 5,60,000.
Pass the necessary journal entries to record above transactions and
redemption of preference shares. (8 marks)
Answer:
(i) (a) Computation of liabilities of underwriters (No. of shares):
Particulars P Q R
Gross liability 12,00,000 12,00,000 12,00,000
Less: Firm underwriting 1,00,000 1,00,000 1,00,000
11,00,000 11,00,000 11,00,000
 [Chapter  1] Accounting of Shares and... O 12.79

Less: Marked applications 7,25,000 8,40,000 13,10,000

3,75,000 2,60,000 (2,10,000)
Less: Unmarked applications
distributed to P and Q in 1,12,500 1,12,500 Nil
equal ratio
2,62,500 1,47,500 (2,10,000)
Less: Surplus of R distributed
to P and Q in equal ratio 1,05,000 1,05,000 2,10,000
Net liability (excluding firm
underwriting) 1,57,500 42,500 Nil
Add: Firm underwriting 1,00,000 1,00,000 1,00,000
Total liability (No. of shares) 2,57,500 1,42,500 1,00,000

(b) Computation of amounts payable by underwriters: (`)

Particulars P Q R
Liability towards shares
to be subscribed @12 30,90,000 17,10,000 12,00,000
per share
Less: Commission (5%
on 12 lakhs shares @ 10 6,00,000 6,00,000 6,00,000
each)
Net amount to be paid
by underwriters 24,90,000 11,10,000 6,00,000
(c) In the Books of Masood Ltd.
Journal Entries
Particulars Dr. (`) Cr. (`)
Underwriting commission A/c Dr. 18,00,000
To P A/c 6,00,000
To Q A/c 6,00,000
To R A/c 6,00,000
(Being underwriting commission on the
shares underwritten)
 12.80 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

P A/c Dr. 30,90,000

Q A/c Dr. 17,10,000
R A/c Dr. 12,00,000
To Equity share capital A/c 50,00,000
To Share premium A/c 10,00,000
(Being shares including firm underwritten
shares allotted to underwriters)
Bank A/c Dr. 42,00,000
To P A/c 24,90,000
To Q A/c 11,10,000
To R A/c 6,00,000
(Being the amount received towards
shares allotted to underwriters less
underwriting commission due to them)
Answer:
(b) (ii) Books of Mogari Limited
Journal (in Lakhs)
Particulars Dr. (`) Cr. (`)
(i) Bank A/c Dr. 28,00,000
To E. S. Application A/c 18,00,000
To Debenture A/c 10,00,000
(Application money received on 1,20,000
equity shares @`15 per share and on 10,000
debentures @ ` 10 each)
(ii) Bank A/c Dr. 5,60,000
To Profit & Loss A/c 60,000
To Investment A/c 5,00,000
(Profit on sale of Investments)
(iii) E. S. Application A/c Dr. 18,00,000
To E. S. Capital A/c 12,00,000
To Securities Premium A/c 6,00,000
(Application money transferred)
(iv) Debenture Application A/c Dr. 10,00,000
To 12% Debenture A/c 10,00,000
 [Chapter  1] Accounting of Shares and... O 12.81

(v) Security Premium A/c Dr. 7,00,000

General Reserve A/c Dr. 50,000
To Premium on redpm. of pref. sh. A/c 7,50,000
(vi) General Reserve A/c Dr. 12,50,000
Profit & Loss A/c Dr. 5,50,000
To Capital Redemption Reserve A/c 18,00,000
(vii)10% Redeemable P. S. Capital A/c Dr. 30,00,000
Premium on Red. of P. S. A/c Dr. 7,50,000
To Bank A/c 37,50,000

Note: Preference shares are redeemed either out of distributable profits

or proceeds from fresh issue of shares or both. Hence, Preference shares
of ` 12,00,000 redeemed through fresh issue of equity shares and
remaining of ` 18,00,000 redeemed out of profits.
Space to write important points for revision

2015 - June [1] Answer the question:

(a) Neel Limited issued 10,000 debentures of ` 10 each redeemable at the
end of 10 years, but reserves the right to redeem earlier from the end of
3rd year. The company decides at the end of 5th year to redeem 2,000
debentures out of its profits. Pass necessary journal entries in the books
of Neel Limited on redemption of debentures. (2 marks)

Answer:
Journal Entries in the books of Neel Limited on redemption of
debentures
5th Year Particulars Dr. Cr.
Dec. 31 (`) (`)
I Debentures A/c Dr. 20,000
To Debentureholders A/c 20,000
(Being the amount due on redemption of
debentures) 2,000 × 10
 12.82 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

II Profit & Loss Appropriation A/c Dr. 20,000

To Debenture Redemption Reserve A/c 20,000
(Being the transfer of Profit to Debenture
Redemption Reserve A/c as per SEBI
guidelines)
III Debentureholders A/c Dr. 20,000
To Bank A/c 20,000
(Being the amount paid to debenture-
holders)
Space to write important points for revision

2015 - June [3] (a) Answer the question:

(ii) Vikash Ltd. resolved by a special resolution to buy-back its 5,00,000
equity shares of ` 10 each (paid up value ` 8) at a premium of ` 15
per share. At the time of buy-back the following balances appeared
in its books:
`
Securities Premium Account 60,00,000
General Reserve Account 50,00,000
Profit and Loss Account (Cr.) 45,00,000
The company utilized the whole of the securities premium for buy-
back purpose.
You are required to pass the necessary journal entries in the books
of the company. (4 marks)
Answer:
Buy Back of Shares
Journal Entries in the books of Vikash Limited
I Equity share final call A/c Dr. 10,00,000
To Equity share capital A/c 10,00,000
(Being final call money due for 5,00,000
equity shares @ ` 2 per share)
II Bank A/c Dr. 10,00,000
To Equity share final call A/c 10,00,000
(Being final call money received for
5,00,000 equity shares @ ` 2 per share)
 [Chapter  1] Accounting of Shares and... O 12.83

III Equity shareholders A/c Dr. 1,25,00,000

To Bank A/c 1,25,00,000
(Being amount paid on buy back of shares
@ ` 25 per share)
IV Equity share capital A/c Dr. 50,00,000
Securities premium A/c Dr. 60,00,000
General Reserve A/c Dr. 15,00,000
To Equity Shareholders A/c 1,25,00,000
(Being cancellation of 5,00,000 equity
shares on buy back)
V General Reserve A/c Dr. 35,00,000
Profit & Loss A/c Dr. 15,00,000
To Capital Redemption Reserve A/c 50,00,000
(Being transfer of General Reserve of
` 35,00,000 & ` 15,00,000 to cover the
nominal amount of shares brought back to
Capital Redemption Reserve A/c)
Space to write important points for revision

2015 - June [3] (c) Answer the question:

(ii) Seth Co. Ltd. issued 20,000 shares which were underwritten as:
Ram: 12,000 shares, Raghu: 5,000 shares and Ravi: 3,000 shares.
The underwriters made applications for firm underwriting as follows:
Ram: 1,600 shares; Raghu: 600 shares; Ravi: 2,000 shares. The total
subscriptions excluding firm underwriting (including marked
applications) were 10,000 shares.
The marked applications were: Ram: 2,000 shares; Raghu: 4,000
shares; Ravi: 1,000 shares.
Show the net liability of underwriters (number of shares).
(6 marks)
 12.84 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer:
Statement showing the liability of under writers
No. of shares
Underwriters Ram Raghu Ravi
Gross liability 12,000 5,000 3,000
Less: Marked Applications (excluding firm 2,000 4,000 1,000
under writing)
10,000 1,000 2,000
Less: Unmarked applications in the ratio of 4,320 1,800 1,080
gross liability (Note - 1)
Resultant liability or surplus 5,680 (800) 920
Less: Surplus of B allocated to A&C in the ratio (640) 800 (160)
of 12:3
Net liability as per agreement 5,040 Nil 760
Add: Firm underwriting 1,600 600 2,000
Total liability 6,640 600 2,760
Working Notes:
Under this method, firm underwriting is treated as “unmarked application”
and it is dividend in the ratio of gross liability. Total unmarked applications
are calculated as follows:
1. Calculation of Unmarked Applications:
Total subscriptions (excluding firm underwriting) 10,000
Less: Marked application (excluding firm underwriting) 7,000
Unmarked application by public 3,000
Add: Application under firm underwriting 4,200
Total unmarked applications 7,200
Unmarked Applications are allotted in the ratio of gross liability = 12:5:3
2. Total Allocation of Shares:
Unmarked Application by Public 3,000
Marked Application by Public 7,000
Total liability (6,640 + 600 + 2,760) 10,000
20,000
Space to write important points for revision
 [Chapter  1] Accounting of Shares and... O 12.85

2015 - Dec [1] Answer the questions:

(d) Mahi Ltd. taken a loan of ` 15,00,000 from the SBI by issuing 25000,
12% Debentures of ` 100 each as collateral security. Pass the
necessary journal entries in the books of company. (2 marks)
st
(f) On 1 June, 2015 Suku Ltd. purchased 250 of its own 12% debentures
from the open market at ` 97 (cum-interest) each for immediate
cancellation. Face value of each debenture is ` 100. Debenture interest
is payable on 30th June and 31st December every year. Pass necessary
journal entry to record the above transaction. (2 marks)
Answer:
(d) Journal of Mahi Ltd.
Particulars (`) (`)
Bank A/c Dr. 15,00,000
To Bank Loan A/c 15,00,000
(Loan taken from SBI)

Debenture Suspense A/c Dr. 25,00,000

To 12% Debentures A/c 25,00,000
(12% Debentures worth ` 20 Lakhs issued as
collateral security for a Loan from SBI as per
Board’s Resolution No…… Date)
(f)
Particulars Dr. Cr.
(`) (`)
12% Debentures A/c (250 x ` 100) Dr. 25,000
Debenture Interest A/c Dr. 1,250
To Bank A/c (250 x ` 97) 24,250
To profit on Redemption of Debentures A/c 2,000
(250 debentures cancelled by purchase from open
market)
Accrued Interest upto 1.6.2015 = 250 x 100 x × = ` 1,250.
Space to write important points for revision
 12.86 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2015 - Dec [3] Answer the questions:

(a) (i) On 31st March 2015, following was the Balance Sheet of FCS
Limited:
Liabilities ` Assets `
( in lakhs) (in lakhs)
Equity Share Capital (` 10) 2,400 Machinery 3,600
Securities Premium 350 Furniture 452
General Reserve 930 Investments 148
Profit and Loss Account 340 (Face Value
Current Liabilities 2,640 ` 200 lakhs)
Current Assets 2,460
6,660 6,660
On 1st April, 2015 the company announced the buy-back of 25% of its equity
shares @ 15 per share. For this purpose, it sold all of its investments for
` 150 Lakhs and issued 2,00,000, 14% preferences shares of ` 100 each at
par, the entire amount being payable with application.
The issue was fully subscribed. The company achieved the target of buy-
back. Later the company issued one fully paid up equity share of ` 10 by way
of bonus shares for every four equity shares held by the equity shareholders.
Required: Show journal entries for all transactions including cash
transactions. (10 marks)
(b) (ii) Sonic Ltd. incorporated on 1st June, 2015 issued a prospectus
inviting applications for 10,00,000 equity shares of ` 10 each. The
whole issue was fully underwritten by four underwriters:
S T U V
Underwriter 4,00,000 shares 3,00,000 shares 2,00,000 shares 1,00,000 shares
Applications were received for 9,00,000 shares of which marked
applications were as follows:
S T U V
Underwriter 4,40,000 shares 1,80,000 shares 2,20,000 shares 20,000 shares
Find out the liability of each underwriter individually. (6 marks)
 [Chapter  1] Accounting of Shares and... O 12.87

Answer:
(a) (i) In the books of FCS Ltd.
Journal Entries
(` In Lakhs)
Date Particulars L.F. Dr.(`) Cr.(`)
1. Bank A/c Dr. 150
To Investments A/c 150
(Being the Sale of investments)
2. Investments A/c Dr. 2
To Profit and Loss A/c 2
(Being the t/f of Profit on sale of
Investments)
3. Bank A/c Dr. 200
To 14% Preference Share Application
& Allotment A/c 200
(Being the Application money received)
4. 14% Preference Share Application &
Allotment A/c Dr. 200
To 14% Preference Share Capital A/c 200
(Being the Allotment of shares)
5. Equity Shares Buy Back A/c Dr. 900
To Bank A/c 900
(Being the payment made to equity
shareholders on buy-back)
6. Equity Share Capital A/c Dr. 600
Securities Premium A/c Dr. 300
To Equity Shares Buy Back A/c 900
(Being the cancellation of share bought
back)
 12.88 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

7. General Reserve A/c Dr. 600

To Capital Redemption Reserve A/c 600
(Being creation of Capital Redemption
Reserve A/c to the extent of the face
value of equity shares bought back)
8. Capital Redemption Reserve A/c Dr. 400
Securities Premium A/c Dr. 50
To Bonus Issue A/c 450
(Being the utilisation of Capital
Redemption reserve and securities
premium to issue one bonus share for
every four shares held)
9. Bonus Issue A/c Dr. 450
To Equity Share Capital A/c 450
(Being the Issue of one bonus share for
every four equity shares)

Note: Amount of Bonus Issue = 25% of (2400 - 25% of 2400) = ` 450

lakhs.
(b) (ii) Statement of Underwriters’ Liability
Particulars S T U V TOTAL
Gross Liability 4,00,000 3,00,000 2,00,000 1,00,000 10,00,000
Less: Marked Applications 4,40,000 1,80,000 2,20,000 20,000 8,60,000
Balance Left (40,000) 1,20,000 (20,000) 80,000 1,40,000
Less: Unmarked Application 16,000 12,000 8,000 4,000 40,000
Applications in the ratio of (56,000) 1,08,000 (28,000) 76,000 1,00,000
gross liability
Division of surplus of S and U (56,000) (63,000) 28,000 (21,000) 0
to T and V in the ratio of (3:1)
Net Liability NIL 45,000 NIL 55,000 1,00,000
Space to write important points for revision
 [Chapter  1] Accounting of Shares and... O 12.89

2016 - June [5] (a) The following balances were shown in the Balance Sheet
of Anukula Limited as at 31st March, 2015:
`
8,00,000 Equity Shares of ` 10 each fully paid up 80,00,000
50,000 8% Preference Shares of ` 100 each ` 80 paid up 40,00,000
Capital Reserve 35,00,000
General Reserve 80,00,000
Securities Premium 70,00,000
Profit & Loss Account 52,00,000
12% Debentures 10,00,000
Non-Current Investment at cost 65,00,000
Cash and Bank 92,00,000
Additional Information:
(i) The company passed a resolution to buy-back 20% of its equity capital
@ ` 35 per share. For this purpose, it sold its investments of ` 30 lakhs
for ` 28 lakhs.
(ii) The company redeemed the preference shares at a premium of 25%.
(iii) Included in its investments were ‘Investments in own debentures’
costing ` 10 lakhs (face value ` 11.50 lakhs). These debentures were
cancelled.
You are required to pass necessary journal entries in the books of the
company for above. (10 marks)
Answer:
(a) Journal Entries In the Books of Anukula Ltd:
(` in Lakhs)
Particulars Dr. Cr.
1. Bank A/c Dr. 28
Profit and Loss A/c Dr. 2
To Investment A/c 30
(Being investment sold for the purpose of buy-back
of Equity Shares)
 12.90 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2. Preference Share Final Call A/c Dr. 10

To 8% Preference Share Capital A/c 10
(Being call money due)
3. Bank A/c Dr. 10
To Preference Share Final Call A/c 10
(Being call money received)
4. 8% Preference Share Capital A/c Dr. 50
Premium on Redemption of Preference Shares A/c 12.50
Dr.
To Preference Shareholders A/c 62.50
(Being redemption of preference share capital at
premium of 25%)
5. Preference Shareholders A/c Dr. 62.50
To Bank A/c 62.50
(Being payment made to preference shareholders)
6. General Reserve A/c Dr. 66
To Capital Redemption Reserve A/c 66
(Refer Note)
(Being creation of capital redemption reserve)
7. Equity Share Capital A/c Dr. 16
Securities Premium A/c Dr. 40
(Premium payable on buy-back)
To Equity Shares Buy-back A/c 56
(Being the amount due on buy-back of equity shares)
8. Equity Shares Buy-back A/c Dr. 56
To Bank A/c 56
(Being payment made for buy-back of equity shares)
9. 12% Debentures A/c Dr. 11.5
To Own Debentures A/c 10
To Capital Reserve A/c (Profit on cancellation) 1.50
(Being own debentures cancelled at profit)
 [Chapter  1] Accounting of Shares and... O 12.91

10. Securities Premium A/c Dr. 12.50

To Premium on Redemption of Preference
Shares A/c 12.50
(Being premium on redemption of preference shares
adjusted through securities premium)
Note: Transfer to Capital Redemption Reserve A/c as:
`
For Redemption of P.S. Capital 50 lakhs
For Buy-back of Equity Shares 16 lakhs
Total 66 lakhs
Space to write important points for revision

2016 - Dec [7] (a) APC Ltd. has 12% redeemable preference share capital
of ` 1,00,000 consisting shares of ` 100 each fully called and paid-up. The
company wants to redeem them at 10% premium.
The ledger accounts show the following balances:
Securities Premium A/c: ` 4,000
Profit & Loss A/c: ` 20,000
The company wants to make a minimum fresh issue of equity shares of ` 10
each at 5% premium for redemption of the preference shares.
You are required to:
(i) Ascertain the amount of fresh issue to be made by the company;
(ii) Pass necessary journal entries regarding redemption of the preference
shares and fresh issue. (10 marks)
Answer:
Calculation showing number of equity shares to be issued —
Total Liability = Preference Share Capital to be redeemed
= Profit and Loss Account balance + Securities Premium +
Proceeds of fresh issue
Let, Numbers equity shares to be issued be X
 ` 1,10,000 = ` 4,000 + ` 20,000 + [1.05 X × `10]
Or, `10.5 X = `(1,10,000 – 4,000 – 20,000)
Or, X = ` 86,000 / `10.5
Or, X = 8,190
 12.92 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Hence, amount of fresh issue —

No. of shares to be issued 8,190
Equity Share Capital = 8,190 × `10 = ` 81,900
Securities Premium [`10 × 5%] × 8,190 = ` 4,095
` 85,995
APC Ltd.
Journal Entries
Particulars Dr. (`) Cr. (`)
Bank A/c Dr. 85,995
To Equity Share Capital A/c 81,900
To Securities Premium A/c 4,095
(8190 equity shares of `10 each at a premium of 5%)
Securities Premium A/c Dr. 8,095
Profit & Loss A/c 1,905
To Premium on Redemption of Preference Shares A/c 10,000
(Premium provided for redemption)
Profit & Loss A/c Dr. 18,100
To Capital Redemption Reserve A/c 18,100
(Amount transferred to capital redemption reserve not
covered by fresh issue)
12% Redeemable Preference Share Capital A/c Dr. 1,00,000
Premium on Redemption of Preference Shares A/c Dr. 10,000
To Preference Shareholders A/c 1,10,000
(Redemption of preference shares made)
Preference Shareholders A/c Dr. 1,10,000
To Bank 1,10,000
(Payment made)
Space to write important points for revision
 [Chapter  1] Accounting of Shares and... O 12.93

2017 - June [2] (a) A joint stock company resolved to issue 5 lakh equity
shares of ` 10 each at a premium of ` 1 per share. 50000 of these shares
were taken up by the directors and their relatives, the entire amount being
received forthwith. The remaining shares were offered to the public, the
entire amount being asked for with applications.
The issue was underwritten by P, Q and R for a commission of 2% of the
issue price. 65% of the issue was underwritten by P, while Q and R’s share
were 25% and 10% respectively.
Their firm underwriting was as follows:
P 15000 shares, Q 10000 shares and R 5000 shares. The underwriters were
to submit unmarked applications for shares underwritten firm with full
application money along with the members of the general public.
Marked applications were as follows: P 59750 shares, Q 28750 shares and
R 5250 shares. Unmarked applications totaled 350000 shares.
Accounts with the underwriters were promptly settled.
You are required to prepare a statement calculating liability of the
Underwriters for shares other than shares underwritten Firm and also
calculate the amount due from/to the Underwriters. (8 marks)
Answer :
Statement Showing the Liability of underwriters
Underwriters P Q R Total
Gross Liability 2,92,500 1,12,500 45,000 4,50,000
Less: Marked Application
(excluding firm underwriting) 59,750 28,750 5,250 (93,750)
2,32,750 83,750 39,750 3,56,250
Less: Unmarked Applications
(in the ratio of gross Liability) 2,27,500 87,500 35,000 (3,50,000)
Result and Liability 5,250 (3,750) 4,750 6,250
Less: Surplus of a allocated to
P & R (65:10) (3,250) (3,750) (500) —
Net Liability as per agreement 2,000 Nil 4,250 6,250
Add: Firm underwriting 15,000 10,000 5,000 30,000
Total Liability 17,000 10,000 9,250 36,250
 12.94 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Workings: Calculation of amount due from/to underwriters

Particulars P Q R
No. of shares to be subscribed as per 2,000 Nil 4,250
agreement (exc. Firm)
Amount payable @` 11 22,000 Nil 46,750
Underwriting commission @ 2%
P: (292500 × 11× 2%) 64,350
Q: (112500 × 11× 2%) 24,750
R: (45000 × 11 × 2%) 9,900
Amount (paid)/received (42,350) (24,750) 36,850
Space to write important points for revision

2017 - Dec [2] (a) R Ltd. wants to buy-back 100000 equity shares of ` 10
each at a price of ` 20 each on 01.04.2017. The buy-back is allowed in its
articles of association and the company has obtained necessary approval
from the shareholders. The company has sufficient bank balance to make
the payment for buy-back of shares.
The following information is available as on 31.03.2017: `
Equity Share Capital (` 10 each fully paid) 50,00,000
General Reserve 60,00,000
Dividend Equalization Reserve 10,00,000
Balance of Profit and Loss (Cr.) 5,00,000
10% Debentures (` 100 each) 75,00,000
Bank Loan 40,00,000
Current Liabilities 66,00,000
Verify whether the buy-back plan of the company meets the conditions
specified by the Companies Act 2013 as regards to the maximum amount of
buy-back. Also pass necessary journal entries in the books of the company
to give effect of the process, if the plan is found to be in place. (9 marks)
 [Chapter  1] Accounting of Shares and... O 12.95

Answer:
Determination of maximum buyback permissible as per Companies Act
2013:
1. Shares Outstanding Test: Max. Permissible Limit = 25% of
Outstanding Shares
Particulars
Total number of shares outstanding 5,00,000
25% of the shares outstanding 1,25,000

2. Resource Test: Max. Permissible Limit = 25% of Paid up Capital plus

Free Reserves
Particulars
Equity share capital (`) 50,00,000
Free Reserve (`) (General Reserve + DER +P/L) 75,00,000
Paid up Capital plus Free Reserves (`) 125,00,000
25% of Paid up Capital plus Free Reserves (`) 31,25,000
Buy back price per share (`) 20
No. of shares that can be bought back (31,25,000/20) 1,56,250

3. Debt Equity Ratio Test: Debt after buyback cannot exceed twice the
paid up capital plus free reserves.
Particulars
Total Debt (`) (75,00,000 + 40,00,000 + 66,00,000) 181,00,000
Minimum Equity to be maintained after buyback in the 90,50,000
ratio 2:1 (`)
Paid up capital plus free reserves before buyback (`) 125,00,000
12.96 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Future Paid up capital plus free reserves (`) (see 113,50,000

working note: 1) (125,00,000 - 11,50,000)
Maximum permissible buyback (`) (113,50,000 - 23,00,000
90,50,000)
Buy back price per share (`) 20
No. of shares that can be bought back 1,15,000
Summary of three test results:
No. of Shares
Permissible Buyback as per -
Share Outstanding Test 1,25,000
Resource Test 1,56,250
Debt-Equity Ratio Test 1,15,000
Maximum permissible buyback (least of the three) 1,15,000
Actual buyback plan 1,00,000
Since actual buyback proposed is below the permissible limit, the
company can buy back 100000 shares at ` 20 each.
Working Note 1:
In case buyback of shares is done out of free reserves and securities
premium, a company is required transfer a sum equal to the nominal
value of the shares buyback to Capital Redemption Reserve A/C. Thus
shareholders' fund after buyback includes CRR. Now CRR is not a free
reserve. Hence it cannot form part of paid up capital plus free reserve
after buyback.
Let nominal value of shares bought back is x. Then CRR after buyback
is x. Moreover total premium on buyback = x (` 10 face value and ` 20
buyback price, so premium on buyback ` 10). So total amount to be
deducted from shareholders' fund for buyback = x (capital) +x (premium)
= 2x. Moreover free reserves to be reduced by x.
Total paid up capital plus free reserves after buyback = 125,00,000 – x
(i.e. CRR) – 2x (i.e. buyback proceeds)
Conditionally, 125,00,000 - x - 2x = 90,50,000, or, x = 11,50,000 Nominal
value of buyback = 11,50,000 (i.e. CRR)
 [Chapter  1] Accounting of Shares and... O 12.97

Journal
Date Particular Dr. (`) Cr. (`)
1.4.2017 Equity Share Buyback A/c Dr. 20,00,000
To Bank A/c 20,00,000
(Being buyback of 100000 shares of
` 10 each at ` 20 per share.)
1.4.2017 Equity Share Capital A/c Dr. 10,00,000
General Reserve A/c 10,00,000
To Equity Share Buyback A/c 20,00,000
(Being cancellation of shares bought
back and premium on buyback
provided out of General Reserve)
1.4.2017 General Reserve A/c Dr. 10,00,000
To Capital redemption Reserve A/c 10,00,000
(Being nominal value of shares
bought back transferred to CRR)
Space to write important points for revision

2018 - June [2] (a) On 01.01.2017 Jay Ltd. had 2,000, 12% Debentures of
` 100 each. On 01.05.2017 the company purchased 400 own Debentures at
` 97 cum-interest in the open market. Interest on debentures is payable on
30th June and 31st December each year.
Required: Give the necessary journal entries assuming that the own
Debentures purchased were retained as investments till 31.12.2017, on
which date they were cancelled.
Assume that the company follows English Calendar Year. (6 marks)
Answer:
Journal of Jay Ltd.
Date Particulars L.F. Dr.(`) Cr.(`)
May 01 Own Debentures A/c Dr. 37,200
Interest on Own Debenture A/c Dr. 1,600
To Bank A/c 38,800
(Being the purchase of 400 debentures
@ ` 97 cum - interest)
 12.98 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

June 30 Debentures Interest A/c Dr. 12,000

To Interest on Own Debentures A/c 2,400
To Bank A/c 9,600
(Being the interest paid / credited on
` 2,00,000 debentures held by outsiders
and by the company own debentures for 2
months ).
Dec. 31 Debentures Interest A/c Dr. 12,000
To Bank A/c 9,600
To Interest on Own Debentures A/c 2,400
(Being the interest paid / credited on
` 1,60,000 debentures held by outsiders
and ` 40,000 own debentures for six
months)
Dec. 31 Profit and Loss A/c Dr. 24,000
To Debenture Interest A/c 24,000
(Being the transfer of debenture interest to
P & L A/c)
Dec. 31 Interest on Own Debentures A/c Dr. 3,200
To Profit and Loss A/c 3,200
(Being the transfer of interest on own
debentures to P & L A/c)
Dec. 31 12% Debentures A/c Dr. 40,000
To Own Debentures A/c 37,200
To Capital Reserve A/c 2,800
(Being the cancellation of 400 own
debentures)
Dec. 31 Profit and Loss Appropriation A/c Dr. 37,200
To Debenture Redemption Reserve 37,200
A/c
(Being the transfer of an amount
equivalent to the cash sum applied in
redeeming the debentures)
Space to write important points for revision
 [Chapter  1] Accounting of Shares and... O 12.99

2018 - Dec [2] (a) Following is the extract of the Balance Sheet of Xeta Ltd.
as at 31st March, 2017:
Authorised Capital:
50,000 12% Preference shares of ` 10 each 5,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
45,00,000
Issued and Subscribed Capital:
24,000 12% Preference shares of ` 10 each fully paid 2,40,000
2,70,000 Equity shares of ` 10 each, ` 8 paid up 21,60,000
Reserves and Surplus:
General Reserve 3,60,000
Securities Premium 1,00,000
Profit and Loss Account 6,00,000

On 1st April, 2017, the Company has made final call @ 2 each on 2,70,000
Equity shares. The call money was received by 20th April, 2017. Thereafter,
the company decided to capitalize its reserves by way of bonus at the rate
of one share for every four shares held.
Show necessary journal entries in the books of the company and prepare the
extract of the Balance sheet as on 30th April, 2017 after bonus issue.
(7 marks)

Table Showing Marks of Compulsory Questions

Year 14 14 15 15 16 16 17 17 18 18
J D J D J D J D J D
Descriptive 4
Total 4
 2 PRESENTATION OF
FINANCIAL STATEMENTS
THIS CHAPTER INCLUDES
• Me a n in g of Fina n cia l • Statement of Profit and Loss
Statements Account
• Objective of Financial • Balance Sheet
Statements • Schedule III:
• Components of Financial • Part I – Form of Balance
Statements Sheet;
• Users and their Information • Part II– Form of Statement
Needs of Profit and Loss;
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical

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12.100
 [Chapter  2] Presentation of Financial Statements O 12.101

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.

1. Meaning and Financial statements are compilation of financial

Objective of data, collected and classified in a systematic
Financial manner according to the accounting principles, to
Statement assess the financial position of an enterprise as
regards to its profitability, operational efficiency,
long and short – term solvency and growth
potential.
Financial statements are basic and formal means
through which management of an enterprise make
public communication of financial information along
with select quantitative details. They are structured
financial representation of the financial position,
performance and cash flows of an enterprise. Many
users are rely on the general purpose financial
statements as the major source of financial
information and therefore, financial statements
should be prepared and presented in accordance
with their requirement.
2. Component
of Financial
Statement
 12.102 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

3 Statement of Name of the Company.............................

Profit and Profit and Loss Statement for the year
Loss ended:.............. (` in..........)
Particulars Note F i g u r e s Figures
No. f o r t h e for the
Current Previous
Reporting Reporting
Period Period

I Revenue from xxx xxx

Operations

II Other Income xxx xxx

III Total Revenue (I+II) xxx xxx

IV Expenses:
Cost of Materials xxx xxx
Consumed xxx xxx
Purchases of Stock-in-
Trade
Changes in Inventories of xxx xxx
Finished Goods/Work-in-
progress and Stock-in-
Trade
Employee Benefits
Expense
Finance Costs
Depreciation and
Amortization Expense
Other
Expense

Total Expenses xxx xxx

V Profit before Exceptional

& Extraordinary Items and xxx xxx
Tax (III-IV)

VI Exceptional Items xxx xxx

[Chapter  2] Presentation of Financial Statements O 12.103

VII P r o f i t b e f o r e
Extraordinary Items and xxx xxx
Tax (V-VI)

VIII Extraordinary Items xxx xxx

IX Profit before Tax (VII- xxx xxx

VIII)

X Tax Expenses:
(1) Current Tax xxx xxx
(2) Deferred Tax xxx xxx

XI Profit/(Loss) for the period

from Continuing xxx xxx
Operations (IX-X)

XII P r o f i t / ( L o s s ) f r o m
Discontinuing Operations xxx xxx

XIII T a x E x p e n s e of
Discontinuing Operations xxx xxx

XIV P r o f i t / ( L o s s ) f r o m
Discontinuing Operations xxx xxx
(After Tax) (XII-XIII)

XV Profit/(Loss) for the period xxx xxx

(XI + XIV)

XVI Earnings per Equity

Share: xxx xxx
(1) Basic
(2) Diluted
 12.104 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

4. Balance Sheet Part I - From of Balance Sheet

Name of the Company ...................................
Balance Sheet as at: .......................... (` in..........)
Particulars Note Figures as Figures as
at the end at the end
of Current o f the
Reporting P r e v i o u s
Period R e p o r tin g
Period
` `

I. Equity and Liabilities

(1) Shareholders’ Funds
(a) Share Capital
(b) R e s e r v e s &
Surplus
(c) Money Received
against Share
Warrants
Share Application
money pending
allotment
(2) Non-Current Liabilities

(3) (a) L o n g Term

Borrowings
(b) DTL (Net)
(c) Other Long Term
Liabilities
(d) L o n g Term
Provisions
(4) Current Liabilities
(a) S h o r t Term
Borrowings
(b) Trade Payables
(c) Other Current
Liabilities
(d) S h o r t Term
Provisions
Total
 [Chapter  2] Presentation of Financial Statements O 12.105

Assets

(1) Non-Current Assets

(a) Fixed Assets
(i) T a n g i b l e
Assets
(ii) I n t a n g i b l e
Assets
(iii) Capital WIP
(iv) I n t a n g i b l e
Assets under
Development
(b) N o n - C u r r e n t
Investments
(c) DTA (Net)
(d) Long Term Loans
& Advances
(e) Other Non-Current
Assets

(2) Current Assets

(a) C u r r e n t
Investments
(b) Inventories
(c) Trade Receivables
(d) Cash & Cash
Equivalents
(e) Short Term Loans
& Advances
(f) Other Current
Assets

Total
For the purpose of this Schedule, the terms used herein shall be as per the
applicable Accounting Standards.
 12.106 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

SHORT NOTES
2010 - Dec [8] Write a short note on
(d) Contingent liability. (5 marks)
Answer:
As per the accounting standard, a contingent liability is a possible obligation
that arises from past event and existence of which will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future events not
wholly within the control of the enterprise. To be called contingent liability the
following conditions must be fulfilled:
- possible obligation as a result of past event,
- existence of which will be confirmed only by the occurrence or non-
occurrence of future event,
- future event not wholly within the control of the enterprise.
Space to write important points for revision

2011 - June [8] Write a short note on :

(b) Treatment of past losses of limited companies; (5 marks)
Answer :
Treatment of Past losses of the company.
If a company Incurs a loss in any financial year falling after 28th December,
1960 then;
(i) The amount of loss, or
(ii) An amount which is equal to the amount provided for depreciation for
that year or those years, whichever is less, must be set off against:
(a) The profits of the company, after providing for prescribed
depreciation for the year for which dividend is proposed to be
declared or
(b) The profits of the company for any previous financial year or
years arrived at after providing for the prescribed depreciation;
or
(c) The aggregate of (a) and (b) together.
Space to write important points for revision
 [Chapter  2] Presentation of Financial Statements O 12.107

2012 - June [8] Write a short note on:

(c) Objectives of Financial Statements; (5 marks)
Answer :
The main objectives in preparing the financial statements are as follows:
1. To provide financial information that is useful in making rational
investment, credit and similar decisions.
2. To provide financial information to enable users to predict cash flows to
the business.
3. To provide financial information about business resources (assets),
claims to these resources (liabilities and owner’s equity) and changes in
these resources and claims.
Space to write important points for revision

2012 - Dec [8] Write a short note on:

(d) Contingent liability. (5 marks)
Answer :
Contingent liability can be termed as an obligation relating to an existing
condition or situation which may arise in future depending on the occurrence
or non- occurrence of one or more uncertain future events- For example, a
company may have certain pending litigation, assessments made by tax
authorities which are being contested etc, Which might result in company
incurring financial liability in future and in all such cases, the amounts
involved are shown as contingent liability.
Contingent liabilities are classified under the following head:-
(i) Claims against the company not acknowledged as debts
(ii) Uncalled liability on shares partly paid
(iii) Arrears of fixed cumulative dividend
(iv) Estimated amount of contracts remaining unexecuted on capital
account not provided for, and
(v) Other money for which the company is liable contingently
Space to write important points for revision

2018 - Dec [5] Write a short note on:

(d) Schedule III disclosure requirement in respect of cash and cash
equivalents. (4 marks)
 12.108 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

DISTINGUISH BETWEEN
2009 - June [1] {C} (a) Distinguish between liability and provisions.
(3 marks)
Answer :
Liabilities Provision
1. If an amount is payable in 1. Provision is also a liability but the
future and is exact it is a amount is measured by using a
liability. substantial degree of estimation.
2. Eg:- Purchasing an asset and 2. Eg: For doubtful debts provision is
payment in installment creates required to be provided for.
a liability.
Space to write important points for revision

2009 - Dec [6] (b) Distinguish between Reserve and Provisions. (5 marks)
Answer :
Reserves Provisions
1. It is an appropriation of profit and 1. It is charge against profit and
doesn’t affect the amount of net reduces the amount of net
profit. profit.
2. It is created to strengthen 2. It is created to meet known
financial position and to meet liability of which the amount
unforeseen losses. cannot be determined with
substantial accuracy.
3. It is created only when profit 3. It is created and charged to
earned. profit and loss Account even if
there is a loss.
4. It can be invested outside the 4. It cannot be invested.
business and in that case, it is
called a fund.
Space to write important points for revision
 [Chapter  2] Presentation of Financial Statements O 12.109

DESCRIPTIVE QUESTIONS
2009 - Dec [7] (b) State the respective heads of the following items in the
Balance sheet of a company:
(i) Loose Tools, (iii) Mortgage loan, (iv) Interest Accrued but not due on
loans. (v) Public Deposit. (5 marks)
Answer :
(i) Loose Tools: Non Current Assets,
(iii) Mortgage loan : Non Current Liabilities
(iv) Interest Accrued but not due on loans: Current liabilities:
(A) Current Liabilities.
(v) Public deposits: Non Current Liabilities.
Space to write important points for revision

2013 - Dec [2] (c) (i) What are the characteristics of a liability? (4 marks)
Answer:
Characteristics of a Liability :
(i) Normally liability arises from present obligation. But future obligation
may also create liability if they are irrevocable. A forward contract to
buy goods is irrevocable; therefore, gain or loss on such contract is
evaluated and recognized as an asset or a liability.
(ii) Liabilities result from past transactions or other past events. Even an
irrevocable future obligation arises from past transactions or
commitment (event) only.
(iii) Normally liabilities are measurable in money terms. Sometimes
liabilities are estimated which are termed as provisions. Framework
defines the term liability broadly that includes provisions.
(iv) Statement of liability means giving up resources embodying economic
benefits. Liabilities are settled in any of the following ways :
 payment cash or transfer of other assets;
 provision of services;
 replacement by a new obligation;
 conversion of an obligation into equity;
 extinguished by way of waiver from the creditors.
Space to write important points for revision
 12.110 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2014 - June [1] {C} Answer the following:

(a) State the two main accounting assumptions, on which financial
statements are prepared and presented. (2 marks)
Answer:
Accounting Assumption: Underlying assumptions for the preparation and
presentation of financial statements are accrual and going concern. Under
accrual assumption, the effects of transactions and other events are
recognised when they occur (and not as cash or its equivalent is received or
paid) and they are recorded in the books of account and reported in the
financial statements of the periods to which they relate. It helps in
performance measurement in a better manner and identifying the financial
position appropriately.
Under going concern assumption, the financial statements are normally
prepared on the assumption that an entity is a going concern and will
continue in operation for the foreseeable future. Therefore, it is assumed that
the entity has neither the intention nor the need to liquidate or curtail
materially the scale of its operations; if such an intention or need exists, the
financial statements may have to be prepared on a different basis. In case
going concern basis could not be used, the entity shall disclose the basis
used as well.
Space to write important points for revision

2014 - June [3] {C} Answer the following:

(b) Name four items which are required to be disclosed under the head
‘Inventories’ as per Schedule III disclosure requirement. (2 marks)
Answer:
Inventories
Schedule III Disclosure Requirement Points
Inventories shall be classified as: • Goods in Transit should be
(a) Raw Materials, included under relevant
(b) Work In Progress, heads with suitable
(c) Finished Goods, disclosure.
(d) Stock-in-Trade,  The heading “Finished
(e) Stores and Spares, Goods” should comprise of
(f) Loose Tools, all Finished Goods other
 [Chapter  2] Presentation of Financial Statements O 12.111

(g) Others (specify nature) than those acquired for

Note: Goods-in-Transit shall be trading purposes. Those
disclosed under the relevant sub-head a cq u ire d f o r tra d in g
of Inventories. Mode of Valuation shall purposes are to be shown
be stated. under “Stock in Trade”.
Space to write important points for revision

2015 - Dec [2] (a) Answer the following:

(ii) What are the characteristics of a Liability? (4 marks)
Answer:
Please refer 2013 - Dec [2] (c) (i) on page no. 109
Space to write important points for revision

PRACTICAL QUESTIONS
2009 - June [2] (a) Prepare the Balance Sheet as at 31st March, 2008 from
the particulars furnished by Vision Ltd., as per Schedule III of Companies
Act.
`
Equity Share Capital (`10 each fully paid) 8,00,000
Calls in arrear 800
Land 1,60,000
Building 2,80,000
Plant & Machinery 4,20,000
Furniture 40,000
General Reserve 1,68,000
Loan from IDBI 1,20,000
Loans (Unsecured) 96,800
Provision for Taxation 54,400
Sundry Debtors 1,60,000
Advances (Dr.) 34,160
Proposed dividend 48,000
Profit & Loss A/c. 80,000
Cash balance 24,000
 12.112 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Cash at Bank 1,97,600

Preliminary Expenses 10,640
Sundry Creditors (For goods & expenses) 1,60,000
Stock :
Finished goods 1,60,000
Raw material 40,000 2,00,000
Adjustment:
(i) 1500 equity shares were issued for consideration other than cash.
(ii) Loan of ` 1,20,000 from IDBI is inclusive of ` 6,000 for interest
accrued but not due. The loan is hypothecated by plant & machinery.
(iii) Debtors of ` 50,000 are due for more than six months.
(iv) The cost of assets :
`
Building 3,20,000
Plant & Machinery 5,60,000
Furniture 50,000
(v) Bank balance includes ` 2,000 with Trust Bank Ltd., which is not a
scheduled Bank.
(vi) Bills receivable for ` 2,20,000 maturing on 30th June, 2008 have been
discounted.
(vii) The company had contract for the erection of machinery at ` 1,50,000
which is still incomplete. (10 marks)
Answer :
Balance Sheet of Vision Ltd.
as on 31st March, 2008
Particulars Note Figures as Figures as
No. at the end of at the end of
current previous
reporting reporting
period period
I. EQUITY AND LIABILITIES
1. Shareholders’ Funds
(a) Share Capital 1 7,99,200
(b) Reserves and Surplus 2 2,85,360
(c) Money received against share
warrants
 [Chapter  2] Presentation of Financial Statements O 12.113

2. Share application money pending

allotment
3. Non-Current Liabilities
(a) Long-term borrowings 3 2,10,800
(b) Other Long term Liabilities
(d) Long term provisions
4. Current Liabilities
(a) Short-term borrowings
(b) Trade payables — 1,60,000
(c) Other current liabilities 4 6,000
(d) Short--term provision 54,400
Total 15,15,760
II. Assets
1. Non Current Assets
(a) Fixed assets 5 9,00,000
(i) Tangible assets
(ii) Intangible assets
(iii) Capital Work-in-progress
(iv) Intangible assets under
development
(b) Non-current investment
(c) Deferred tax assets (net)
(d) Long term loans and advances
(e) Other Non Current Assets
2. Current Assets
(a) Current investments
(b) Inventories
(c) Trade receivables 6 2,00,000
(d) Cash and cash equivalents 7 1,60,000
(e) Short-term loans and advances 8 2,21,600
(f) Other current assets — 34,160
Total 15,15,760
 12.114 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Note:
Contingent Liability & Commitment-
B/R discounted 2,20,000
Contract for erection of- Machinery 1,50,000
3,70,000
Notes on Account:
1. Share Capital
Issue, Subscribed & Paid up Capital
80,000 Share for ` 10 Each
8,00,000
Less: Unpaid calls 800 7,99,200
2. Reserve & Surplus
General Reserve 1,68,000
P&L 69,360
Proposed dividend 48,000
2,85,360
3. Long term Borrowings
Loan From IDBI (1,20,000-6,000) 1,14,000
Unsecured Loans 96,800
2,10,800
4. Other Current Liabilities
Interest accrued 6,000
6,000
5. Tangible Assets
Land 1,60,000
Building 3,20,000
Less-Dep. 40,000 2,80,000
Plan & Machinery 5,60,000
Less- Dep. 1,40,000 4,20,000
Furniture 50,000
Less-Dep. 10,000 40,000
9,00,000
 [Chapter  2] Presentation of Financial Statements O 12.115

6. Inventories
Finished Goods 1,60,000
Raw Material 40,000
2,00,000
7. Trade Receivable
Debts O/S for a period exceeding 6 50,000
month Other Debts 1,10,000
1,60,000
8. Cash & Cash Equivalents
Balance with Bank 1,97,600
Cash in hand 24,000
2,21,600
Space to write important points for revision

2010 - Dec [6] (b) A limited company finds that the stock sheets as on
31.3.2010 had included an item twice, the cost of which was ` 50,000
You are asked to suggest, how the error would be dealt with in the accounts
for the year ended on 31.3.2010. (2 marks)
(c) While preparing the financial statements of X Co. Ltd. for the year ended
31.12.2009, you came across the following information. State with
reasons, how you would deal with them in the financial statements:
There was a major theft of stores valued at ` 20 lakhs in the preceding
year which was detected only during the current accounting year ended
on 31.12.2009. (3 marks)
Answer :
(b) As Per Accounting Standard 5. Prior Period Items are Income or
expenses which arise in the current period as a result of errors or
omissions” in the preparation of the financial statement of one or more
prior period.
In the given case stock of ` 50,000 was included twice in the last year.
For this the opening stock of the current year is overvalued it should be
reduced by ` 50,000.
 12.116 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

The closing stock of last year was overvalued by ` 50,000 therefore the
profit of last year was recorded ` 50,000 more. It is a prior period item.
Therefore the current year profit should be reduced by ` 50,000 as prior
period items. It should be disclosed separately.
Answer:
(c) The major theft of stores in the preceding year 2008, detected only
during the current financial year 2009, caused overstatement of closing
stock of stores in the preceding year. This must have also resulted in the
overstatement of profits of previous year, brought forward to the current
year. The adjustments are required to be made in the current year as
‘Prior Period Item’ as per AS-5 (REVISED), “Net Profit or Loss for the
Period, Prior Period Items and Changes in Accounting Policies”. As such
the adjustments relating to both opening stock of the current year and
profit brought forward from the pervious year should be separately
disclosed in the statement of profit and loss together with their nature
and amount in a manner that their impact on the current profit and loss
can be perceived.
Alternatively, it can be assumed that in the preceding year, the value
of stock of stores was found out by physical verification of stocks and
that was considered in the preparation of financial statements of the
preceding year. In such a situation, only the disclosure as to the theft
and the consequential loss is required in the notes to the accounts for
the current year i.e. year ended 31.12.2009
Space to write important points for revision

2013 - June [2] (a) Prepare the Balance Sheet as at 31.03.2012 from the
particulars furnished by M/s PRAN Ltd. as per revised Schedule III of the
Companies Act:
Particulars Amount Particulars Amount
(`) (`)
Share Capital 7,50,000 Capital Redemption Reserve 20,000
Calls in Arrear 5,000 Investment in 6% GP Notes 3,00,000
Land 2,20,000 (Tax Free)
 [Chapter  2] Presentation of Financial Statements O 12.117

Building 2,00,000 Profit and Loss Account 65,000

General Reserve 50,000 Cash in Hand 25,000
Loan from IDBI 1,00,000 Debtor 10,000
Sundry Creditors 1,50,000 Stock 1,00,000
Goodwill 25,000
(5 marks)
Answer :
(a) Balance Sheet as at 31.03.2012
I. Equity & Liabilities Note No. Current Year Previous year
1. Shareholders’ Funds:
(a) Share Capital 1 7,45,000 —
(b) Reserve & Surplus 2 1,35,000 —
(c) Money received against share
warrant
2. Share Application Money
Pending Allotment
3. Non-current Liabilities:
(a) Long Term Borrowings 3 1,00,000 —
(b) Deferred Tax Liability
(c) Other Long Term Liabilities
(d) Long Term Provision
4. Current Liabilities:
(a) Short Term Borrowings
(b) Trade Payable 4 1,50,000 —
(c) Other Current Liabilities
(d) Short Term Provisions
Total 11,30,000 —
 12.118 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

II. Assets:
1. Non Current Assets:
(a) Fixed Assets
1. Tangible Assets 5 6,70,000 —
2. Intangible Assets 6 25,000 —
3. Capital work in Progress
4. Intangible Asset Under
Development
(b) Non-Current Investment 7 3,00,000 —
(c) Deferred Tax Asset (Net)
(d) Long Term Loans and Advances
(e) Other Non Current Assets
2. Current Assets:
(a) Current Investment
(b) Inventories 8 1,00,000 —
(c) Trade Receivable 9 10,000 —
(d) Cash & Cash Equivalent 10 25,000 —
(e) Short Term Loans & Advances
(f) Other Current Assets
Total 11,30,000 —
Annexure
Note No. 1: Share Capital
Share Capital 7,50,000.00
Less: Calls in Arrear 5,000.00 7,45,000.00
Total 7,45,000.00
Note No. 2: Reserve & Surplus
General Reserve 50,000.00
Capital Redemption Reserve 20,000.00
Profit & Loss A/c 65,000.00 1,35,000.00
1,35,000.00
 [Chapter  2] Presentation of Financial Statements O 12.119

Note No. 3: Long Term Borrowings

Loan From IDBI 1,00,000.00
1,00,000.00
Total 1,00,000.00
Note No. 4: Trade Payables
Sundry Creditors 1,50,000.00
1,50,000.00
Total 1,50,000.00
Note No. 5: Tangible Assets
Land 2,20,000.00
Building 2,00,000.00
Plant & Machinery (Bal. Fig.) 2,50,000.00 6,70,000.00
Total 6,70,000.00
Note No. 6: Intangible Assets
Goodwill 25,000.00
25,000.00
Total 25,000.00
Note No. 7: Non Current Investments
Investment in 6% G.P. Notes 3,00,000.00
3,00,000.00
Total 3,00,000.00
Note No. 8: Inventories
Stock 1,00,000.00
1,00,000.00
Total 1,00,000.00
 12.120 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Note No. 9: Trade Receivables

Debtors 10,000.00
10,000.00
Total 10,000.00
Note No. 10: Cash & Cash Equivalents
Cash in Hand 25,000.00
25,000.00
Total 25,000.00

Note: There is no item of Plant & Machinery in Question. It may be

considered as balancing figure to tally the Balance Sheet.
Space to write important points for revision

2013 - June [6] (b) The following items are extracted from the Balance Sheet
of Best Ltd. as at 1st April, 2012:
`
(i) 9% Preference Shares of ` 100 each 50,00,000
(ii) Equity Shares of ` 10 each (` 8 paid up) 80,00,000
(iii) General Reserve 26,00,000
(iv) Securities Premium 20,00,000
(v) 12% Debentures 40,00,000
Profit before interest and tax for the year ending on 31.03.2013 was
` 44,80,000.
The Board of Directors of the Company proposed payment of Preference
Share Dividend and Equity Share Dividend @ 20%. The Board also declared
Capital Bonus out of General Reserve for making partly paid-up shares into
fully paid-up. Ignore Corporate Dividend Tax.
Provision to be made for Taxation @ 30%.
7.5% of Net Profit to be transferred to General reserve.
You are required to show the Journal entries to be passed to incorporate the
Recommendations and adjustments. (6 marks)
 [Chapter  2] Presentation of Financial Statements O 12.121

Answer :
Journal of Best Ltd.
S. Date Particulars Dr. ` Cr. `
No.
(i) 31.3.13 P/L A/c Dr. 4,80,000
To Debenture Interest A/c 4,80,000

(ii) 31.3.13 P/L A/c Dr. 12,00,000

To Provision for Taxation A/c 12,00,000
(Provision made for tax @ 30% on (44,80,000  4,80,000)
(iii) 31.3.13 P/L A/c Dr. 28,00,000
To Surplus A/c 28,00,000
(Net profit 40,00,000  12,00,000 = 28 Lakhs transferred)
(iv) 31.3.13 Surplus A/c Dr. 20,50,000
To Proposed Pref. Dividend A/c 4,50,000
To Proposed Equity Dividend A/c 16,00,000
(Proposed Div. On P.S. 9% of 50,00,000 as on preference
shares @ 20% on 80,00,000 on equity shares.)
(v) 31.3.13 General Reserve A/c Dr. 20,00,000
To Bonus to Shareholders A/c 20,00,000
(Capital bonus declared to meet the final call money)
(vi) 31.3.13 Surplus A/c Dr. 2,10,000
To General Reserve A/c 2,10,000
(General reserve @ 7.5% of net profit ` 28,00,000)
(vii) 31.3.13 Equity Share Final Call A/c Dr. 20,00,000
To E.S. Capital A/c 20,00,000
(Equity share final call money due)
(viii) 31.3.13 Bonus to Shareholders A/c Dr. 20,00,000
To Equity Share Final Call A/c 20,00,000
(Bonus to shareholder utilized)
Space to write important points for revision
 12.122 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2016 - Dec [1] Answer the following question:

(d) PROMET LTD. follows a policy of refunding money to the dissatisfied
customers if they claim within 15 days from the date of purchase and
return the goods. It appears from the past experience that in a month
only 0.2% of the customers claims refunds.
The company sold goods amounting to ` 30 Lakh during the March,
2016. State how the matter will have to dealt with in the accounts for the
year 2015-16. (2 marks)
Answer:
There is a probable present obligation as a result of past obligating event.
The obligating event is the sale of product. Provision should be recognized
as per AS-29.
So, a provision of ` 6,000 (` 30 lakh × 0.2%) should be provided in the
financial accounts for the year 2015-16.
Space to write important points for revision

2017 - June [4] Elixir Ltd. provides the following Trial Balance as on 31st
March, 2016:
Particulars Dr. Balance (`) Cr. Balance (`)
Equity Share Capital 30,00,00 shares of 30,00,000
` 10 each fully paid
12% Bank Loan 2,00,000
Furniture 2,25,000
Machinery 7,50,000
Building 12,50,000
Non-current Investment 2,00,000
Sales 48,00,000
Sales Return 4,00,000
Interest Received on Investment 20,000
Interest on Bank Loan 20,000
Purchase 33,20,000
 [Chapter  2] Presentation of Financial Statements O 12.123

Purchase Returns 4,20,000

Opening Stock 2,00,000
Discount 6,250
Carriage on Goods Sold 1,39,000
Rent and Taxes 60,000
Trade Receivables 12,00,000
Trade Payables 80,000
Advertisement 1,20,000
Bad Debt 10,000
Salaries 4,00,750
Audit Fees 27,000
Contribution of P.F. 60,000
Cash at Bank and in hand 1,32,000
Total 85,20,000 85,20,000
Additional Information:
(i) Closing Stock as on 31st March, 2016 was ` 2,12,500
(ii) Depreciation Rates: Furniture 10%; Machinery 20% and Building 10%
(iii) Outstanding salaries as on 31st March, 2016 was ` 62,250
(iv) Trade receivables include a sum of ` 25,000 due from Mr. B. Reddy
and trade payables include ` 15,000 due to him.
(v) Create a provision for doubtful debt @ 5% on trade receivables.
(vi) Provide for income tax ` 80,000.
Prepare a Statement of Profit and Loss for the year ended on 31st March,
2016 and a Balance Sheet as on that date. (12 marks)
Answer:
Notes to Accounts (Schedules):
Schedule -1. Employee Benefit Expenditure `
Salaries 4,00,750
Outstanding Salaries 62,250
Contribution to P.F. 60,000
5,23,000
 12.124 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Schedule -2. Finance Cost `

Interest on loan 20,000
Outstanding Interest 4,000
24,000

Schedule -3. Other Expenditure `

Discount 6,250
Carriage 1,39,000
Rent 60,000
Advertisement 1,20,000
Bad Debt 10,000
Audit fees 27,000
Provision for Bad Debt 59,250
4,21,500

Schedule -4. Trade Receivable `

Total Receivable 12,00,000
(-) Set off 15,000
11,85,000
(-) Provision @5% 59,250
11,25,750

Schedule -5. Fixed Assets Furniture (`) Machine (`) Building (`)
Balance 2,25,000 7,50,000 12,50,000
(-) Depreciation 22,500 1,50,000 1,25,000
2,02,500 6,00,000 11,25,000
Total Fixed Assets 19,27,500
Depreciation 2,97,500
 [Chapter  2] Presentation of Financial Statements O 12.125

Statement of Profit and Loss for the year ended on 31.03.2016

Particulars Note `
I. Revenue from operation (sales less returns) 44,00,000
II. Other Income (Income from Investment) 20,000
III. Total revenue 44,20,000
IV. Expenses:
Purchase 29,00,000
Changes in inventory i.e. opening less Closing (12,500)
Employee Benefit expenses 1 5,23,000
Finance cost 2 24,000
Depreciation 5 2,97,500
Other expenses 3 4,21,500
41,53,500
V. Profit before exceptional and extraordinary items 2,66,500
and tax
VI. Exceptional Items Nil
VI. Profit before extraordinary items and tax 2,66,500
VII. Extraordinary items Nil
VIII.Profit before tax 2,66,500
IX Tax (provision for tax) 80,000
X Profit after tax 1,86,500
Balance Sheet as on 31.03.2016
I. Equity and Liabilities Note `
1. Shareholders’ Funds
(a) Share Capital 30,00,000
(b) Reserve and Surplus (Balance of Profit) 1,86,500
 12.126 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2. Share Application money pending allotment Nil

3. Non-current liabilities (12% Bank loan) 2,00,000
4. Current Liabilities
Trade payable (after set off of ` 15,000) 65,000
Outstanding interest 4,000
Outstanding salary 62,250
Provision for Tax 80,000
Total 35,97,750
II. Assets
1. Non-current Assets
(a) Fixed Assets (Tangible) 5 19,27,500
(b) Non-current Investment 2,00,000
2. Current Assets
Inventories 2,12,500
Trade Receivable 4 11,25,750
Cash and cash equivalent 1,32,000
Total 35,97,750
Space to write important points for revision

2017 - Dec [4] ABC Ltd. provides the following Trial Balance as on 31st
March, 2017:
Particulars Dr. Balances (`) Cr. Balances (`)
Equity Share Capital: 350000 shares
of ` 10 each fully paid 35,00,000
10% Debentures 3,00,000
Motor Van 4,00,000
 [Chapter  2] Presentation of Financial Statements O 12.127

Machinery 20,00,000
Land and Building 12,00,000
12% Long Term Govt. Securities 2,00,000
Sales 60,00,000
Sales Return 3,00,000
Interest on Debenture 22,500
Purchase 36,00,000
Purchase Returns 4,00,000
Opening Stock 3,00,000
Discount 7,500
Carriage Outward 1,50,000
Rent and Rates 50,000
Income from Govt. Securities 24,000
Trade Receivables 10,00,000
Trade Payables 2,00,000
Advertisement 1,50,000
Bad Debt 20,000
Salaries 6,72,000
Misc. Expenditure 30,000
Contribution to P.F. and Gratuity
Funds 1,00,000
Cash at Bank and in hand 2,22,000
Total 1,04,24,000 1,04,24,000
 12.128 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Additional Information:
(i) Closing Stock as on 31st March, 2017 was ` 3,50,000.
(ii) Depreciation Rates: Motor Vehicle 10%, Machinery 20% and Land &
Building 5%.
(iii) Misc. expenditure includes ` 20,000 as audit fees.
(iv) Interest on debenture is payable quarterly and the last quarter’s
interest is yet to be paid.
(v) Trade receivables include a sum of ` 25,000 due from Mr. X who has
become insolvent and only 25 paisa in a rupee is expected to be
recoverable from him.
(vi) Create a provision for doubtful debt @ 2% on trade receivables.
(vii) Provide for income tax ` 1,50,000.
Prepare a Statement of Profit and Loss for the year ended on 31st March,
2017 and a Balance Sheet as on that date. (12 marks)
Answer:
Notes to Accounts:
1. Employee Benefit Expenditure `
Salaries 6,72,000
Contribution to P.F. 1,00,000
7,72,000

2. Finance Cost `
Interest on loan 22,500
Outstanding Interest 7,500
30,000

3. Other Expenditure `
Discount 7,500
Carriage 1,50,000
Rent 50,000
Advertisement 1,50,000
 [Chapter  2] Presentation of Financial Statements O 12.129

Bad Debt 20,000

Audit fees 20,000
Misc. Exp. 10,000
Provision for B/D 38,250
4,45,750

4. Trade Receivable `
Total Receivable 10,00,000
(-) Provision @ 2% 38,250
9,61,750
Provision = 25,000 × 0.75 + (10,00,000 – 25,000) × 0.02 38,250

5. Fixed Assets Motor Van Machine L&B

Balance 4,00,000 20,00,000 12,00,000
(-) Depreciation 40,000 4,00,000 60,000
3,60,000 16,00,000 11,40,000
Total Fixed Assets 31,00,000
Depreciation 5,00,000

Statement of Profit and Loss for the year ended on 31.03.2017

Particulars Note `
I. Revenue from operation (sales less returns) 57,00,000
II. Other Income (Income from investment) 24,000
III. Total revenue 57,24,000
IV. Expenses:
Purchase 32,00,000
Changes in inventory i.e. opening less. Closing (50,000)
 12.130 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Employee Benefit expenses 1 7,72,000

Finance cost 2 30,000
Depreciation 5 5,00,000
Other expenses 3 4,45,750
48,97,750
V. Profit before exceptional and extraordinary 8,26,250
items and tax
VI. Exceptional items Nil
VII. Profit before extraordinary items and tax 8,26,250
VIII. Extraordinary items Nil
IX. Profit before tax 8,26,250
X. Tax (provision for tax) 1,50,000
XI. Profit after tax 6,76,250

Balance Sheet as on 31.03.2017

I. Equity and Liabilities Note `
1. Shareholders' Funds
(a) Share Capital 35,00,000
(b) Reserve and Surplus (Balance of Profit) 6,76,250
2. Share Application money pending allotment Nil
3. Non-current liabilities (10% Debentures) 3,00,000
4. Current Liabilities
Trade Payable 2,00,000
Outstanding interest 7,500
Provision for Tax 1,50,000
Total 48,33,750
 [Chapter  2] Presentation of Financial Statements O 12.131

II. Assets
1. Non-current Assets
(a) Fixed Assets (Tangible) 5 31,00,000
(b) Non-current Investment (12% L.T. Govt. 2,00,000
Securities)
2. Current Assets
Inventories 3,50,000
Trade Receivable 4 9,61,750
Cash and cash equivalent 2,22,000
Total 48,33,750
Space to write important points for revision

2018 - June [4] ABC Limited has an authorized capital of ` 5,00,000 divided
into 5,000 equity shares of ` 100 each. On 31.3.2018, 2,500 shares were
fully called up.
The following are the balance extracted from the ledger of the company as
on 31.3.2018:
` `
Inventory 50,000 Advertisement 3,800
Sales 4,25,000 Bonus 10,500
Purchases 3,00,000 Accounts receivable 38,700
Productive wages 70,000 Accounts payable 35,200
Discount allowed 4,200 Plant and Machinery 80,500
Discount received 3,150 Furniture 17,100
Insurance (year up to 30.06.2018) 6,720 Cash at bank 1,30,000
Salaries 18,500 Cash in hand 4,700
Rent 6,000 Reserves 25,000
General expenses 8,950 Loan from Managing Director 15,700
Profit and Loss A/c (cr.) 6,220 Bad debts 3,200
Printing and Stationary 2,400 Calls in arrears 5,000
Share capital 2,50,000
 12.132 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Also the following information are given:

(a) Closing inventory is ` 91,500
(b) Depreciation to be charged on plant and furniture at 15% and 10%
respectively
(c) Outstanding liabilities––wages at ` 5,200, salaries at ` 1,200 and rent at
` 600
(d) Salesman are entitled to a commission of 1% on sales
(e) ` 4,000 are to be transferred to General reserves
(f) Dividend on paid up share capital is to be provided @ 5%
You are required to prepare Profit and Loss Statement for the year ended
31.03.2018 and the Balance Sheet as on that date in accordance with the
Companies Act, 2013 in the Vertical Form along with the Notes on Accounts.
(12 marks)
Answer:
Balance Sheet of ABC Limited as on 31st March, 2018
Particulars Note Amount
No. (`)
I. Equity and Liabilities
(1) Shareholders' Funds:
(a) Share Capital 1 2,45,000
(b) Reserves and Surplus 2 30,995
(2) Non-Current Liabilities:
(a) Long Term Borrowing 3 15,700
(3) Current Liabilities:
(a) Trade Payable 35,200
(b) Other Current Liabilities 4 11,250
(c) Short Term Provision 5 12,250
3,50,395
 [Chapter  2] Presentation of Financial Statements O 12.133

II. Assets
(1) Non - Current Assets
Fixed Assets
Tangible Assets 6 83,815
(2) Current Assets:
(a) Inventories 91,500
(b) Trade Receivables 38,700
(c) Cash and Cash Equivalents 1,34,700
(d) Short Term Loans and Advances 1,680
(Prepaid Insurance)
3,50,395

Profit and Loss Statement for the year ended 31st March, 2018

Particulars Note Amount Amount

No. (`) (`)
I. Revenue From Operation 4,25,000
II. Other Income 3,150
III. Total Revenue (I + II) 4,28,150
IV. Expenses:
(a) Cost of material consumed 7 3,33,700
(b) Employees cost/ benefits 8 30,200
expenses
(c) Depreciation and amortization 13,785
expenses
(d) Other expenses 9 38.440
Total Expenses 4,16,125
 12.134 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

V. Profit for the year (III - IV) 12,025

Balance brought forward from previous 6,220
year
Profit available for appropriation 18,245
Appropriation:
Proposed dividend 12,250
Transfer to General Reserve 4,000
16,250
Balance carried forward 1,995
Notes:
1. Share Capital: `
Issued, Subscribed and Paid up 2,50,000
Less: Calls in arrears 5,000
2,45,000
2. Reserves and Surplus:
General Reserve 29,000
Surplus (P & L A/c) 1,995
30,995
3. Long Term Borrowings:
Unsecured:
Loan from Managing Director 15.700
15,700
4. Other Current Liabilities:
Outstanding Expenses 7,000
Salesmen Commission 4,250
11,250
 [Chapter  2] Presentation of Financial Statements O 12.135

5. Short Term Provisions:

Proposed Dividend 12,250
12,250

6. Tangible Fixed Assets:

Item Closing Balance (` ) Depreciation (` ) Net (` )
Plant and Machinery 80,500 12,075 68,425
Furniture 17,100 1,710 15,390
Total 97,600 13,785 83,815

7. Cost of Materials Consumed: `

Opening stock 50,000
Purchases 3,00,000
Less: Closing Stock (91,500)
Wages 75.200
3,33,700
8. Employees Benefit Expenses:
Salary 19,700
Bonus 10,500
30,200
9. Other Expenses:
Administrative Expenses (5,040 + 6,600 + 8,950 + 2,400) 22,990
Provision for bad debts 3,200
Marketing Expenses (4,200 + 3,800 + 4,250) 12,250
38,440
Space to write important points for revision
 12.136 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2018 - Dec [4] The following is the Trial Balance of Omega Limited as on
31.03.2018:
(Figures in `.’000)
Debit Credit
Land at cost 220 Equity Capital (Shares of 300
` 10 each)
Plant and Machinery at cost 770 10% Debentures 200
Trade Receivables 96 General Reserve 130
Inventories (31.03.18) 86 Profit and Loss A/c 72
Bank 20 Securities Premium 40
Adjusted Purchases 320 Sales 700
Factory Expenses 60 Trade Payables 52
Administration Expenses 30 Provision for Depreciation 172
Selling Expenses 30 Suspense Account 4
Debenture Interest 20
Interim Dividend Paid 18
1,670 1,670
Additional Information:
(i) The Authorised Share Capital of the Company is 40,000, shares of
` 10 each.
(ii) The company on the advice of independent valuer wish to revalue the
land at ` 3,60,000.
(iii) Declared final dividend @ 10% (over Interim Dividend of ` 18,000).
(iv) Suspense account of ` 4,000 represents cash received for the sale of
some of the machinery on 01.04.2017. The cost of the machinery was
` 10,000 and the accumulated depreciation thereon being ` 8,000.
(v) Depreciation is to be provided on plant and machinery at 10% on cost.
 [Chapter  2] Presentation of Financial Statements O 12.137

You are required to prepare Omega Limited’s Profit and Loss Statement for
the year ended 31.03.2018 and the Balance Sheet as on that date in
accordance with the Companies Act, 2013 in the Vertical Form along with the
Notes on Accounts. Ignore previous years’ figures and taxation.
(12 marks)

Repeatedly Asked Questions

No. Question Frequency
1 Write short notes on Contingent liability.
10 - Dec [8] (d), 12 - Dec [8] (d) 2 Times
2 What are the Characteristics of a Liability?
13 - Dec [2] (c) (i), 15 - Dec [2] (a) (ii) 2 Times

Table Showing Marks of Compulsory Questions

Year 14 14 15 15 16 16 17 17 18 18
J D J D J D J D J D

Descriptive 4

Total 4
 3 CASH FLOW STATEMENT
THIS CHAPTER INCLUDES
• Statement of Cash Flows; • Types of Cash Flow
• Meaning of Cash and Cash • Ind AS - 7.
Equivalents;
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions

Legend
Objective Short Notes Distinguish Descriptive Practical

For detailed analysis Login at www.scannerclasses.com

for registration and password see first page of this book.

12.138
 [Chapter  3] Cash Flow Statement O 12.139

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. Introduction Cash flow statement is additional information to
user of financial statement. This statement
exhibits the flow of incoming and outgoing cash
and cash equivalent. It assesses the ability of the
enterprise to generate cash and utilize cash.
Cash Flow Statement is one of the tools for
assessing the liquidity and solvency of the
enterprise.
2. Statement of “The information provided in a statement of cash
Cash Flow flows, if used with related disclosures and
information in the other financial statements,
should help investors, creditors, and others to
(a) assess the enterprise’s ability to generate
positive future net cash flows;
(b) assess the enterprise‘s ability to meet its
obligations, its ability to pay dividends, and
its needs for external financing;
(c) assess the reasons for differences between
net income and associated cash receipts
and payments; and
(d) assess the effects on an enterprise‘s
financial position of both its cash and
non-cash investing and financing
transactions during the period.” - SFAS 95
Statement of Cash Flows, Financial
Accounting Standards Board, US
12.140 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

3. Importance of  Cash flows are crucial to business decisions.

Cash flows Cash is invested in the business and the
rationality of such investment is evaluated
taking into account the future cash flows it is
expected to generate.
 Economic value of an asset is derived on the
basis of its ability to generate future cash
flows.
 Economic value of an asset is given by the
present value of future cash flows expected
to be derived from the asset.
4. M e a n i n g o f Cash means cash in hand and balance of foreign
Cash and Cash currency. Cash equivalent implies bank balance
Equivalent and other risk-free short term investments, and
advances which are readily encashable.
Cash equivalent means short term highly liquid
investments that are readily convertible into
known amounts of cash and which are subject to
an insignificant risk of changes in value.
5. Types of Cash (i) Operating activities are the principal
Flow revenue-producing activities of the enterprise
and other activities that are not investing and
financing. Operating activities include all
transactions that are not defined as investing
or financing. Operating activities generally
involve producing and delivering goods and
providing services.
(ii) Investment activities are the acquisition
and disposal of long term assets and other
investments not included in cash equivalents.
(iii) Financing activities are activities that result
in changes in the size and composition of the
owners‘ capital (including preference share
capital in the case of a company) and
borrowings of the enterprise.
 [Chapter  3] Cash Flow Statement O 12.141

6. Objective Information about the cash flows of an entity is

useful in providing users of financial statements
with a basis to assess the ability of the entity to
generate cash and cash equivalents ,the needs
of the entity to utilise those cash flows and the
timing and certainty of their generation.

SHORT NOTES
2017 - June [5] Write a short note:
(d) Objective of preparing Cash Flow Statement. (4 marks)
Answer :
Objective of preparing Cash Flow Statement: The objectives are as
follows:
(i) To provide information about firm's liquidity, flexibility and ability to
generate future cash flow.
(ii) To provide information about firm's ability to meet future obligations.
(iii) To enhance comparability among firms.
(iv) To assess reliability of net profit and quality of earnings.
(v) To enable the users to assess how assets and liabilities have
increased or decreased.
(vi) To project future cash flow streams.
(vii) To provide information on different types of cash flow.
Space to write important points for revision

DESCRIPTIVE QUESTIONS
2013 - Dec [3] {C} Answer the following:
(a) What is the meaning of the expression ‘cash equivalent’? (2 marks)
Answer:
Cash equivalent means short term highly liquid investments that are readily
convertible into known amounts of cash and which are subject to an
 12.142 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

insignificant risk of changes in value. An investment of short maturity, say

three months or less from the date of acquisition is generally considered as
cash equivalent. Equity investments are not considered as cash equivalent
because of high market risk. Investment in call money market, money market
mutual funds, repo transactions, badla transactions, etc., are usually
classified as cash equivalents.
Space to write important points for revision

2014 - Dec [1] Answer the question:

(a) State the classification of cash flow activities as per AS-3. (2 marks)
Answer:
Cash flow as per AS-3:
 Cash flow from Operating Activity
 Cash flow from Investing Activity
 Cash flow from Financing Activity
Space to write important points for revision

PRACTICAL QUESTIONS
2009 - Dec [6] (a) The following particulars pertain to PIOUS LTD.:
Income Statement for the year ended March 31, 2009
(Amount in ` lakh)
Sales Revenue 3,200
Less: Cost of goods sold 2,000
1,200
Add: Government Compensation for loss in riots 50
1,250
Less: Operating expenses 790
Interest on debentures 15
Depreciation on Fixed Assets 210
Cost of issue of Debentures (written off) 1 1,016
Profit before Tax 234
Less: Tax-Provision 92
Profit after tax 142
 [Chapter  3] Cash Flow Statement O 12.143

(Amount in ` lakh)
As on March As on March
31,2008 31,2009
Inventories 180 220
Debtors 40 38
Bills Receivables 30 55
Cash in hand and at Bank 102 248
Creditors 78 95
Bills Payables 20 15
Outstanding Expenses 31 44
Additional Information:
The following important transactions have taken place in the year ended
March 31, 2009:
(i) Fully paid Equity Shares of the face value of ` 200 lakh were allotted
at premium of 20%.
(ii) 10% Debentures for ` 300 lakh were redeemed at a premium of 2%.
(iii) Land was Purchased for ` 150 lakh and the consideration was
discharged by the allotment to the vendor of zero percent convertible
Debentures for the amount.
(iv) Dividend for the year ended March 31, 2008 amounting to ` 100 lakh
was paid.
(v) Tax paid during the year totaled ` 95 lakh.
Required :
Prepare Cash Flow Statement for the year ended March 31, 2009 using
the Direct Method on the line specified in AS-3. (6 marks)
Answer:
PIOUS LTD.
Cash Flow Statement for the Year Ended March 31, 2009
(Direct Method) (Amount in
` lakh)
Cash Flow from Operating Activities :
Cash receipts from customers (WN-1) 3,177
Cash payments to suppliers and employees (WN-2) (2,805)
Cash inflow from operations 372
Income Tax paid (95)
 12.144 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Cash Flow from extraordinary item: 277

Government compensation for loss in riots 50 327
NET CASH from OPERATING ACTIVITIES 327
CASH FLOWS from FINANCING ACTIVITIES
Issue of equity Share Capital at a premium
Redemption of 10% Debentures at a premium 240
Debenture interest paid” (306)
Dividend paid (15) (181)
Net increase in cash and cash equivalents (100) 146
Cash and cash equivalents in the beginning 102
CASH AND CASH EQUIVALENTS AT THE END 248
Significant Non Cash Transaction:
Land was purchased by issuing at par ZERO percent
convertible debentures of ` 150 lakh
**Alternatively, Debenture Interest paid may be treated as a flow from
operating activities.
Working Notes:
(1) (` in lakh)
Sales revenue 3,200
Add: Debtors on 31.3.2008 40
Bills Receivables on 31.3.2008 30
3,270
Less: Debtors on 31.3.2009 38
Bills Receivables on 31.3.2009 55 (93)
CASH Receipt from the customers 3,177
(2) (` in lakh)
Cost of goods sold 2,000
Operating Expenses 790
2,790
Add: Inventories on 31.3.2009 220
Creditors on 31.3.2008 78
Bills Payable on 31.3.2008 20
Outstanding Expenses on 31.3.2008 31
3,130
 [Chapter  3] Cash Flow Statement O 12.145

Less: Inventories on 31.3.2008 180

Creditors on 31.3.2009 95
Bills Payable on 31.3.2009 15
Outstanding Expenses on 31.3.2009 44 (334)
CASH PAID to Suppliers and Employees 2,805
Space to write important points for revision

2010 - June [5] Examine the following schedule prepared by X Ltd.

Schedule of funds provided by operations for the year ended 31st July, 2009:
(`’000) (` ‘000)
Sales 32,760
Add: Decrease in bills receivable 1,000
Less: Increase in accounts receivable (626) 33,134
Inflow from operating revenues
Cost of goods sold 18,588
Less: Decrease in inventories (212)
Add: Decrease in trade payable 81 18,457
Wages and Salaries 5,284
Less: Increase in wages payable (12) 5,272
Administrative Expenses 3,066
Add: Increase in prepaid payable 11 3,077
Property taxes 428
Interest expenses 532
Add: Amortisation of premium on
bonds payable 20 552 27,786
From Operations 5,348
Rent Income 207
Add: Increase in unearned rent 3 210
Income Tax 1,330 5,558
Less: Increase in deferred tax 50 1,280
Funds from operations 4,278
Required:
(i) What is the definition of funds shown in the Schedule?
(ii) What amount was reported as gross margin in the Income Statement?
(iii) How much cash was collected from the customers?
 12.146 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(iv) How much cash was paid for the purchases made?
(v) As a result of change in inventories, did the working capital increase
or decrease and by what amount?
(vi) How much rent was actually earned during the year?
(vii) What was the amount of tax expenses reported on the income
statement?
(viii) Can you reconcile the profits after tax with the funds provided by the
operation? (15 marks)
Answer :
(i) ‘Funds’ shown in the schedule refer to the cash and cash equivalents
(as defined) in AS – 3 (Revised) on Cash Flow Statements
`(‘000)
(ii) Gross margin in the income statement 32,760
Sales 18,588
Cost of goods sold 14,172
(iii) Cash collected from the customers 33,134
(iv) Cash paid for purchases made 18,457
(v) Change in inventories would reduce the
working capital by 212
(vi) Rental income earned during the year 207
(vii) Tax expenses reported in the income statement 1,330
(viii) Reconciliation Statement `(‘000)
Profit after tax (See W.N.) 3,719
Decrease in bills receivable 1,000
Increase in accounts receivable (626)
Decrease in inventories 212
Decrease in trades payable (81)
Increase in wages payable 12
Increase in prepaid expenses (11)
Increase in unearned rent 3
Increase in deferred tax 50
Fund from operation as shown in 4,278
the schedule (i.e. cash and cash Equivalents)
 [Chapter  3] Cash Flow Statement O 12.147

Working Note :
Calculation of Profit after Tax ` (`000)
Sales 32,760
Less : Cost of goods sold 18,588
Gross margin 14,172
Add : Rental income 207
14,379
Less : Wages and salaries 5,284
Administrative expenses 3,066
Property taxes 428
Interest expenses 532
Amortisation premium on bond payable 20
Profit before Tax 9,330
Less : Income Tax 5,049
Profit after Tax 1,330
3,719
Space to write important points for revision

2010 - Dec [8] (b) The following is an extract from the cash flow statement
of VENTEX LTD. prepared for the year ended March 31, 2010.
Particulars (` in Lakh)
Net Profit 600
Add: Sale of Investment 700
Depreciation of Assets 110
Issue of Preference shares 90
Loan raised 45
Decrease in stock 120
1,665
Less: Purchase of Fixed Assets 650
Decrease in Creditors 60
Increase in Debtors 80
Exchange Gain 80
Profit on Sale of Investments 120.0
Redemption of Debentures 57.0
 12.148 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Dividend Paid 14.0

Interest Paid 9.45 1070.45
594.55
Add: Opening Cash & Cash equivalent 123.41
Closing Cash & Cash equivalent 717.96
Required:
Redraft and reconstruct the cash flow statement of VENTEX LTD. in
proper order for the year ended March 31,2010 in accordance with AS-3
(Revised) using indirect method. (6 marks)
Answer:
VENTEX LTD.
Cash Flow Statement for the year ended March, 31,2010
` In Lakhs
1. Cash Flow from operating Activities:
Net profit before Tax and Extra ordinary items: 600.0
Adjustment For:
Depreciation 110.0
Profit on Sale of Investment (120.0)
Foreign Exchange Gain (80.0) (90.0)
Working Capital Adjustment: 510.0
Decrease in Stock
Decrease in Creditors 120.0
Increase in Debtors (60.0) (20.0)
Cash from Operation (80.0) 490.0
Tax paid
Cash from Operating Activities 490.0
2. Cash flow from Investing Activities:
Sale of investments 700.0
Purchase of fixed assets (650.0) 50.0
Net cash from investing Activities 50.0
3. Cash flow from Financing Activities:
Loan raised 45.0
Issue of Preference Shares 90.0
 [Chapter  3] Cash Flow Statement O 12.149

Redemption of Debentures (57.0)

Dividend paid (14.0)
Interest paid (9.45) 54.55
54.55
Net Cash from financing Activities 594.55
Net increase in Cash and Cash Equivalents
[(1)+ (2)+(3)]
Cash and Cash equivalents at beginning of the
year (April, 2009) 123.41
Cash and Cash Equivalents at the end of year
(March, 2010). 717.96
Space to write important points for revision

2013 - Dec [4] (a) (ii) The following relevant items from the Balance Sheet
of LM Limited are provided:
Balance Sheet figures
As at 31.03.2012 As at 31.03.2013
` `
Goodwill 90,000 75,000
Profit and Loss A/c 4,15,000 6,25,000
General Reserve 3,25,000 3,75,000
Inventories 4,15,000 5,10,000
Debtors 3,45,000 3,22,000
Prepaid Expenses 18,000 15,000
Creditors 2,35,000 2,70,000
Provision for Taxation 1,05,000 1,55,000
Provision for Doubtful Debts 17,250 15,000
 12.150 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Depreciation amounting to ` 1,42,000 and Profit on sale of Machinery

amounting to ` 21,000 appeared in the Profit and Loss A/c for the year
ending 31.03.2013. During the year 2012-13 ` 1,00,000 was paid as Income
Tax.
You are required to calculate Net Cash Flow from operating activity for the
year ending 31st March, 2013. (4 marks)
Answer:
Cash Flow Statement
(for the year ending 31st March, 2013)
Particulars Amount in `
Cash flow from operating activities :
Net profit (6,25,000 - 4,15,000) 2,10,000
(+) Transfer to General Reserve 50,000
(+) Provision for taxation 1,50,000
P.B.T. 4,10,000
Adjustment for :
(+) Depreciation 1,42,000
(-) Profit on sale of machine (21,000)
(+) Amortisation of Goodwill 15,000
Net operating profit before working capital changes. 5,46,000
(+) Increase in creditors 35,000
(+) Decrease in Debtors [23,000 - (17,250 - 15,000)] 20,750
(+) Decrease in Prepaid Expenses 3,000
(-) Increase in Stock (95,000)
Operating profit before tax & extraordinary items 5,09,750
(-) Tax paid (1,00,000)
Net Operating Income 4,09,750
 [Chapter  3] Cash Flow Statement O 12.151

Working Note :
Provision for Taxation
To Bank A/c 1,00,000 By Balance b/d 1,05,000
To Balance c/d 1,55,000 By P/L A/c 1,50,000
2,55,000 2,55,000
Space to write important points for revision

2014 - June [4] (c) (ii) Shyama Limited has given the following information
for the preparation of cash flow statement for the year 2013-14.
` in ‘000
Net profit before tax 50,000
Dividend (including dividend tax) paid 17,070
Provision for income tax 10,000
Income tax paid during the year 8,496
Loss on sale of assets (net) 80
Book value of the assets sold 370
Depreciation charged during the year 40,000
Amortisation of capital grant 12
Profit on sale of investments 200
Cost of investment sold 55,530
Interest received on investments 5,012
Interest expenses 20,000
Interest paid during the year 21,040
Increase in Current Assets (excluding cash & Bank balance) 77,500
Decrease in Current Liabilities 34,650
Purchase of Fixed Assets 29,120
Purchase of investment 7,700
Expenditure on construction work in progress 69,480
Receipt of grant for capital projects 28
Proceeds from issue of share capital 51,960
Proceeds from issue of Debentures 41,150
Opening cash and Bank balance 10,006
Closing cash and Bank balance 13,976
You are required to prepare the Cash Flow Statement for the year 2013-14
in accordance with AS-3. (10 marks)
 12.152 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer: Shyama Limited

Cash Flow Statement
for the year ended 31st December, 2014
(` in lakhs)
Cash flows from operating activities
Net profit before taxation (50,000 + 10,000) 60,000
Adjustments for:
Depreciation 40,000
Loss on sale of assets (Net) 80
Amortisation of capital grant (12)
Profit on sale of investments (200)
Interest income on investments (5,012)
Interest expenses 20,000
Operating profit before working capital changes 1,14,856
Increase in Current Assets (Excluding cash and (77,500)
bank balance)
Decrease in Current Liabilities (34,650)
Cash generated from operations 2,706
Income taxes paid (8,496)
Net cash used in operating activities (5,790)
Cash flows from investing activities
Sale of assets 290
Sale of investments (55,530 + 200) 55,730
Interest income on investments 5,012
Purchase of fixed assets (29,120)
Investment in joint venture (7,700)
Expenditure on construction work-in-progress (69,480)
Net cash used in investing activities (45,268)
 [Chapter  3] Cash Flow Statement O 12.153

Cash flows from financing activities

Receipts of grant for capital projects 28
Proceeds from issue of share capital 51,960
Proceeds from long-term borrowings 41,150
Interest paid (21,040)
Dividend (including dividend tax) paid (17,070) 55,028
Net increase in cash and cash equivalents 3,970
Cash and cash equivalents at the beginning of the period 10,006
Cash and cash equivalents at the end of the period 13,976
Working Notes:
Book value of the assets sold 370
Less: Loss on sale of assets (80)
Proceeds of sale 290
Assumption: Interest income on investments ` 5,012 has been received
during the year.
Space to write important points for revision

2014 - Dec [3] Answer the question:

(c) (ii) Relevant balance sheet accounts of Arti Limited, as on 31st March,
2013 and 2014 are as follows:
(` in lakhs)
Particulars 31.03.13 31.03.14
General Reserve 46 49.50
Profit and Loss A/c (Cr.) 41 47.00
Creditors 25 23.50
Bills Payable 3 4.00
Income Tax Payable 10 17.00
Proposed Dividend 15 18.00
Stock 30 27.00
Debtors 22 26.00
Bills Receivable 4 2.50
Prepaid Expenses 1 2.40
 12.154 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Other Information:
(1) During the year 2013-14, one old machine costing ` 6,45,000
(W.D.V. ` 3,92,000) was sold for ` 3,68,000 and some investments
are sold at a profit of ` 15,000.
(2) During the year 2013-14, depreciation charged ` 4,50,000, goodwill
written off ` 25,000 and Income tax paid ` 8,75,000.
You are required to calculate the net cash flow from operating
activities. (8 marks)
Answer:
Calculation of Cash Flow from Operation Activities for the year ended
31st March, 2014
(` in lakhs)
Net Profit before tax and Extra Ordinary Items: 39.75
Adjustment for:
Transfer to General Reserve 3.50
Loss on sale of old Machine (3,92,000 - 3,68,000) 0.24
Profit on sale of investments (0.15)
Goodwill written off 0.25
Depreciation 4.50
Operating Profit before working capital changes 48.09
Adjustment for:
Decrease in Creditors (1.50)
Increase in Bills Payable 1.00
Decrease in Stock 3.00
Increase in Debtors (4.00)
Decrease in Bills Receivable 1.50
Increase in Prepaid Expenses (1.40)
Cash Generated from operations 46.69
Income Tax paid Net (8.75)
Cash from Operating Activities 37.94
 [Chapter  3] Cash Flow Statement O 12.155

Working Notes:
1. Net Profit before tax and Extra ordinary items: (` In Lakhs)
P/L A/c as on 31.3.14 47
Less: P/L A/c as on 31.3.13 41
6
Add: Proposed Dividend 18
Add: Provision for Tax 15.75
N.P. before tax 39.75
2.
Income Tax Payable A/c
` `
To Bank 8,75,000 By Balance b/d 10,00,000
To Balance c/d 17,00,000 By P/L A/c 15,75,000
25,75,000 25,75,000
Statement showing surplus available before notional capital
Particulars (`)
Assets realized 14,28,000
(+) Surplus from secured creditors 1,22,000
(-) Expenses of liquidation (including Liquidator’s 72,000
remuneration)
(-) Preferential Creditors 29,400
(-) Unsecured Creditors 5,24,600
(-) Preference Shareholders 9,00,000
24,000
Surplus available before notional capital ` 24,000
Add: Notional Capital
[(8,000×25)+(6,400×40) + (56,000×5)] ` 7,36,000
Total ` 7,60,000
Surplus available for each equivalent number of equity shares of ` 10 each
=
 12.156 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Class A Equity Share will receive — [(` 3.8×10)- ` 25] = ` 13.00 per share.
Class B Equity Share will receive — [(` 3.8×10)- ` 40] = (` 2.00) per share.
Class C Equity Share will receive — [`3.8-`5] = (`1.2) per share.
Space to write important points for revision

2015 - June [3] Answer the following:

(c) (i) Following details are provided by Patasha Ltd:
Particulars 31.03.2015 (`) 31.03.2014 (`)
Liabilities:
Share Capital 25,00,000 22,00,000
General Reserve 4,00,000 3,50,000
Profit and Loss Account 3,00,000 1,50,000
Debentures 5,00,000 3,00,000
Provision for taxation 2,00,000 1,50,000
Proposed dividend 4,00,000 3,50,000
Trade payables 9,00,000 11,50,000
52,00,000 46,50,000
Assets:
Plant and Machinery 15,00,000 11,00,000
Land and Building 10,00,000 8,00,000
Investments (Non trading) 3,00,000 1,50,000
Trade receivables 9,00,000 10,50,000
Inventories 10,00,000 12,00,000
Cash in hand/Bank 5,00,000 3,50,000
52,00,000 46,50,000
 [Chapter  3] Cash Flow Statement O 12.157

(1) Depreciation @ 15% was charged on the opening value of Plant

and Machinery.
(2) At the year end, one old machine costing ` 1,50,000 (WDV
` 70,000) was sold for ` 1,10,000. Purchase was also made at the
year end.
(3) ` 1,20,000 was paid towards Income tax during the year.
(4) ` 15,000 received as interest on investment during the year.
(5) Building under construction was not subject to any depreciation.
You are require to prepare Cash Flow Statement as per AS-3.
(10 marks)
Answer:
Cash flow statement for the year ended on 31st March, 2015
A. Cash flow from Operating Activities
` `
Profit & Loss A/c as on 31.03.2015 3,00,000
Adjustments for:
Transfer to General Reserve 50,000
Provision for Taxation 1,70,000
Proposed Dividend 4,00,000
Depreciation 1,65,000
Interest on Investment (15,000)
Profit on Sale of Machinery (40,000)
10,30,000
Less: Opening Balance of P&L A/c (1,50,000)
Operation Profit before working capital 8,80,000
changes
Decrease in trade payables (2,50,000)
Decrease in trade receivables 1,50,000
Decrease in value of inventories 2,00,000
Cash generated from operations 9,80,000
Income tax paid (1,20,000)
Net Cash from Operating Activities 8,60,000
 12.158 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

B. Cash flow from Investing Activities

Purchase of Plant & Machinery (6,35,000)
Purchase of Land & Building (2,00,000)
Purchase of Investment (1,50,000)
Proceeds from Sale of Plant & Machinery 1,10,000
Interest on Investments 15,000
Net Cash from Investing Activities (8,60,000)
C. Cash flow from Financing Activities
Proceeds from issue of share capital 3,00,000
Proceeds from issue of debentures 2,00,000
Payment of dividend (3,50,000)
Net Cash from Financing Activities 1,50,000
Net increase/decrease in cash and cash 1,50,000
equivalent during the year
Cash & Cash equivalent at the beginning of 3,50,000
the year
Cash & Cash equivalent of the end of the year 5,00,000
Working Note:
1. Provision for Taxation A/c
` `
To Bank A/c 1,20,000 By Balance b/d 1,50,000
To Balance c/d 2,00,000 By P&L A/c 1,70,000
3,20,000 3,20,000
2. Plant & Machinery A/c
` `
To Balance b/d 11,00,000 By Bank A/c (Sale) 1,10,000
To P&L A/c 40,000 By Depreciation A/c 1,65,000
 [Chapter  3] Cash Flow Statement O 12.159

To Bank A/c 6,35,000 By Balance 15,00,000

(Purchase being
balancing figure)
17,75,000 17,75,000
Space to write important points for revision

2016 - June [4] (a) Following balances are provided by the Meenakshi Ltd.
for the year ended 31st March, 2015 and 2016:
Particulars 31.03.2015 31.03.2016
` `
Equity Share Capital 120,00,000 140,00,000
General Reserve 74,00,000 89,00,000
Profit & Loss A/c 42,00,000 60,00,000
11% Debentures 100,00,000 60,00,000
Goodwill 20,00,000 16,00,000
Land & Building 140,00,000 130,00,000
Plant & Machinery 120,00,000 132,00,000
Investment (Non trading) 48,00,000 44,00,000
Creditors 37,00,000 43,00,000
Provision for tax 25,50,000 38,40,000
Proposed Dividend 18,00,000 25,20,000
Stock 80,00,000 77,00,000
Debtors 57,60,000 83,00,000
Cash at Bank 17,60,000 18,60,000
Prepaid Expenses 3,00,000 2,20,000
 12.160 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Additional Information:
(i) Investment were sold during the year for ` 7,00,000.
(ii) During the year an old machine costing ` 16,00,000 was sold for
` 7,20,000. Its written down value was ` 9,00,000.
(iii) Depreciation charged on plant and machinery @ 20% on the opening
balance.
(iv) There was no purchase or sell of land and building during the year.
(v) Provision for tax made during the year was ` 32,20,000.
(vi) During the year premium on redemption of debentures ` 4,00,000 was
written-off.
You are required to prepare a statement showing the net cash flow from the
operating activities. (9 marks)
Answer:
Statement Showing Net Cash Flow from Operating Activities for the
year ending 31st March, 2016:
Particulars ` `
Profit & Loss A/c as on 31.03.2016 60,00,000
Less: Profit & Loss A/c as on 31.03.2015 42,00,000
18,00,000
Add: Transfer to General Reserve 15,00,000
Provision for tax 32,20,000
Proposed Dividend 25,20,000 72,40,000
Profit before tax 90,40,000
Adjustment for Depreciation:
Land & Building 10,00,000
Plant & Machinery 24,00,000 34,00,000
Profit on sale of Investment (7,00,000 – 4,00,000) (3,00,000)
Loss on sale of Plant & Machinery 1,80,000
Goodwill written-off 4,00,000
 [Chapter  3] Cash Flow Statement O 12.161

Premium on redemption debentures written-off 4,00,000

Operating Profit before Working Capital Changes 1,31,20,000
W.C. Changes:
Decrease in Prepaid Expenses 80,000
Decrease in Stock 3,00,000
Increase in Debtors (25,40,000)
Increase in Creditors 6,00,000

Cash generated from operations 1,15,60,000

Income Tax paid (19,30,000)
Net Cash Inflow from Operating Activities 96,30,000
Working Notes:
Provision for Tax Account:
Dr. Cr.
Particulars (`) Particulars (`)
To Bank A/c 19,30,000 By Balance b/d 25,50,000
(Balancing figure)
To Balance c/d 38,40,000 By Profit & Loss A/c 32,20,000
57,70,000 57,70,000

Dr. Investment Account Cr.

Particulars (`) Particulars (`)
To Balance b/d 48,00,000 By Bank A/c (sale) By 7,00,000
To Profit & Loss A/c (profit) 3,00,000 By Balance c/d 44,00,000
51,00,000 51,00,000
Space to write important points for revision
 12.162 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2016 - Dec [5] (a) EVVM INDIA LTD. has the following balances as on
1st April, 2015:
Amount (`)
Fixed Assets 5,70,000
Less: Depreciation 1,99,500
3,70,500
Stocks and Debtors 2,37,500
Bank Balance 33,250
Creditors 57,000
Bills Payable 38,000
Capital (Shares of ` 100 each) 2,85,000
The company made the following estimates for financial year 2015-16:
(i) The company will pay a free of tax dividend of 10% the rate of tax
being 25%.
(ii) The company will acquire fixed assets costing ` 95,000 after selling
one machine for ` 19,000 costing ` 47,500 and on which depreciation
provided amounted to ` 33,250.
(iii) Stocks and Debtors, Creditors and Bills payables at the end of
financial year are expected to be ` 2,80,250, ` 74,100 and ` 49,400
respectively.
(iv) The profit would be ` 52,250 after depreciation of ` 57,000.
Prepare the projected cash flow statement and ascertain the bank balance
of EVVM INDIA LTD. at the end of financial year 2015-16. (9 marks)
Answer:
Working Notes:
Particulars Amount (`)
Cash Flow from operations
Profit for the year 52,250
Add: Depreciation (non cash item) 57,000
1,09,250
 [Chapter  3] Cash Flow Statement O 12.163

Less: Profit on sale of machine 4,750

1,04,500
Add increase in:
Creditors (` 74,100 – ` 57,000) = ` 17,100
Bills payable (` 49,400 – ` 38,000) = ` 11,400 28,500
1,33,000
Less : Increase in Stocks & Debtors (` 2,80,250 –
` 2,37,500) 42,750
Cash from operations 90,250
Payment of Dividend
10% on capital ` 2,85,000 = ` 28,500
Gross up Amount
Total Dividend ` 8,000
Tax 25% ` 9,500
Payment of Dividend ` 28,500
Note: Income Tax on Company's Profit Ignored
Projected Cash Flow Statement
for the Year ending on 31st March, 2016
Particulars Amount (`) Amount (`)
st
Bank Balance as on 1 April, 2015 33,250
Add: Inflow of Cash
Sale of Machine 19,000
Cash From operation 90,250 1,09,250
Less: Outflow of Cash
Purchase of Fixed Assets 95,000
Payment of Dividend 28,500
Tax Paid 9,500 1,33,000
st
Bank Balance on 31 March, 2016 9,500
Space to write important points for revision
 12.164 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2017 - June [3] (a) From the following information provided, prepare a Cash
Flow Statement as per AS-3.
Balance Sheet of PQR Ltd.
Particulars Note As on As on
No. 31.03.16 31.03.15
` `
I Equity and Liabilities
1. Shareholders’ fund
(a) Share Capital 1 20,00,000 20,00,000
(b) Reserves and Surplus 2 10,00,000 8,70,000
2. Share application money pending Nil Nil
allotment
3. Non-Current Liability Nil Nil
4. Current Liabilities 6,50,000 8,00,000
Total 36,50,000 36,70,000
II Assets
1. Non-current Assets
(a) Fixed Assets (Tangible) 16,50,000 15,00,000
(b) Non-current Investment 7,00,000 8,00,000
2. Current Assets
(a) Inventories 7,60,000 7,00,000
(b) Trade Receivables 4,50,000 5,00,000
(c) Cash and Cash Equivalent 6,000 74,000
(d) Short term loan and 84,000 96,000
advances (Prepaid
Expenses)
36,50,000 36,70,000
 [Chapter  3] Cash Flow Statement O 12.165

Notes to Accounts:
1. Share Capital
Equity Share Capital 20,00,000 15,00,000
Redeemable Preference Share Capital of Nil 5,00,000
` 100, ` 50 paid
20,00,000 20,00,000
2. Reserve and Surplus
Balance of Profit 3,00,000 4,50,000
General Reserve 2,00,000 4,00,000
Capital redemption reserve 5,00,000 Nil
Securities Premium Nil 20,000
10,00,000 8,70,000
Additional Information:
(i) During the year the company got income from investment ` 80,000.
(ii) Company paid ` 1,50,000 as equity dividend and ` 76,000 as
preference dividend.
(iii) The company redeemed the preference shares at a premium of 5%
after making a successful call of ` 50 per share to make the shares
fully paid
(iv) During the year one machine was sold for ` 50,000 and the profit on
sale of ` 6,000 was taken to Profit and Loss A/c. Depreciation for the
year on fixed assets was ` 1,80,000. (9 marks)
Answer:
Cash flow statement (As per AS - 3)
Particulars Amount Amount
(`) (`)
Cash From Operating Activities:
Net profit as per Balance Sheet 3,00,000
Add: Depreciation 1,80,000
 12.166 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Dividend on equity shares 1,50,000

Dividend on Preference Shares 76,000
Premium on Redemption of Preference Shares 30,000
Transfer to Capital Redemption Reserve A/c 3,00,000
10,36,000
Less: Income from Investment 80,000
Less: Profit on Sale of Machinery 6,000
Less: Opening Balance of Profit & Loss A/c 4,50,000
Cash from Operations 5,00,000
Adjustments for Working Capital Changes
Add: Decrease in current assets & Increase in
current liabilities
Decrease in Trade Receivable 50,000
Decrease in short term loan on advances 12,000 62,000
5,62,000
Less: Decrease in current liabilities 1,50,000
Increase in Inventories 60,000 2,10,000
Cash flow from Operating Activities 3,52,000
Cash flow from Investing Activities
Sale of Non-current Investments 1,00,000
Income from Investment 80,000
Sale of Machinery 50,000
Purchase of Machinery (3,74,000) (1,44,000)
Cash Flow from Financing Activities
Issue of equity shares 5,00,000
Find call on Preference Shares 5,00,000
 [Chapter  3] Cash Flow Statement O 12.167

Redemption of Preference Shares (10,00,000)

Premium on Redemption of Preference Shares (50,000)
Payment of equity Dividend (1,50,000)
Payment of Dividend on Preference Shares (76,000) (2,76,000)
(68,000)
Add: Opening Balance of Cash & Cash equivalent 74,000
Closing Balance of Cash & Cash equivalent 6,000

Working Note:
1. General Reserve A/c
Particulars Amount Particulars Amount
(`) (`)
To Transfer to Capital By Balance b/f 4,00,000
Redemption Reserve A/c 2,00,000
To Balance c/f 2,00,000
4,00,000 4,00,000
2. Fixed Asset A/c
Particulars Amount Particulars Amount
(`) (`)
To Balance b/f 15,00,000 By Sale of Machinery 50,000
To Profit on Sale of 6,000 By Depreciation 1,80,000
Machinery
To Bank A/c (Purchase 3,74,000 By Balance C/f 16,50,000
of machinery being
balancing figure)
18,80,000 18,80,000
Space to write important points for revision
 12.168 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2017 - Dec [3] (a) On the basis of the following information provided by X
Ltd. prepare a Cash Flow Statement for the year ended on 31st March, 2017.
(i) X Ltd. sold all the goods for cash only and purchased the goods in
credit only.
(ii) The company earned a Gross Profit of ` 4,00,000 with a Gross Profit
Ratio of 25%.
(iii) The closing inventory was higher than the opening inventory by
` 20,000.
(iv) The company paid ` 4,50,000 as wages and ` 90,000 as office
expenses during the year.
(v) Balance of Suppliers accounts on 31.03.2016 was higher than the
balance on 31.03.2017 by ` 30,000.
(vi) Tax paid by the company amounts to ` 80,000 while provision for
taxation was ` 70,000.
(vii) The company repaid bank loan of ` 1,75,000 which included interest
of ` 15,000.
(viii) Dividend paid during the year ` 50,000 (including dividend
distribution tax).
(ix) X Ltd. sold investments of ` 6,00,000 at a profit of ` 40,000.
(x) Depreciation charged on fixed assets ` 1,20,000.
(xi) Furniture purchased during the year ` 2,00,000.
(xii) Cash and Cash Equivalents as on 31.03.2016 was ` 1,00,000.
(xiii) Cash and Cash Equivalents as on 31.03.2017 was ` 4,95,000.
(8 marks)
Answer:
Working Note 1:
Gross Profit @ 25% on Sales = ` 4,00,000, So Total Sales = ` 16,00,000 (all
for cash)
COGS = Sales - G.P = ` 12,00,000
Let closing inventory is x and hence opening inventory is (x – 20,000)
Now, COGS = Op. Inventory + Purchase + Wages - CI. Inventory
Or. 12,00,000 = (x-20,000) + Purchase – 4,50,000 - x
Or. Purchase = 7,70,000.
 [Chapter  3] Cash Flow Statement O 12.169

Working Note 2:
Let closing balance of suppliers = y, hence opening balance = (y +30,000)

Suppliers' Account
Dr. Cr.
` `
To Payment to Suppliers 8,00,000 By Balance b/f Y + 30,000
(Bal. Fig.)
To Balance c/f y By Purchase 7,70,000
y + 8,00,000 y + 8,00,000

Cash Flow Statement for the year ended on 31.03.2017

Particulars ` `
A. Cash Flow from Operating Activities
Cash Sales 16,00,000
(-) Cash payments
Payment to suppliers 8,00,000
Wages paid 4,50,000
Office expenses paid 90,000 13,40,000
2,60,000
(-) Income tax paid 80,000
1,80,000
B. Cash Flow from Investing Activities
Sale of Investments 6,40,000
Purchase of furniture (2,00,000) 4,40,000
 12.170 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

C. Cash Flow from Financing Activities

Bank loan repaid with interest (1,75,000)
Dividend paid with distribution tax (50,000) (2,25,000)
(A+B+C) 3,95,000
D. Opening Cash and Cash Equivalent 1,00,000
E. Closing Cash and Cash Equivalent 4,95,000
Space to write important points for revision

2018 - June [3] (a) The following are the summarized Balance Sheets of
ABC Limited as on 31st March, 2016 and 2017:
Liabilities 31.03.16 31.03.17 Assets 31.03.16 31.03.17
` ` ` `
Share Capital 4,60,000 4,60,000 Land and Building 3,00,000 3,00,000
Profit and Loss 32,000 46,000 Machinery 1,04,000 1,40,000
Balance
Reserve 1,20,000 1,20,000 Investments 2,20,000 1,48,000
8% Debentures 1,80,000 1,40,000 Stock 1,64,000 2,12,000
Depreciation Fund 80,000 88,000 Debtors 1,34,000 86,000
Creditors 2,06,000 1,92,000 Cash 1,80,000 1,80,000
Outstanding expenses 26,000 24,000 Prepaid expenses 2,000 4,000
11,04,000 10,70,000 11,04,000 10,70,000
Additional Information :
(i) 10% Dividend was paid during 2016-17.
(ii) Old Machinery costing ` 24,000 (accumulated depreciation ` 12,000)
was sold for ` 8,000.
(iii) 40,000 8% Debenture were redeemed by purchase from open market
at ` 96 for a debenture of ` 100 on 31.03.2017.
(iv) Investments worth ` 72,000 were sold at book value.
(v) Bad debt written off during the year ` 10,000.
Prepare a Statement of Cash Flow for the year ended 31.3.2017.
(8 marks)
 [Chapter  3] Cash Flow Statement O 12.171

Answer:
ABC Ltd.
Cash Flow Statement for the year ended 31.03.2017
Particulars ` ` `
1. Cash Flows under Operating Activities
Operating Profit (As per adjusted P / L A/c) 96,800
Add: Decrease in Debtors 48,000
1,44,800
Less: Increase in stock 48,000
Increase in prepaid expenses 2,000
Decrease in creditors 14,000
Decrease in outstanding expenses 2,000 66,000
Net cash from Operating Activities 78,800
2. Cash Flows from Investing Activities:
Sale of machinery 8,000
Sale of investment 72,000
Less: Purchase of machinery 80,000
Net cash from Investing 60,000 20,000
3. Cash Flows from Financing Activities:
Redemption of Debenture (96 / 100 × 40,000) (38,400)
Payment of interest (14,400)
Payment of dividend (46,000)
Net cash from Financing activities (98,800)
Net change in Cash and Cash equivalent for the Nil
year
Add : Cash at the beginning of the year 1,80,000
Cash at the end of the year 1,80,000
 12.172 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(1) Machinery Account

Dr. Cr.
Particulars ` Particulars `
To Balance b/d 1,04,000 By Bank - Sale proceeds 8,000
" Bank - Purchase (Bat. Fig.) 60,000 "Depreciation fund 12,000
" Adj. P/L A/c - loss on sale 4,000
By Balance c/d 1,40,000
1,64,000 1,64,000

(2) Depreciation Fund Account

Dr. Cr.
Particulars ` Particulars `
To Machinery A/c 12,000 By Balance b/d 80,000
To Balance c/d 88,000 " Adj. P / L A/c - Depreciation 20,000
1,00,000 1,00,000

(3) Investment Account

Dr. Cr.
Particulars ` Particulars `
To Balance b/d 2,20,000 By Bank 72,000
By Balance c/d 1,48,000
2,20,000 2,20,000

(4) Adjusted Profit and Loss Account

Dr. Cr.
Particulars ` Particulars `
To Machinery A/c - loss 4,000 By Balance b/d 32,000
on sale
"Depreciation Fund - 20,000 " 8% Debenture - Profit on 1,600
Depreciation cancellation
"Dividend 46,000 By Operating profit (Bal. figure) 96,800
 [Chapter  3] Cash Flow Statement O 12.173

" Interest (1,80,000 x 8/100); 14,400

To Balance c/d 46,000
1,30,400 1,30,400
Note: There is no need to make any adjustment entry for bad debt as it has
already been written off.
Space to write important points for revision

2018 - Dec [3] (a) Following are the summarized Balance Sheets of Beta
Ltd.
Liabilities 31.03.17 31.03.18 Assets 31.03.17 31.03.18
` ` ` `

Equity Share Land & Building 4,00,000 3,80,000

Capital (` 10) 4,00,000 5,00,000 P l a n t a n d
General Reserve 1,00,000 1,20,000 Machinery 3,00,000 3,38,000
Profit & Loss (Cr.) 61,000 61,200 Inventory 2,00,000 1,48,000
Bank Loan 1,40,000 _ Trade Receivable 1,60,000 1,28,400
Trade Payable 3,00,000 2,70,400 Cash in hand 1,000 1,200
Provision for Cash at Bank - 16,000
Taxation 60,000 70,000 Goodwill - 10,000
10,61,000 10,21,600 10,61,000 10,21,600
Additional Information:
(i) Dividend paid during the year ` 46,000.
(ii) Net profit for the year ` 1,32,200.
(iii) Depreciation written-off on building ` 20,000 and on machinery
` 28,000.
(iv) Income tax paid during the year ` 56,000.
(v) The following assets of another company were purchased for a
consideration of ` 1,00,000 and paid in shares.
Assets were: Inventory ` 40,000 and Machinery ` 50,000.
(vi) Further machinery was purchased for ` 50,000 during the year. There
was a sale of Machinery.
You are required to prepare a Cash Flow Statement as per AS 3.
(9 marks)
 4A ACCOUNTS OF BANKING
COMPANY
THIS CHAPTER INCLUDES
 Important Provisions of  Final Accounts of Bank
Banking Regulation Act, 1949  Performing & Non-Performing
• Bank’s Book Keeping System Assets
• Books of Accounts  Rebate on Bills Discounted
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical

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for registration and password see first page of this book.

12.174
 [Chapter  4A] Accounts of Banking Company O 12.175

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. "Non- The interest and / or instalment of principal in
Performing respect of such an Advance has remained due for
Assets" (NPA) a specified period of time. The identification of NPA
is done on the basis of the position as on the
balance Sheet date.
2. Time Limits An Advance / Asset will be treated as NPA
considering the following time limits-
Nature When termed as NPA
Term Loan Interest and / or Instalment of
principal has remained overdue
for a period exceeding 90 days.
Overdraft / The account has remained "Out-
Cash Credit of-order" for a period exceeding
90 days.
Bill Purchased The bill remains overdue for a
& Discounted period exceeding 90 days.
Agricultural The instalment of principal or
Advances interest thereon remains
overdue for:
 Short Duration Crops - Two
Crop Seasons
 Long Duration Crops - One
Crop Seasons
 12.176 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

3. Classification The bank have to classify their advances as

of Assets follows:
1. Standard Assets: Standards Assets is one
which do not pose any problems and which do
not carry more than normal risk attached to the
business. They are not NPAs.
2. Sub-Standard Assets: Substandard Assets
are those which have remained an NPA for a
period not exceeding 12 Months.
3. Doubtful Assets: An assets would be
classified as doubtful if it remained in the sub-
standard category for 12 Months.
4. Loss Assets: A loss assets is one where loss
has been identified by the bank or Internal /
External Auditors or by the RBI Inspection.

SHORT NOTES
2009 - June [8] Write short note on:
(c) Statutory Reserve in case of Bank; (3 marks)
Answer:
Statutory Reserve in case of Banks:
Every banking company incorporated in India shall create a reserve fund and
transfer to least 25% of the annual profit as disclosed in the Profit and Loss
Account before any dividend is declared.
Any appropriation out of reserve fund must be intimated to RBI within 21
days from the day such appropriation, explaining the circumstances relating
thereto.
Space to write important points for revision

2010 - Dec [8] Write short note on:

(a) Non - Banking Assets (5 marks)
 [Chapter  4A] Accounts of Banking Company O 12.177

Answer
Non- banking assets :
A Bank cannot acquire certain assets but it can always lend against the
security of such assets. This means that sometimes, in case of failure on the
part of the loanee to repay the loans, the bank may have to take possession
of such assets. In that case, the assets will be shown in the balance sheet
as “ Non- banking Assets”. These must be disposed of within seven years.
Income from or profit/loss on sale such assets has be separately shows in
profit and loss account of the bank.
Space to write important points for revision

2011 - June [8] Write short note on :

(d) Rebate on Bills discounted. (5 marks)
Answer
Rebate on Bills Discounted
When a bank discounted bill, bills discounted and purchased A/c. is debited
with the full value of the bill and current A/c. (Customers) is credited with the
net proceeds and interest and Discount A/c. is credited with the amount of
total discount of the bill. Discount represents the interest on bill value for the
unexpired period of the bill (difference between the date of maturity and date
of discounting). It sometimes happen that on the closing day, the bill in
question has not matured and then the interest relating to next period should
be carried forward.
Space to write important points for revision

2012 - June [8] Write short note on:

(d) Liquidity norms of Banking Companies; (5 marks)
Answer:
Liquidity Norms of banking Companies under Section 24 of banking
Regulation Act.
Banking Companies have to maintain sufficient liquid assets in the Normal
courses of business. In order to safeguard the interest of depositors and to
prevent banks from overextending their resources, liquidity norms have been
settled and given statutory recognition. Every banking company has to
maintain in cash, gold or unencumbered approved securities, an amount not
 12.178 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

less than 25% of its demand and time liabilities in India. However, this
percentage is changed by the Reserve Bank of India from time to time
considering the general economic conditions. This is in addition to the
average daily balance which a scheduled bank is required to maintain under
Section 42 of the Reserve bank of India Act and in case of other banking
companies, the cash reserve required to be maintained under Section 18 of
the Banking Regulation Act.
Space to write important points for revision

2013 - June [8] Write short note:

(b) Rebate on Bills Discounted; (5 marks)
Answer:
At the time of discounting the bill total among of discount (difference between
face value and discounted amount ) is credited to interest and discounted by
a bank. Discount represents the interest on bill value for the unexpired period
of the bill, It may sometime happen that on the closing day of the accounting
year, the bill in question has not matured. At the time of preparing final
accounts, the interest relating to next accounting period must be carried
forward by passing the following entry:
Interest and Discount A/c. Dr.
To Rebate on Bills Discounted Account.
Space to write important points for revision

2017 - Dec [5] Write short note:

(c) Provisioning Arrangements for Non-Performing Assets (4 marks)
Answer:
Rates of Provisioning for Non-Performing Assets and Restructured
Advances
Category of Advances Rate (%)
Standard Advances
(a) Direct advances to agricultural and SME 0.25
(b) Advances to Commercial Real Estate (CRE) Sector 1.00
 [Chapter  4A] Accounts of Banking Company O 12.179

(c) All other loans 0.40

Sub-standard Advances
Secured Exposures 15
Unsecured Exposures in respect of Infrastructure loan accounts 20
where certain safeguards such as escrow accounts are
available.
Unsecured other loans 25
Doubtful Advances - Unsecured Portion 100
Doubtful Advances - Secured Portion
For Doubtful upto 1 year 25
For Doubtful > 1 year and upto 3 years 40
For Doubtful > 3 years 100
Space to write important points for revision

DISTINGUISH BETWEEN
2008 - Dec [5] (b) Distinguish between Statutory Reserve and Cash Reserve
in respect of Banking Companies. (5 marks)
Answer:
Statutory Reserve:
Banking companies incorporated in India shall create a reserve fund and
transfer to it atleast 25% of its annual profit as disclosed in the profit and loss
account before any dividend is declared.
Where a banking company appropriates any sum or sums from the Reserve
Fund or Share Premium Account, it shall report the fact to the Reserve Bank
explaining circumstance relating to such appropriations within 21 days from
the date of such appropriation.
Cash Reserve:
Every banking company not being a scheduled bank, has to maintain a Cash
Reserve (CRR) of atleast 4% of the total of its demand and time liabilities or
as specified by Reserve Bank of India, from time to time.
Space to write important points for revision
 12.180 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

DESCRIPTIVE QUESTIONS
2010 - Dec [4] (b) Describe how the classification of investments is done by
a Banking Company. (5 marks)
Answer:
The investment portfolio of a Bank would normally consist of both approved
securities (Predominantly government securities) and other securities
(shares, debentures, bonds etc.). Banks are required to classify their entire
investment portfolio into three categories.
(i) Held-to-maturity Securities acquired by bank with the intention to
hold them upto maturity should be classified as
‘held-to-maturity’.
(ii) Held-for-maturity Securities required by bank with the intention to
trade by taking advantage of short term price
interest rate movements should be classified as
held-for-maturity/trading.
(iii) Available-for-sale Securities which do not fall within the above two
categories should be classified as available-for-
sale.
Space to write important points for revision

2011 - June [4] (d) State the main characteristics of the Book keeping
system of Banks. (4 marks)
Answer:
Main characteristics of a Bank’s Book-Keeping system.
(i) Voucher posting Entries in the personal ledger are made directly
from vouchers instead of being posted from the
books of prime entry.
 [Chapter  4A] Accounts of Banking Company O 12.181

(ii) Voucher summary The vouchers entered into different personal

sheets ledgers each day are summarized on summary
sheets, totals of which are posted to the control
accounts of the general ledger.
(iii) Daily trial balance The general ledger trial balance is extracted and
agreed every day.
(iv) C o n t i n u o u s All entries are checked by persons other than
checks those who have made the entries.
(v) Control accounts A trial balance of the detailed personal ledgers
is prepared periodically, usually every two
weeks, agreed with general ledger control
accounts.
(vi) Double voucher Two vouchers are prepared for every transaction
system not involving cash- one debit voucher and
another credit voucher.
Space to write important points for revision

2011 - Dec [5] (b) Discuss some important provisions of the Banking
Regulation Act, 1949 regarding disposal of Non-Banking Assets u/s 9 of the
Act. (5 marks)
Answer:
 Not with standing anything contained in Section 6 which specifies the
various forms of business in which a Banking company may engage in
addition to the business of Banking, no Banking company shall hold any
immovable property howsoever acquired, except such as is required for
its own use, for any period exceeding seven years from the acquisition
thereof or from commencement of the Act, whichever is later, or any
extension of such period as in section provided; and such property shall
be disposed of within such period or extended period, as the case may
be.
 12.182 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

 Provided that the Banking company may, within the period of seven
years as aforesaid; deal or trade in any such property for the purpose of
facilitating the disposal thereof. Provided further that Reserve Bank may
in any particular case extend the aforesaid period of seven years by
such period not exceeding five years, where it is satisfied that such
extension would be in the interest of the depositors of the Banking
company.
Space to write important points for revision

2014 - June [3] (b) Describe the principal accounting policies for a Banking
Company in respect of foreign exchange transactions.
(2 marks) [CMAIG - I]
Answer:
Transactions involving Foreign Exchange
(a) Monetary assets and liabilities have been translated at the exchange
rates, prevailing at the close of the year. Non-monetary assets have
been carried in the books at the historical cost.
(b) Income and expenditure items in respect of Indian branches have been
translated at the exchange rates, ruling on the date of the transaction
and respect of overseas branches at the exchange rates prevailing at
the close of the year.
(c) Profit or loss on pending forward contracts has been accounted for.
Space to write important points for revision

PRACTICAL QUESTIONS
2009 - Dec [2] (a) From the following information, prepare the Profit and
Loss Account of German Bank Ltd. for the year ending 31st March, 2009:
`
Interest on Loans 2,56,000
Interest on Fixed Deposits 2,75,000
Commission 5,200
Establishment Expenses 54,000
 [Chapter  4A] Accounts of Banking Company O 12.183

Discount on Bills discounted 1,46,000

Interest on Cash Credit 2,23,000
Interest on Current Accounts 42,000
Rates and Taxes 18,000
Interest on Overdrafts 1,54,000
Directors’ Fees 3,000
Auditor’s Fees 1,200
Interest on Savings Bank Deposits 68,000
Postage and Telegrams 1,400
Printing and Stationery 2,900
Sundry Charges 1,700
Income from Investments 2,000
Profit on Sale of Investment 4,000
Bad Debts to be written off amounted to ` 40,000. Provision for taxation may
be made @ 55%. (10 marks)
Answer:
Profit and Loss Account
for the year ending 31st March,2009
I. Income:
Interest Earned 781.00
Other Income 9.20
760.20
II. Expenditure:
Interest Expended 385.00
Operating Expenses 82.20
Provisions & Contingencies 195.65
662.85
Profit/Loss:
III. Net Profit/Loss (-) for the year 127.35
Profit/Loss (-) brought forward ---
127.35
Appropriation
IV. Transfer to Statutory Reserve 31.84
(25% of 127.35 Balance Carried 101.88
over to Balance Sheet 133.72
 12.184 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Schedule - 13 : Interest Earned

I. Interest on Advances on 779.00
II. Discount on Bills 2.00
Income on Sale of Investments 781.00
Schedule - 14 : Other Income
I. Commission, Exchange and Brokerage 5.20
II. Profit on Sale of Investments 4.00
9.20
Schedule - 15 : Interest Extended
I. Interest on Deposit 385.00
385.00
Schedule - 16 : Operating Expenses
I. Payment to and Provision for employees (Establishment) 54.00
II. Rent, Taxes and Lighting 18.00
III. Printing and Stationary 2.90
IV. Directors Fees, Allowances and Expenses 3.00
V. Auditors Fees and Expenses 1.20
VI. Postage, Telegrams, Telephones etc. 1.40
VII. Other Expenditure (Sundry Charges) 1.70
82.20

Note:
1. Calculation of Interest and Discount for Schedule No.13
Interest on Loans 256
Interest on Cash Credit 223
Interest on Overdrafts 154
Discount on Bills Discounted 146
779
2. Calculation of Interest on Deposits for Schedule No.15
Interest on Fixed Deposits 275
Interest on Current Accounts 42
Interest on Savings Bank Deposits A/c 68
385
Space to write important points for revision
 [Chapter  4A] Accounts of Banking Company O 12.185

2013 - Dec [1] {C} Answer the following questions (give workings wherever
required):
(vi) New Bank Ltd. informs you the following:
(a) Bill discount commission (unadjusted) ` 21,00,000
(b) Rebate on bills discounted as1+65 on 01.04.2014 ` 2,43,000
(c) Rebate on bills discounted as on 31.03.2015 ` 2,18,000
Compute the discount to be credited to the profit and loss account of
the Bank for the year ended 31.03.2015. (2 marks) [CMAIG - I]
Answer:
New Bank Ltd.
Rebate on Bills Discounted A/c
Date Particulars Amount ` Date Particulars Amount `
31.03.2015 To P& L A/c 21,25,000 01.04.2014 By Balance b/d 2,43,000
(Balancing Fig.)
31.03.2015 To Balance c/d 2,18,000 31.03.2015 By Sundry 21,00,000
Parties
23,43,000 23,43,000
Space to write important points for revision

2014 - June [1] {C} Answer the following questions (give workings):
(vii) Sahookar Bank Ltd. had extended the following credit lines to a Small
Scale Industry, which had not paid any interest since March 2011:
Balance outstanding out off term loan on 31.03.2015 ` 45 Lakhs

DICGC Cover 40%

Securities held ` 20 Lakhs

Realizable value of securities ` 18 Lakhs

You are required to compute the necessary provision to be made for the
year ended 31st March, 2015. (2 marks) [CMAIG - I]
 12.186 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer:
` (in lakhs)
Outstanding balance of tern loan 45.0
Less: Value of security held 18.0
(subject to reliable value)
Unsecured portion 27.0
Less: DICGC cover (40%) 10.8
Balance 16.2
Provision (16.2 + 18) = 34.2
Space to write important points for revision

2014 - Dec [1] Answer the following question (Give workings):

(j) A loan account remains out of order as on date of Balance Sheet of
MODERN Bank. The account has been classified as Doubtful asset
(upto 1 year). Details of the account are as under:
Outstanding ` 6,73,000
ECGC Coverage 25% (limited to ` 1,00,000)
Value of security held ` 1,50,000
Compute the necessary provision to be made by the Bank in respect of
this particular account. (2 marks) [CMAIG - I]
Answer:
Computation of Provision
`
Doubtful Assets (upto 1 year) 6,73,000
Less: Value of security 1,50,000
5,23,000
Less: ECGC coverage (limited to ` 1 lakh) 1,00,000
Unsecured portion 4,23,000
Provision on secured portion @ 25% on 1,50,000 37,500
Provision on unsecured portion @ 100% on 4,23,000 4,23,000
Total provision 4,60,500
Space to write important points for revision
 [Chapter  4A] Accounts of Banking Company O 12.187

2014 - Dec [7] Answer the question:

(a) Some of the items in the Trial Balance of CANHC Bank Limited as on
March 31, 2012 were as follows:
` `
Loans and Advances 71,50,000 Printing and Stationary 5,000
Current Accounts Interest on Saving Bank 75,000
(including Overdrafts of ` 66,00,000 Deposits 5,000
15,00,000) Auditor’s Fees
Bills Discounted and Interest on Overdrafts 95,000
Purchased 19,20,000 Provision for Doubtful Debts,
Interest on Fixed Deposits 1,55,000 April 1, 2011 42,000
Interest on Loans 2,25,000 Bad Debts 21,000
Discount (subject to 2,01,000 Provision for Income tax,
unexpired discount April 1, 2011 66,000
` 30,000) 1,05,000 Income tax paid for 2011- 54,000
Interest on Cash Credits 47,000 2012
Commission earned
Loss on investment 34,000
Salaries and Allowances 82,000
Required: Prepare the Profit and Loss Account of the Bank maintaining the
provision for Income tax at ` 84,000 and Provision for Doubtful Debts at
` 52,000 for the year ended March 31, 2012. (8 marks) [CMAIG - I]
Answer:
CANHC Bank Limited
Profit & Loss A/c for year ended 31.03.2012
Particulars Schedule Year ended
No. 31.03.2012
Amount (`)
(` ‘000)
I. Income:
Interest earned 13 596
Other income 14 13
609
 12.188 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

II. Expenditure:
Int. expended 15 230
Operating exp. 16 92
Provision & contingencies (72 + 31) 103
Total 425
III. Profit or Loss:
Net Profit for the year 184
P/L brought forward —
184
IV. Appropriations:
Transfer to statutory reserve @ 25% 46
Balance carried over to Balance-sheet 138
Total 184
Schedule 13
Interest earned
Interest/discount 596
(225 + 201 + 105 + 95 - 30)
Interest on investments —
Interest on balance with RBI & other banks —
596
Schedule 14
Other Income
Commission, exchange brokerage 47
(-) loss on investment 34
13
Schedule 15
Interest expended
Interest on deposits (155 + 75) 230
Interest on RBI /other bank borrowings
230
 [Chapter  4A] Accounts of Banking Company O 12.189

Schedule 16
Operating Expenses
Salaries & allowances 82
Printing & Stationery 5
Auditor fees 5
92
Provision for Doubtful debts A/c
Dr. Cr.
Particulars Amount Particulars Amount
To Bad debts 21 By Balance b/d 42
To Balance c/d 52 By P/L (B.f.) 31
73 73
Provision for taxation
Particulars Amount ` Particulars Amount `
To Bank 54 By Balance b/d 66
To Balance c/d 84 By P/L (B.f.) 72
138 138
Space to write important points for revision

2015 - Dec [1] Answer the following questions (Give workings):

(i) INDIAN BANK provides the following particulars:
Sl. No. Date of Bill Amount of Bill Period Rate of Discount
(`)
(i) 15.01.2015 90,000 5 Months 8%
(ii) 10.02.2015 60,000 4 Months 9%
Required:
Calculate the Rebate on Bills Discounted as on 31st March, 2015.
(2 marks) [CMAIG - I]
 12.190 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer:
Rebate on Bills Discounted
Due date Days after Discount `

90,000 18.6.15 79 8% 1,558

60,000 13.6.15 74 9% 1,095
2,653
Space to write important points for revision

2015 - Dec [7] Answer the question.

(b) The following is an extract from Trial Balance of VAISHNAVI BANK LTD.
as at 31st March, 2015.
` `
Bills discounted 9,00,000
Rebate on Bills discounted 44,320
(as on 1st April, 2014)
Discount Received 2,11,416

An analysis of the Bills discounted and held on 31.03.2015 is as follows:

Sl. Date of Bills Amount (`) Period Rate of
No. Discount
(i) 5.01.2015 2,50,000 5 months 10%
(ii) 10.02.2015 1,50,000 4 months 9%
(iii) 25.02.2015 2,00,000 4 months 9%
(iv) 20.03.2015 3,00,000 3 months 8%
You are required to:
(i) Calculate the amount of discount on bills to be credited to Profit and
Loss Account for the year ended 31st March, 2015.
(ii) Show the necessary Journal Entries in this respect.
(6 + 2 = 8 marks) [CMAIG - I]
 [Chapter  4A] Accounts of Banking Company O 12.191

Answer:
Rebate on bills discounted
Due date Days after Discount `
31.3.15 rate
2,50,000 8.6.15 69 10% 4,726
1,50,000 13.6.15 74 9% 2,740
2,00,000 28.6.15 89 9% 4,389
3,00,000 23.6.15 84 8% 5,523
17,378

Rebate on bills discounted A/c Dr. 44,320

To Discount on bills A/c 44,320
Bills A/c Dr. 9,00,000
To Discount A/c 2,11,416
To Client A/c 6,88,584
Discount on bills A/c Dr. 17,378
To Rebate on bills discounted A/c 17,378
Discount on bills A/c Dr. 2,38,361
To P/L 2,38,361
Space to write important points for revision

2016 - June [7] (a) The following details are extracted from the books of
HEAVEN BANK LTD., a Commercial Bank as on 31st March, 2016:
(Amount in ` lakh)
Interest and discount received 390
Interest paid on deposits 204
Issued and subscribed capital 100
Salaries and allowances 20
Directors fee and allowances 3
Rent and taxes paid 9
Postage and telegrams 6
 12.192 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Statutory reserve fund 80

Commission, exchange and brokerage 20
Profit on Exchange Transaction 7
Profit on sale of investments 21
Depreciation on bank’s properties 3
Law charges 4
Audit fee 1
The following further information is given:
(i) A customer to whom a sum of ` 100 lakhs has been advanced, has
become insolvent and it is expected only 50% can be recovered from
his estate.
(ii) There were also other debts for which a provision of ` 15 lakh was
found necessary by the auditors.
(iii) Rebate on bills discounted on 31.03.2015 was ` 1,20,000 and
31.03.2016 was ` 1,60,000.
(iv) Provided ` 65 lakh for Income Tax.
(v) The directors desire to declare 10% dividend.
(vi) Provide 25% for Statutory Reserve.
(vii) Profit & Loss Account as on 31.03.2015 was NIL.
Required:
Prepare Profit & Loss Account of Heaven Bank Ltd. for the year ended
March 31, 2016.
(Notes/Schedules to Profit & Loss Account need not form part of the answer)
(10 marks) [CMAIG - I]
Answer :
Heaven Bank Ltd.
Profit & Loss A/c for the year ended 31.3.2016
I. Income:
Interest earned 13 389.60
Other Income 14 48.00
Total 437.60
 [Chapter  4A] Accounts of Banking Company O 12.193

II. Expenditure:
Interest expended 15 204.00
Operating expenses 16 46.00
Provisions & contingencies (65 + 50 + 15) 130.00
Total 380.00
III. Profits/Losses:
Net profit for the year 57.60
Profit brought forward Nil
Total 57.60
IV. Appropriations:
Transfer to statutory reserve 14.40
Proposed dividend 10.00
Balance c/f to B/s 33.20
Total 57.60

Schedule - 13 Interest earned:

Interest 390.00
Add: Rebate on 31.3.2015 1.20
Less: Rebate on 31.3.2016 1.60
389.60
Schedule - 14 Other Income:
Commission, exchange & brokerage 20.00
Profit on sale of inv. 21.00
Profit on exchange transaction 7.00
48.00
Schedule - 16 Operating Expenses:
Payment to & Prov. for employees 20.00
Rent & taxes 9.00
Depreciation 3.00
Director’s fees 3.00
 12.194 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Auditor’s fees 1.00

Law charges 4.00
Postage & telegram 6.00
Total 46.00
Shareholder’s share: 5% of 92 = 4.6
Space to write important points for revision

2017 - Dec [3] (b) From the following information for a Bank calculate the
amount of discount to be transferred to the Statement of Profit and Loss.
(i) Rebate on Bills Discounted (as on 01.04.2016) ` 28,000. Discount
Received ` 1,02,000.
(ii) The following bills have been discounted during the year:
Amount of Bill (`) Rate of Discount Due Date (including grace days)
65,000 13% p.a. June 14, 2017
1,50,000 15% p.a. July 19, 2017
4,30,000 12% p.a. August 10, 2017
Also pass the necessary journal entry for the unexpired discount as on
31.03.2017. (3 + 1 = 4 marks)
Answer:
Calculation for rebate on bill discounted
Bill Due Date Days after due date Amount (`) Rate Discount
14.06.17 75 65,000 13% 1,736
19.07.17 110 1,50,000 15% 6,781
10.08.17 132 4,30,000 12% 18,661
Total 27,178
Amount to be credited to P/L = 28000 + 102000 - 27178 = ` 102822.
Journal Entry:
Interest and Discount A/C ............…………..Dr 27,178
To Rebate on Bill Discounted A/C 27,178
Space to write important points for revision
 [Chapter  4A] Accounts of Banking Company O 12.195

2018 - June [3] (b) Given below are details of interest on advance of a
Commercial Bank as on 31.3.2017:
Particulars Interest Earned Interest Received
(` in Crore) (` in Crore)
Performing Assets
Term Loan 120 80
Cash Credit and Overdraft 750 620
Bills Purchased and Discounted 150 150
Non-Performing Assets
Term Loan 75 5
Cash Credit and Overdraft 150 12
Bills Purchased and Discounted 100 20
st
Find out the income to be recognized for the year ended 31 March, 2017.
(4 marks)
Answer:
As per RBI Circular, Interest on non - performing assets are considered on
Cash Basis whereas interest on performing assets are considered on
Accrual Basis.
Statement Showing the Recognition of Income
(` in Crore)
Particulars Amount Amount
(`) (`)
1. Interest on Term Loans
(i) Performing Assets 120
(ii) Non-performing Assets 5
125
2. Interest on Cash Credit and Overdraft
(i) Performing Assets 750
(ii) Non-performing Assets 12
762
 12.196 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

3. Interest on Bills Purchased and Discounted

(i) Performing Assets 150
(ii) Non-performing Assets 20
- 170
Income to be recognized 1057
Space to write important points for revision

Repeatedly Asked Questions

No. Question Frequency
1 Write short notes Rebate on Bill Discount.
11 - June [8] (d), 13 - June [8] (b) 2 Times

Table Showing Marks of Compulsory Questions

Year 14 14 15 15 16 16 17 17 18 18
J D J D J D J D J D
Practical 2
Total 2
 4B ACCOUNTS OF ELECTRICITY
COMPANY
THIS CHAPTER INCLUDES
• The Electricity Act, 2003  Accounting of Service Line Cum
 Central Electricity Authority Development (SLD) Charges
 Central Electricity Regulatory under Accounting
Commission (CERC)  Accounting for Depreciation
 State Electricity Commission  Debt-Equity Ratio
(SEC)  Interest on Loan Capital
 Accounting of Security Deposit  Return on Equity
 Optimised Depreciated
Replacement Cost
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical

For detailed analysis Login at www.scannerclasses.com

for registration and password see first page of this book.

12.197
 12.198 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. Electricity Act, The Act has been enacted to replace:
2003  Indian Electricity Act, 1910
 The Electricity Supply Act, 1948
 The Electricity Rules, 1956
 The Electricity Regulatory Commissions
Act, 1988
2. O b j e c t i v e o f 1. To consolidate the laws relating to
“Electricity Act, generation, transmission, distribution,
2003” trading and use of electricity.
2. For taking measure conducive to
development of electricity industry, and
promoting competition therein.
3. Protecting interest of consumers and
supply of electricity to all areas.
4. Rationalization of electricity tariff.
5. Ensuring transparent policies regarding
Subsidies.
6. Constitution of Central Electricity Authority,
Regulatory Commissions and
Establishment of Appellate Tribunal.
3. Main features of (i) The activities like generation,
the Electricity transmission and distribution of power
Act, 2003 have been separately identified.
(ii) The Act de-licenses power generation
completely (except for hydro power
projects, over a certain size).
 [Chapter  4B] Accounts of Electricity Company O 12.199

(iii) 10% of the power supplied by suppliers

and distributors to the consumers has to
be generated using renewable and
non-conventional sources of energy.
(iv) Setting up State Electricity Regulatory
Commission (SERC) made mandatory.
(v) Appellate Tribunal to hear appeals
against the decision of the CERC and
SERCs.
(vi) Ombudsman scheme for consumers‘
grievance redressal.
4. Various 1. Central Electricity Authority: Central
Regulatory/Auth Electricity Authority (CEA) shall exercise
orities under the such functions and perform such duties as
Electricity Act are assigned to it under the electricity Act.
2. “Appropriate Commission” means:
(a) Central Electricity Regulatory
Commission (CERC) referred u/s
76(1), or,
(b) State Ele ct ricity Regulatory
Commission (SERC) referred u/s 82,
or,
(c) Joint commission referred u/s 83.
3. Central Electricity Regulatory
Commission (CERC):
(a) There shall be a Commission to be
known as the Central Electricity
Regulatory Commission (CERC) to
exercise the powers conferred on, and
discharge the functions assigned to, it
under this Act.
(b) CERC has jurisdiction over Generating
Companies owned or controlled by the
Central Government and those
12.200 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Generating Companies who have

entered into or otherwise have a
composite scheme for generation and
sale in more than one state.
4. S t a t e Electricity Regulatory
Commission (SERC):
(a) Every State Government shall, within 6
months from the appointed date, by
Notification constitute for the purpose
of this Act, a Commission for the State
to be known as the (name of the state)
Electricity Regulatory Commission
(…SERC).
(b) State SERC’s have jurisdiction over
Generating Stations within the State
boundaries, except those under the
CERC’s jurisdiction.
5. Joint Commission:
(a) By two or more Governments of
States, or
(b) By the Central Government, in respect
of one or more Union Territories, and
one or more Governments of States,
and shall be in force for such period
and shall be subject to renewal for
each further period, if any, as may be
stipulated in the agreement.
The Joint Commission shall determine
Tariff in respect of the Participating
States or Union Territories separately
and independently.
6. Central Advisory Committee (CAC) and
State Advisory Committee:
The CERC/SERC may, by notification,
establish from a specified date, a
 [Chapter  4B] Accounts of Electricity Company O 12.201

Committee to be known as Central

Advisory Committee (CAC) / State
Advisory Committee (SAC) respectively.
The objects of CAC / SAC shall be to
advise the CERC / SERC on:
 Major questions of policy,
 Matter relating to quality, continuity
and extent of service provided by the
Licensees,
 Compliance by the Licensees with the
conditions and requirements of their
License,
 Protection of consumer interest,
 Electricity supply and overall standards
of performance by utilities.

SHORT NOTES
2016 - June [9] Write short notes on following:
(b) Main features of the Electricity Act. - 2003 (5 marks) [CMAIG - I]
(d) Average Revenue Per User (APRU) (5 marks) [CMAIG - I]
Answer :
(b) Main Features of the Electricity Act, 2003:
(i) The activities like generation, transmission and distribution of
power have been separately identified.
(ii) The Act de-licenses power generation completely (except for hydro
power projects, over a certain size).
(iii) 10% of the power supplied by suppliers and distributors to the
consumers has to be generated using renewable and non-
conventional sources of energy.
(iv) Setting up State Electricity Regulatory Commission (SERC) made
mandatory.
 12.202 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(v) Appellate Tribunal to hear appeals against the decision of the

CERC and SERCs.
(vi) Ombudsman Scheme for consumer’s grievance redressal.
(vii) Provision for private licensees in transmission and entry in
distribution through an independent network.
(viii) Metering of all electricity supplied made obligatory.
(ix) Provision relating to theft of electricity made more strict.
(d) ARPU:
 The Average Revenue Per User (ARPU) or subscriber is an
indication of the net recurring revenue per subscriber per month
earned by the telecom operator.
 This is calculated by dividing the monthly net revenue by the
average subscriber base. ARPU includes monthly rentals,
airtime/call charges, VAS charges and all other charges as reduced
by pass through.
 ARPU does not include non-recurring revenues like handset sales,
installation fees, revenue from roaming services from other
networks, etc. Due to a large variation between prepaid and
postpaid services, the ARPU is calculated separately for both these
services. ARPU for prepaid services is generally lower
(approximately 40% less) as compared to post-paid services
bringing down the blended ARPU.
 For June 2005 and September 2005, the blended ARPU on an all
India basis has fallen from ` 381 in June 2005 to ` 374 in
September 2005. It is interesting to note that the Indian telecom
industry has witnessed a continuous fall of ARPU on a quarter to
quarter basis due to falling airtime rates.
Space to write important points for revision

2017 - June [5] Write short note :

(c) Treatment of Service Line Cum Development Charges (4 marks)
Answer:
Following different accounting and reporting practices are noticed in
published Financial Statements of some Electricity Companies:
 [Chapter  4B] Accounts of Electricity Company O 12.203

Accounting Practice 1: SLD is accounted for as a liability and subsequently

proportionate amount is transferred to Income Statement during the
expected life of the Asset.
Accounting Practice 2: SLD is accounted for as Reserve as the amount is
not refundable and disclosed under the head Reserves and Surplus without
transferring any proportionate amount to Income Statement during the
expected life of the Asset.
Accounting Practice 3: SLD is accounted for as Capital Reserve as the
amount is not refundable and subsequently proportionate amount is
transferred to Income Statement during the expected life of the Asset to
match against depreciation on total cost of such asset.
Notes:
• Balance of Capital Service Line Contributions A/c at the end of the
accounting period should be disclosed as Capital Reserve under the
head ‘Reserves and Surplus’ as it is not refundable to consumers.
• Balance of Capital Service Line Contributions A/c at the end of the
accounting period should be disclosed as Capital Reserve under the
head ‘Reserves and Surplus’ wherein the amount transferred to Income
Statement is shown as deduction. The amount transferred matches
proportionately against depreciation charged on total cost of such asset
in the Statement of Profit and Loss.
Accounting Practice 4: SLD is accounted for as reduction in the cost of
Non-Current Asset and depreciation is provided on such reduced cost.
Space to write important points for revision

DESCRIPTIVE QUESTIONS
2015 - Dec [7] (c) Answer the question.
(ii) State the justifications/reasons for which an immediate shift to the
Optimized Depreciated Replacement Cost (ODRC) Method is not
recommended. (2 marks) [CMAIG - I]
 12.204 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer:
An immediate shift to the optimized Depreciated Replacement cost (ODRC)
method is not recommended due to
– Problems in producing a detailed asset register.
– Absence of norms for standard lives of assets.
– Absence of construction cost estimates.
– Lack of data on future load growth.
Space to write important points for revision

PRACTICAL QUESTIONS

2014 - June [2] (b) The following information and details are provided to you
by the Mahi Electricity Supply Company for the year ending 31st March,
2014:
`
8% Investments of the reserve fund 2,10,00,000
8% Investments of the contingencies reserve 1,90,00,000
14% Debentures 1,80,00,000
Development Reserve 15,60,000
Loan from Electricity Board 3,50,00,000
Capital Base 6,57,25,000
RBI rate of the relevant date 8%
Profit before debenture interest 1,14,65,300
You are required to calculate the reasonable return and show the disposal
of surplus. (8 marks) [CMAIG - I]
Answer:
Reasonable Return
Capital Base × (Bank Rate + 2%)
i.e. 6,57,25,000 × 10% 65,72,500
+ Income from reserve fund investment 16,80,000
 [Chapter  4B] Accounts of Electricity Company O 12.205

+ Intt. income from debentures @ ½% 90,000

+ Interest Income from Loan from Electricity Board @ ½% 1,75,000
+ Interest Income from Development Reserve @ ½% 7,800
Reasonable Return 85,25,300
Disposal of Surplus
Profit 1,14,65,300
Less: Debenture interest 25,20,000
89,45,300
Less: Reasonable Return 85,25,300
Surplus 4,20,000
Disposal
1/3 (being less than 5% of reasonable return) at the 1,40,000
disposal of the company of the balance
½ to TDCR 1,40,000
½ to consumer’s benefit A/c 1,40,000
4,20,000
Space to write important points for revision

2014 - Dec [7] (c) The Mettur Electricity Company Ltd. decides to replace
one of its old plants with a modern one with a larger capacity. The plant
when installed in 1950 cost the company ` 48,00,000, the components of
materials, labour and overhead being in the ratio of 5:3:2.
It is ascertained that the cost of materials and labour have gone up by
40% and 80% respectively.
The proportion of overheads to total costs is expected to remain the
same as before.
The cost of the new plant as per improved design is ` 1,20,00,000 and
in addition, materials recovered from the old plant of a value ` 4,80,000 have
been used in the construction of the new plant. The old plant was scrapped
and sold for ` 15,00,000.
The accounts of the company are maintained under Double Account
System. Indicate how much would be capitalised and the amount that would
be charged to revenue. Show journal entries and prepare necessary ledger
accounts. (8 marks) [CMAIG - I]
 12.206 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer:
Working Note:
`
(i) Computation of total actual cost of new plant:
Cost of new plant (as given) 1,20,00,000
Add: Value of materials of old plant used in construction
of new Plant 4,80,000
1,24,80,000
(ii) Split-up of cost of old Plant when acquired in 1950:
Materials 24,00,000

Labour 14,40,000

Overheads 9,60,000

48,00,000

Percentage of overheads to total cost = = 20% or

Percentage of overheads to combined cost of material and labour
= = 25%

Current Cost of Replacement :

(i) Materials is (Increase by 40% over ` 24,00,000) 33,60,000
(i.e., ` 24,00,000 + 40% increase ` 9,60,000)
Labour (increased by 80% over ` 14,40,000) 25,92,000
(i.e., ` 14,40,000 + 80% increase ` 11,52,000)
Overheads (25% of combined cost of materials
and Labour i.e., 25% of (` 33,60,000 + 25,92,000) 14,88,000
74,40,000
 [Chapter  4B] Accounts of Electricity Company O 12.207

(ii) Computation of amount of replacement to be

capitalized:
Total actual cost of new Plant 1,24,80,000
Less: Estimated present cost of replacement 74,40,000
Amount to be capitalised 50,40,000
(iii) Computation of amount of replacement to be
charged to Revenue A/c:
Estimated present cost of replacement 74,40,000
Less: Value of old material used in construction of new
plant 4,80,000
Amount realized on sale of old Plant 15,00,000 19,80,000
Change to Revenue 54,60,000
(iv) Computation of actual amount of Cash spent on
replacement :
Total actual cost of new Plant 1,24,80,000
Less: Value of old materials used in construction
of new Plant 4,80,000
1,20,00,000
Journal Entries
Dr. Cr.
Date Particulars L.F. ` `
1 Replacement A/c Dr. 74,40,000
Plant A/c (Bal. Fig.) Dr. 45,60,000
To Bank A/c [W.N. (iv)] 1,20,00,000
2 Bank A/c Dr. 15,00,000
To Replacement A/c 15,00,000
3 Plant A/c Dr. 4,80,000
To Replacement A/c 4,80,000
4 Revenue A/c Dr. 54,60,000
To Replacement 54,60,000
 12.208 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Plant A/c
Particulars ` Particulars `
To Balance b/d 48,00,000 By Balance c/d 98,40,000
To Bank A/c 45,60,000
To Replacement A/c 4,80,000
98,40,000 98,40,000

Replacement A/c
Particulars ` Particulars `
To Bank A/c 74,40,000 By Bank A/c 15,00,000
By Plant A/c 4,80,000
By Revenue A/c 54,60,000
(Bal. Fig.)
74,40,000 74,40,000
Space to write important points for revision

2015 - June [7] Answer the question:

(c) The following balances are extracted from the records of NARMODA
ELECTRICITY CO. LTD. for the year ended March 31, 2015.
Particulars (` in Lakh) Particulars (` in Lakh)

Balance as on1st April, 2014: Expenses of Management 14,400

Land 1,80,000 Cost of distribution 6,000

Machinery 7,20,000 Depreciation 24,000

Mains 2,40,000 Sale of energy for lighting 80,000

Share Capital - Ordinary Shares 6,58,800 Sale of energy for Power 76,000

Debentures 2,40,000 Meter Rent 6,000

 [Chapter  4B] Accounts of Electricity Company O 12.209

Expenditure during the year: Interest on Debentures 12,000

Land 6,000 Interim Dividend 24,000
Machinery 6,000 Net Revenue Account as on 34,200
Mains 61,200 01.01.2014
Sundry Creditors 1,200 Depreciation Fund 3,00,000
Cost of Generation 42,000 Sundry Debtors:
Rent, Rates and Taxes 6,000 For Energy Supplied 48,000
Others 600
Cash Balance 6,000

You are required to prepare:

(i) Revenue Account and
(ii) Net Revenue Account for the year ended March 31, 2015
(iii) General Balance Sheet as at 31.03.2015.
(3 + 2 + 3 = 8 marks) [CMAIG - I]
(Note: Schedules/Note to Balance Sheet are not required)
Answer:
NARMODA ELECTRICITY CO. LTD.
Revenue Account Year ended 31st March, 2015
Dr. Cr.
Particulars ` in lakh Particulars ` in lakh

Expenses of management 14,400 By Sale of energy 80,000

Cost of distribution 6,000 for lighting

Depreciation 24,000 By Sale of energy 76,000

Cost of generation 42,000 for power

Rent rates and taxes 6,000 By Meter rent 6,000

To net revenue a/c 69,600

1,62,000 1,62,000
 12.210 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Dr. Net Revenue A/c for the year ended 31st March, 2015 Cr.
Particulars ` in lakh Particulars ` in lakh
Interest on deb. 12,000 By Balance from last 34,200
Dividend 24,000 year’s a/c
Bal. Carried to general 67,800 By Bal. b/f revenue A/c 69,600
b/s
1,03,800 1,03,800
General Balance Sheet as on 31st March, 2015
Liabilities ` in lakh Assets ` in lakh
Capital Account Capital Account:
Amount received 8,98,800 Amount expended on works 12,13,200
Sundry Creditors 1,200 Sundry Debtors
Net revenue A/c balance 67,800 For Energy supplied 48,000
Depreciation fund A/c 3,00,000 Other 600 48,600
Cash balance 6,000
12,67,800 12,67,800

Working:
(1) Amount received : 6,58,800 + 2,40,000 = 8,98,800
(2) Amount expended on works
` (1,80,000 + 7,20,000 + 2,40,000 + 6,000 + 6,000 + 61,200) -
` 12,13,200
Space to write important points for revision

2015 - Dec [7] Answer the question.

(c) (i) From the following information of VIDYUT ELECTRICITY CO. LTD.,
an Electricity generation Project, CALCULATE:
(1) Depreciation and
(2) Advance Against Depreciation upto the year 2014-15 as per
Regulation 21 of the Central Electricity Regulatory Commission
(Terms and Conditions of Tariff) Regulations 2004.
 [Chapter  4B] Accounts of Electricity Company O 12.211

 Date of Commercial Operation of COD : 1st April, 2012

 Approved Opening Capital Cost as on 1st April, 2012 :
` 10,00,000
 Weighted average Rate of Depreciation : 5.20%
 Details of allowed Additional Capital, Repayment of loan and
Weighted Average Rate of Interest on Loan are as follows:
(Amount in `)
Year 2012-13 2013-14 2014-15
Additional Capital Expenditure (allowed) 70,000 20,000 15,000
Repayment of Loan 60,000 70,000 70,000
Weighted Average Rate of Interest on 7.50% 7.60% 7.80%
Loan
(3 + 3 = 6 marks) [CMAIG - I]
Answer:
Computation of Depreciation:
Particulars 1st year 2nd year 3rd year
2012-13 2013-14 2014-15

Opening capital cost (A) 10,00,000 10,70,000 10,90,000

Additional capital cost (B) 70,000 20,000 15,000
Closing capital cost 10,70,000 10,90,000 11,05,000
(A+B) (C)
Average capital cost
(A+C/2) 10,35,000 10,80,000 10,97,500
weighted average rate of
depreciation 5.20% 5.20% 5.20%
Annualised depreciation 53,820 56,160 57,070
Advance against
depreciation 6,180 13,840 12,930
Total Depreciation 60,000 70,000 70,000
 12.212 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Computation of advance against depreciation:

Particulars 2012-13 2013-14 2014-15
Repayment of loan (A) 60,000 70,000 70,000
Depreciation (B) 53,820 56,160 57,070
Difference (A-B) (C) 6,180 13,840 12,930
cumulative payment of loan (D) 60,000 1,30,000 2,00,000
cumulative Dep(E) 53,820 1,09,980 1,67,050
Difference (D-E) (F) 6,180 20,020 32,950
Advance against depreciation
(Min of c & f) 6,180 13,840 2,930
Space to write important points for revision

2016 - June [1] {C} (d) Answer the following question.

(v) GREAT POWER LTD. received ` 2,00,000 as Security Deposit from
its consumers on 1st July 2015. R.B.I interest rate as on 1st April 2015
was 8%.
Pass the Journal Entries in the book of Great Power Ltd. for the year
ended March 31,2016. (2 marks) [CMAIG - I]
Answer :
In the books of Great Power Ltd.
1, July Bank A/c Dr. 2,00,000
2015 To Security Deposit A/c 2,00,000
(Being Security Deposit received)
31st March Interest expense A/c Dr. 12,000
2016 To Interest accrued on Security 12,000
Deposit A/c
(Being provision for interest accrued
on Security Deposit made)
Interest accrued on Security Deposit Dr. 12,000
A/c 12,000
To Sales Turnover A/c
(Being Adjustment of Interest
accrued in consumer’s bill)
Space to write important points for revision
 [Chapter  4B] Accounts of Electricity Company O 12.213

2016 - June [7] (b) The following information are abstracted from the records
of EVERGREEN POWER LTD.
• The name of the power station: EVERGREEN POWER LTD.
• Date of Commercial Operation of COD = 1st April, 2012
• Approved Opening Capital Cost as on 1st April, 2012 = ` 75,00,000
• Details of allowed additional Capital Expenditure during the years are as
follows:
(Amount in `)
Year ended March 31, 2013 2014 2015 2016
Additional Capital Expenditure (Allowed) 5,00,000 1,50,000 1,00,000 50,000
You are required to calculate Return on Equity for 2012-13 to 2015-16 years
as per Regulation 21 of the Central Electricity Regulatory Commission
(Terms and Conditions of Tariff) Regulations 2004. (5 marks) [CMAIG - I]
Answer:
Computation of Return of Equity:
Particulars 2013 2014 2015 2016
Opening Equity (30%) (A) 22,50,000 24,00,000 24,45,000 24,75,000
Additional Equity (30% (B) 1,50,000 45,000 30,000 15,000
Closing Equity (A + B) (c) 24,00,000 24,45,000 24,75,000 24,90,000
Average Equity (A + C)/2 (D) 23,25,000 24,22,500 24,60,000 24,82,500
Return on Equity (D × 14%) 3,25,500 3,39,150 3,44,400 3,47,550
Space to write important points for revision

2017 - June [3] (b) From the following information calculate Return on Equity
as per Regulation 21 of the Central Electricity Regulatory Commission
(Terms and Conditions of Tariff) Regulations, 2004:
(i) Date of Commercial Operation COD = 1st April, 2016
(ii) Approved Opening Capital Cost as on 1st April, 2016 = ` 20,00,000
(iii) Return of equity to be computed @ 14% p.a.
(iv) Additional Capital Expenditure (Allowed) is as follows:
Year 1 2 3 4
Amount (`) 1,20,000 40,000 30,000 15,000
(3 marks)
 12.214 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer:
Computation of Return on equity
Particulars 1st Year 2nd Year 3rd Year 4th Year
(A) Opening Equity (30%) 6,00,000 6,36,000 6,48,000 6,57,000
(B) Additional Equity (30%) 36,000 12,000 9,000 4,500
(C) Closing Equity 6,36,000 6,48,000 6,57,000 6,61,500
(D) Average Equity [(A + C)/2] 6,18,000 6,42,000 6,52,500 6,59,250
(E) Return on Equity (D × 14%) 86,520 89,880 91,350 92,295
Space to write important points for revision

2018 - Dec [3] (b) From the following information calculate return on equity
as per Regulation 21 of the Central Electricity Regulatory Commission
(Terms and Conditions of Tariff) Regulation 2004:
(i) Date of commercial operation of COD = 01.04.2014
(ii) Approved opening capital cost as on 01.04.2014 = ` 30,00,000
(iii) Details of allowed additional capital expenditure:
Year 1 2 3 4
Additional Capital 2,00,000 60,000 40,000 20,000
Expenditure (`)
(3 marks)

Table Showing Marks of Compulsory Questions

Year 13 14 14 15 15 16 16 17 17 18
D J D J D J D J D J
Practical 2
Total 2
 4C ACCOUNTS OF INSURANCE
COMPANY
THIS CHAPTER INCLUDES
 Types of Policies  IRDA Regulation
 Principles of Insurance  Books of Accounts
 Life & Non-Life Insurance  Financial Statements
 Important Provisions of - The  General Insurance
Insurance Act 1938
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions

Legend
Objective Short Notes Distinguish Descriptive Practical

For detailed analysis Login at www.scannerclasses.com

for registration and password see first page of this book.

12.215
 12.216 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. Introduction Several people exposed to a particular type of
risk contribute small amounts called premiums to
an insurance fund from which the unfortunates
who actually suffer the risk are compensated.
Insurance business is essentially a way of
averaging the risks.
2. Types o f Depending on the type of risk, there are several
Policies types of insurance policies.
Risks of fire are covered by fire policies.
Marine risks of goods, vessels and freights of
goods are covered by marine insurance
policies.
Losses of theft are covered by Burglary
insurance.
3. Principles of (i) Principle of indemnity: Insurance is a
Insurance contract of indemnity. The insurer is called
indemnifier and the insured is the
indemnified. In a contract of indemnity,
only those who suffer loss are
compensated to the extent of actual loss
suffered by them. One cannot make profit
by insuring his risks.
(ii) Principle of uberrimae fidei: Under
ordinary law of contract there is no positive
duty to tell the whole truth in relation to the
subject-matter of the contract.
 [Chapter  4C] Accounts of Insurance Company O 12.217

4. Books required 1. The registrar of policies. This book contains

to be the following particulars in respect of each
maintained by policy issued:
Insurance (a) The name and address of the
Companies policyholder;
(b) The date when the policy was effected;
and
(c) A record of any assignment of the policy.
2. The register of claims. This book should
contain the following particulars in respect of
each claim:
(a) The date of claim;
(b) The name and address of the claimant;
(c) The date on which the claim was
discharged; and
(d) In the case of a claim which is rejected,
the date of rejection and the ground for
rejection.
3. The register of licensed insurance agents.
This book should contain the following
particulars in respect of each agent:
(a) Name and address of every insurance
agent appointed;
(b) The date of appointment; and
(c) The date on which appointment ceased,
if any.
5. Annuity Life insurance companies also do annuity
Business business. Annuity refers to fixed annual payment
made by the insurance company to the insured
on his attaining a specified age. The insured
deposits lump sum amount by way of
consideration for the annuity granted.
12.218 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

6. Surrender In the case of life policy, the policy normally has

Value value only when it matures. But to facilitate the
promotion of business, insurance companies
assign value to the policy on the basis of the
premiums paid. Insurance companies will be
prepared to pay such value on the surrender of
the policy by a needy policy holder desiring to
realize the policy.
7. Paid-up Policy A policy holder, who has difficulty in paying the
premium, may be allowed an option to get the
policy paid-up. In such a case, the policyholder is
relieved from the obligation of paying off the rest
of premium, but he will not get the full value of
policy which is calculated as follows:

8. Re-insurance Re-insurance means the transfer of a part of risk

by the insurer. This is particularly done when the
amount of insurance is very high and when it is
very difficult to bear the entire risk by a single
insurer, a part of the risk is to be insured with
some other insurance companies.
9. Life Assurance This represents the excess of revenue receipts
Fund over revenue expenditure relating to life
business. The fund is available to meet the
aggregate liability on all policies outstanding.
Revenue Account is prepared every year to
ascertain the balance of life insurance fund at the
end of the year.
 [Chapter  4C] Accounts of Insurance Company O 12.219

SHORT NOTES

2008 - Dec [8] Write note on :

(a) Re-insurance (3 marks)
Answer :
Re-insurance
If an insurer finds that a particular risk is too heavy for his capacity to bear,
he may re-insure a part of the risk with another insurer. Such an
arrangement between two insurers is called reinsurance. The first insurer, in
that event, parts with a proportionate share of the premium with the second
insurer. On maturity of the claim, both the insurers shares the claim, in
agreed ratio.
Space to write important points for revision

2012 - June [8] Write short note on:

(a) Surrender value of policy; (5 marks)
Answer :
In the case of life policy, the policy normally has value only when it matures.
But to facilitate promotion of business insurance companies assign value to
the policy on the basis of the premium paid. Insurance companies will be
prepared to pay such value on the surrender of the policy by a needy policy
holder desiring to realise the policy. Therefore the value is referred to as
‘surrender value’. Surrender value is similar to claims paid. Thus surrender
value is the amount the policy holder will get from the life insurance company
if he decides to exit the policy before maturity.
Space to write important points for revision

2013 - June [8] Write Short Note :

(c) Commission on Reinsurance ceded/accepted;
(5 marks)
 12.220 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer :
When insurance company gets re-insurance business if has to pay
commission to some other companies. This commission is called
“Commission on Reinsurance accepted” and is shown as an expenses in the
revenue account. When an insurance company passed on a part of business
to some other companies then the company (which gives business) gets
commission from the company to whom such business is given. This
commission is called “Commission on reinsurance Ceded” and is an income
to the company surrendering the business. It appears as an income in the
Revenue account.
Space to write important points for revision

2018 - Dec [5] Write short note on :

(b) Re-insurance (4 marks)

DISTINGUISH BETWEEN

2018 - June [5] (c) Distinguish between Life and Non-Life Insurance.
(4 marks)
Answer:
There are certain basic differences between life policies and other
types of policies. These are listed below:
(i) Human life cannot be valued exactly. Therefore each insured is
permitted to insure his life for a specified sum, depending on his
capacity to pay premiums. This is also one form of investment and the
policy amount depends on his investment decision. In the event of the
policy maturing, the insurer must pay the policy amount, as actual loss
cannot be determined. This is not the case with other policies. Other
policies are contracts of indemnity. Therefore, notwithstanding the
amount for which the policy is taken, the insurer would pay (reimburse)
only the actual loss suffered or the liability incurred.
 [Chapter  4C] Accounts of Insurance Company O 12.221

(ii) Life insurance contracts are long-term contracts. Once a policy is

taken, premiums have to be paid for number of years till maturity and
the policy amount is paid on maturity. Of course, a life policy can be
surrendered after certain number of years and the insured is paid a
proportion of the premiums paid known as surrender value. In the case
of other policies, they are for a short period of one year although the
policy can be renewed year after year.
(iii) Life insurance is known also by another term 'assurance' since the
insured gets an assured sum. Other policies are known as insurance.
(iv) The determination of profit is by different methods for life and general
insurance business. In the case of life business, periodically actuaries
estimate the liability under existing policies. On that basis, a valuation
Balance Sheet is prepared to determine the profit. In the case of
general insurance business, a portion of the premium is carried
forward as a provision for unexpired liability and the balance net of
claims and expenses is taken as profit (or loss).
Space to write important points for revision

DESCRIPTIVE QUESTIONS

2008 - Dec [1] {C} (e) What is meant by Reversionary Bonus?

(3 marks)
Answer :
In the case of life policies with profits, policyholders are given the right to
participate in the profits of the business. After nationalization policyholders
are given 95% of profits of LIC by way of bonus. Bonus can be paid in cash
adjusted against the future premiums due from the policyholders or it can be
paid on maturity of the policy, together with the policy amount. Bonus paid
at the end along with the policy amount is called reversionary bonus.
Space to write important points for revision
 12.222 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

PRACTICAL QUESTIONS
2009 - June [3] (a) The following balances have been extracted from the
books of Star Insurance Co. Ltd. for the year ending 31st December, 2006:

`
Amount of Life Assurance at the beginning of the year 12,56,450
Claims by death 93,584
Claims by maturity 77,136
Premia 1,68,457
Expenses of management 23,912
Commission 29,233
Consideration for annuities 8,496
Interest, dividends and rents 41,969
Income-tax paid on profit 2,448
Surrenders 17,414
Annuities 23,536
Bonus paid in cash 7,560
Bonus paid in reduction of premium 2,800
Preliminary expenses 480
Claims admitted but not paid at the end of the year 64,027
Annuities due but not paid 17,904
Capital paid up 4,80,000
Government Securities 13,52,712
Sundry Assets 4,54,488
Investment Reserve 48,000
Prepare the Revenue Account and the Balance Sheet after taking into
account the following :
`
(i) Claims covered under re- insurance 8,000
(ii) Further claims intimated 6,400
(iii) Further bonus utilised in reduction of premium 1,200
 [Chapter  4C] Accounts of Insurance Company O 12.223

(iv) Interest accrued 12,320

(v) Premium outstanding 5,920
(vi) Bonus surrendered 4,000
(10 marks)
Answer:
Star Insurance Co. Ltd.
Revenue Account for the year ending 31st December, 2006
Particulars ` Particulars `
Claims less reinsurance Balance of Fund at the 12,56,450
beginning of the year
By death 93,584 Premia 1,68,457
Add further Claim Add Outstanding 5,920 1,74,377
Intimated 6,400 Consideration for.
99,984 Annuities granted
Interest, dividends
By maturity 77,136 and rents 41,969
1,77,120 Add accrued int. 12,320 54,289
Less: Reinsurance 8,000 1,69,120 Fines for getting lapsed NIL
Surrender’s 17,414 Policies revised NIL
Bonus surrendered 4,000 21,414 Other Receipts NIL
Annuities 23,536
Bonus (paid in cash) 7,560
Bonus in consideration of NIL
premium Expenses of
management
Paid 23,912
Commission 29,233 53,145
Income-tax on profits 2,448
Dividend and Other items NIL
Balance of Fund at the end 12,16,389
of the year to be transferred
to Balance Sheet
14,93,612 14,93,612
 12.224 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Star Insurance Co. Ltd

Balance Sheet as at 31st December, 2006
Liabilities ` Assets `
Share Capital Loans NIL
Issued and Paid up 4,80,000 Investments:
Reserve and Profit and Government Securities 13,52,712
Loss
balances: Accrued Interests 12,320
Investment Reserve 48,000
Life Assurance Fund 12,16,389 Outstanding Premium 5,920
Amount due to Other Less: Bonus Surrendered 1,200 4,720
Persons Nil Outstanding Dividends, ent, etc NIL
Other Liabilities Amount due from Other
Insurers:
Outstanding claims64,027 Reinsurance claims 8,000
Claims intimated 6,400 Sundry Debtors & Bills Nil
Annuities due but receivable
Not paid 17,904 88,331 Sundry Assets 4,54,488
Other Items, if any:
Preliminary expenses 480
18,32,720 18,32,720
Space to write important points for revision

2010 - Dec [6] (a) Credential General Insurance Co. supplies you the
following information. You are asked to show the amount of claim as it would
appear in the Revenue Account for the year ended 31.3.2010.
Direct Indirect
business business
` `
Claims paid during the year: 90,10,000 12,40,000
Claims payable - 1.4.09 15,08,500 1,55,000
31.3.10 17,25,000 65,500
 [Chapter  4C] Accounts of Insurance Company O 12.225

Claims received : — 3,60,000

Claims receivable - 1.04.09 — 95,000
31.3.10 — 1,90,500
Expenses of the management - 4,10,000
(included ` 61,500 as Surveyor’s
fees and ` 78,300 as legal expenses for
settlement of claims) (10 marks)
Answer:
Credential General Insurance Co.
(Abstract showing the amount of claims)
Claim less insurance (fig in `)
Paid during the year 1,00,23,800
Add: Outstanding claims at the end of 16,00,000
the year
1,16,23,800
Less: Outstanding claims at the beginning 15,68,500 1,00,55,300
of the year
Working:
1. Claims paid during the year:
Direct business 90,10,000
Re-Insurance 12,40,000 1,02,50,000
Add: Surveyor’s fees 61,500
Legal expenses 72,300 1,33,800
1,03,83,800
Less: Claims received from Re- 3,60,000
insurance
1,00,23,800
2. Claims outstanding on 31-3-10:
Direct business 17,25,000
Re-insurance 65,500 17,90,500
Less: Claims receivable from Re- 1,90,500
insurance
16,00,000
 12.226 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

3. Claims outstanding on 1.4.09:

Direct business 15,08,500
Re-insurance 1,55,000 16,63,500
Less: Claims receivable from Re- 95,000
insurance
15,68,500
Space to write important points for revision

2011 - June [7] (b) The Revenue Account of Sunlife Insurance Company
shows the Life Insurance Fund on 31.3.2011 at ` 75,20,400 before taking
into account the following items :
(i) Claim covered under re-insurance - ` 17,000
(ii) Bonus utilized in reduction of life insurance premium - ` 6,300
(iii) Interest accrued on securities - ` 13,240
(iv) Outstanding premium - ` 10,180
(v) Claim intimated but not admitted - ` 32,400
Calculate the assurance fund considering the above omissions. (5 marks)
Answer:
(b) `
Balance of Fund as on 31.03.2011 75,20,400
Add Bonus utilized in reduction `
of premium 6,300
Interest on securities 13,240
Premium outstanding 10,180 29,720
75,50,120
Less: Claims outstanding 32,400
Less: Covered under re-ins. 17,000 15,400
Add, bonus in reduction of premium 6,300 21,700
Balance of life Assurance Fund 75,28,420
Space to write important points for revision
 [Chapter  4C] Accounts of Insurance Company O 12.227

2012 - June [7] (b) The Life Insurance Fund of Bharat Life Insurance Co.
Ltd. was ` 50 lakhs on 31.03.2012. Its acturial valuation on 31.03.2012
disclosed a net liability of ` 42,50 lakhs. An interim bonus of ` 80,000 was
paid to the policy holders during previous two years. It is now proposes to
carry forward ` 1,50,000 and to divide the balance between policy holders
and the shareholders.
Show the (a) Valuation Balance Sheet; (b) Net profit for the two-year period;
and (c) Distribution of profits. (5 marks)
Answer :
Valuation Balance Sheet as on 31.3.2012
Particulars ` Assets `
Net liabilities 4,250 Life Insurance Fund 5,000
Net profit 750
5,000 5,000
Net profits for two year period.
Profit as per valuation balance sheet 7,50,000
Add: Interim bonus paid 80,000
Net Profit 8,30,000
Distribution of profits:
Net profits 8,30,000
Less: Amount proposed for carry forward 1,50,000
6,80,000
Share of policy holders - 95% of 6,80,000 = 6,46,000
Less: Interim bonus 80,000
Amount due to policy holders 5,66,000
Share of shareholders (5% of 6,80,000) = 34,000
Space to write important points for revision

2012 - Dec [5] (b) The Revenue Account of a Life Insurance Company
shows the Life Assurance Fund on 31.03.2012 at ` 75,00,000 before taking
into account the following items:
 12.228 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

A. Claims covered Under Re-insurance ` 3,15,000

B. Income Tax on the above ` 35,000
C. Bonus in reduction of Premium ` 4,25,000
D. Dividend from Investment ` 3,20,000
E. Claims intimated but not yet admitted ` 8,15,000
F. Outstanding Premium ` 25,000
Compute the Life Insurance Fund on 31.03.2012 after taking into account the
above omission. (5 marks)
Answer :
Statement showing Life Insurance Fund as on 31.03.2012
Particulars Amount Amount
(`) (`)
Balance of Fund on 31.03.2012 75,00,000
Add: Bonus Utilised in reduction on Premium 4,25,000
Dividend from Investment 3,20,000
25,000 7,70,000
82,70,000
Premium Outstanding
Less: Claims Intimated but not admitted 8,15,000
Claims covered under Re-insurance 3,15,000 5,00,000
Income Tax 35,000
Bonus Utilised in reduction on Premium 4,25,00 9,60,000
Balance of Life Insurance Fund 73,10,000
Space to write important points for revision

2013 - June [7] (a) BISLA Life Insurance Company furnishes you the
following information:
Life Insurance fund on 31.03.2012 1,40,00,000
Net Liability on 31.03.2012 as per Actuarial Valuation 1,20,00,000
Interim Bonus paid to Policy holders during
Intervaluation Period 2,50,000
 [Chapter  4C] Accounts of Insurance Company O 12.229

You are required to prepare:

(a) Valuation Balance Sheet
(b) Statement of Net Profit for the Valuation Period. (3 marks)
Answer :
Bisla Life Insurance Co.
Valuation Balance Sheet as on 31.03.2012
Particulars ` Particulars `
To Net Liability as per 1,20,00,000 By Life Insurance Fund 1,40,00,000
Actuarial valuation
To Surplus 20,00,000
1,40,00,000 1,40,00,000
Statement Showing Net Profit for the valuation period
Particulars `
Surplus as per Valuation Balance Sheet 20,00,000
Add: Interim Bonus Paid 2,50,000
Net Profit 22,50,000
Space to write important points for revision

2013 - Dec [1] {C} Answer the following questions (give workings wherever
required):
(v) Fact General Insurance Company informs you that the claims
outstanding on 01.04.2012 was ` 5,20,000 and claims paid during the
financial year 2012-13 was ` 64,50,000. The claims outstanding as on
31.03.2013 was ` 5,60,000 and claims recoverable from re-insures
being ` 1,90,000. Calculate the amount of claims incurred which is to
be charged to its revenue account. (2 marks) [CMAIG - I]
Answer:
Fact General Insurance Co. Ltd.
Claims incurred (Net)
`
Claims paid 64,50,000
Add: Claims outstanding at the end of the year 5,60,000
70,10,000
 12.230 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Less: Claims outstanding at the beginning of the year 5,20,000

64,90,000
Less: Recoverable from re-insures as on 31.03.2013 1,90,000
63,00,000
Space to write important points for revision

2013 - Dec [6] (c) The Revenue Account of a life insurance company shows
the life assurance fund on 31st March, 2013 at ` 60,20,000 before taking into
account the following items:
(i) Claims covered under re-insurance ` 1,20,000.
(ii) Bonus utilized in reduction of life insurance premium ` 45,000.
(iii) Interest accrued on securities ` 82,600.
(iv) Outstanding premium ` 60,000.
(v) Claims intimated but not admitted ` 3,00,000.
What is the life assurance fund after taking into account the above
omissions? (4 marks) [CMAIG - I]
Answer:
Statement showing Life Assurance Fund as at 31st March, 2013
Particulars Amount Amount Amount
(`) (`) (`)
Balance of fund as on 31st March, 2013 60,20,000
Add: Interest on securities 82,600
Premium outstanding 60,000 1,42,600
61,62,600
Less: Claim outstanding 3,00,000
Less: Covered under Re-insurance 1,20,000 1,80,000
Bonus in reduction of Premium 45,000 2,25,000
Balance of (correct) Life Assurance 59,37,600
Fund
 [Chapter  4C] Accounts of Insurance Company O 12.231

Note: Bonus is nothing but the share of profit which is payable by the
insurance company to the policyholders and Bonus in reduction of premium
is applied to reduce further premium.
Space to write important points for revision

2014 - June [8] (b) A Life Insurance Company gets its valuation made once
in every two years. Its life assurance fund on 31st Dec. 2012 stood at
` 55,55,000 before providing for ` 55,000 being the shareholders’ dividend
for 2012. Its actuarial valuation on 31st Dec. 2012 disclose a net liability of
` 35,00,000. An interim bonus of ` 1,00,000 was paid to the policyholders
during the previous two years.
You are required to show :
(i) Valuation Balance Sheet.
(ii) New Profit for the period.
(iii) The Distribution of the surplus. (8 marks) [CMAIG - I]
Answer:
(i) Preparation of Valuation Balance Sheet:
Particulars Amount `
Life Assurance Fund as on 31.12.2012 55,55,000
Less: Dividend for the year 2012 55,000
55,00,000
..................................... Co. Ltd.
Valuation Balance Sheet as at 31st December, 2012
Liabilities ` Assets `
Net Liabilities a per 35,00,000 Life Assurance Fund
Actuarial Valuation as at as per Balance Sheet 55,00,000
31.12.2012 Surplus 20,00,000
55,00,000 55,00,000
(ii) Net Profit for the Period:
Particulars Amount `
Surplus (as per Valuation Balance Sheet) 20,00,000
Add: Interim bonus for the period 1,00,000
Therefore, Net profit for the period 21,00,000
 12.232 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(iii) Distribution of the surplus:

Particulars Amount `
Net Profit (Calculated as above) 21,00,000
Policyholders’ shares 95% (i.e., ` 21,00,000 × 95 / 100) 19,95,000
Less: Payment of Interim Bonus 1,00,000
Reversionary Bonus to be declared 18,95,000
Shareholders’ share only @ 5% (i.e., ` 21,00,000 × 5 / 100) 1,05,000
Space to write important points for revision

2014 - Dec [1] Answer the following question (Give workings):

(i) Human Life Insurance Company provides the following information:
Life insurance Fund on 31st March, 2014 ` 155 Lakhs
st
Net liability on 31 March as per actuarial valuation ` 132 Lakhs
Interim Bonus paid to Policy holders during inter
valuation period ` 11 Lakhs
Prepare Valuation Balance Sheet. (2 marks) [CMAIG - I]
Answer:
Valuation Balance Sheet (` in lakhs)

Particulars Amount Particulars Amount

st
To Net liability on 31 March By Life Insurance Fund 155
as per actuarial valuation 132
To Surplus 23
155 155
Space to write important points for revision

2014 - Dec [7] (b) Following information are provided by the Rashtriya
Beema Company for the year ended 31st March, 2014:
(i) On 1st April, 2013. The unexpired risks reserve was in respect of
marine insurance business ` 52.50 crores; in respect of fire insurance
business ` 55 crores and in respect of miscellaneous insurance
business ` 12.50 crores.
 [Chapter  4C] Accounts of Insurance Company O 12.233

(ii) It is the practice of the company to create reserve at 100% of net

premium income in respect of marine insurance policies and at 50%
of net premium in respect of fire and miscellaneous insurance policies.
(iii) During the year 2013-2014 the following business was conducted:
(` in crores)
Particulars Marine Fire Miscellaneous
Premium collected from: ` ` `
1. Insured in respect of policies 57 125 30
issued
2. Other insurance companies in
respect of risks undertaken 17.5 12.5 10
Premium paid/payable to other
insurance companies on business
ceded 21.50 16.50 8.50
You are required:
(i) Pass necessary journal entries relating to unexpired risks reserve.
(ii) Show unexpired risks reserve account (in columnar form) for the year
ended 31st March, 2014. (8 marks) [CMAIG - I]
Answer:
Books of Rashtriya Beema Company
Journal
Date Particulars (` in crores) (` in crores)
31.03.14 Marine Revenue A/c Dr. 0.5
To Unexpired Risks Reserve A/c 0.5
[Provision made for unexpired risks
reserve on marine business is (53-
52.50)]
31.03.14 Fire Revenue A/c Dr. 5.5
To Unexpired Risks Reserve A/c 5.5
[Unexpired risks reserve made for fire
business is (60.5-55)]
 12.234 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

31.03.14 Miscellaneous Revenue A/c 3.25

To Unexpired Risks Reserve A/c 3.25
[Unexpired Risks Reserve made for
Miscellaneous business is (15.75-
12.50)]
Unexpired Risk Reserve A/c
Dr. Cr.
Date Particulars Marine Fire Misc. Date Particulars Marine Fire Misc.
31.3.14 To Revenue A/c 52.5 55.00 12.50 1.4.13 By Balance b/d 52.5 55.00 12.50
31.3.14 To Balance c/d 53.0 60.50 15.75 31.3.14 By Revenue A/c 53.0 60.50 15.75
105.5 115.50 28.25 105.5 115.50 28.25
Space to write important points for revision

2015 - June [1] Answer the question:

(i) GRIZA LIFE INSURANCE CO. LTD. furnishes the following information:
Life Insurance fund as on 31.03.2014 ` 26,56,000
Net Liability on 31.3.2014 as per actuarial valuation ` 10,34,000
Interim Bonus paid to Policy holders during intervaluation
period ` 1,23,800
Amount proposed to carry forward amount of ` 2,55,000
What is the amount of share of Shareholders? (2 marks) [CMAIG - I]
Answer:
In the Books of Griza Life Insurance Co. Ltd.
Valuation Balance Sheet as on 31st March, 2014
Particulars Amount ` Particulars Amount `
To Net liability 10,34,000 By Life Assurance Fund 26,56,000
To Net Profit 16,22,000
26,56,000 26,56,000
Net profit as per Valuation Balance Sheet = 16,22,000
Add: Interim Bonus paid = 1,23,800
Net Profit = 17,45,800
Distribution of the profits
 [Chapter  4C] Accounts of Insurance Company O 12.235

Net Profit = 17,45,800

Less: Amount proposed to be carried forward = 2,55,000
Balance = 14,90,800
Share of policyholders (95% of 14,90,800) = 14,16,260
Less: Interim bonus paid = 1,23,800
Amount due to policyholders = 12,92,460
Share of Shareholders (5% of 14,90,800) = 74,540
Space to write important points for revision

2015 - June [7] Answer the question:

(b) LONG LIFE ASSURANCE CO. LTD. furnishes you the following
information:
`
Life Assurance Fund on 31.03.2015 90,00,000
The interim bonus paid during the previous two-years
period to Policy holders 1,50,000
Net Liability as per periodical Actuarial Valuation 75,00,000
Surplus brought forward from the previous valuation 9,00,000
The directors of the Company proposed to carry forward ` 10,00,000
and to divide the balance between the Policy holders and Shareholders.
You are required to show:
(i) The valuation Balance Sheet as on 31.3.2015
(ii) The Net profit for the two years (valuation period)
(iii) The distribution of the surplus (Profit)
(2 + 3 + 3 = 8 marks) [CMAIG - I]
Answer:
LONG LIFE ASSURANCE CO. LTD.
Valuation Balance Sheet as at March 31, 2015
Particulars Amount ` Particulars Amount `
Net liability as per actuarial 75,00,000 Life Assurance 90,00,000
valuation Fund
Surplus (Balancing Figure) 15,00,000
90,00,000 90,00,000
 12.236 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Statement showing net profit for the valuation period

Net profit for valuation period: (As per valuation Balance Sheet)
A. Surplus as per valuation balance sheet 15,00,000
B. Add: Interim Bonus distributed 1,50,000
C. Less: Surplus in the beginning (9,00,000)
D. Net profit for the valuation period 7,50,000
Distribution of Surplus
A. Total surplus 16,50,000
B. Less: Surplus to be carried forward 10,00,000
6,50,000
C. Shareholders (5% of ` 6,50,000) 32,500
D. Policy holders (95% of ` 6,50,000) 6,17,500
E. Less: Interim bonus already distributed 1,50,000
F. Bonus still due to Policy holders 4,67,500
Space to write important points for revision

2015 - Dec [1] Answer the following question (Give workings):

(j) The Revenue Account of HEAVEN LIFE INSURANCE LTD. shows the
Life Assurance Fund on 31st March, 2015 at ` 42,08,400 before taking
into account the following items:
`
Claims covered under re-insurance 12,000
Claims intimated but not admitted 22,050
Premium Outstanding 8,110
What is the Balance of Life Assurance Fund? (2 marks) [CMAIG - I]
Answer:
Balance of funds as on 31.3.2015 = 42,08,400
Add:
Premium o/s = 8,110
Less: 42,16,510
 [Chapter  4C] Accounts of Insurance Company O 12.237

Claims o/s 22,050

Claims covered under re-insurance 12,000 34,050
Balance of life assurance fund 41,82,460
Space to write important points for revision

2015 - Dec [7] Answer the question.

(a) The following details are extracted from the Books of HEAVEN FIRE
INSURANCE CO. LTD. for the year ended March 31, 2015.
(Amount in ` Lakh)
Particulars
Claims Paid 440
Legal expenses regarding claim 9
Premiums received 1,200
Re-insurance Premiums paid 90
Commission 250
Expenses of Management 150
Provision against unexpired risk on 1st April, 2014 480
Claims unpaid on 1st April, 2014 40
Claims unpaid on 31.03.2015 70
Create Reserve for Unexpired Risk @ 40%
Required:
Prepare the Revenue Account as per IRDA Regulations for the year ended
March 31, 2015. (8 marks) [CMAIG - I]
Answer:
Heaven Fire Insurance Co. Ltd.
Revenue A/c for the year ending 31st March, 2015.
Particulars Sed. No `
Premium received (Net) 1 1,110
change in provision for unexpired 36
Income from Investments risk 1,146
Total (A)
 12.238 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Claim incurred 2 479

Commission 250
Management expenses 150
Total (B) 879
Operating loss (A-B) 267

Schedule - 1 Premium Earned

Premium earned 1,200
Less: Premium ended on reinsurance 90
Net premium 1,110

Schedule - 2 Claims incurred

Claims paid 440
Add: O/S claims as on 31.3.15 70
Less: O/S claims as on 31.3.14 (40)
470
Add: Legal expenses regarding claim 9
479
Space to write important points for revision

2016 - June [1] {C} (d) Answer the following question.

(ii) SUKHAM LIFE INSURANCE CO. furnishes the following information:
(` in Lakhs)
Particulars Amount (`)
Life Insurance fund on 31.03.2016 650
Net liability on 31.03.2016 as per actuarial valuation 510
Interim bonus paid to policy holders during inter-
valuation period 35
You are required to prepare the valuation Balance Sheet as on
31.03.2016. (2 marks) [CMAIG - I]
 [Chapter  4C] Accounts of Insurance Company O 12.239

Answer :
Sukham Life Insurance Co.:
Valuation Balance Sheet as on 31.3.2016
Liabilities Amount Assets Amount
To Net Liability as per By Life Insurance fund 650
actuarial Valuation 510
To Surplus 140
650 650
Space to write important points for revision

2016 - June [8] (b) SUN LIFE INSURANCE CO. LTD. provides the following
information:
(Amount in ` Lakh)
st
Balance of Life Assurance Fund as on 1 April, 2015 502
Interim bonus paid in the valuation period 80
Balance of Revenue Amount for the year ended
31st March 2016 700
Net liability as per Actuarial Valuation as on
31st March 2016 490
You are required to prepare:
(i) Valuation Balance Sheet and
(ii) Profit Distribution Statement-for the year ended 31st March, 2016.
(3 + 3 = 6 marks) [CMAIG - I]
Answer:
In the Books of Sun Life Insurance Co. Ltd.
(i) Valuation Balance Sheet as on 31st March, 2016
(` in lakhs)
Liabilities Amount ` Assets Amount `
To Net liability 490 By Life Assurance Fund 700
To Net Profit 210
700 700
 12.240 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(ii) Profit Distribution Statement:

Profit as per Valuation Balance Sheet = 210
Add: Interim Bonus = 80
Net Profit = 290
Distribution:
Net Profit = 290
Policy Shareholder’s Shares @ 95% = 275.5
Less: Interim bonus = 80
Amount due to policyholders = 195.5
Shareholders Share @ 5% of 290 lakhs 14.50
Space to write important points for revision

Repeatedly Asked Questions

No. Question Frequency
1 Write short notes Re-insurance.
08 - Dec [8] (a), 18 - Dec [5] (b) 2 Times

Table Showing Marks of Compulsory Questions

Year 14 14 15 15 16 16 17 17 18 18
J D J D J D J D J D
Practical 2
Total 2
 5 ACCOUNTING STANDARDS
THIS CHAPTER INCLUDES
• AS - 11; • AS - 17;
• AS - 12; • AS - 18;
• AS - 15; • AS - 19.
• AS - 16;
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions

Legend
Objective Short Notes Distinguish Descriptive Practical

For detailed analysis Login at www.scannerclasses.com

for registration and password see first page of this book.

12.241
 12.242 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. AS 11: The statement applies mandatorily in respect
Accounting for of:
the effects of (a) Accounting for transaction in foreign
changes in foreign currencies
exchange rates (b) Translating the financial statements of
foreign branches for inclusion in the
financial statements of the reporting
enterprise.
2. AS 12: Government refers to Union/State, Govt.
Accounting for Agencies and similar bodies - Local, National
government grants or International. Grants also include
subsidies, cash incentive, and duty drawback
either in cash or kind/benefits to an enterprise
on recognition of compliance in the past or
future compliance with condition attached to
it.
3. AS 15: The statement applies to benefit usually
Accounting for c o m p r i s i n g o f P r o v i d e n t F u n d ,
employee benefits Superannuation/ Pension Fund, Gratuity,
Leave encashment or retirement, Post
retirement health and welfare schemes and
other benefits provided by an employer to
employees either in pursuance of legal
requirement or otherwise, but does not
extend to employers‘ obligation which cannot
be reasonably estimated (e.g. ex-gratia
ad-hoc on retirement).
 [Chapter  5] Accounting Standards O 12.243

4. AS 16: Borrowing costs are interests and other costs

Borrowing costs incurred by an enterprise in connection with
the borrowing of funds.
A qualifying asset is an asset that necessarily
takes substantial period of time to get ready
for its intended use or sale.
5. AS 17: In India, disclosures of disaggregated
Segment reporting information are required as per Schedule III
to the Companies Act, 2013. A
manufacturing company is required to
disclose value and quantities of opening and
closing stock of goods produced by each
class of goods. Also it has to disclose
quantitative information about licensed and
installed capacities and actual production by
each class of goods.
6. AS 18: Generally business transactions between
Accounting related parties lose the feature and character
standard related of the arms length transactions. Related party
party disclosures relationship affects the volume and decision
of business of one enterprise for the benefit
of the other enterprise one. Hence, it is
necessary to disclose the related transaction
for proper understanding of financial
performance and financial position of an
enterprise.
Related Party
A related party is essentially any party that
controls or can significantly influence the
management or operating policies of the
company during the reporting period.
12.244 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

7. AS 19: Lease is an arrangement by which the

Accounting for “Lessor” gives the right to use an asset for
leases given period of time to the “Lessee” on rent.
It involves two parties, a Lessor and a Lessee
and an asset which is to be leased. The
Lessor, who owns the asset, agrees to allow
to the Lessee to use it for a specified period
of time in return for periodic rent payments.
Types of lease
(i) Finance Lease: It is a lease, which
transfers substantially all the risks and
rewards incidental to ownership of an
asset to the Lessee by the Lessor but not
the legal ownership. In following
situations, the lease transactions are
called Finance Lease.
(ii) Operating Lease: It is a lease which
does not transfer substantially all the risk
and reward incidental to ownership.
Applicability
The Accounting Standard is not applicable to
following types of lease:
 Lease agreement to explore natural
resources such as oil, gas, timber, metal
and other mineral rights.
 Licensing agreements for motion picture
film, video recording, plays, manuscripts,
patents and other rights.
 Lease agreement to use land.
 [Chapter  5] Accounting Standards O 12.245

SHORT NOTES
2017 - June [5] Write short note:
(a) Recognition of Govt. grants related to specific fixed assets. (4 marks)
Answer
Recognition of Govt. grants related to specific fixed assets:
Grants received specifically for fixed asset is disclosed in the financial
statement either
(i) by way of deduction from the gross block of the asset concerned, thus
grant is recognized in Profit and Loss Account through reduced
depreciation (in case of funding of specific asset Cost entirely, the
asset should be stated at a nominal value in Balance Sheet); or
(ii) the grant treated as deferred revenue income and charged off on a
systematic and rational basis over the useful life of the asset, until
appropriated disclosed as —Deferred Govt. grant under Reserves and
Surplus in the Balance Sheet (grants relating to depreciable assets
should be credited to Capital Reserve and suitably credited to Profit
and Loss Account to offset the cost charged to income).
Space to write important points for revision

2017 - Dec [5] Write short note:

(a) Operating Lease and Finance Lease (4 marks)
Answer:
Operating Lease and Finance Lease
A lease is an agreement whereby the lessor conveys to the lessee in return
for a payment or series of payments the right to use an asset for an agreed
period of time.
A finance lease is a lease that transfers substantially all the risks and
rewards incidental to ownership of an asset. Title may or may not eventually
be transferred.
An operating lease is a lease other than a finance lease.
 12.246 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

As per AS 19, a lease is classified as a finance lease if it transfers

substantially all the risks and rewards incidental to ownership. A lease is
classified as an operating lease if it does not transfer substantially all the
risks and rewards incidental to ownership.
Space to write important points for revision

2018 - June [5] Write short notes:

(a) Geographical Segment as per AS-17 (4 marks)
Answer:
A geographical segment is a distinguishable component of an enterprise that
is engaged in providing products or services within a particular economic
environment and that is subject to risk and returns that are different from
those of components operating in other economic environments. Factors that
should be considered in identifying geographical segments include:
(i) Similarity of economic and political conditions;
(ii) Relationships between operations in different geographical areas;
(iii) Proximity of operations;
(iv) Special risks associated with operations in a particular area;
(v) Exchange control regulations; and
(vi) The underlying currency risks.
Space to write important points for revision

2018 - Dec [5] Write short note:

(a) Related Party as per AS 18 (4 marks)

DESCRIPTIVE QUESTIONS

2009 - Dec [3] (b) What is sale & lease back? Enumerate accounting
treatment of sale & lease back under AS 19. (5 marks)
Answer :
A sale and lease back transaction includes the sale of an asset by vendor
and leasing of the same asset back to the vender. The seller gets the right
 [Chapter  5] Accounting Standards O 12.247

to use the same asset as also increasing its liquidity position. It is like eating
the cake and having it too. The benefit of depreciation is available to the
buyer.
Accounting Treatment:
1. If lease back is Any profit or loss of sale proceeds over the
financial lease carrying amount should not be immediately
recognized as profit or loss in the financial
statement of seller lessee.
It should be deferred and amortised over lease
term in proportion to the depreciation of leased
assets.
2. If lease back is Any profit or loss is recognized immediately when
operating lease sale price is equal to fair value.
If sale price is ‘below’ fair value:
Profit - recognize profit immediately.
Loss - recognize loss immediately if not compen-
sated by future lease payment.
Loss - defer and amortise loss if loss is compen-
sated by future lease payment.
Space to write important points for revision

2011 - June [6] (b) Lakshmi Bank has followed the policies for retirement
benefits as under:
(i) Contribution to pension fund is made based on actuarial valuation at
the year end in respect of employees who have opted for pension
scheme.
(ii) Contribution to the gratuity fund is made based on actuarial valuation
at the year end.
(iii) Leave encashment is accounted for on “PAY-AS-YOU-GO” method.
Comment whether the policy followed by Bank in the above cases are in
accordance with AS-15. (3 marks)
 12.248 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer :
(i) As the contribution to Pension Fund is made on actuarial basis every
year, therefore, the policy is as per AS15.
(ii) As the contribution is being made on annual basis to gratuity fund on
actuarial basis, the policy is in accordance with AS - 15.
(iii) As regard leave encashment, which is accounted for on PAY-AS-YOU-
GO basis, it is not in accordance with AS - 15. It should be accounted
for on actual basis.
Space to write important points for revision

2012 - Dec [2] (b) What do you mean by “Fellow Subsidiary” in the context
of Related Party Disclosure (As per AS-18)? (2 marks) [CMAFG - IV]
Meaning:
(i) As per AS-18, a Company is considered to be a Fellow Subsidiary of
another company, if both the companies are subsidiaries of the same
holding company.
(ii) Say, A Ltd. is holding 60 % shares of B Ltd. and A Ltd. also holds 55 %
shares in C Ltd. Then B Ltd. and C Ltd. are the subsidiaries of A Ltd.,
i.e., A Ltd. is the holding company of both B Ltd. and C Ltd. In this given
Example, B Ltd. and C Ltd., are “Fellow Subsidiaries” of each other.
Space to write important points for revision

2013 - Dec [1] {C} Answer the following:

(a) State the disclosure requirements under AS-12. (2 marks)
Answer:
Disclosure under AS-12
(a) The accounting policy adopted for Government Grants including, method
of presentation in the financial statement.
(b) The nature and extent of Govt. grants recognized in the financial
statements, including grants of non-monetary assets given at a
concessional rate or free of cost.
Space to write important points for revision
 [Chapter  5] Accounting Standards O 12.249

2013 - Dec [2] (a) (i) What are the disclosure requirements for an enterprise
as per AS-11? (4 marks)
Answer:
Disclosure under AS -11:
An enterprise should disclose:
(i) The amount of exchange difference included in the net profit or loss for
the period.
(ii) The amount of exchange difference adjusted in the carrying amount
of fixed assets during the accounting period.
(iii) The amount of exchange difference in respect of forward contracts to
be recognized in the profit/loss for one or more subsequent accounting
period.
(iv) Foreign currency risk management policy.
Space to write important points for revision

2014 - June [1] {C} Answer the following:

(b) State the types of lease to which AS-19 are not applicable. (2 marks)
Answer:
The Accounting Standard AS-19 is not applicable to the following types
of Lease:
(i) Lease agreement to explore natural resources such as oil, gas, timber,
metal and other material rights;
(ii) Licensing agreements for motion picture film, video recording, Plays,
manuscripts, patents and other rights;
(iii) Lease agreement to use land.
Space to write important points for revision

2014 - June [2] (b) (i) State the disclosure requirements under AS-15.
(3 marks)
(ii) What are the components of pension expenses for defined benefit
pension plan? (5 marks)
 12.250 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer:
(i) Disclosure under AS-15:
(a) In view of the varying practices, adequate disclosure of method of
accounting for an understanding of the significance of such costs
to an employer.
(b) Disclosure separately made for statutory compliance or otherwise
the retirement benefit costs are treated as an element of employee
remuneration without specific disclosure.
(c) Financial statements should disclose whether actuarial valuation
is made at the end of the accounting period or earlier (in which
case the date of actuarial valuation and the method used for
accrual period if not based on actuary report).
Answer:
(ii) The components of pension expenses for defined pension plan
are:
(i) Current service cost;
(ii) Interest cost;
(iii) Actuarial gains and losses;
(iv) Past service cost;
(v) The effect of any curtailment re-settlements;
(vi) Effect of recognition of over funding (assets) of defined benefit
plan at lower of over funding amount and present value of any
economic benefit plan at lower of over funding amount and
present value of any economic benefit available in the plan or
reduction in future contribution to the plan;
(vii) Excepted return on any plan assets or any reimbursement rights.
Space to write important points for revision

2015 - Dec [2] Answer the question:

(a) (i) What are disclosure requirements under AS-11? (4 marks)
Answer:
Disclosure under AS -11: An enterprise should disclose:
(a) The amount of exchange difference included in the net profit or loss for
the period.
 [Chapter  5] Accounting Standards O 12.251

(b) The amount of exchange difference adjusted in the carrying amount of

fixed assets during the accounting period.
(c) The amount of exchange difference in respect of forward contracts to be
recognized in the profit/ loss for one or more subsequent accounting
period.
(d) Foreign currency risk management policy.
Space to write important points for revision

PRACTICAL QUESTIONS

2008 - Dec [4] (a) The following information relate to company AKG Ltd.
Exchange rate
Goods purchased on 25.02.2007 for US $ 1,00,000 ` 44.50
Exchange rate on 31.03.2007 ` 45.00
Date of actual payment 05.06.2007 ` 45.40
Required:
Calculate the loss/gain for the financial years 2006-07 and 2007-08 as
per AS-11 (2 marks)
Answer :
As per AS – 11 all foreign currency transactions are to be recorded by
applying the exchange rate at the date of transaction. So, goods purchased
on 25.02.2007 and corresponding creditor account would be recorded at the
rate of ` 44.50 = US $1, i.e at ` 44,50,000.
At the balance sheet date all monetary items should be reported, as per
AS– 11, using the rate on the date of closing the accounts. So, the amount
resulting in exchange loss of `50,000 [` 45,00,000 – ` 44,50,000] has to be
debited in Profit and Loss Account for 2006 – 07.
Further, exchange difference on settlement on 05-06-2007 on this monetary
item as a loss of `40,000 [` 45,40,000 - ` 45,00,000] will be debited in Profit
and Loss Account for the year 2007-08.
Space to write important points for revision
 12.252 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2008 - Dec [7] (b) Softex Ltd. acquired an equipment on lease from Simplex
Ltd. (Lessor) on April 1, 2008 for 3 years. Its useful life is 5 years. Both the
cost and the fair market value of the equipment are ` 6,00,000. The amount
(annual lease payment) will be paid in three instalments at end of each year.
Simplex Ltd. will get back the equipment upon termination of the lease.
However, Softex Ltd. is given an option to retain the equipment at a nominal
value at the end of the lease period. The unguaranteed residual value at the
end of 3 years is ` 80,000.
The internal rate of return (IRR) of the investment is 10%:
[PVIFA10%.3 yrs = 2.4868; PVIF10%. 3 yr. = 0.7513].
Required:
(i) State with reason whether the lease constitute a finance lease.
(3 marks)
(ii) Calculate unearned finance income keeping in view the relevant
Accounting Standard (AS. 19). (2 marks)
Answer :
(i) The IRR of the investment is 10% (given).
Investment in lease is `6,00,000.
So, from the lessor’s point of view, PV of minimum lease payment
(MLP) + unguaranteed residual value = `6,00,000.
Now, PV of unguaranteed residual value = `80,000 × 0.7513
= ` 60,104.
PV of MLP is then `6,00,000 - `60,104 = `5,39,896.
The fact that……………..
1. the PV of MLP at the beginning of the lease period substantially.
(`5,39,896 `6,00,000 or 90% approx.) covers the initial fair value.
2. the lease period covers major part (60%) of the life of the asset,
and
3. the lessee is given the option to retain (buy) the equipment for a
nominal value at the end of the lease period…..makes the lease a
finance lease.
 [Chapter  5] Accounting Standards O 12.253

Answer:
(ii) Unearned Finance Income:
Annual lease payment = ` 5,39,896÷2.4868 = ` 2,17,104.71.
`
Gross investment in lease : ` 2,17,104.71 × 3 = 6,51,314
Add : Unguaranteed residual value 80,000
7,31,314
(Less) PV of Gross investment in lease (6,00,000)
Unearned Finance Income `1,31,314
Space to write important points for revision

2009 - Dec [6] (b) PARASH LTD. had the following borrowings during a year
in respect of capital expansion :
Plant Cost of Assets (`)Remarks
Plant–M 100 lakh No specific borrowings
Plant–N 125 lakh Bank loan of ` 65 lakh at 10%
Plant–X 175 lakh 9% Debentures of ` 125 lakh were issued
In addition to the specific borrowings stated above the company had
obtained term loans from two Banks :
(1) ` 100 lakh at 10% from Corporation Bank and
(2) ` 110 lakh at 11.5% from State Bank of India to meet its capital
expansion requirements.
Required :
Determine the amount of borrowings costs to be capitalized in each of the
above plants as per AS-16. (6 marks) [CMAFG - IV]
Answer:
PARASH LTD.
1. Computation of actual borrowing costs incurred during the year.
Sources Loan Amount Interest Rate Interest Amount
(` in lakh) (` in lakh)
Bank Loan 65.00 10% 6.50
9% Debentures 125.00 9% 11.25
Term Loan from
Corporation Bank 100.00 10% 10.00
 12.254 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Term Loan from State

bank of India 110.00 11.25% 12.65
400.00 40.40
Specific Borrowing included
in above 190.00 17.75

2. Weighted Average Capitalization Rate for General Borrowings

=

= = = 10.79%

3. Capitalization of Borrowings costs under AS-16 will be as under :

Plant Borrowing Loan Interest Rate Interest Cost of Assets

Amount (%) Amount
M General 100 10.79 10.79 110.79
N Specific 65 10.00 6.50 71.50
General 60 10.79 6.47 66.47 137.97
X Specific 125 9.00 11.25 136.25
General 50 10.79 5.39 55.39 191.64
400 40.40 440.40

Note: The amount of borrowings costs capitalized should not exceed the
actual interest Cost.
Space to write important points for revision

2010 - Dec [7] Answer the following question:

(c) AB Ltd. has set up its business in a designated backward area which
entitles the company to receive from the Govt. of India a subsidy of 25%
of the cost of investment. Having fulfilled all the conditions under the
 [Chapter  5] Accounting Standards O 12.255

scheme, the company in its investment of ` 80 crores in capital assets,

received ` 20 crores from the Govt. in February, 2010 in the accounting
period 2009-10. The company wants to treat this receipt as an item of
revenue and thereby reduce the losses in P. & L. A/c for the year ended
31.3.2010.
Do you think the treatment is justified? Answer with reference to relevant
AS. (5 marks)
Answer :
As per para 10 of AS-12 ‘Accounting for Govt. Grants’, when the Govt, grants
are of the nature of promoters’ contribution., i.e., they are given with
reference to the total investment in an undertaking or by way of the
contribution towards its total capital out lay (for example, central investment
subsidy scheme) and no repayment is ordinarily expected in respect thereof,
the grants are treated as capital reserve which can neither be distributed as
dividend nor considered as deferred income.
In the instant case, the subsidy received is neither in relation to specific
fixed asset nor in relation to revenue, Thus it is inappropriate to recognise
Govt. grants in the profit and loss statement, since they are not earned but
represent an incentive provided by Govt. without related costs. The correct
treatment is to credit the subsidy to Capital Reserve. Therefore, the
accounting treatment followed by the company is not proper.
Space to write important points for revision

2011 - June [7] (a) A Ltd. Leased a machinery to B Ltd. on the following
terms:
Fair value of the machinery ` 20 lakhs, Lease terms 5 years, Lease Rental
per annum ` 5 lakhs, Guaranteed Residual value ` 1 lakh, Expected
Residual value ` 2 lakhs, Internal Rate of Return 15%.
Depreciation is provided on straight line method @ 10% per annum.
Ascertain unearned financial income and necessary entries may be passed
in the books of the Lessee in the First year. (9 marks)
 12.256 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer :
Computation of Unearned Finance Income
As per AS 19 on Leases, unearned finance income is the difference between
(a) the gross investment in the lease and (b) the present value of minimum
lease payments under a finance lease from the standpoint of the lessor; and
any unguaranteed residual value accruing to the lessor, at the interest rate
implicit in the lease;
Where;
(a) Gross Investment in the lease is the aggregate of (i) minimum lease
payments from the stand point of the lessor and (ii) any unguaranteed
residual value accruing to the lessor.
Gross Investment = Minimum lease payment + Unguaranteed
residual value
= (Total lease rent + Guaranteed residual value) + Unguaranteed
residual value
= [(` 5,00,000 × 5 years) + ` 1,00,000] + ` 1,00,000
= ` 27,00,000…………..(a)
(b) Table showing present value of (i) Minimum lease payments (MLP) and
(ii) Unguaranteed residual value (URV).
Year MLP inclusive of URV Internal rate of Present
` return (Discount value
factor 15%) `
1. 5,00,000 0.8696 4.34,800
2. 5,00,000 0.7561 3.78,050
3. 5,00,000 0.6575 3.28,750
4. 5,00,000 0.5718 2.85,900
5. 5,00,000 0.4972 2.48,600
1,00,000 0.4972 .49,720
(guaranteed residual value) 17.25,820 (i)
1,00,000 0.4972 .49,720 (ii)
(unguaranteed residual value) (i) + (ii) 17.75,540 (b)
Unearned Finance Income = (a) – (b)
= ` 27,00,000 – ` 17,25,540
= ` 9,74,460
 [Chapter  5] Accounting Standards O 12.257

Journal Entries in the books of B Ltd.

` `
At the inception of lease
Machinery account Dr. 17,25,820
To A Ltd’s account (Note 1) (Note 1) 17,25,820
(Being lease of machinery recorded at present
value of MLP)
At the end of the first year of lease Dr. 2,58,873
Finance charges account (Refer Working
Note) 2,58,873
To A Ltd’s account
(Being the finance charges for first year due)
A Ltd’s account Dr. 5,00,000
To Bank account 5,00,000
(Being the lease rent paid to the lessor which
includes outstanding liability of ` 2,41,127 and
finance charge of ` 2,58,873)
Depreciation account Dr. 1,72,582
To Machinery account 1,72,582
(Being the depreciation provided @ 10% p.a. on
straight line method)
Profit and loss account Dr. 4,31,455
To Depreciation account 1,72,582
To Finance charges account 2,58,873
(Being the depreciation and finance charges
transferred to profit and loss account)

Note: 1 Working Note:

Table showing apportionment of lease payments by B. Ltd. between the
finance charges and the reduction of outstanding liability.
 12.258 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Year Outstanding Lease rent Finance Reduction Outstanding

liability (opening charge in liability
balance) ` ` outstanding (closing
` liability ` balance) `
1 17,25,820 5,00,000 2,58,873 2,41,127 14,84,693
2 14,84,693 5,00,000 2,22,704 2,77,296 12,07,397
3 12,07,397 5,00,000 1,81,110 3,18,890 8,88,507
4 8,88,507 5,00,000 1,33,276 3,66,724 5,21,783
5 5,21,783 5,00,000 78,267 5,21,783 1,00,050*
8,74,230 17,25,820
*The difference between this figure and guaranteed residual value
(` 1,00,000) is due to approximation in computing the interest rate implicit in
the lease.
Space to write important points for revision

2012 - June [2] (a) As on 1st April, 2011 the Fair Value of Plan Assets was
` 1,00,000 in respect of a pension plan of X Ltd. On 30th September, 2011
the plan paid out benefits of ` 20,000 and received inward contributions of
` 50,000. On 31st March, 2012 the fair value of plan assets was ` 1,50,000
and present value of the defined benefit obligation was ` 1,48,000. Actuarial
losses on the obligations for the year 2011-12 were ` 1,000. On 1st April,
2011 the company made the following estimates, based on its market
studies, understanding and prevailing prices:
Interest & Dividend Income, after tax payable by the fund 9.50%
Realized and unrealized gains on Plan Assets (after tax) 2.00%
Fund Administrative Costs (1.25%)
Expected Rate of Return 10.25%
Required: Find the Expected & Actual Returns on Plan Assets for the year
2011-12 (5 marks)
Answer:
A. Closing Balance of Fair Value of Plan Assets ` 1,50,000

B. Add : Benefit Paid ` 20,000

 [Chapter  5] Accounting Standards O 12.259

C. Less : Contributions Received (` 50,000)

D. Less : Opening Balance of Fair Value of Plan

Assets ` 1,00,000

E. Actual Return on Plan Assets ` 20,000

A. Return on Opening Balance of Fair Value of

Plan Assets [` 1,00,000 × 10.25% ×12/12] `10,250

B. Return on Net Contributions Received ` 1,500

[Contributions - Benefits paid]
[(` 50,000 - ` 20,000) × 5%]

C. Expected Return on Plan Assets ` 11,750

Note : Equivalent Half Yearly Compounding Interest Rate

=
= = .05 or 5%
Space to write important points for revision

2013 - Dec [2] (a) (ii) The following details are provided by an Import House:
Particulars Exchange rate
1 Us Dollar =
Goods purchased on 24th August, 2012 ` 47.10
Us Dollar 2,00,000
Exchange rate on 31st March, 2013 ` 54.20
Exchange rate on date of actual payment on ` 56.30
25th May, 2013
Calculate gain or loss for the financial years 2012-13 and 2013-14 and its
accounting treatment. (4 marks)
 12.260 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(b) Kovid Limited has taken a Machinery on Lease from Krishna Limited.
The following information are provided by Kovid Limited:
Lease Term 5 years
Fair value at inception of Lease ` 20 Lakhs
Lease Rent ` 5 Lakhs per annum payable at the
end of the year
Expected Residual value ` 3 Lakhs
Guaranteed Residual value ` 2 Lakhs
Implicit Interest rate 15.5% per annum
You are required to prepare Lease Rent Account and Lease Liability Account
in the Books of Kovid Limited. (The present value of Re. 1 at Discount rate
of 15.5% are 0.8658, 0.7496, 0.6490, 0.5619 and 0.4865 for year 1 to year
5 respectively.) (8 marks)
Answer:
(a) (ii) As per AS-11, all foreign currency transactions should be recorded
by applying the exchange rate at the date of transaction. Therefore,
goods purchased on 24th August, 2012 and corresponding creditor
would be recorded at ` 47.10.
= 2,00,000 x 47.10 = ` 94,20,000
As per As-11, at the balance sheet date all monetary items should
be reported using the closing rate. Therefore, the creditors of US $
2,00,000 outstanding on 31st March, 2013 will be reported as:
= 2,00,000 x 54.20 = ` 1,08,40,000
Exchange loss ` 14,20,000 (1,08,40,000 - 94,20,000) should be
debited in profit and loss account for 2012-13.
As per AS-11, exchange difference on settlement on monetary
items should be transferred to profit and loss account as gain or loss
thereof:
= 2,00,000 x 56.30 = 1,12,60,000 - 1,08,40,000 = `4,20,000
` 4,20,000 should be debited to profit or loss for the year 2013-14.
 [Chapter  5] Accounting Standards O 12.261

Answer:
(b) Present value of minimum lease payment
Year MLP (`) Discount PV (`)
factor @ 15.5%
1 5,00,000 0.8658 4,32,900
2 5,00,000 0.7496 3,74,800
3 5,00,000 0.6490 3,24,500
4 5,00,000 0.5619 2,80,950
5 7,00,000 0.4865 3,40,550
[including ` 2,00,000]
27,00,000 17,53,700
Present value of minimum lease payment (` 17,53,700) is less than fair value
at the inception of lease (` 20,00,000) so the leased asset and liability should
be recognized at ` 17,53,700.
Apportionment of finance lease
Rate of Interest 15.5%
Year Liability (`) MLP (`) Finance Principal Amount
Charge (`) of reduction (`)
0 17,53,700 – – –
1 15,25,524 5,00,000 2,71,824 2,28,176
2 12,61,980 5,00,000 2,36,456 2,63,544
3 9,57,587 5,00,000 1,95,607 3,04,393
4 6,06,013 5,00,000 1,48,426 3,51,574
5 – 7,00,000 93,932 6,06,068
Books of Kovid Limited
Lease Rent Account
Year Particulars Amount Particulars Amount
(`) (`)
st
1 Year To Bank A/c 5,00,000 By Finance Charges A/c 2,71,824
By Lease Liability A/c 2,28,176
5,00,000 5,00,000
 12.262 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2nd Year To Bank A/c 5,00,000 By Finance Charges A/c 2,36,456

By Lease Liability A/c 2,63,544
5,00,000 5,00,000
3rd Year To Bank A/c 5,00,000 By Finance Charges A/c 1,95,607
By Lease Liability A/c 3,04,393
5,00,000 5,00,000
4th Year To Bank A/c 5,00,000 By Finance Charges A/c 1,48,426
By Lease Liability A/c 3,51,574
5,00,000 5,00,000
5th Year To Bank A/c 7,00,000 By Finance Charges A/c 93,932
By Lease Liability A/c 6,06,068
7,00,000 7,00,000
Lease Liability Account (less or A/c)
Year Particulars Amount Particulars Amount
(`) (`)
1st Year To Lease Rent A/c 2,28,176 By Fixed Assets A/c 17,53,700
To Balance c/d 15,25,524
17,53,700 17,53,700
nd
2 Year To Lease Rent A/c 2,63,544 By Balance b/d 15,25,524
To Balance c/d 12,61,980
15,25,524 15,25,524
rd
3 Year To Lease Rent A/c 3,04,393 By Balance b/d 12,61,980
To Balance c/d 9,57,587
12,61,980 12,61,980
th
4 Year To Lease Rent A/c 3,51,574 By Balance b/d 9,57,587
To Balance c/d 6,06,013
9,57,587 9,57,587
th
5 Year To Lease Rent A/c 6,06,013 By Balance b/d 6,06,013
60,60,013 6,06,013
Space to write important points for revision
 [Chapter  5] Accounting Standards O 12.263

2014 - June [2] (a) (i) Jayakrishna Mills Ltd., runs a modern wheat flour mill.
The CFO has prepared the draft accounts, duly considering the mandatory
accounting standards. Following note appears: “The company purchased on
15.6.2013, a special purpose machinery for ` 75 lakhs. It received a State
Government grant for 10% of the price. The machine has an effective life of
10 years”.
What is the proper method of accounting treatment for the above?
(4 marks)
(ii) Springlily Ltd. borrowed US $ 6,00,000 on 31.12.2013 which will be
repaid (settled) as on 30.6.2014. The company prepares its financial
statements ending on 31.3.2014.
Rate of exchange between reporting currency (Rupee) and foreign
currency (US $) on different dates are as under:
31.12.2013 1 US $ = ` 64.00
31.03.2014 1 US $ = ` 64.50
30.06.2014 1 US $ = ` 64.75
State the aspects to be noted while preparing the financial statements
due to the applicable AS. How should the difference in exchange rates
be treated? (4 marks)
Answer:
(i) AS-12 prescribes two methods in accounting treatment of Government
grants for specific fixed assets.
Method I: Government grants related to depreciable fixed assets to be
treated as deferred income which is to be recognized in the Profit and
Loss Account in proportion in which depreciation on those assets is
charged over the useful life of the asset.
The deferred income pending its apportionment to Profit and Loss
Account to be disclosed in the balance sheet separately with a suitable
description, e.g. Deferred Government Grants, to be shown after
“Reserves & Surplus” but before “ Secured Loans”.
Method II: Grants received specifically for Fixed Asset may be
disclosed in the financial statement by way of deduction from the gross
block of the asset concerned, thus grant is recognised in P/L Account
through reduced depreciation.
 12.264 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

In this case machinery will be recognised at ` 67.5 lakhs i.e. after

deduction of `7.5 lakhs Govt. Grants and depreciation will be
calculated on that ` 67.5 lakhs.
Answer:
(ii) As per AS-11, all foreign currency transactions should be recorded by
applying the exchange rate at the date of transaction. Therefore,
amount borrowed on 31.12.2013 and corresponding lender would be
recorded at ` 64.00
= 6,00,000 x 64.00 = 3,84,00,000
As per AS-11, at the balance sheet date all monetary items should be
reported using the closing rate. Therefore, the lenders of US
$ 6,00,000 outstanding on 31.3.14 will be reported as:
= 6,00,000 x 64.50 = 3,87,00,000.
Exchange loss ` 3,00,000 = (3,87,00,000– 3,84,00,000) should be
debited in profit and loss account for 2013-14.
As per AS-11, exchange difference on settlement on monetary items
should be transferred to profit and loss account as gain or loss thereof:
6,00,000 x 64.75 = 3,88,50,000 – 3,87,00,000 = ` 1,50,000 should be
debited to profit or loss for the year 2014-15.
Space to write important points for revision

2014 - Dec [1] Answer the questions:

(b) During the year 2013-14, Purvi Limited received a grant from the
Government of India amounting to ` 35 lakh towards purchase of a piece
of land for ` 140 lakh.
You are required to show the accounting treatment of the above
transaction in the books of Purvi Limited, as per AS-12.
(c) Chandra Limited purchased a machinery of ` 10,00,000 from Machinery
Mart. The consideration was paid in the form of fully paid up equity
shares of ` 10 each at 60% premium. Pass necessary journal entries in
the books of Chandra Ltd. (2 marks each)
 [Chapter  5] Accounting Standards O 12.265

Answer:
(b) As per AS-12, accounting for Government Grants related to non-
depreciable assets should be credited to capital reserve.
Thus, in the Books of Purvi Limited: (` In Lakhs)
Accounting entries: ` `
(i) On Purchase of Land
Land A/c Dr. 140
To Bank A/c 140
(ii) On receipt of Govt. Grant
Bank A/c Dr. 35
To Capital Reserve A/c 35
Answer:
(c)
Journal of Chandra Ltd.
Particulars Dr. (`) Cr. (`)
Machinery A/c Dr. 10,00,000
To Machinery Mart 10,00,000
Machinery Mart Dr. 10,00,000
To E. S. Capital A/c 6,25,000
To Securities Premium A/c 3,75,000
Space to write important points for revision

2015 - June [1] Answer the questions:

(e) Rukmani Limited purchased a plant for US $ 2,50,000 on 1st March,
2015, payable after three months. Company entered into a forward
contract for three months @ ` 54.10 per dollar. Exchange rate per dollar
on 1st March, 2015 was ` 53.74. Compute amount of profit or loss on
forward contract as per AS-11. How will you recognise the same in the
books of the company? (2 marks)
 12.266 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer:
Forward Premium = (54.10 - 53.74) × 2,50,000
= ` 90,000
As per AS- 11 this should be expended over the tenor of contract i.e. three
months (01.03.2015 to 31.05.2015).
Space to write important points for revision

2015 - June [2] Answer any two question:

(a) Makkhu Limited leased a machine to Gunu Limited on the following
terms:
(i) Fair value of the machine ` 72 lakhs
(ii) Lease term 5 years
(iii) Lease rental per annum ` 12 lakhs
(iv) Guaranteed residual value ` 2.40 lakhs
(v) Expected residual value ` 4.50 lakhs
(vi) Internal rate of return 15%
st th
Discounted rates at 15% for ` 1, 1 year to 5 year are 0.8696,
0.7561, 0.6575, 0.5718 and 0.4972 respectively.
Ascertain Unearned Finance Income. (8 marks)
(b)(i) As on 1st April, 2014, the fair value of plan assets was ` 2,00,000 in
respect of a pension plan of Sagar Limited. The plan paid out benefits
of ` 25,000 and received inward contributions of ` 55,000. On 31st
March, 2015, the fair value of plan assets was ` 3,00,000 and acturial
losses on the Defined Benefit Obligations for the year 2014-15 were
` 30,000. On 1st April, 2014, the company made the following
estimates, based on its market studies, understanding and prevailing
prices:
Interest and Dividend income, after tax payable by the fund 11.25%
p.a. Realised and unrealised gains on plan assets (after tax) 3% p.a.
Fund administrative costs 4% p.a. Calculate Net Acturial gains/losses
for the year 2014-15. (5 marks)
 [Chapter  5] Accounting Standards O 12.267

(ii) Patta Ltd. purchased a piece of Land for ` 25,00,000 for which it
received a grant from the State Government amounting to ` 6,00,000.
How will you treat Government grant in the accounts as per AS-12?
Also pass the necessary journal entries of the above in the books of
the company. (3 marks)
Answer:
As per AS-19 on leases, unearned finance income is the difference between
(a) the gross investment in the lease and (b) the present value of minimum
lease payment under the finance lease from the stand point of the lessor,
and any unguaranteed residual value accruing to the lessor, at the interest
rate implicit in the lease.
where:
(a) Gross investments in the lease is the aggregate of:
(i) minimum lease payments from the stand point of the lessor and
(ii) any unguaranteed residual value accruing to the lessor.
Gross investment = Minimum Lease Payments + Unguaranteed
Residual Value
= Total lease rent + Guaranteed Residual Value
(GRV) + Unguaranteed Residual Value (URV)
= (12,00,000 × 5) + 2,40,000 + 2,10,000
= 64,50,000 (a)
(b) Table showing present value of (1) Minimum Lease Payments (MLPs)
and Unguaranteed Residual Value (URV):

Year MLP inclusive of Internal Return of Return Present Value

URV (`) (discount factor @ 15%)
1 12,00,000 0.8696 10,43,520
2 12,00,000 0.7561 09,07,320
3 12,00,000 0.6575 7,89,000
4 12,00,000 0.5718 6,86,160
 12.268 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

5 12,00,000 0.4972 5,96,640

2,40,000 (GRV) 0.4972 1,19,328
62,40,000 41,41,968 (i)
2,10,000 (URV) 0.4972 1,04,412 (ii)
Total 64,50,000 (i) + (ii) 42,46,380 (b)
Unearned finance income = (a) - (b)
= 64,50,000 - 42,46,380
= 22,03,620
Answer:
(b) (i)
A. Closing Balance of Fair Value of Plan Assets ` 3,00,000
B. Add Benefits Paid ` 25,000
C. Less: Contribution Received (` 55,000)
D. Less: Opening Balance of Fair Value of Plant Assets (` 2,00,000)
E. Actual Return on Plan Assets ` 70,000
F. Expected Return on Plan Assets [` 2,00,000 × 10.25% ` 22,000
× 12/12] + [(` 55,000 – ` 25,000) × 5%]
G. Actual Gains on Plan Assets [E-F] ` 48,000
H. Acturial losses on the obligations ` 30,000
I. Net Acturial Gains [G+H] ` 18,000
Working Notes:
1. Expected Rate of Return = 11.25% + 3% – 4% =
10.25%
2. Equivalent Half Yearly Compounding Interest Rate =
-1 = -1
= 0.05 or 5%
 [Chapter  5] Accounting Standards O 12.269

3. Assumptions:
(a) All Contributions are received and Benefits are
paid in middle of the year
(b) Expected Rate of Return is compounded half
yearly.

(ii) Grant related to non depreciable Fixed Assets. (AS-12) Grant is shown
as deduction from the gross value of assets in arriving at its book value
when grant is equal to the cost of asset, the asset should be shown in
the balance sheet at nominal value.
Journal Entries in the books of Patta Limited
I At the time of Purchase of Land
Land A/c Dr. 25,00,000
To Bank A/c 25,00,000
(Being Land purchased for ` 25,00,000)
II At the time of Receiving of Govt. Grant
Bank A/c Dr. 6,00,000
To Land A/c 6,00,000
(Being Grant received from State Govt.)
Space to write important points for revision

2015 - Dec [1] Answer the questions:

(a) Shiva Limited has received a grant of ` 15 crores from the Government
for setting up a manufacturing unit in a backward area. Out of this grant,
the company distributed ` 4 crores as dividend. Also, Shiva Limited
received land free of cost from the State Government but it has not
recorded it at all in the books as no money has been spent. In the light
of AS-12 examine, whether the treatment of both the grants is correct.
(2 marks)
 12.270 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(b) GANGOTRI LTD. reports the following information regarding Pension

Plan assets.
(`)
Fair market value of Plan Assets as on 31.03.2015 17,00,000
Fair market value of Plan Assets as on 01.04.2014 16,00,000
Benefit payments to Retirees 1,80,000
Employer contribution 1,50,000
Calculate the Actual Return on Plan Assets as per AS-15. (2 marks)
Answer:
(a) As per AS -12 "Accounting for Government Grants," when Government
Grant is received for a specific purpose, it should be utilized for the
same. So, the Grant received for setting up a manufacturing unit is not
available for distribution of dividend.
In the case, even if the company has not spent money for the acquisition
of land, land should be recorded in the books of accounts at a nominal
value. The treatment of both the elements in the treatment of the grant
is incorrect as per AS -12.
(b)
Particulars (`)
Fair market value of Plan assets as on 31.03.2015 17,00,000
Less: Fair market value of Plan assets as on 01.04.2014 (16,00,000)
1,00,000
Add: Benefit payment to Retirees 1,80,000
Less: Employer Contributions (1,50,000)
Actual Return on Plan Assets 1,30,000
Space to write important points for revision

2015 - Dec [2] Answer the questions:

(c) Classify the following into either Operating or Financial Lease (briefly
give your reasoning):
1. Lessee has option to purchase the asset at lower than fair value, at
the end of lease term. It is certain that the lessee will exercise the
option.
 [Chapter  5] Accounting Standards O 12.271

2. Economic life of the asset is 7 years, lease term is 6 years, but asset
is not acquired at the end of lease term.
3. Economic life of the asset is 6 years, lease term is 2 years, but the
asset is of special nature and has been procured only for use of the
lessee.
4. Present value of minimum lease payment = X. Fair value of the
asset = Y. (8 marks)
Answer:
1. Finance lease if it becomes certain at the inception of lease itself that the
option will be exercised by the lease that also at a price which is lower
than its expected fair value.
2. Finance lease, since a substantial portion of the life of the asset is
covered by lease term.
3. Finance lease since the asset is procured only for the use of lessee.
4. Finance lease since at the beginning of the lease term, present value of
minimum lease rental covers substantially the initial fair value of the
leased asset. Where X is minimum lease rental and Y is initial fair value.
Space to write important points for revision

2016 - June [4] (b) X Ltd. has leased equipment over its useful life that costs
` 7,46,55,100 for a three year lease period. After the lease term the asset
would revert to the Lessor. You are informed that:
(i) The estimated unguaranteed residual value would be ` 1 lakh only.
(ii) The annual lease payments have been structured in such a way that
the sum of their present values together with that of the residual value
of the asset will equal the cost thereof.
(iii) Implicit interest rate is 10%.
You are required to ascertain the annual lease payment and the
unearned finance income P.V. factor @ 10% for years 1 to 3 are 0.909,
0.826 and 0.751 respectively. (6 marks)
Answer:
Calculation of lease rental:
 Cost of Assets
= Present value of lease rental + Present value of residual valued
 7,46,55,100 = 2.486x + .751 × 1,00,000
 12.272 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

 7,46,55,100 - 75,100 = 2.486x

 =x
 x = 3,00,00,000
Calculation of Unearned Financial Income:
 Gross investment — Net investment
 [(3,00,00,000 × 3) + 1,00,000] - 7,46,55,100
 9,01,00,000 — 7,46,55,100
 1,54,44,900
Space to write important points for revision

2016 - June [6] (b) The fair value of plan assets at the beginning and at the
end of the year was ` 3,800 and ` 4,300 respectively. The employer’s
contribution to the plan during the year was ` 300. Benefit payments to
retirees were ` 400.
Calculate the actual return to the plan assets. (5 marks)
Answer:
Particulars Amount (`)
Fair value of plan asset at the beginning of the year 3,800
Add: Employer’s Contribution 300
Add: Actual Return ?
Less: Benefit Payments (400)
Fair value of plan assets at the end of the year 4,300
Actual = Fair value at the closing of the year – Fair value of the plan assets
at the opening of the year – Employer’s Contribution + Benefit payments
= (` 4,300 – ` 3,800 - ` 300 + ` 400) = ` 600.
Space to write important points for revision
 [Chapter  5] Accounting Standards O 12.273

2016 - Dec [1] Answer the following questions:

(a) ROLTA Ltd. reports the following information regarding Pension Plan
Assets:
Particulars Amount (`)
Fair market value of Pension Plan assets as on
01.04.2015 6,00,000
Fair market value of Pension Plan assets as on
31.03.2016 9,00,000
Actual Return 1,95,000
Benefit payments of Retirees 1,50,000
Calculate the Employer’s Contribution to the Pension Plan assets during
the year 2015-16 as per AS-15.
(c) The following information relate to ZOOM Ltd.
Imported Raw materials on 25.02.2015 for US $ 10,000;
Exchange Rate on 25.02.2015 ` 60 per US $;
Exchange Rate on 31.03.2015 ` 60.50 per US $;
Date of Actual payment for import: 15.06.2015;
Exchange Rate on 15.06.2015 ` 61 per US $;
Calculate the (Loss)/Gain for the financial year 2015-16 (as per AS-11).
(e) ATIMA LTD. purchased a fixed asset for ` 45 Lakh on 05.04.2015. The
company received a grant from the Government of West Bengal during
the year amounting to ` 18 Lakh.
Show the accounting treatment of the above if it is non-depreciable asset
as per AS-12. (2 marks each)
Answer:
(a) Employer's contribution to plan assets during the year 2015-16:
Fair value of plan assets (end of year) - Fair value of plan assets
(beginning of year) + benefit payments - Actual return of plan
= (9,00,000 - 6,00,000 + 1,50,000 - 1,95,000) = ` 2,55,000.
(c) As per AS-11 outstanding liability for creditors as on 31.03.2015 will be
reported (10,000 x 60.50) = ` 6,05,000. Hence (loss) /Gain for the year
2015-16 will be 10,000 × (61 - 60.50) = (` 5,000)
 12.274 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(e) As per AS-12 accounting for Government Grants related to

non-depreciable assets should be credited to Capital Reserve.
Accounting entries:
(i) On purchase of Fixed Asset
(` in Lakh)
Fixed Asset A/c Dr. 45.00
To Bank A/c 45.00

(ii) On receipt of Government Grant

(` in Lakh)
Bank A/c Dr. 18.00
To Capital Reserve / Fixed Assets A/c 18.00
Space to write important points for revision

2017 - June [2] (b) M Ltd. sold machinery having WDV of ` 200 Lakhs to N
Ltd. for ` 250 Lakhs and the same machinery was leased back by N Ltd. to
M Ltd. The lease back is an operating lease. Comment on the accounting
treatment as per AS 19 in the following circumstances:
(i) Fair value is ` 230 Lakhs and sale price is ` 250 Lakhs
(ii) Fair value is ` 175 Lakhs and sale price is ` 195 Lakhs (4 marks)
Answer:
(i) Profit of ` 30 Lakhs (230 Lakhs - 200 Lakhs) to be immediately
recognised in its books and balance profit of ` 20 Lakhs (250 Lakhs -
230 Lakhs) is to be amortised/deferred over lease period.
(ii) Loss of ` 25 Lakhs (200 Lakhs - 175 Lakhs) to be immediately
recognised by M Ltd. in its books and profit of ` 20 Lakhs (195 Lakhs -
175 Lakhs) should be amortised/deferred over lease period.
Space to write important points for revision

2017 - Dec [2] (b) Z Ltd. sold goods to a US Company for US $ 50000 on
10.02.2017 and realized the due on 30.06.2017. Z Ltd. closes the books of
accounts on 31st March. Exchange rates were as follows:
 [Chapter  5] Accounting Standards O 12.275

Date Rate
10.02.2017 65.40
31.03.2017 66.00
30.06.2017 65.80
Calculate the exchange loss/gain the reporting date and on the settlement
date and comment on their treatment as per AS 11. (3 marks)
Answer:
As per AS 11, transactions such as purchase, sales etc. are to be recorded
in the books of accounts at the exchange rate prevailing on the date of
transaction. Any exchange gain/ loss arising subsequently is to be
transferred to Income Statement.
Value of the goods sold = $ 50000
Exchange rate on the date of transaction = ` 65.40/$
So sales to be recorded in the books = 50000×65.40 = ` 3,270.000
Exchange rate on the date of reporting (31.03.17) = ` 66.00/$
Value of the receivables on 31.03.17 = 5000 × 66 = ` 3,300,000
Exchange gain on 31.03.2017 = (33,00,000 – 32,70,000) = ` 30,000, to be
credited to P/L A/c.
Exchange rate on the date of settlement (30.06.17) = ` 65.80/$
Exchange loss on 30.06.17 = 50000×(66.00 – 65.80) = ` 10,000 to be
debited to P/L A/c.
Space to write important points for revision

2018 - June [2] (b) M/s. Ayush Ltd. began construction of a new building on
1st January, 2017. It obtained ` 3,00,000 lakh special loan to finance the
construction of the building on 1st January ,2017 at an interest rate of 12%
p.a. The company’s other outstanding two non-specific loans were:
Amount Rate of Interest
` 6,00,000 11% p.a.
` 11,00,000 13% p.a.
 12.276 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

The expenditure that were made on the building project were as follows:
Amount (`)
January, 2017 3,00,000
April, 2017 3,50,000
July, 2017 5,50,000
December, 2017 1,50,000
st
Building was completed on 31 December, 2017. Following the principles
prescribed in AS 16 on ‘Borrowing Cost’, calculate the amount of interest to
be capitalized and pass one Journal entry for capitalizing the cost and
borrowing in respect of the building. (6 marks)
Answer:
(i) Computation of average accumulated expenses:
`
` 3,00,000 X 12 / 12 3,00,000
` 3,50,000 X 9 / 12 2,62,500
` 5,50,000 X 6 / 12 2,75,000
` 1,50,000 X 1 / 12 12,500
` 13,50,000 8,50,000
(ii) Calculation of average interest rate other than for specific
borrowings:
Amount of loan (`) Rate of interest Amount of interest
(`)
6,00,000 11 % = 66,000

11,00,000 13% =1,43,000

17,00,000 2,09,000
Weighted average = 12.29%
rate of interest
 [Chapter  5] Accounting Standards O 12.277

(iii) Interest amount to be capitalized:

Particulars `
Specific borrowings (` 3,00,000 × 12%) = 36,000
Non-specific borrowings [` 5,50,000 (` 8,50,000 - = 67,595
` 3,00,000) × 12.29%]
Amount of interest to be capitalized = 1,03,595

(iv) Computation of actual interest costs incurred during the year:

Particulars Amount (`)
` 3,00,000 × 12% 36,000
` 6,00,000 × 11% 66,000
` 11,00,000 × 13% 1,43,000
2,45,000
Amount to be capitalized is ` 13,50,000 + ` 1,03,595 i.e. ` 14,53,595
which is not more than ` 2,45,000.
(v)
Journal Entry
Date Particulars Dr. (`) Cr.(`)

31.12.2017 Building Account (13,50,000 +1,03,595) Dr. 14,53,595

To Bank Account 14,53,595
(Being amount of cost of building and borrowing
cost thereon capitalized)
Space to write important points for revision

2018 - Dec [2] (b) An enterprise operates through six segments, namely,
A, B, C, D, E and F. The relevant information about these segments are
given in the following table (amounts in `.’ 000):
 12.278 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

A B C D E F Total
(segment)
1. Segment Revenue
(a) External Sales - 550 250 150 50 50 1050
(b) Inter Segment
Sales 100 100 50 200 - 50 500
2. Segment Results-Profit/
(Loss) (90) 25 (5) (15) 5 10 -
3. Segment Assets 30 50 10 20 10 5

Identify the reportable segments under (i) segment revenue criterion,

(ii) segment result criterion and (iii) segment asset criterion as per AS17.
(5 marks)

Table Showing Marks of Compulsory Questions

Year 14 14 15 15 16 16 17 17 18 18
J D J D J D J D J D
Descriptive 2
Total 2
 5A OBJECTIVE QUESTIONS
2008 - Dec [1] {C} (a) Indicate with reasons/working the correct answer, out
of the four as given, in each of the following cases:
(ii) The fair values of Pension plan assets of Milestones Ltd. at the
beginning and the end of the year 2007-08 were ` 2,80,000 and
` 3,08,600 respectively. The employer’s contribution to the plan during
the year was ` 29,000. If benefit payments made to the retirees are
` 32,000, the actual return on Pension plan assets for the year will be
(as per AS-15):
A. ` 25,600
B. ` 31,600
C. ` 32,600
D. None of A, B and C
(vi) In a cash flow statement there is no place for
A. Issue of equity shares
B. Issue of bonus shares
C. Conversion of debt to equity
D. Both B and C above (2 × 2 = 4 marks)
Answer :
(a) (ii) AS -15 defines “Actual return” as the difference in values of the
assets on opening and closing dates (+) benefit payments (-)
employer’s contribution to the pension plan during a period.
So, the actual return = ` (3,08,600 – 2,80,000 +32,000 -29,000)
= ` 31,600
Correct answer is B
(vi) Neither an issue of bonus shares nor a conversion of debt to equity
involves the use of cash and cash equivalents. These transactions
are excluded from a cash flow statement, they should be disclosed
in the financial statements.
Space to write important points for revision

12.279
 12.280 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2008 - Dec [2] (a) For the given abbreviations name the terms in full.
(i) ICAI
(ii) AS
(iii) IAS
(iv) US GAAP
(v) IFRS (1× 5 = 5 marks)
Answer :
Abbreviation Full term
(i) ICAI Institute of Chartered Accountant of India
(ii) AS Accounting Standards (of India)
(iii) IAS International Accounting Standards
(iv) USGAAP Generally Accepted Accounting Standards of United
States of America
(v) IFRS International Financial Reporting Standard
Space to write important points for revision

2009 - June [1] {C} (a) In each of the cases given below one out of four
answers is correct. Indicate the correct answer (= 1 mark) and give your
workings/reasons briefly (= 1 mark).
(viii) An external user of financial statement of a company is
(a) Director
(b) Partner
(c) Supplier
(d) Officer
each of whom has some relationship with the company. (2 marks)
(b) Choose the most appropriate one from the stated options and write it
down (only indicate by A, B, C, D as you think correct).
(iii) RAINBOW LTD. has different distinguishable segments One of them
is engaged in providing an individual product and it is subject to risk
and returns. Such segment is known as
(a) Business Segment;
(b) Geographical Segment;
(c) Reportable Segment;
(d) Primary Segment.
 [Chapter  5A] Objective Questions O 12.281

(iv) As per AS-11 exchange differences arising on repayment of fixed

asset-linked liabilities should be adjusted to
(a) Profit & Loss Account;
(b) Fixed Asset Account;
(c) Revaluation Reserve;
(d) None of the above. (1 × 2 = 2 marks)
(c) State which of the following statements is T (= true) or F (= false):
(iv) Government grant receivable as compensation for expenses or
losses incurred in previous accounting period is an Extraordinary
item to be disclosed separately in Profit & Loss Account of the
Company. (1 mark)
Answer :
(a) (viii) ‘C’; Suppliers.
Directors, Partners of the company and its officers are not “external”
persons. The Companies Act provides that Directors and partners
(as shareholders) shall be provided with copies of the Companies
Financial Statements. These persons as well as officers of the
company have much economic interest in the well being of the
company for which they need to look into the financial statements.
Suppliers are external persons and their sake in the company
is not that much.
Answer:
(b) (iii) – A
(iv) – A
Answer:
(c)(iv) – T
Space to write important points for revision

2009 - Dec [1] {C} (a) In each of the cases given below are out of four
answers is correct. Indicate the correct answers (= 1 mark) and give your
workings/reasons briefly (= 1 mark).
 12.282 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(i) M. K. Leasing Company expects a minimum yield of 10% on its

investment in the leasing business. It proposes to lease a machine
costing ` 5,00,000 for ten years. If yearly lease payments are received
in advance, the lease rental to be charged by the company for the
lease will be [Given PVIFA (10%, 9 years = 5.759)]
A. ` 81,372;
B. ` 73,975;
C. ` 72,370;
D. None of (A), (B), (C).
(vii) XYZ Co. Ltd. proposed a dividend of 20%. The net profit of the
company is ` 1,20,000. The called up equity share capital is
` 5,00,000 and the amount of calls in arrears is ` 30,000. What will be
the amount of dividend payable ?
A. ` 1,00,000;
B. ` 94,000;
C. ` 24,000;
D. ` 1,06,000. (2 × 3 = 6 marks)
(b) Choose the most appropriate one from stated options and write it down
(only indicate by A, B, C, D, as you think correct) :
(ii) As per AS-17, the revenue of the reportable segment must have at
least the following percentage of total revenue of the enterprise :
A. 60%
B. 75%
C. 80%
D. 90%. (1 mark)
(c) State which of the following statements is True (= T) and False (=F) :
(ii) Recognising cost of retirement benefits only at the time payments
are made to employees on or after retirement, is known as pay-as-
you go.
(iii) Aria Corporation Ltd. had total turnover of ` 60 crores including inter
division transfer of ` 14 crores. The company is liable to give
segment reporting as per AS-17. (1 × 2 = 2 marks)
 [Chapter  5A] Objective Questions O 12.283

Answer :
(a) (i) B – 73,975
Lease Rental to be charged:
` 73,975.44 i.e. ` 73,975
(vii) B- ` 94,000/-
The amount of dividend payable will be ` 94,000/-
Answer:
(b) (ii) – B
Answer:
(c) (ii) – True
(iii) – False
Space to write important points for revision

2010 - June [1] {C} (a) In each of the cases given below, one out of four
alternatives is correct. Indicate the correct answer (1 mark) and give your
workings/reasons briefly (1 mark)
(iii) The fair value of Pension Plan Assets of ROLTA LTD. at the
beginning and end of the year 2009-10 were ` 3 lakh and ` 4.50 lakh
respectively. Benefit payment made to retirers were ` 75,000, what
would be the employer’s contribution to the Plan during the year, if the
actual return on Pension Plan assets are ` 97,500? As per AS-15.
A. ` 97,500
B. 1,27,500
C. 1,50,000
D. Insufficient information
(v) STC LTD. had imported raw materials with US$ 1000 on 24.02.2009
when exchange rate was ` 46.60 per US$. The payment for imports
was made on 15.6.2009 when exchange rate was ` 47.50 per US$. If
the rate of exchange on 31.3.2009 is ` 47.00 per US$, the (Loss)/gain
for the financial year 2009-10 will be (as per AS-11)
A. (` 500) Loss
B. ` 500 Gain
C. ` 400 Gain
D. None of (A), (B), (C)
 12.284 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(vi) GAYATHRI LTD. purchased 1000 shares in SAVITHA LTD. at ` 600

per share in 2008. There was a rights issue in 2009 at one shares for
every two held at a price of `150 per share. If GAYATHRI LTD.
subscribed to the rights what would be the carrying cost of 1500
shares?
A. ` 6,75,000
B. ` 6,50,000
C. ` 6,00,000
D. Insufficient information (2 × 3 = 6 marks)
(b) Choose the most appropriate one from the stated options and write it
down (only indicate A, B, C, D as you think correct).
(v) Include the power of Audit Committee is/are
A. To investigate any activity within its terms of reference
B. To seek information from any employee
C. To obtain outside legal or other professional advice
D. All the above (A), (B), & (C) (1 mark)
Answer :
(a) (iii) B: ` 1,27,500
Employers contribution during the year 2009-10:
Fair value of assets (end of year) – Fair value of assets (beginning
of the year)- Actual Return of plan + benefit payments = 4,50,000-
3,00,000 – 97,500 + 75,000 = ` 1,27,500.
(v) A: (` 500) Loss
As per AS- 11 Outstanding Liability for creditors as on 31.3.2009 will
be reported ( 1,000 × 47.00) = ` 47,000
Hence (Loss)/ Gain for year 2009-10 will be `(1,000 × 47.50
-47,000) = (`500) Loss.
(vi) A; ` 6,75,000
Cost of original holding (1,000×500) = ` 6,00,000
Amount paid for rights (500×150) = ` 75,000
Carrying cost of 1,500 shares in SABITA Ltd. = ` 6,75,000
Answer:
(b) (v) – D
Space to write important points for revision
 [Chapter  5A] Objective Questions O 12.285

2010 - Dec [1] {C} (a) In each of the cases given below, one out of four
alternatives is correct. Indicate the correct answer(= 1 mark) and give your
working/reasons briefly (= 1 mark):
(iii) VARTUAL LTD. acquired 1000 shares in ANKIT LTD. at a Cum-right
price of ` 250 per share. Ankit Ltd. offered right shares of one for
every two held at ` 125 per share. After the right issue the share price
fell from ` 250 to ` 200 per share. If the rights were sold by vartual Ltd.
at ` 70 per share, what would be the carrying cost of investment in
Ankit Ltd. After the sale of rights ?
(A) ` 2,50,000;
(B) ` 2,15,000;
(C) ` 2,85,000;
(D) None of (A), (B) and (c).
(iv) The fair market values of Pension Plan assets of ASILEENA LTD. at
the beginning of year 2009-10 was ` 7,00,000. The employer
contribution to the plan and Benefit payments made to retire during the
year were ` 1,00,000 and ` 40,000 respectively. If the actual return on
pension Plan assets is `50,000, what would be the Fair market value
of pension plan at end of year 2009-10 (As per-AS-15)?
(A) ` 8,00,000;
(B) ` 8,10,000;
(C) ` 8,30,000;
(D) Insufficient information. (2 × 2 = 4 marks)
(b) Choose the most appropriate one from the stated options and write it
down (only indicate A, B, C, D as you think correct):
(iii) ARKUTI LTD. has different distinguishable segments—One of them is
engaged in providing an individual product and it is subject to risk and
returns. Such segment is known as:
(A) Business Segment;
(B) Reportable Segment;
(C) Geographical Segment;
(D) Primary Segment. (1 mark)
 12.286 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Answer :
(a) (iii) (D) None of(a) and (B) and (c).
(iv) (B) 8,10,000
Answer:
(b) (iii) A- Business Segment
Space to write important points for revision

2011 - June [1] {C} (a) In each of the cases given below, one out of four
alternatives is correct. Indicate the correct answer (=1 mark) and give your
workings/reasons briefly (=1 mark) :
(ii) RAJASTHALI & CO. purchased fixed assets costing ` 3,000 lakhs on
1.4.2010 and the same was fully financed by foreign currency loan
(U.S. Dollars) payable in three annual equal instalments. Exchange
rates were 1 Dollar = ` 40.00 and ` 42.50 as on 1.4.2010 and
31.03.2011 respectively. First instalment was paid on 31.03.2011. As
per AS-11 (Revised)
(a) Exchange Difference of ` 187.50 lakhs should be charged to P&L
A/c.
(b) Exchange Difference of ` 125 lakhs should be charged to P&L
A/c.
(c) Exchange Difference of ` 187.5 lakhs should be added to Fixed
Assets A/c.
(d) Exchange Difference of ` 125 lakhs should be added to Fixed
Assets A/c.
(v) The Chief Accountant of PELF FIN STOCK Ltd. gives the following
data regarding its six segments :
` In lakhs
Particulars M N O P Q R Total
Segment Assets 50 25 10 5 5 5 100
Segment Results -50 -140 80 10 -10 10 -100
Segment Revenue 200 320 200 90 90 100 1000
 [Chapter  5A] Objective Questions O 12.287

Reportable Segments As per AS-17 are:

(a) M, N, O, P, Q, R
(b) M, N, O, P, Q, only
(c) M, N, O, P only
(d) M, N, O, R only (2 × 2 = 4 marks)
Answer :
(a) (ii) A.
Foreign currency loan = = 75 lakhs US Dollars

Exchange difference = 75 lakhs US Dollars × (42.50 – 40.00) =

` 187.50 lakhs
(Including exchange loss on payment of first installment). To be
charged to Profit & Loss Account for the year.
(v) D.
As per para 27 of AS – 17 ‘Segment Reporting’, a business segment
or geographical segment should be identified as a reportable segment
if :
(i) Its revenue from sales to external customers and from other
transactions with other segments is 10% or more of the total
revenue – external and internal of all segment; or
M, N, O, R have at least 10% of Total Segment Revenue.
(ii) Its segment result whether profit or loss is 10% or more of :
(1) The combined result of all segments in profit ; or
(2) The combined result of all segments in loss, whichever is
greater in absolute amount; or M, N, O have at least 10%
of Total Segment Result, (i.e. ` 200 lakhs)
(iii) Its segment assets are 10% or more of the total assets of all
segments.
M, N, O have at least 10% of Total Segment Assets.
Space to write important points for revision

2011 - Dec [1] {C} (a) In each of the cases given below, one out of four
alternatives is correct. Indicate the correct answer (= 1 mark) and give your
workings/reasons briefly (= 1 mark):
 12.288 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(iv) PRARTHANA Ltd. is in engineering industry. The company received

an actuarial valuation for the first time for its pension scheme which
revealed a surplus of ` 6 lakhs. It contributes ` 5 lakhs annually for its
pension schemes. The average remaining life of the employee is
estimated to be 6 years. As per AS 15 (Revised)
(a) Surplus of ` 6 lakhs in the pension scheme on its actuarial
valuation is required to be credited to the Profit and Loss
Statement for the current year.
(b) Surplus of ` 6 lakhs can be spread over the next 2 years by
reducing the annual contribution to ` 2 lakhs instead of ` 5 lakhs
(c) Surplus of ` 6 lakhs is to be spread over the average remaining
life of the employees of 6 years by crediting to the Profit and Loss
Statement of each year.
(d) None of these
(v) M/s. XYZ Ltd. has three segments namely X, Y, Z. The total assets of
the Company are: Segment X ` 1.00 crore, Segment Y ` 3.00 crores
and Segment Z ` 6.00 crores. Deferred tax assets included in the
assets of each Segments are: X ` 0.50 crore, Y ` 0.40 crore and Z
` 0.30 crore. As per AS 17
(a) X, Y and Z are reportable segments
(b) Only X and Y are reportable segments
(c) Only X and Z are reportable segments
(d) Only Z and Y are reportable segments
(vi) NIKITA Limited wishes to obtain a machine costing ` 30 lakhs by way
of lease. The effective life of the machine is 15 years, but the company
requires it only for the first 5 years. It enters into an agreement with
Ashok Ltd., for a lease rental for ` 3 lakhs p.a. payable in arrears and
the implicit rate of interest is 15%. Treatment as per AS 19 in the
books of Lessee
(a) Lease payments should be recognized as an expense in the
Statement of Profit and Loss on a straight line basis over the
lease term
(b) Finance Charges included in Lease payments should be
recognized as an expense in the Statement of Profit and Loss
 [Chapter  5A] Objective Questions O 12.289

(c) Depreciation of ` 2,00,000 p.a. should be recognized as an

expense in the Statement of Profit and Loss
(d) None of these (2 × 3 = 6 marks)
Answer :
(iv) Correct option – A
Explanation: According to para 92 of AS 15 (Revised) “ Employee
Benefits”, actuarial gains and losses should be recognized immediately
in the statement of profit and loss as income or expenses.
(v) Correct option – D
Explanation : According to AS 17 “Segment Reporting”, Segment
Assets do not include income tax assets. Therefore, the revised total
assets are 8.8 crores [10 crores – (0.5+0.4+0.3)].
Segment X holds total assets of 0.5 crore (1 crore – 0.5 crore):
Segment Y holds 2.6 crores (3 crores – 0.4 crores); and Segment Z
holds 5.7 crores (6 crores – 0.3 crores).
Thus, only Z and Y hold more than 10% of the total assets and hence,
only Y and Z are reportable segments.
(vi) Correct option – A
Explanation: The given lease agreement is an Operating Lease since:
(a) The present value of minimum lease payment amounts [` 10.8
lakhs (i.e. ` 3 lakh x 3.36)] is substantially less than the fair value
of leased asset (i.e. ` 30 lakhs)
(b) The lease term (5 years) is substantially less than economic life of
the asset (15 years).
As per AS 19 ‘Leases’, a lease will be classified as Finance Lease if
at the inception of the lease, the present value of minimum lease
payment amounts to at least substantially equal to the fair value of
leased asset.
Therefore, Lease payments under an Operating Lease should be
recognized as an expense in the statement of profit and loss on a
straight line basis over the lease term unless another systematic basis
is more representative of the time pattern of the user’s benefit.
Space to write important points for revision
 12.290 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2012 - June [1] {C} (a) In each of the cases given below, one out of four
alternatives is correct. Indicate the correct answer (= 1 mark) and give your
workings/reasons briefly (= 1 mark):
(i) RAJASTHALI Ltd. purchased Fixed Assets costing ` 6,000 lakhs on
1.4.2011 and the same was fully financed by Foreign Currency Loan
(U.S. Dollars) payable in three annual equal instalments. Exchange
rates were 1 Dollar = ` 40 and ` 42.50 as on 1.04.2011 and
31.03.2012 respectively. First instalment was paid on 31.03.2012. As
per AS 11, Exchange Difference to be charged to P & L A/c for the
year 2011-12 will be:
(A) ` 375 lakhs
(B) ` 250 lakhs
(C) Nil
(D) None of these
(iv) M/s XYZ Ltd. has three segments namely X, Y, Z. The total assets of
the Company are: Segment X ` 2.00 crores, Segment Y ` 6.00 crores
and Segment Z ` 12.00 crores. Deferred tax assets included in the
assets of each Segments are X-` 1crore, Y-` 0.80 crores and Z-` 0.60
crores. The accountant contends that all the three Segments are
reportable segments. As per AS 17:
(A) X, Y, and Z are reportable segments
(B) Only X and Y are reportable segments
(C) Only X and Z are reportable segments
(D) Only Y and Z are reportable segments
(ix) SRIJAN Ltd. wishes to obtain a machine costing ` 60 lakhs by way of
lease. The effective life of the machine is 15 years, but the company
requires it only for the first 5 years. It enters into an agreement with
Ashok Ltd., for a lease rental for ` 6 lakhs p.a. payable in arrears and
the implicit rate of interest is 15%. As per AS 19, what should be
recognized as an expense in the Statement of Profit and Loss in the
books of Lessee:
(A) Total Lease Payments
(B) Only Finance Charges included in Lease payments
 [Chapter  5A] Objective Questions O 12.291

(C) Depreciation of ` 4,00,000 p.a

(D) None of these (2 × 3 = 6 marks)
Answer:
(a) (i) A – ` 375
Foreign Currency Loan = ` 6,000 lakhs / ` 40 = 150 lakhs US
Dollars
Exchange difference = 150 lakhs US Dollars × (42.50 – 40.00) =
` 375 lakhs
(including exchange loss on payment of first instalment)
Therefore, entire loss due to exchange differences amounting ` 375
lakhs should be charged to Profit and Loss Account for the year.
(iv) D- Only Y & Z are reportable segments.
According to AS 17 “Segment Reporting”, Segment assets do not
include income tax assets. Therefore, the revised total assets are
17.6 crores [20 crores – (1 + 0.8 + 0.6)]
Segment X holds total assets of 1 crore [2 crore- 1 crore]; Segment
Y holds 5.2 crores (6 crores – 0.8 crores); and Segment Z holds
11.4 crores (12 crores – 0.6 crores)
Thus, only Y and Z hold more than 10% of the total assets and
hence Only Y and Z are reportable segments.
(ix) A – Total lease payments.
The given lease agreement is an operating lease since:
(a) The present value of minimum lease payment amount [` 20.10
lakhs (i.e., ` 6 lakhs × 3.35)] is substantially less than the fair
value of leased asset (i.e.,` 60 lakhs)
(b) The lease term (5 years) is substantially less than economic life
of the asset (15 years ) as per AS 19 “Leases,” a lease will be
classified as finance lease it at the inception of the lease, the
present value of minimum lease payment amounts to at least
substantially equal to the fair value of leased asset.
 12.292 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Therefore, Lease payments under an operating lease should be

recognized as an expense in the statement of profit and loss on a
straight line basis over the lease term unless another systematic
basis is more representative of the time pattern of the user’s benefit.
Note: PVAF @ 15% for 5 years is 3.35
Space to write important points for revision

2012 - Dec [1] {C} (a) In each of the cases given below, one out of four
alternatives is correct. Indicate the correct answer (= 1 mark) and give your
workings/reasons briefly (= 1 mark):
(ii) The fair value of Plan assets of ARIMA LTD. at beginning and end of
the year 2011-2012 were ` 4,00,000 and ` 5,70,000 respectively. The
employer’s contribution to the plan during the year was ` 1,40,000. If
benefit payments to retirees were ` 1,00,000, what would be the actual
return on plan assets (as per AS-15)?
A. ` 1,50,000 lakhs
B. ` 1,30,000 lakhs
C. ` 1,20,000 lakhs
D. Insufficient Information
(iii) FICKLE LTD. has five business segments with operating profits and
losses as shown below:
Segment Operating Profit/(Loss)
(` in lakh)
P 3
Q (3)
R 20
X (9)
Y (20)
Reportable Segments as per AS-17 are
A. P, Q, R, X, Y
B. P, Q, R, Y
C. P, Q, R only
D. R, X, Y only
 [Chapter  5A] Objective Questions O 12.293

(iv) NANDITHA LTD. has imported $ 50,000 worth of goods from

CHICAGO TRADERS of USA on 30.2.2012 when exchange rate was
` 54.60 per US $. The payment for imports was made on 30.6.2012
when exchange rate was ` 55.50 per US $. If the rate of exchange on
31.3.2012 is ` 55.00 per US $, the exchange difference to be
charged/debited to Profit & Loss Account for the year 2012-13 as per
AS-11 will be
A. ` 25,000
B. ` 45,000
C. ` 20,000
D. None of (A), (B) and (c) (2 x 3 = 6 marks)
(b) Choose the most appropriate one from the stated options and write it
down (only indicate A, B, C, D as you think correct):
(v) SKY LTD. purchased a special machinery from Earth Ltd. for ` 50
Lakhs in consideration of 50,000 equity shares of ` 100 each of the
company. Where this transaction will be reflected in the Cash Flow
Statement as per AS-3?
A. Operating Activities
B. Financing Activities
C. Investing Activities
D. None of the above (1 mark)
Answer:
(a) (ii) B: ` 1,30,000
Actual Return = Fair value of assets (end of year) - Fair Value of
assets (beginning of year) – Employer’s contribution + benefit
payments = (5,70,000 – 4,00,000 – 1,40,000 + 1,00,000) =
` 1,30,000.
(iii) D: R, X, Y
As per Para 27 of AS – 17 “Segment Reporting” a Business
Segment or Geographical should be identified as a reportable
segment If: Its segment results, where profit or loss is 10% or more
of i) the combined result of all segment in profit; ii) The combined
result of all segments in loss, whichever is greater, i.e., absolute
amount.
 12.294 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

Absolute in profit; ii) The combined result of all segment in loss,

whichever is greater, i.e., absolute amount.
Absolute profits = (3 +20) Lakh = 23 Lakh
Absolute Losses = (3 + 9 +20) lakhs = 32 Lakh
Greater of these two absolute amounts are loses of ` 32 lakhs
10% of ` 32 = ` 3.20 Lakh
Reportable Segments are R, X, Y.
(iv) A: ` 25,000
As per AS-11, exchange difference on settlement on monetary items
should be transferred to profit & Loss Account as gain or loss.
Therefore (` 55.50 – ` 55.00) × $ 50,000 = ` 25,000 will be debited
to profit & Loss Account for the year 2012-13.
Answer:
(b) (v) D
Space to write important points for revision

2013 - June [1] {C} (a) In each of the cases given below, one out of four
alternatives is correct. Indicate the correct answer (= 1 mark) and give
workings/reasons briefly in support of your answer (= 1 mark):
(iv) The fair values of Pension Plan Assets of ZOOM LTD. at the beginning
and end of the year 2012-13 were ` 5,60,000 and ` 6,20,000
respectively. The actual return on Pension Plan Assets for the year
was ` 63,000. If benefit payments made to the retirees are ` 64,000,
the employer’s contribution to the plan during the year as per AS-15
would be
(a) ` 52,000
(b) ` 61,000
(c) ` 65,000
(d) None of (a), (b), (c) (2 marks)
(b) Choose the most appropriate one from the stated options and write it
down (only indicate a, b, c, d as you think correct).
(ii) As per AS-3 (Revised) Interest and Dividends received in the
case of a manufacturing enterprise should be classified as cash
flow from
 [Chapter  5A] Objective Questions O 12.295

(a) Operating activities

(b) Financing activities
(c) Investing activities
(d) Both (b) and (c)
(v) According to AS-11 (Revised) the difference between the
forward rate and the exchange rate at the date of transaction
should be
(a) Ignored
(b) Recognized as income or expense
(c) Adjusted to Shareholders’ interests
(d) None of (a), (b), (c) (1 x 2 = 2 marks)
Answer:
(a)(iv) B : ` 61,000
As per AS - 15 the employer’s Contribution
= the difference in values of the assets on opening and closing dates
+ benefit payments  Actual Return on plan.
= (6,20,000  5,60,000) + 64,000  63,000 ` 61,000
Answer:
(b) (ii) C
(v) B
Space to write important points for revision

2017 - June [1] (a) Choose the correct answer from the four alternatives
given:
(i) Underwriting Agreements are of
(a) One type
(b) Two types
(c) Three types
(d) Four types
(ii) Segment Reporting is covered under
(a) AS 16
(b) AS 17
(c) AS 18
(d) AS 19
 12.296 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(iii) On redemption of Debentures, the amount lying in Debenture

Redemption Reserve, which is no longer necessary to be retained,
should be transferred to
(a) Revaluation Reserve
(b) Securities Premium Reserve
(c) Capital Reserve
(d) General Reserve
(iv) Rate of provisioning by a Bank for Advances doubtful for more than 1
year but less than 3 years is
(a) 25%
(b) 40%
(c) 60%
(d) 100%
(v) Balance of Interest Accrued on Security Deposit A/c of an Electricity
company should be shown
(a) under Current Liability.
(b) under Non-current Liability.
(c) under Current Asset.
(d) under Non-current Asset.
(vi) Which of the following items is not a part of cash flow from operating
activities?
(a) Collection from customers
(b) Payment of outstanding wages
(c) Payment to suppliers of machinery
(d) Advances to foreign suppliers for raw materials
(1 × 6 = 6 marks)
(b) Match the following items in Column ‘A’ with items shown in Column ‘B’:
Column ‘A’ Column ‘B’
1. Grants Received from Government A. Capital Redemption Reserve
2. Redemption of Debentures B. AS 15
3. Issue of Bonus shares C. AS 12
4. Defined benefit plans D. Sinking Fund
(1 × 4 = 4 marks)
 [Chapter  5A] Objective Questions O 12.297

(c) State whether the following statements are True or False:

(i) Exchange difference arising in respect of monetary items is to be
recognized as income or expenditure during the year.
(ii) Capital Reserve is a Reserve which is available for distribution as
Dividend.
(iii) Interest received by a finance company is a part of cash flow from
investing activities.
(iv) Interest accrued and due should be shown under the head Other
Current Liabilities in a Balance Sheet of a Company.
(1 × 4 = 4 marks)
Answer:
(a)
(i) (b) Two types
(ii) (b) AS 17
(iii) (d) General Reserve
(iv) (b) 40%
(v) (b) under Non-Current Liability
(vi) (c) Payment to suppliers of machinery
(b)
Column ‘A’ Column ‘B’
(1) Grant Received from Government (C) AS 12
(2) Redemption of Debentures (D) Sinking Fund
(3) Issue of Bonus Shares (A) Capital Redemption Reserve
(4) Defined benefit plans (B) AS 15

(c)
(i) True
(ii) False
(iii) False
(iv) True
Space to write important points for revision
 12.298 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

2017 - Dec [1] (a) Choose the correct alternative:

(i) While preparing Cash Flow Statement of XY Ltd., a finance
company, interest received on loans should be shown as
(a) Cash Flow from Operating Activities
(b) Cash Flow from Investing Activities
(c) Cash Flow from Financing Activities
(d) Cash and Cash Equivalent
(ii) As per Schedule III Current Maturities of Long Term Borrowings
should be shown under
(a) Current Assets in Balance Sheet
(b) Non-current Liability in Balance Sheet
(c) Current Liabilities in Balance Sheet
(d) Other Expenses in Statement of Profit and Loss
(iii) Which of the following is not a criterion for selecting a reportable
segment under AS 17?
(a) 10% or more of aggregate revenue of all segment
(b) 10% or more of aggregate assets of all segment
(c) 10% or more of aggregate liabilities of all segment
(d) 10% or more of aggregate profit or loss of all segment (higher
of the two)
(iv) Which of the following is not a mandatory financial statement of a
General Insurance Company as per IRDA regulations?
(a) Revenue Account
(b) Profit and Loss Account
(c) Balance Sheet
(d) Cash Flow Statement
(v) A Banking Company needs to transfer a minimum of ______ its
profit to reserve fund.
(a) 10%
(b) 15%
(c) 20%
(d) 25%
 [Chapter  5A] Objective Questions O 12.299

(vi) In case of an electricity company, depreciation on assets is

calculated based on the rates notified by
(a) Companies Act 2013
(b) State Electricity Commission
(c) Central Electricity Regulatory Commission
(d) Income Tax Act 1961 (1 × 6 = 6 marks)
2017 - Dec [1] (b) Match the following items in Column ‘A’ with items shown
in Column ‘B’:
Column ‘A’ Column ‘B’
1. Guaranteed Residual Value (GRV) A. Capital Reserve
2. Premium on Redemption of B. AS 11
Preference shares
3. Exchange Difference C. Securities Premium A/c
4. Profit on reissue of forfeited shares D. AS 19
(1 × 4 = 4 marks)
2017 - Dec [1] (c) State whether the following statements are True or False:
(i) In case of an underwriting arrangement, marked applications are those
applications that bear the stamp of the issuing company.
(ii) In case the leaseback is a finance lease, the sale proceeds in excess
of the carrying amount should be immediately recognized in the
Income Statement.
(iii) Issue of fully paid up bonus shares increases the total shareholders
fund.
(iv) Interest and dividend received form a part of financing cash flow.
(1 × 4 = 4 marks)
Answer:
(a) (i) (A)
(ii) (C)
(iii) (C)
(iv) (D)
(v) (D)
(vi) (C)
 12.300 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(b) (1) (D)

(2) (C)
(3) (B)
(4) (A)
(c) (i) (F)
(ii) (F)
(iii) (F)
(iv) (F)
Space to write important points for revision

2018 - June [1] (a) Choose the correct alternative:

(i) Premium on redemption of redeemable preference shares can be paid
out of
(a) Capital Redemption Reserve Account
(b) Existing Shares Premium Account
(c) Proceed of fresh issue of shares
(d) All of the above
(ii) Which of the following is not a component of Cash Flow Statement?
(a) Cash payments to suppliers for goods and services
(b) Charging of Depreciation
(c) Cash advances and loans made to third parties
(d) Cash repayments of amounts borrowed
(iii) The Electricity Act, 2003 replaced which of the following three existing
legislations?
(a) The Indian Electricity Act, 1910
(b) The Electricity (Supply) Act, 1948
(c) The Electricity Regulatory Commissions Act, 1998
(d) All of the above
(iv) General Ledger of a Banking Company does not contain
(a) Control Accounts of all personal ledgers
(b) Assets Accounts
(c) Contra Accounts
(d) Balance Sheet
 [Chapter  5A] Objective Questions O 12.301

(v) Which of the following is a principle of insurance?

(a) Principle of indemnity
(b) Insurable interest
(c) Principle of uberrimae fidei
(d) All of the above
(vi) Underwriting commission payable on the shares taken up by the
promoters is
(a) 2.5%
(b) 2%
(c) 5%
(d) Nil (1 × 6 = 6 marks)
2018 - June [1] (b) Match the following items in Column ‘A’ with items shown
in Column ‘B’:
Column ‘A’ Column ‘B’
1. Government Grants A. Capital Redemption Reserve
2. Redemption of Debentures B. AS 16
3. Un-guaranteed Residual Value C. AS 12
4 Borrowing Cost D. AS 19
(1 × 4 = 4 marks)
2018 - June [1] (c) State whether the following statements are True or False:
(i) Marked applications are those applications which bear the stamp of an
underwriter.
(ii) In order to spread the risk of under- subscription, the principal
underwriters may enter into subsidiary agreements with sub-leasees.
(iii) When debentures are issued at discount, it is prudent to write off the
loss during the life of debentures.
(iv) Any surplus cash may be utilized by the company for buy-back and
avoid the payment of dividend tax. (1 × 4 = 4 marks)
Answer:
(a) (i) (b)
(ii) (b)
(iii) (d)
(iv) (d)
(v) (d)
(vi) (d)
 12.302 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(b) 1. (c)
2. (a)
3. (d)
4. (b)
(c) (i) True
(ii) False
(iii) True
(iv) True
Space to write important points for revision

2018 - Dec [1] {C} (a) Choose the correct alternative:

(i) Which of the following reserves cannot be used for the purpose of
issuing bonus shares?
(a) Revaluation Reserve
(b) Dividend Equalization Reserve
(c) Capital Redemption Reserve
(d) General Reserve
(ii) In Case of Life Insurance Business, Bonus may be of
(a) One type
(b) Two types
(c) Three types
(d) None of the above
(iii) Instalment of principal amount of long-term loan payable within next 12
months is shown under Balance Sheet of a company under the
heading
(a) Non-current Assets
(b) Non-current Liabilities
(c) Current Assets
(d) Current Liabilities
(iv) Which of the following is not a condition of buy-back of securities?
(a) Both fully and partly paid-up securities can be bought back.
(b) Buy-back must be authorised by the Articles of Association.
 [Chapter  5A] Objective Questions O 12.303

(c) Buy-back must be authorised by passing a special resolution in

general meeting.
(d) Buy-back should be completed within 1 year from the date of
passing of special resolution .
(v) A banking company is required to maintain _______ provision on
unsecured portion of doubtful advances.
(a) 25%
(b) 40%
(c) 50%
(d) 100%
(vi) Which of the following is correct?
(a) Debenture carries a fixed rate of dividend.
(b) A company limited by shares may issue irredeemable preference
shares.
(c) Unmarked applications are those applications that bear the stamp
of the underwriter.
(d) Except as provided in Section 54, a company shall not issue
shares at a discount. (1 × 6 = 6 marks)
2018 - Dec [1] (b) Match the following items in Column ‘A’ with items shown
in Column ‘B’:
Column ‘A’ Column ‘B’
(i) Functional Currency (a) Electricity Company
(ii) Surrender Value (b) AS 19
(iii) Service Line Development Charges (c) AS 11
(iv) Contingent Rent (d) Insurance Company
(e) No match found
(1 × 4 = 4 marks)
2018 - Dec [1] (c) State whether the following statements are True or False:
(i) The profit on forfeiture and re-issue of equity shares are credited to
Capital Redemption Reserve.
(ii) As per Companies Act 2013, companies are not permitted to buy back
their own shares out of securities premium.
 12.304 O Scanner CMA Inter Gr. II Paper 12A (2016 Syllabus)

(iii) Bonus is the share of profit which is payable by the insurance

company to the policyholders.
(iv) Interest on loan is included in ‘other operating expenses’ under the
Statement of Profit and Loss. (1 × 4 = 4 marks)
Section B
Auditing
 6 AUDITING CONCEPTS
THIS CHAPTER INCLUDES
 Evolution of Auditing  Basic Principles Governing an
 Definition Audit
 Nature of Auditing  Advantages of Audit
 Relationship and Distinction  Concept of True and Fair
B e t we e n A u d it in g a n d  Concept of “Materiality” in
Accounting Planning and Performing the
 Audit and Investigation Audit
 Aspects to be Covered in Audit  Disclosure of Accounting
 Objective of Auditing Policies
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions

Legend
Objective Short Notes Distinguish Descriptive Practical

For detailed analysis Login at www.scannerclasses.com

for registration and password see first page of this book.

12.307
 12.308 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. Definitions of Lawrence R. Dicksee-‘An audit is an examination of
Auditing accounting records undertaken with a view to
establishing whether they correctly and completely
reflect the transactions to which they purport to relate.’
Taylor and Perry- “Audit is defined as an investigation
of some statements of figures involving examination of
certain evidence, so as to enable an auditor to make a
report on the statement.
2. Meaning (i) An intelligent and critical examination of the
books of accounts of business.
(ii) It is done by an independent qualified person.
(iii) It is done with the help of vouchers, documents,
information and explanations received from the
clients.
(iv) The auditor satisfies himself with the authenticity
of the financial accounts prepared for a
particular period.
3. Features of 1. Audit is a systematic and scientific examination of
Auditing the books of accounts of a business.
2. Audit is undertaken by an independent person or
body of persons who are duly qualified for the job.
3. Audit is a verification of the results shown by the
profit and loss account and the state of affairs as
shown by the balance sheet.
4. Audit is a critical review of the system of
accounting and internal control.
5. Audit is done with the help of vouchers,
documents, information and explanations received
from the authorities.
 [Chapter  6] Auditing Concepts O 12.309

4. Objectives of The objectives of auditing may be classified into two

Auditing parts:
1. The primary objective
2. The secondary or incidental objective.
5. Basic Princi- (i) Integrity objectivity and independence
ples Govern- (ii) Confidentiality
ing an Audit (iii) Skill and competence
(iv) Work performed by others
(v) Documentation
(vi) Planning
(vii) Audit evidence
(viii) Accounting System and Internal Control
(ix) Audit conclusions and reporting
6. True and Fair 1. The books of account have recorded all the
View business transaction correctly.
2. The books of account have been prepared
according to the accepted principles of
accountancy and have followed accounting
standards issued by different regulatory bodies.
3. There are no errors and frauds present in the
books of account.
4. The financial statements that have been prepared
by the company are in conformity with the books of
accounts and all mandatory provisions of
Companies Act.
5. The books of accounts must disclose all material
facts regarding revenue, expenses, assets and
liabilities.
7. Advantages 1. It safeguards the financial interest of persons who
of an are not associated with the management of the
Independent entity, whether they are partners or shareholders.
Audit 2. It acts as a moral check on the employees from
committing defalcations or embezzlement.
 12.310 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

3. Audited statements of account are helpful in

setting liability for taxes, negotiating loans and for
determining the purchase consideration for a
business.
4. This are also use for settling trade disputes or
higher wages or bonus as well as claims in respect
of damage suffered by property, by fire or some
other calamity.
5. Audited accounts are of great help in the
settlement of accounts at the time of admission or
death of partner.
6. Government may require audited and certificated
statement before it gives assistance or issues a
licence for a particular trade.
8. Materiality in Materiality can be defined as the magnitude of an
Auditing omission or misstatement of accounting information
that, in the light of surrounding circumstances, makes
it probable that the judgment of a reasonable person
relying on the information would have been changed or
influenced by the omission or misstatement.

DESCRIPTIVE QUESTIONS
2009 - June [5] {C} Comment on the following statements based on legal
provisions:
(e) Auditor's primary responsibility is to detect errors and frauds.
(2 marks)
Answer :
False: auditor’s primary responsibility as per AAS-2 is to express an opinion
on financial statements.
Space to write important points for revision
 [Chapter  6] Auditing Concepts O 12.311

2010 - Dec [7] (b) Explain the factors which act as guiding measures to the
concept of materiality. (4 marks)
Answer :
The main factors to be considered for determining materiality of an item
are:
(i) Individually It may be determined individually. e.g., a
payment of ` 1,000 may be material in a small
business, but even ` 1 lac could be immaterial
for a big business entity.
(ii) Aggregate It may be determined in aggregate. e.g., total
income from investment in mutual funds could be
more material than looking into each individual
investment.
(iii) Legal It depends on the statutory or legal
Considerations considerations. e.g., where the terms of
appointment of a whole time director are not
according to law, the remuneration paid to him is
a material item even if the financial implication is
not much.
(iv) Legal It may be defined or described in law itself. E.g.,
Definition Schedule III requires separate disclosure of
items of all expenses exceeding 1% of turnover
or to write off capital assets purchased for less
than ` 5000.
(v) Relative overall It may depend on the relative degree of
impact relevance to the overall accounts or the group, or
class of transactions to which it pertains. E.g.,
short recoveries from debtors.
(vi) Qualitative It may be qualitative and not often reckoned with
respect to quantitative details alone. E.g.,
improper disclosure of an accounting policy in
the Notes to the Annual Financial Statements
may affect economic decisions.
 12.312 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(vii) I ns i g n i f i c a nt It maybe of an insignificant quantity otherwise,

quantity but but material in special circumstances. e.g.,
special context rounding off to the nearest rupee the fraction of
0.666 as 0.67 in computer software. It may be
material in future due to cumulative effect even if
insignificant now.
Space to write important points for revision

2012 - Dec [6] (f) Risk of non-detection of error is less than the risk of non-
detection of fraud—Comment. (2 marks)
Answer :
Fraud is more difficult to detect than error. Fraud may be divided broadly into
two classed:
(a) Defalcation, involving either misappropriation of money or goods.
(b) The fraudulent manipulation of accounts not involving defalcation.
This is so since fraud generally involves complicated, ticklish and carefully
organized/perpetrated schemes to concede the same from the eyes of the
Auditor and/or the management, such as forgery institutional failure of
records transaction, cooking up the vouchers for expenses etc.
Space to write important points for revision

2014 - June [7] (a) (i) Bring out in a tabular form, the relationship between
accounting and auditing. (4 marks)
(ii) State the aspects to be seen by an auditor to ensure that the statements
audited project a true and fair view. (4 marks)
Answer:
(i) The relationship between accounting and auditing has been explained
by Kell and Ziegler in “Modern Auditing” as follows:
Accounting Auditing
(i) A n a l y z e events a n d Review client’s internal control
transactions. system.
 [Chapter  6] Auditing Concepts O 12.313

(ii) Record and summarize data in Obtain and evaluate evidence on

accounting records. statement assertions.
(iii) Make financial statement Determine fairness of state-ments
assertions. in conformity with recog-nized
accounting principles.
(iv) Prepare financial statements Prepare audit report on finding.
as per recognized accounting
principles.
(v) Distribute Financial state- Deliver audit report to client.
ments and Auditor’s report to
shareholders.
(ii) (i) That the assets are neither undervalued or overvalued, according
to the applicable accounting principles;
(ii) No material asset is omitted
(iii) The charges, if any, on assets are disclosed;
(iv) Material liability should not be omitted;
(v) The profit and loss account discloses all the matters required to be
disclosed by Part II of Schedule III and the balance sheet has been
prepared in accordance with Part I of Schedule III;
(vi) All unusual, exception or non-recurring items have been disclosed
separately.
Space to write important points for revision

2014 - Dec [4] (a) Comment on the following:

(i) The concept of true and fair is a fundamental concept in Auditing.
(4 marks)
Answer:
(a) (i) The main object of audit is to find out whether the financial
statements prepared by a company show the true and fair view of
the financial state of affairs of a company and if not then in what
respect they are not showing. The accounts are said to be true and
fair if:
 12.314 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

1. The books of account have recorded all the business

transactions correctly.
2. The books of account have been prepared according to the
accepted principles of accountancy and have followed
accounting standards issued by different regulatory bodies.
3. There are no errors and frauds present in the books of account.
4. The financial statements that have been prepared by the
company are in conformity with the books of accounts and all
mandatory provisions of Companies Act.
5. The profit and loss shown in the profit and loss account shows
the true and fair results of entity’s operations and the value of
assets and liabilities appearing in the balance sheet is shows
the correct financial picture.
6. The books of accounts must disclose all material facts
regarding revenue, expenses, assets and liabilities.
Space to write important points for revision

2016 - Dec [9] (a) “Some material mis-statements remain unreported by

Auditors.”—Comment. (8 marks)
Answer:
The concept of materiality is applied by the auditor both in planning and
performing the audit, and in evaluating the effect of identified misstatements
on the audit and of uncorrected misstatements, if any, on the financial
statements. In general, misstatements, including omissions, are considered
to be material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of
the financial statements. Judgments about materiality are made in the light
of surrounding circumstances, and are affected by the auditor's perception
of the financial information needs of users of the financial statements, and
by the size or nature of a misstatement, or a combination of both. The
auditor's opinion deals with the financial statements as a whole and therefore
the auditor is not responsible for the detection of misstatements that are not
material to the financial statements as a whole.
 [Chapter  6] Auditing Concepts O 12.315

Risk of material misstatement: The risk that the financial statements are
materially misstated prior to audit. This consists of two components,
described as follows at the assertion level:
(i) Inherent risk: The susceptibility of an assertion about a class of
transaction, account balance or disclosure to a misstatement that
could be material, either individually or when aggregated with other
misstatements, before consideration of any related controls.
(ii) Control risk: The risk that a misstatement that could occur in an
assertion about a class of transaction, account balance or disclosure
and that could be material, either individually or when aggregated with
other misstatements, will not be prevented, or detected and corrected,
on a timely basis by the entity's internal control.
Space to write important points for revision
 7 TYPES OF AUDIT
THIS CHAPTER INCLUDES
 Voluntary Audit or Private Audit  Forensic Audit
 Advantages of Auditing for Sole  Social Audit
Proprietors  Environmental Audit
 Advantages of Auditing for  Efficiency Cum Performance Audit
Partnership Firms & Others  Propriety Audit
 Statutory Audit  Operational Audit
 Government Audit  Continuous Audit
 Difference Between Private  Information Systems Audit
(Voluntary) Audit and Statutory  Annual Audit (Final Audit)
(Mandatory) Audit  Interim Audit
 Difference Between Statutory Audit  Balance Sheet Audit
and Government Audit  Statutory Report.
 Independent Financial Audit

Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical

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12.316
 [Chapter  7] Types of Audit O 12.317

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. Voluntary Audit “Though audit is not necessary for each form of
or Private Audit ownership, yet they go for audit’’.
“Audit of accounts may not be compulsory, yet
on e may get the books of accounts audited for
various reasons’’.
2. Statutory Audit Statutory audit is the checking of accounts
required by law. A statute or law may require
having an annual audit of financial records of a
company or any other entity. The law may
require the audit to be conducted in the specified
manner.
3. Government United Nations (UN)Handbook on Government
Audit Auditing in Developing Countries states that
“Government auditing is the objective,
systematic, professional and independent
examination of financial,
administrative and other operations of a public
entity for the purpose of evaluating and verifying
them, presenting a report containing comments,
conclusions and recommendations and
expressing the appropriate professional opinion
in respect of financial statements.”
4. I n d e p e n d e n t An independent financial audit may be conducted
Financial Audit by a qualified auditor at the request of a client,
which may be a sole-proprietorship, partnership,
non-profit organization or any other entity.
12.318 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Its objective is to comment on the truthfulness

and fairness of the Financial Statements, and it
may be compulsory under some Acts which
govern the entity.
5. Internal Audit Internal Auditing is an independent, objective
assurance and consulting activity designed to
add value and improve an organization’s
operations. It helps an organization accomplish
its objectives by bringing a systematic,
disciplined approach to evaluate and improve the
effectiveness of risk management, control, and
governance processes.
6. Scope of Internal 1. Reliability and Integrity of Financial and
Audit Operating Information
2. Economical and Efficient Use of Resources
3. Compliance with Laws, Policies, Plans,
Procedures, and Regulations
4. Accomplishment of Established Goals for
Operations
5. Safeguarding of Assets

7. Forensic Audit  Major accounting scandals involving Enron,

Worldtel, Parmalat and Satyam have been
widely reported.
 In all these cases, the methods and purpose
of manipulations in the Financial Statements
were peculiar to the motives of such
manipulations.

8. Social Audit  Organizations, these days, focus on attaining

economic growth through performing
processes that ensure social and
environmental development simultaneously.
 [Chapter  7] Types of Audit O 12.319

 A social audit is a way of measuring,

understanding, reporting and improving an
organization’s performance towards meeting
its social and ethical objectives.
9. Environmental According to the United States Environmental
Audit Protection Agency (USEPA), environmental audit
may be defined as a systematic, documented,
periodic and objective review by a regulated
entity of facility operations and practices related
to meeting environmental requirements,”
10. Propriety Adit The Propriety Audit means the verification of
following main aspects to find out whether:
(i) Proper recording has been done in
appropriate books of accounts.
(ii) The assets have not been misused and
have been properly safeguarded.
(iii) The business funds have been utilized
properly.
(iv) The concern is yielding the expected
results..
11. Continuous  Continuous audit may be defined as the
Audit examination and verification of a firm’s
financial transactions and their supporting
documents, continuously throughout the
year, at regular or irregular intervals.
 A continuous audit driven system generates
alarm triggers that provide advance notice
about anomalies and errors detected by the
system.
 It is performed usually by the firm’s internal
auditors to eliminate the year-end workload.
12.320 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

12. Information “Information systems auditing is an

Systems Audit organizational function that evaluates asset
safeguarding, data integrity, system
effectiveness, and system efficiency in computer
based information systems. It has arisen for
seven major reasons:
i. The consequences of losing the data
resource;
ii. The possibility of misallocating resources
because of decision based on incorrect data
or decision rules;
iii. The possibility of computer abuse if
computer systems are not controlled;
iv. The high value of computer hardware,
software, and personnel;
v. The high costs of computer error;
vi. The need to maintain the privacy of
individual persons; and
vii. The need to control the evolutionary use of
computers.”

13. Final Audit Annual Audit is conducted at the end of the

accounting year, after the books of accounts
have been closed.

14. Interim Audit Interim audit is an audit conducted between two

annual audits. It may be conducted for a specific
period, such as a quarter or half year, with an
interim object of declaration of interim dividend or
valuation of shares on a certain date, in case of
mergers.
 [Chapter  7] Types of Audit O 12.321

15. Balance Sheet Balance sheet audit is generally synonymous

Audit with statutory audit. In a balance sheet audit, the
auditor reviews and critically examines the
Financial Statements, which include the Balance
Sheet and Profit & Loss Account prepared by the
management. He verifies each assertion in the
Financial Statements, working backwards and
checking through original entries made in the
books of accounts and evidences to support the
entries recorded.
16. Complete, Partial A complete audit is an audit where the scope of
and Detailed (in audit is not confined to specific limits, which may
depth) Audit be set by the management or any other authority.
The auditor is required to check all the possible
aspects of a business, including manufacturing
operations, data flow processes, accounting
records and procedures, etc. In general business
practices, it is not feasible to get a complete audit
conducted.
17. Partial Audit Is a non statutory audit, which restricts the scope
of the auditor to checking of certain specific
aspects only. The auditor’s powers to enquiry are
restricted by his terms of engagement. He may
not be allowed to obtain information which falls
outside the purview of the scope defined for him.
18. Detailed Audit Is also known as audit-in-depth. It involves
checking of transactions from the time of their
recording till their final effect on the Financial
Statements. Every stage that a transaction goes
through in the accounting process is closely
examined by the auditor using various audit
evidences.
 12.322 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

19. Statutory Report Statutory Audit of a public company implies the

audit of the transactions of the company which
are the subject-matter of the report under Section
143. The auditor, however, has to certify as
correct only as much of the Statutory Report as
relates to the shares allotted by the company,
cash received in respect of such shares and
other receipts and payments of the company.

DISTINGUISH BETWEEN
2015 - June [4] (c) Answer the question:
(ii) Distinguish between Statutory audit and Government Audit.
(4 marks)
Answer:
Sl. Statutory Audit Government Audit
No.
i. Applicable to Applicable to
(a) All private companies (a) Government departments
(b) All co-operative societies (b) Statutory corporations
(c) Proprietorship and partnership (c) Government companies
concerns in some cases. E.g.
Tax audit under Section 44AB
of the Income Tax Act.
ii. (a) In case of private companies: (a) In case of government
shareholders. departments: Comptroller
and Auditor General.
(b) In case of sole proprietor and (b) In case of statutory
partnership: proprietor or corporation: as per the
partners. provisions of the special
statute for that corporation.
 [Chapter  7] Types of Audit O 12.323

(c) In case of trust: trustee or (c) In case of government

Managing Committee. company: Company Law
(d) In case of co-operative Board, on the advice of the
societies: Managing Committee Comptroller and Auditor
with prior approval of the General.
Registrar.
iii. Report is submitted to the owners/ Report is submitted to the
shareholders in a format prescribed shareholders and a copy is
by the Companies Act, 2013, in given to the Comptroller and
the case of Companies. Auditor General in a format
prescribed by the CAG.
Space to write important points for revision

DESCRIPTIVE QUESTIONS
2008 - Dec [5] {C} Comment on the following statements based on legal
provision :
(f) Management Audit is conducted by Statutory Auditor of the Company.
(2 marks)
Answer :
The statement is incorrect. The management audit is conducted by ;
(i) An administrative staff
(ii) An audit committee
(iii) An officer on special duty
(iv) Outside management consultants.
Space to write important points for revision

2008 - Dec [7] (e) What are the objectives of Operational Audit?(4 marks)
Answer :
The Objectives of operational audit are as given below:
1. To ensure that the operational activities are as per objectives of the
company.
 12.324 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

2. To assure management that MIS has been functioning properly to attain

organizational objectives.
3. To assure management that the management control system is
functioning efficiently and effectively.
Space to write important points for revision

2008 - Dec [8] (c) State the need for Management Audit. (4 marks)
Answer :
The objectives of management audit are:
(i) to detect and correct the human limitations of top management;
(ii) to improve upon management’s productivity;
(iii) to avoid possible losses arising from inefficient management and
(iv) to study the current state of all affairs of the management and suggest
suitable measures for improvement.
Space to write important points for revision

2009 - June [5] {C} Comment on the following statements based on legal
provisions:
(g) Management emphasises on problem identification rather than problem
solving. (2 marks)
Answer :
True. Identification of problems is the first step towards their solution. The
management ensures and examines whether policies and procedures
adopted in the organization, are consistent with objectives and understood
properly at all functional levels.
Space to write important points for revision

2009 - June [6] (a) What are the limitation of Management audit?
(4 marks)
Answer :
The limitations of Management audit are as given below :
 The management audit is audit of the management, by the
management, and for the management. The management auditors are
selected by the management itself.
 [Chapter  7] Types of Audit O 12.325

 The management auditors are generally familiar with the organization,

the staff and employees. The personal aspects cannot be overlooked in
such audits. Some may use this audit to level the score with someone
while other may utilize it to favour someone.
 They are more likely to take the facts for granted and may not probe into
depth to investigate the matter any further.
 Time and cost constraints may limit the scope, operation and extent of
such audits.
 The management audit team as selected by the management may not
look, act and work as a team. Conflicting interests, attitude and
inclination may jeopardize the entire objective of the audit.
Space to write important points for revision

2009 - Dec [8] (a) Management audit is beneficial to the Foreign

Collaborators also. How ? (2 marks)
Answer :
Management audit is beneficial to every one connected with the organization
in any manner because it is intended to make improvements in all processes
and functions of management. Foreign collaborators invest their funds in the
organization and would always wish for better utilization of it. They would like
to ensure that the management is not inefficient; management audit provides
them such assurance.
Space to write important points for revision

2010 - Dec [7] (d) (iii) Do you agree that Management Audit can be
conducted by an Audit Committee? (1mark)
Answer :
Yes, the management audit can be conducted by any group of individuals
appointed by the management. Audit committee is also a good choice for
conducting the management audit.
Space to write important points for revision

2013 - Dec [5] {C} Answer the following:

(b) What is Tax audit? (2 marks)
 12.326 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer:
Tax Audit :
 “A systematic and independent examination of data, statements,
records, operations and performances (financial or otherwise) of an
enterprise for a stated purpose.
 In any auditing situation, the auditor perceives and recognises the
propositions before him for examination, collects evidence, evaluates the
same and on this basis formulates his judgment which is communicated
through his audit report”.
 Under the existing provisions of Section 44AB, every person carrying
on business is required to get his accounts audited if the total sales,
turnover or gross receipts in the previous year exceed one crore rupees.
 Similarly, a person carrying on a profession is required to get his
accounts audited if the total sales, turnover or gross receipts in the
previous year exceed Twenty five lakh rupees.
Space to write important points for revision

2013 - Dec [6] (a) (i) State the basic features and necessity of continuous
Audit.
(ii) State the scope and advantages of Operational Audit. (4 marks)
Answer:
(a) (i) Continuous audit may be defined as the examination any verification
of a firm’s financial transactions and their supporting documents,
continuously throughout the year, at regular or irregular intervals.
Features of Continuous Audit :
(i) It is a process conducted throughout the year.
(ii) It is conducted at regular or irregular intervals.
(iii) It focuses on testing 100% of transactions.
(iv) Technology is important to enabling it.
(v) It provides advance notice about errors and irregularities
detected.
(vi) Surprise visits by the auditor are involved.
Necessary of Continuous Audit :
(i) Internal controls are inadequate.
(ii) The transactions run in large numbers.
 [Chapter  7] Types of Audit O 12.327

(iii) The management is interested in getting statement of accounts

audited periodically for enabling better management of
resources.
(ii) Operational audit, in its initial stages, was developed as a branch of
internal auditing. Internal audit focuses on accounting operations of
the entity but operational audit has a wider scope of working and
covers all other operations, such as production and marketing too.
Advantages :
• Operational audit is one of the management tools to get first
hand information.
• It is more useful in an entity where the management is at a
distance from actual operations.
• It is very useful in large organizations where management
cannot control the actual operations due to layers of delegation
of responsibility.
• The management information system has various tools like
routine performance report from department heads, internal
audit reports, surprise checks, periodic inspections and
investigation to control the managers responsible for their
departments.
• The operational audit is also one of the tools used in large or
geographically vast entities to control the operation at first stage
and to fill up the gaps of information provided by department
heads through periodic reports.
Space to write important points for revision

2014 - June [5] {C} (d) Why do the financial institutions demand
Management Audit by companies, while participating in their equities?
(2 marks)
Answer:
Management Audit:
Financial Institutions conduct the Management Audit while participating in
equities of a company to avoid possible loss arising out of inefficient
management. Financial Institutions also conduct Management Audit for
following reasons:
 12.328 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(i) For investments in a company

(ii) For granting loans to company
(iii) For giving guarantee etc.
Space to write important points for revision

2014 - June [7] (b) (i) Tabulate the differences between statutory audit and
forensic audit. (4 marks)
Answer:
Difference Between Statutory Audit and Forensic Audit
Sl. Statutory Audit Forensic Audit
No.
(i) Express an opinion on the Determine if any fraud has been
truthfulness and fairness of the committed in the client’s business.
Financial Statements.
(ii) Substantive and compliance Substantive procedures, audit-in
procedures are used. depth, trend, past-data analysis
are used.
(iii) Accounts relating to the relevant Accounts may be checked for as
accounting year are checked. many number of years as required
to detect the cause of the fraud, if
any.
(iv) Check the arithmetical accuracy Propriety aspect is focused on.
and compliance with procedures.
(v) Qualifications may be given in The amount of fraud, the persons
case of adverse findings. behind it and the legal implication
are mentioned in the audit report.
Space to write important points for revision

2015 - June [1] Answer the questions:

(g) What do you understand by Information Security Audit?
(h) What is continuous Audit? (2 marks each)
 [Chapter  7] Types of Audit O 12.329

Answer:
(g) Information Security Audit:
• Information Security Audit is an audit of the level of information
security in an organization.
• The controls in any business organization can be classified as
technical, physical and administrative controls.
• Thus, information security audit involves checking of security
controls from the physical security of data centres to the logical
security of databases.
• When centered on the IT aspects of information security, it can be
seen as a part of an information technology audit. However,
information security encompasses much more than IT.
Answer:
(h) Continuous Audit:
• According to the IIA (The Institute of Internal Auditors, USA),
continuous auditing is “a method used to perform control and risk
assessments automatically on a more frequent basis.
• Continuous auditing changes the audit paradigm from periodic
reviews of a sample of transactions to ongoing audit testing of 100
percent of transactions. It becomes an integral part of modern
auditing at many levels... technology is a key to enabling such an
approach.”
• Continuous audit may be defined as the examination and verification
of a firm’s financial transactions and their supporting documents,
continuously throughout the year, at regular or irregular intervals.
• A continuous audit driven system generates alarm triggers that
provide advance notice about anomalies and errors detected by the
system. It is performed usually by the firm’s internal auditors to
eliminate the year-end workload.
Space to write important points for revision

2015 - June [4] (a) Comment on the following:

(ii) Operational audit is merely an extension of Internal Audit.
(4 marks)
 12.330 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer:
(ii) The statement is true. In operational audit function, the internal auditor
goes beyond financial controls and looks into operational areas also.
Operational auditing having scope and objectives similar to that of
Internal Audit is therefore an extension of Internal Audit.
Space to write important points for revision

2015 - Dec [4] Answer the question:

(c) (i) What are the matters to be specially considered while conducting
the audit of a Partnership firm? (8 marks)
Answer:
(i) Special Points in Audit of a Partnership Firm: Matters which should
be specially considered in the audit of accounts of a partnership firm
are as under:
(i) Confirming that the letter of appointment, signed by a partner, duly
authorised, clearly states the nature and scope of audit
contemplated by the partners, specially the limitation, if any, under
which the auditor shall have to function.
(ii) Examine the partnership deed signed by all partners and its
registration with the registrar of firms. Also ascertain from the
partnership deed about capital contribution, profit sharing ratios,
interest on capital contribution, powers and responsibilities of the
partners, etc.
(iii) Studying the minute book, if any, maintained to record the policy
decision taken by partners specially the minutes relating to
authorisation of extraordinary and capital expenditure, raising of
loans, purchase of assets, extraordinary contracts entered into
and other such matters which are not of a routine nature.
(iv) Verifying that the business in which the partnership is engaged
authorised by the partnership agreement; or by any extension or
modification thereof agreed to subsequently.
(v) Examining whether books of account appear to be reasonable and
are considered adequate in relation to the nature of the business
of the partnership.
 [Chapter  7] Types of Audit O 12.331

(vi) Verifying generally that the interest of no partner has suffered

prejudicially by an activity engaged in by the partnership which, it
was not authorised to do under the partnership deed or by any
violation of a provision in the partnership agreement.
(vii) Confirming that a provision for the firm’s tax payable by the
partnership has been made in the accounts before arriving at the
amount of profit divisible among the partners. Also see various
requirements of legislations applicable to the partnership firm like
Section 44AB of the Income- tax Act, 1961 have been complied
with.
(viii) Verifying that the profits and losses have been divided among the
partners in their agreed profit-sharing ratio.
Space to write important points for revision

2016 - June [3] Answer the questions:

(a) What is Statutory Audit?
(d) What are basic features of Continuous Audit? (2 marks each)
Answer:
(a) Statutory audit is the checking of accounts required by law. A statute or
law may require having an annual audit of financial records of a
company or any other entity. The law may require the audit to be
conducted in the specified manner. The manner of reporting, contents
of the report and the authority to which the report of auditors should be
presented are all specified by the statute. Statutory audits are mandatory
in nature. The statutory auditor is generally the principal auditor in an
organization.
(i) In the case of companies, the Companies Act, 2013 governs the
audit of accounts, its reporting, and manner of preparing the audit
report.
(ii) In the case of audit of a Government body, the scope and audit
programmes are set by the Comptroller and Auditor General and the
Companies Act, 2013.
(iii) In the case of audit of an insurance company or a nationalized bank,
the audit is governed by specific statutes and IRDAIRBI guidelines.
Co-operative banks are also governed by the Co-operative
Societies Act, 1912.
 12.332 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(d) The Basic Features of Continuous Audit:

(i) It is a process conducted throughout the year.
(ii) It is conducted at regular or irregular intervals.
(iii) It focuses on testing 100% of transactions.
(iv) Technology is important to enabling it.
(v) It provides advance notice about errors and irregularities detected.
(vi) Surprise visits by the auditor are involved.
Space to write important points for revision

2016 - Dec [3] Answer the questions:

(a) What are the advantages of Social Audit?
(b) State objectives of Management Audit. (2 marks each)
Answer:
(a) The advantages of Social Audit may be enumerated as below:
(i) Encourages community participation among different business
entities.
(ii) Ensures continuous efforts towards environmental protection and
use of environment friendly production processes.
(iii) Builds customer satisfaction and trust through ethical business
practices.
(iv) Promotes collective decision making and sharing responsibilities.
(v) Develops human resources by working towards improvement of
workers' and the underprivileged persons' working/living conditions.
(b) The objectives of management audit are:
(i) To detect and correct the human limitations of top management;
(ii) To improve upon management's productivity;
(iii) To avoid possible losses arising from inefficient management and
(iv) To study the current state of all affairs of the management and
suggest suitable measures for improvement.
Space to write important points for revision
 [Chapter  7] Types of Audit O 12.333

Repeatedly Asked Questions

No. Question Frequency
1 What are basic features of Continuous Audit?
13 - Dec [6] (a) (i), 16 - June [3] (d) 2 Times

Table Showing Marks of Compulsory Questions

Year 14 14 15 15 16 16 17 17 18 18
J D J D J D J D J D
Descriptive 2
Total 2
 8 AUDIT ENGAGEMENT,
PROGRAMME, WORKING PAPERS
THIS CHAPTER INCLUDES
 Audit Engagement  Audit Risk
 Audit Programme  Audit Evidence
 Audit Working Papers  Audit Report
 Audit Note Book
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions

Legend
Objective Short Notes Distinguish Descriptive Practical

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12.334
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CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. Audit  An audit engagement refers to an audit that
Engagement an auditor performs.
 More specifically, it refers only to the initial
stage of an audit during which the auditor
notifies the client he has accepted the audit
work and clarifies his understanding of the
audit's purpose and scope.
2. Audit  An audit programme is a detailed plan of the
Programme auditing work to be performed, specifying
the procedures to be followed in verification
of each item and the financial statements
and the estimated time required.
 To be more comprehensive, an audit
programme is written plan containing exact
details with regard to the conduct of a
particular audit. It is a description or
memorandum of the work to be done during
an audit.
 Audit programme serves as a guide in
arranging and distributing the audit work as
well as checking against the possibility of
the omissions.
12.336 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

3. Audit Working  Audit working papers are the record of the

Papers planning and execution of the audit
engagement.
 Auditors retain a set of working papers for
each audit engagement for each year.
 The audit working papers for the current
year are referred to as the current working
papers.
 Working papers that are relevant to more
than one audit engagement are often kept
separately in a file referred to as permanent
working papers.
4. Audit Note Book  An audit book is usually a bound book in
which a large variety of maters observed
during the course of audit are recorded.
 The audit note book is a permanent record
of the auditor. For each individual audit, the
auditor usually maintains a separate audit
note book.
 The audit note book should be maintained
clearly, completely and systematically.
 An audit note book is a great evidential tool
available as a defence with the auditors in
the event of any charge is brought against
them.
5. Audit Risk Major accounting scandals involving Enron,
Worldtel, Parmalat and Satyam have been
widely reported. In all these cases, the methods
and purpose of manipulations in the Financial
Statements were peculiar to the motives of such
manipulations.
i. Inherent risk – It is the susceptibility of a
account balance or class of transaction to
 [Chapter  8] Audit Engagement, Programme,... O 12.337

misstatements that could be material, either

individually or when taken together with
misstatements in other balance or classes,
assuming that there were no internal
controls.
ii. Control risk- It is the risk that
misstatement, that could occur in an
account balance or class of transactions
and that could be material, either
individually or when taken together with
misstatements in other balances or classes,
will not be prevented/detected/corrected on
timely basis by the accounting and internal
control systems
iii. Detection risk -It is the risk that an
auditor’s substantive procedures (the
procedures designed to obtain evidence as
to the completeness, accuracy and validity
of the data produced by the accounting
system) will not detect a misstatement that
exists in account balance or class of
transactions that could be material, either
individually or when taken together with
misstatements in other balances or classes.
6. Audit Evidence  While auditing, the auditor come across
various assertions of the management.
 The auditor has to evaluate these
assertions so that he would be able to
express his opinion on the financial
statements.
 This evaluation can be made in the light of
some facts and reasons.
 These facts and reasons are called Audit
Evidence’.
 12.338 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

 The auditor should evaluate whether he has

obtained sufficient appropriate audit
evidence so that reasonable conclusions
can be drawn there from.
7. Audit Report Concept & Definitions While conducting every
audit auditor has to go through three phases
(a) Preliminary work for audit.
(b) Conduct of actual audit, and
(c) Conclusion of audit, which means
submission of Audit Report.

DISTINGUISH BETWEEN

2018 - June [7] (a) Distinguish between Permanent and Current Audit File.
(6 marks)
Answer:
Permanent and Current Audit File:
In case of recurring audits, some working papers files may be classified into
permanent audit files and current audit files while the former is updated with
the information of continuing importance, the latter contains information
relating to audit of a single period. The contents of these files are given
below:
Sr. Permanent Audit File Current Audit File
No.
1. Legal and organizational structure Correspondence relating to
of the entity, e.g. Memorandum of acceptance of annual re -
Association and Article of appointment.
Association in case of a company.
2. Extracts or copies of legal Extracts of important matters in
documents, agreements and the minutes of Board Meetings
minutes relevant to the audit. and General Meetings relevant
to the audit.
 [Chapter  8] Audit Engagement, Programme,... O 12.339

3 A record of study and evaluation of Copies of management letters.

internal controls.
4 Analysis of significant ratios and Analysis of transactions and
trends. balances.
5. Copies of the audited financial Copies of communication with
statements of previous year(s). other auditors, experts and third
parties.
6. Notes regarding significant Audit programme.
accounting policies.
7. Significant audit observations of the Conclusions reached on
earlier years. significant aspects of audit.
Space to write important points for revision

DESCRIPTIVE QUESTIONS
2008 - Dec [6] (e) Risk occurring due to insufficient or incompetent evidence
collected by the auditors to express his opinion on the financial statement
is called an Audit Risk. Is the statement correct? (2 marks)
Answer :
False: The audit risk implies and involves risks associated with process of
auditing as well as performance of auditor. Audit risk occurs due to
insufficiency or incompetent evidence collected by the auditor to express his
opinion on the financial statements.
Space to write important points for revision

2011 - June [6] (a) State the components of Audit risk. (2 marks)
Answer :
Audit Risk:
 Audit risk is the risk of a material misstatement of a financial statement
item that is or should be included in the audited financial statements of
 12.340 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

an entity. In theory, audit risk ranges anywhere from zero, where there
is complete certainty of no material misstatement, to one, where there
is complete certainty of a material misstatement.
 In practice, however, audit risk is always greater than zero.
 There is always some risk of material misstatement as it is not possible,
(except for the audit of the simplest of financial statements), due to the
limitations inherent in both accounting and auditing, to be absolutely
certain that a material misstatement will not exist.
i. Audit risk is the risk that the auditor gives an inappropriate audit
opinion when the financial statements are materially
misstated. Such misstatements can result from either
fraud or error. SA 400 on “Risk Assessments and
Internal Controls” identities the following three
components of audit risk:
ii. Inherent it is the susceptibility of an account balance or class of
risk transaction to misstatements that could be material,
either individually or when taken together with
misstatements in other balance or classes, assuming
that there were no internal controls.
iii. Control it is the risk that misstatement, that could occur in an
risk account balance or class of transactions and that could
be material, either individually or when taken together
with misstatements in other balances or classes will not
be prevented/detected/corrected on timely basis by the
accounting and internal control systems.
Space to write important points for revision

2012 - June [5] {C} Comment on the following statements based on legal
provisions:
(a) Development of the audit evidence is the basic to the understanding of
the audit process. (2 marks)
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Answer :
True: The development of audit evidence is fundamental to understand the
audit process. It is the evidence which gives information about the state of
affairs of the company. Evidence helps the auditor to decide what is to be
audited and how much is to be audited. Evidences are collected through
various audit techniques from various sources.
Space to write important points for revision

2013 - Dec [5] {C} Answer the following:

(a) What do you understand by audit evidence? (2 marks)
Answer:
 Auditing is a logical process. An auditor is called upon to assess the
actualities of the situation, review the statements of account and give an
expert opinion about the truthness and fairness of such accounts.
 This he cannot do unless he has examined the financial statements
objectively.
 Objective examination connotes critical examination and scrutiny of the
accounting statements of the undertaking with a view to assessing how
far the statements present the actual state of affairs in the correct
context and whether they give a true and fair view about the financial
results and state of affairs.
 An opinion founded on a rather reckless and negligent examination and
evaluation may expose the auditor to legal action with consequential loss
of professional standing and prestige.
 Audit evidence may be defined as the information used by the auditor in
arriving at the conclusions on which the auditor’s opinion is based.
 Audit evidence includes both information contained in the accounting
records underlying the financial statements and other information.
Space to write important points for revision

2013 - Dec [7] (b) (ii) Explain the significance of audit working papers.
(4 marks)
 12.342 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer:
The audit working papers constitute the link between the auditor’s report and
the client’s records. According to SA -230 , Audit Documentation refers to the
record of audit procedures performed, relevant audit evidence obtained, and
conclusions the auditor reached (terms such as “working papers” or “work
papers” are also sometimes used). The objects of an auditor’s working
papers are to record and demonstrate the audit work from one year to
another.
Audit documentation serves a number of purposes:
 Assisting the engagement team to plan and perform the audit.
 Assisting members of the engagement team responsible for supervision
to direct and supervise the audit work, and to discharge their review
responsibilities in accordance with SA 220.
 Enabling the engagement team to be accountable for its work.
 Retaining a record of matters of continuing significance to future audits.
 Enabling the conduct of quality control reviews and inspections in
accordance with SQC 1.
 Enabling the conduct of external inspections in accordance with
applicable legal, regulatory or other requirements.
Space to write important points for revision

2014 - June [6] (a) (ii) Discuss in brief, the principles, which are useful in
assessing the reliability of audit evidence. (4 marks)
Answer:
Useful principles for assessing the reliability of audit evidence:
Audit evidence refers to any information, verbal or written, obtained by the
auditor on which he bases his opinion on financial statements.
The reliability of audit evidence depends on its source-internal or external
and on its nature-visual, documentary or oral. While the reliability of audit
evidence is dependent on the circumstances under which it is obtained, the
following generalisations may be useful in assessing the reliability of audit
evidence.
(a) External evidence (e.g. confirmation received from third party) is usually
more reliable than internal evidence.
 [Chapter  8] Audit Engagement, Programme,... O 12.343

(b) Internal evidence is more reliable when related internal control is

satisfactory.
(c) Evidence in the form of documents and written representations is usually
more reliable than oral representations.
(d) Evidence obtained by the auditor himself is more reliable than that
obtained through the entity.
Space to write important points for revision

2014 - June [7] (b) (ii) What is meant by Audit Note Book? State its
importance. What are the contents of a typical Audit Note Book?
(8 marks)
Answer:
Audit Note Book:
An audit book is usually a bound book in which a large variety of matters
observed during the course of audit are recorded. The audit note book is a
permanent record of the auditor. For each individual audit, the auditor usually
maintains a separate audit note book. The audit note book should be
maintained clearly, completely and systematically. An audit note book is a
great evidential tool available as a defence with the auditors in the event any
charge is brought against them. In case of City Equitable Fire Insurance
Company, the auditors were relieved because they had maintained record
of the audit work performed at each stage.
Contents of audit note book:
(i) Name of the business enterprise.
(ii) Organisation structure.
(iii) Important provisions of Memorandum and Articles of Association.
(iv) Communication with the previous auditor, if any.
(v) Management representations and instructions.
(vi) List of books of accounts maintained by the enterprise.
(vii) Accounting methods, internal control systems followed by the
enterprise, applicable laws etc.
(viii) Key management personnel.
(ix) Errors and fraud discovered.
 12.344 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(x) Matters requiring explanations or clarifications.

(xi) Special points that need attention in the audit report and for
subsequent audits.
Space to write important points for revision

2014 - Dec [1] Answer the questions:

(h) What do you understand by audit programme?
(i) State the three components of audit risk. (2 marks each)
Answer:
(h) An audit programme is a written plan containing exact details with regard
to the conduct of a particular audit. It is a description or memorandum of
the work to be done during an audit. Audit Programme serves as a guide
in arranging and distributing the audit work as well as checking against
the possibility of omissions.
Answer:
(i) Three components of audit risks:
• Inherent risk (risk that material errors will occur)
• Control risk (risk that the client’s system of internal control will not
prevent or correct such errors); and
• Detection risk (risk that any remaining material errors will not be
detected by the auditor).
Space to write important points for revision

2014 - Dec [4] Answer the question:

(a) Comment on the following:
(iii) The Audit Note Book is a permanent record of the auditor.
(4 marks)
Answer:
Audit Note Book:
An audit book is usually a bound book in which a large variety of matters
observed during the course of audit are recorded. The audit note book is a
permanent record of the auditor. For each individual audit, the auditor usually
maintains a separate audit note book. The audit note book should be
maintained clearly, completely and systematically. An audit note book is a
 [Chapter  8] Audit Engagement, Programme,... O 12.345

great evidential tool available as a defence with the auditors in the event of
any charge is brought against them. In case of City Equitable Fire Insurance
Company, the auditors were relieved because they have maintained record
of the audit work performed at each stage:
(i) Contents of Audit Note Book.
(ii) Name of the business enterprise.
(iii) Organisation structure.
(iv) Important provisions of Memorandum and Articles of Association.
(v) Communication with the previous auditor, if any.
(vi) Management representations and instructions.
(vii) List of books of accounts maintained by the enterprise.
(viii) Accounting methods, internal control systems followed by the
enterprise, applicable laws etc.
(ix) Key management personnel.
(x) Errors and fraud discovered.
(xi) Matters requiring explanations or clarifications.
(xii) Special points that need attention in the audit report and for
subsequent audits.
Space to write important points for revision

2015 - June [4] (a) Comment on the following:

(i) An audit process involves significant collection of evidences.
(4 marks)
(b) (ii) Briefly explain the audit working paper files. (4 marks)
Answer:
(a) (i) “An audit process involves significant collection of evidences”
In any audit, the auditor examines the available evidences to him
and gives the opinion based on such examination. Moreover, he has
to carry out the audit within the framework of standard auditing
practices and that too with ethical conduct. The auditor has to
proceed in a systematic manner so that he would be in a position to
collect and review the purposeful evidences and also satisfy himself
of the correctness of the financial operations of the business.
Usually, the whole audit process involves the following aspects,
namely:
12.346 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

 Defining the scope of the audit work, i.e. preparation of the audit
engagement letter
 Obtaining the knowledge of the client’s business and formulating
the audit programme
 Evaluation of the accounting and internal control system existing
in the auditee enterprise
 Determining the nature, timing and the extent of audit
procedures keeping in mind the audit risk and the materiality
involved
 Adequate documentation is also necessary i.e. preparation of
audit note book and working papers
 Formulation of opinion about the financial statements
 Issuing of audit report.
An auditor resorts to the following techniques for collection of
relevant evidences, namely
 Vouching
 Confirmation
 Physical examination and observation
 Analytical procedures
 Test checking
 Inquiry
 Electronic data processing
 Preparation of reconciliation statements
 Flow Charts
 Scanning
Further, the various provisions of the law governing the
enterprise are complied with. He has to further examine the
accounting principles followed and disclose the deficiencies and
limitation of the scope if any. At the same time, it also a fact that the
selection of the appropriate audit procedures is a matter of
experience and judgement.
 [Chapter  8] Audit Engagement, Programme,... O 12.347

Answer:
(b) (ii) Audit working paper files :
 Audit working papers are the record of the planning and
execution of the audit engagement.
 Auditors retain a set of working papers for each audit
engagement for each year.
 The audit working papers for the current year are referred to as
the current working papers.
 Working papers that are relevant to more than one audit
engagement are often kept separately in a file referred to as
permanent working papers. .
 The audit working papers (current and permanent) for a client
audit engagement are sufficiently detailed to enable any
appropriately experienced and competent auditor who is not
familiar with the client to obtain an overall understanding of the
engagement.
 Further, as per SA 230, working papers are the momentous
records of the auditor which help in establishing that the
reasonably logical and verifiable conclusions were reached on
the basis of relevant audit evidence.
 These working papers also facilitate audit planning and
supervision of the audit work.
 The form and content of working papers vary from audits to
audits, but they are affected by the following matters:
(a) nature of engagement;
(b) form of audit report;
(c) nature and complexity of client’s business;
(d) nature and condition of client’s records;
(e) degree of reliance of internal controls;
(f) supervision of work performed by assistants.
Types of working paper files:
In case of recurring audits, some working papers files may be
classified into permanent audit files and current audit files: while the
former is updated with the Information of continuing importance, the
latter contains information relating to audit of a single period. The
contents of these files are given below:
 12.348 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Permanent Audit File Current Audit File

(a) Legal and organizational (a) Correspondence relating to
structure of the entity, e.g. MOA acceptance of annual re-
and AOA in case of a company. appointment.
(b) Extracts or copies of legal (b) Extracts of important matters in
documents, agreements and the minutes of Board Meetings
minutes relevant to the audit. and General Meetings relevant
to the audit.
(c) A record if study and evaluation (c) Copies of management letters.
of internal controls.
(d) Analysis of significant ratios & (d) Analysis of transactions and
trends. balances.
(e) Copies of the audited financial (e) Copies of communication with
statements of previous year(s). other auditors, experts and third
parties.
(f) Notes regarding significant (f) Audit programme.
accounting policies.
(g) Significant audit observations of (g) Conclusions reached on
the earlier years. significant aspects of audit.
Space to write important points for revision

2015 - Dec [1] Answer the question:

(j) What is meant by Audit programme and Audit Note Book? (2 marks)
Answer:
Audit Programme:
1. An audit programme is a detailed plan of applying the audit procedure
in the given circumstances with instructions for the appropriate
techniques to be adopted for accomplishing the audit objectives.
2. It is framed keeping in view the nature, size and composition of the
business, dependability of the internal control and the given scope of
work.
 [Chapter  8] Audit Engagement, Programme,... O 12.349

3. It provides sufficient details to serve as a set of instructions to the audit

team and also helps to control the proper execution of the work.
Audit Note Book:
1. An audit note book is usually a bound book in which a large variety of
matters observed during the course of audit are recorded.
2. It forms part of audit working papers.
3. A fresh audit note book is maintained for each year.
Space to write important points for revision

2016 - June [3] Answer the question:

(c) What do you understand by Audit Evidence? (2 marks)
Answer:
Audit Evidence:
 While auditing, the auditor come across various assertions of the
management. The auditor has to evaluate these assertions so that he
would be able to express his opinion on the financial statements.
 This evaluation can be made in the light of some facts and reasons.
These facts and reasons are called ‘Audit Evidence’.
 The auditor should evaluate whether he has obtained sufficient
appropriate audit evidence so that reasonable conclusions can be drawn
there from.
 It is to be noted that sufficiency an appropriateness are interrelated and
apply to evidence obtained from both substantive and compliance
procedures.
 Sufficiency refers to the quantum of audit evidence obtained and
appropriateness relates to its relevance and reliability.
 The following factors influence auditor’s judgement while obtaining audit
evidence:
(a) The nature of the item;
(b) The adequacy of internal controls;
(c) The nature and size of the business carried on by the entity;
(d) Situations which may exert an unusual influence on the
management;
(e) The financial position of the entity;
 12.350 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(f) The materiality of the item;

(g) The experience gained during the previous audits;
(h) The results of auditing procedures, including fraud or error which
may have been found;
(i) The type of information available;
(j) The trend indicated by accounting ratios and analysis.
Space to write important points for revision

2016 - June [9] (a) What is Audit Programme? State its advantages.
(8 marks)
Answer:
Audit Programme:
 An audit programme is a detailed plan of the auditing work to be
performed, specifying the procedures to be followed in verification of
each item and the financial statements and the estimated time required.
 To be more comprehensive, an audit programme is written plan
containing exact details with regard to the conduct of a particular audit.
 It is a description or memorandum of the work to be done during an
audit. Audit programme serves as a guide in arranging and distributing
the audit work as well as checking against the possibility of the
omissions.
 As per SA 300, the auditor should prepare a written audit programme
setting forth the procedures that are needed to be implemented while
carrying out the audit plan.
 He may take into account the reliance to be placed on internal controls.
 The auditor has some flexibility in deciding when to perform audit
procedures.
 But, sometimes he may have no discretion as to timing, such as,
observing the stock taking by the client’s personnel.
 The audit programme should consider previous year’s audit programmes
and these may be modified, if necessary.
An audit programme may be classified into two categories:
(i) Programme common to all types of audit. For example, checking of
books of accounts; and
 [Chapter  8] Audit Engagement, Programme,... O 12.351

(ii) Special programme containing the work relating to a particular audit.

For example, the audit programme for a partnership firm would be
different from that of a company.
Advantages of audit programme:
The main advantages of an audit programme are as follows:
(i) It serves as a ready check list of audit procedures to be performed.
(ii) The audit work can be properly allocated to the audit assistants or the
article clerks.
(iii) The auditor may easily know the extent of work done at any point of
time. Thus, the progress of work done can be under the supervision
and control of the auditor.
(iv) Audit programme would not only be useful for the audit assistants in
carrying the audit work but for the principal too as he would be in a
position to account for the individual responsibilities.
(v) A uniformity of the work can be attained as the same programme
would be followed from time to time.
(vi) It is a useful basis for planning the programme for the following year.
(vii) It may be used as evidence by the auditor in the event when any
charge is brought against him.
He can prove that there has no negligence on his part and he exercised
reasonable care and skill while performing the task.
Space to write important points for revision

2016 - Dec [3] Answer the questions:

(c) What are the contents of a typical Audit Note Book?
(e) Comment on the following in relation to SA– 230:
“Audit documentation serves a number of additional purposes.”
(2 marks each)
Answer:
(c) The contents of a typical audit note book may be enumerated as
below:
(i) Name of the business enterprise.
(ii) Organization structure.
(iii) Important provisions of Memorandum and Articles of Association.
 12.352 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(iv) Communication with the previous auditor, if any.

(v) Management representations and instructions.
(vi) List of books of accounts maintained by the enterprise.
(vii) Accounting methods, internal control systems followed by the
enterprise, applicable laws etc.
(viii) Key management personnel.
(ix) Errors and fraud discovered.
(x) Matters requiring explanations or clarifications.
(xi) Special points that need attention in the audit report and for
subsequent audits.
(e) Audit Documentation:
According to SA 230 on "Audit Documentation", audit documents once
collected serve a number of additional purposes. These purposes are as
follows:
 Enabling the conduct of quality control reviews and inspections.
 Enabling the conduct of external inspections in accordance with
applicable legal, regulatory, or other requirements.
 Enabling the engagement team to be accountable for its work.
 Retaining a record of matters of continuing significance to future
audits.
 Assisting the engagement team to plan and perform the audit.
 Assisting members of the engagement team responsible for
supervision to direct and supervise the audit work and to discharge
their review responsibilities in accordance with SA 220 "Quality
Control for an Audit of Financial Statement."
Space to write important points for revision

2017 - June [7] (a) Define ‘Audit Engagement Letter’. What are the general
contents of an audit engagement letter? (2 + 6 = 8 marks)
Answer:
Auditor’s Engagement
In case of a statutory audit the objective and scope of an audit is clearly
described in the relevant law. However, in a non-statutory audit it has to be
stated with absolute clarity so as to avoid any kind of ambiguity as to the
 [Chapter  8] Audit Engagement, Programme,... O 12.353

objective and scope of audit. A misunderstanding may arise about the exact
scope of the work. For example, the client may be under an impression that
while the auditor is preparing the accounts, the audit is also being carried
out. Therefore, in order to avoid any kind of misunderstanding or dispute it
is in the interests of both the auditor as well as the client to exactly define the
scope of the engagement and reduce the same in writing by way of audit
engagement letter. An auditor’s engagement letter signifies the confirmation
by the auditor of his acceptance of appointment as auditor, the
documentation of the objective and scope of audit or other work, and the
extent of his responsibilities to the client and the form of any reports. ICAI
(CA) has issued SAS 4410, SRS 4400 and SRE 2400 in this regard.
Although the form and content of the engagement letter differs from client to
client but in general the following references should be made in audit
engagement letter:
(i) The objective and the scope of the engagement.
(ii) Management’s responsibility for the financial statements.
(iii) The existence of inherent limitations of audit and resulting material
misstatements that may remain undiscovered,
(iv) The need for use of services of internal auditors and/ or other experts
that may arise during the course of the engagement.
(v) The requirement of management confirmation letter as regards
representations made by them concerning audit.
(vi) Restriction of the auditor’s liability, if any.
(vii) Basis for computation of audit fees and billing arrangements.
(viii) The form of reports or other communication of results of the
engagement.
Space to write important points for revision

2017 - Dec [7] (a) Discuss the various methods of obtaining audit evidences.
How will you assess the reliability of audit evidences obtained?
(5 + 3 = 8 marks)
 12.354 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer:
An auditor applies the following methods for obtaining sufficient and
appropriate audit evidence:
(i) Inspection: Inspection involves examining records or documents,
whether internal or external, in paper form or otherwise or a physical
verification of a tangible asset. Inspection can provide reliable audit
evidence depending on their nature and source and effectiveness of
the internal control over their generation and processing.
(ii) Observation: Observation consists of looking at a process or
procedure being performed by others on a real time basis. For
example the auditor may observe the inventory counting by the entity's
personnel and obtain evidence that it is done correctly.
(iii) External Confirmation: External confirmation represents audit
evidence obtained by the auditor as a direct written response from a
third party, in paper form or by electronic or any other medium. For
example, confirmation from the customer about the terms of
agreement.
(iv) Recalculation: Recalculation consists of checking the mathematical
accuracy of documents or records. This may be performed manually
or electronically.
(v) Reperformance: Reperformance involves auditor's independent
execution of procedures or controls that were originally performed as
part of entity's internal control.
(vi) Analytical Procedures: Analytical procedures involve evaluation of
financial information by studying possible relationships among both
financial and non- financial data and investigating identified
fluctuations from previous years that are inconsistent.
(vii) lnquiry: Inquiry consists of seeking information, both financial and
non-financial, from knowledgeable persons within or outside the entity.
Inquiries may range from formal written inquiries addressed to external
parties to informal inquiries addressed to client's staff.
 [Chapter  8] Audit Engagement, Programme,... O 12.355

As per SA 500, reliability of audit evidence depends on its source

(whether internal or external) and nature (whether visual, documentary
or oral). However, the following generalizations may be considered
useful while assessing the reliability of audit evidence.
(i) Evidence obtained from independent and external sources are
more reliable.
(ii) Internal evidence becomes more reliable when the related internal
control over its preparation and maintenance is effective.
(viii) Evidence obtained directly by the auditor is more reliable than those
obtained indirectly or by inference.
(ix) Evidence in documentary form is usually more reliable than oral
representation.
(x) Audit evidence provided by original documents is more reliable than
audit evidence provided by photocopies or facsimiles or documents
that have been filmed or digitized. In order to be certain about the
reliability of audit evidence in relation to a particular matter, an auditor
should try to obtain evidence from various sources. In case there
appears any inconsistency, the auditor must obtain additional
evidence by conducting other audit procedures.
Space to write important points for revision

2018 - Dec [7] (a) Discuss the method of obtaining Audit Evidences.
(6 marks)
 9 INTERNAL CHECK, INTERNAL
CONTROL AND INTERNAL AUDIT
THIS CHAPTER INCLUDES
 Internal Check  Cut off Procedures
 Difference between a Checklist  Examination in Depth/Auditing
and an Internal Control in Depth: “Walk Through Test”
Questionnaire  Difference between Test
 Distinction between Internal Checking and Statistical
Check, Internal Audit and Sampling
Internal Control  Internal Audit
 Surprise Check
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions

Legend
Objective Short Notes Distinguish Descriptive Practical

For detailed analysis Login at www.scannerclasses.com

for registration and password see first page of this book.

12.356
[Chapter  9] Internal Check, Internal Control and... O 12.357

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. Internal Check  The accounting of transactions has a
number of steps such as posting to the
concerned books of accounts, recording
receipts and payments of cash etc.
 These processes involve a various number
of staffs. Thus in an internal check system,
practically a continuous internal audit is
carried on by the staff itself.
 The work of one individual is checked by
the other in the staff.
 Internal check is a valuable part of the
internal control.
2. Internal Control  The evaluation of internal check system in
Questionnaires an organization is of great concern both to
the statutory auditor as well as to the
internal auditor.
 The guiding factor for audit operation by
the statutory auditor depends to a great
extent on the soundness or otherwise of
the internal controls in business.
 Due to the limitation of time a statutory
auditor can spend on a company’s audit,
he has to decide the extent of in-depth
audit of many areas, particularly the
checking and verification of routine aspects
of financial transactions.
12.358 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

3. Surprise Check All the audit procedures which are applied as

not in the general routine of conducting an
audit but are spontaneous in nature for surprise
checks. They are performed without giving a
prior notice to the client.
Features of Surprise Check:
• It is spontaneous in nature i.e. unplanned.
• Random selection of items to be checked.
• Helps in assuring maintenance of
up-to-date accounts.
• Performed in situations facing weak
internal controls.
4. Cut off  Periods usually coincide with calendar
Procedures months, which lead to the need for specific
demarcation between transactions forming
the part of one period from those included
in the following period.
 Thus, cut-off procedures are adopted to
allocate revenues and costs to the proper
accounting period.
5. E x a m i n a t i o n i. Fixation of the maximum tolerable error
Indepth/Auditing limit/desired confidence level.
in Depth ii. Selecting a few transactions in each area
of audit to be checked.
iii. Verification of those selected transactions-
100% by verifying the accounting aspects,
internal control aspects, documentation
and audit trail.
 [Chapter  9] Internal Check, Internal Control and... O 12.359

6. Internal Control The internal control system comprises all the

methods and procedures adopted to assist in
achieving the objective of efficient conduct of
business, ensure adherence to management
policies, safeguarding of assets, prevention
and detection of frauds and errors, and
checking the accuracy and completeness of the
accounting records. Internal checks and
internal audit are integral parts of the overall
internal control system.
7. Internal Audit “Internal audit is an independent appraisal
activity within the organization for the review of
financial, accounting and other operations done
as a basis of service to the management. It is
a managerial control which functions by
measuring and evaluating the effectiveness of
other controls”.

DISTINGUISH BETWEEN

2014 - June [7] (c) (i) Tabulate the differences between a Checklist and
Internal control questionnaire. (4 marks)
Answer:
Difference Between A Checklist and An Internal Control Questionnaire
Sl. Basis Check List Internal Control
No. Questionnaire
(i) Point of It is issued at the It can be issued at any point
Time commencement of audit of time and reported back
and reported back after immediately.
completion of audit.
 12.360 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(ii) Issued to It is issued to the audit It is issued to various

staff to be followed by people at different levels in
them during audit and the organization.
reported back at
completion.
(iii) Contents It contains instructions It contains questions to be
to be followed by audit answered by the employees
assistants. of the organization.
(iv) Objective It works as a guideline This is used to collect the
for audit staff so that no information to know about
area remains unchec- the internal control system
ked. and evaluate the weak-
nesses therein.
Space to write important points for revision

2015 - Dec [4] Answer the question:

(a) (i) Distinguish between internal audit and internal check. (7 marks)
Answer :
S. No. Basis Internal Check Internal Auditing
1 Way of It operates in routine to In an internal audit
Checking doubly check every part system, each component
of a transaction at the of work is checked.
time of occurrence and
recording of the same.
2 Objective Its objective is to ensure Its objective is to evaluate
that no one employee the internal control
has exclusive control system and to detect
over any transaction or frauds and errors.
group of transactions
and their recording in the
books.
 [Chapter  9] Internal Check, Internal Control and... O 12.361

3 Point of time Methods of recording In an internal audit

transactions are devised system, work is checked
where work of an after it is done.
employee is checked
continuously by
correlating it with the
work of others.
4. Thrust of The thrust of internal The thrust of internal
system control lies in fixing of system is to detect errors
r e s p o n s i b i l i t y a n d and frauds.
division of work to avoid
duplication.
5 Cost It is a part of internal In an internal audit
Involvement control and a method of system, work is checked
division of work, specially; therefore cost is
therefore does not add involved in addition to
to the cost. accounting
6 Repot The summary of day to The internal auditor
day transactions work as submits his report to the
report for the senior. management
Space to write important points for revision

2018 - Dec [7] (b) Distinguish between Internal Control and Internal Check.
(6 marks)

DESCRIPTIVE QUESTIONS

2008 - Dec [5] {C} Comment on the following statements based on legal
provision :
(c) Auditor can avoid checking of records where good internal check system
exist. (2 marks)
 12.362 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer :
If the statutory auditor is satisfied with internal control system and
performance of internal auditor, he often decides to curtail his audit
programme by dispensing with checking already done effectively and
efficiently by internal control staff. It must however, be mentioned that the
statutory auditor is not protected against the liabilities for negligence which
may arise due to his reliance on work performed by the internal auditor.
Space to write important points for revision

2008 - Dec [8] (e) Auditor while undertaking Audit of environment of personal
computer should know that inadequate control measures may create serious
problems. What are those ? (2 marks)
Answer :
Inadequate control measures can create serious problems like
(i) theft, alteration or loss of data
(ii) physical damage to data and the system itself
(iii) reduction in efficacy and efficiency of system.
Space to write important points for revision

2009 - June [8] (c) How has Internal Audit become an important
Management tool- Answer with reasons. (4 marks)
Answer :
Internal Audit has become an important management tool for the
following reasons :
1. Internal Auditing is a specialized service to look into the standards of
efficiency of business operation.
2. Internal Auditing can evaluate various problems independently in terms
of overall management control and suggest improvement.
3. Internal Audit’s independent appraisal and review can ensure the
reliability and promptness of MIS and the management reporting on the
basis of which the top management can take firm decisions.
4. Internal Audit system makes sure the internal control system including
accounting control system in an organization is effective.
 [Chapter  9] Internal Check, Internal Control and... O 12.363

5. Internal Audit ensures the adequacy, reliability and accuracy of financial

and operational data by conducting appraisal and review from an
independent angle.
6. Internal Audit is an integral part of “Management by System”.
7. Internal Audit can break through the power ego and personality factors
and possible conflicts of interest within the organization.
8. It ensures compliance of accounting procedures and accounting policies.
9. Internal Auditor can be of valuable assistance to management in
acquiring new business, in promoting new products and in launching
new projects for expansion or diversification of business.
Space to write important points for revision

2009 - Dec [5] {C} Comment on the following statements based on legal
provisions:
(a) Internal Auditor has a big role to play in preventing fraud. (2 marks)
Answer :
The statement is correct: Internal auditing is tantamount to day to day
auditing which has a significant role to play in detecting and preventing fraud
and other misappropriation of money and other assets. It is independent
appraisal activity within the organization for the review of operations as
services to the management.
Space to write important points for revision

2009 - Dec [8] (f) Internal Audit and Internal Control are one and same.
Explain. (2 marks)
Answer :
No, Internal audit and internal control are different. Internal audit is part of
Internal control. Internal control goes beyond financial and accounting
aspects.
Space to write important points for revision

2010 - June [6] (d) Internal Check is said to have some fundamental aims.
If so give details. (4 marks)
 12.364 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer :
 Internal check is a part of the overall internal control system and
operates as a built-in device as far as the staff organisation and job
allocation aspects of the control system are concerned.
 A system of internal check in accounting implies organisation of system
of book keeping and arrangement of staff duties in such a manner that
no one person can completely carry through a transaction and record
every aspect thereof.
 The essential elements of a goods system of internal check are:
(i) Existence of checks on the day-to-day transaction.
(ii) Which operate continuously as a part of the routine system.
(iii) Whereby the work of each person is either proved independently or
is made complementary to the work of another.
Its objective is to prevent and to bring about a speedy detection of frauds,
wastes and errors. The system is based on the principle that when the
performance of each individual in an organisation, normally and
automatically, is checked by another, the chances of occurrence of errors,
or their remaining undetected, are greatly reduced; also that, when two or
more persons essentially must combine either to receive or to make a
payment, there will be lesser possibility of a fraud being perpetrated by them.
Space to write important points for revision

2010 - Dec [8] (f) Name at least 4 aspects which are being examined by the
Auditor while making appraisal and review of Internal Audit/Check.
(2 marks)
Answer :
The internal control, internal audit and internal check are evaluated by the
statutory auditor to decide the scope of audit being conducted by him. He
can evaluate the system depending upon his judgment, experience and
expertise.
Following aspects should be looked into by auditor to appraise the internal
control, audit and check system:
1. Documentation and work flow.
2. Organisation structure.
 [Chapter  9] Internal Check, Internal Control and... O 12.365

3. Systems of communication.
4. Assessment of performance.
5. Internal Check System.
6. Variance analysis.
Space to write important points for revision

2011 - June [5] {C} Comment on the following statements based on legal
provisions:
(f) Internal Auditing is a function distinct from Authorisation and recording.
(2 marks)
Answer :
True: It is imperative that the control to be exercised by the organization on
the Internal Audit department shall not include the functional area of auditing.
If internal audit function is desired to serve as a real management tool it must
be allowed to function independently to achieve better efficiency and
productivity.
Space to write important points for revision

2011 - June [6] (g) What is Auditing in depth ? (2 marks)

Answer :
Auditing in depth: Auditing in depth means the tracing of a transactions
through its various stages from origin to completion, examining the
supporting records at each stage and ascertaining whether all the
requirements laid down in the system of internal check have been complied
with.
Space to write important points for revision

2011 - Dec [5] {C} Comment on the following statements based on legal
provisions:
(f) For an internal audit function to be effective, the same must be
independent of the activities to be audited. (2 marks)
 12.366 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer :
True: In every audit, the auditor and his associates must be completely
independent of the auditee. It is important that the control of organization on
internal audit department should not include the auditing function and area.
Audit is meaningless if it is not independent.
Space to write important points for revision

2011 - Dec [8] (c) (i) The patterns and degree of internal control may vary
between organisation to organisation due to certain variable factors. Name
at least six such factors. (3 marks)
Answer :
The control environment in an enterprise depends largely on the following
factors:
(i) The entity’s organizational structure and methods of assigning
authority and responsibility (including segregation of duties and
supervisory functions).
(ii) The function of the board of directors or the corresponding governing
body and its committees, e.g. how strong is the audit committee of the
board of directors.
(iii) Management’s philosophy and operating style. Does the management
believe in having a strong control environment (which implies that the
management itself would also be subjected to the discipline of
controls)?
(iv) Management’s control system including the internal audit function,
personnel policies and procedures.
Space to write important points for revision

2012 - June [5] {C} Comment on the following statements based on legal
provisions:
(e) Cost Accountant cannot be Internal Auditor as Internal Audit is related
to financial accounting.
(f) Test checks may be applied to all transactions. (2 marks each)
 [Chapter  9] Internal Check, Internal Control and... O 12.367

Answer :
(e) False: Cost Accountant can also be the internal auditor provided, he is
not the Cost Auditor of the same company.
(f) False: Only some transactions are subject to Test Check. Cash/Bank
Book and Pass Book should be thoroughly checked.
In section 148 of the Companies Act, 2013,—
(i) in sub-section (3),—
(a) for the words "Cost Accountant in practice", the words "cost
accountant" shall be substituted;
(b) in the Explanation, for the words "Institute of Cost and Works
Accountants of India", the words "Institute of Cost Accountants of
India" shall be substituted;
(ii) in sub-section (5), in the proviso, for the words "cost accountant in
practice", the words "cost accountant" shall be substituted.
Space to write important points for revision

2012 - June [6] (c) Internal Control and Internal Check are same.—
Comment. (4 marks)
Answer :
 Internal control is the system of control established by the management
in order to carry on business in an orderly and efficient manner, ensure
adherence to management policies, safeguard assets and completeness
of records whereas Internal check is a system of allocation of
responsibility, division of work and methods of recording transactions,
whereby the work of one employee is checked continuously by another.
 Internal check system is one part of internal control system. Internal
control is broader concept as compared to internal check system; it
contains many more types of controls other than the internal check
system.
 In internal control system, controls other than the internal check system
are internal audit system and other non- financial control systems like
quality control, purchasing controls, marketing controls etc.
 12.368 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

 The essence of internal check system is that the check should be

automatic, continuous and objective while the essence of internal control
system is in implementation of Internal check and Internal audit.
Way of checking: In internal check system work is automatically checked
whereas in internal audit system work is checked specially.
Cost involvement: In internal check system checking is done when the work
is being done. Mistake can be checked at an early stage in internal check
system.
Thrust of system: Thrust of internal check system is to prevent the errors
and whereas the thrust of internal audit system is to detect the errors and
frauds.
Time of checking: In internal check system checking is done when the
work is being done whereas in internal audit system work is checked after it
is done. Mistakes can be detected at an early stage in internal check system.
Space to write important points for revision

2013 - Dec [6] (b) (ii) What are the limitations of Internal Control?
(4 marks)
Answer:
Limitations of Internal Control :
(i) Organization Deficiencies in organizational structure make
Structure internal control ineffective.
(ii) Size of the Small organizations have very low levels of
Organization internal control, which are almost negligible due to
more interferences by owners and management.
(iii) Unusual The internal control procedures, normally fail to
Transactions keep a check on unusual , transactions.
(iv) Costly The implementation of internal control procedures
and processes involves incurring cost in terms of
time, effort and resources.
 [Chapter  9] Internal Check, Internal Control and... O 12.369

(v) A b u s e o f Members at the top-level management may

Power override / interfere with control.
(vi) Collusion of It may lead to internal controls being over-ridden.
two or more
people
(vii) Obsolescence Control system may become redundant with
passage of time if not updated with change in the
size and nature of business.
(viii) Frequent Follow-up procedures need to be frequent to
follow-up ensure its effectiveness, which is extremely time
measures consuming.
Space to write important points for revision

2013 - Dec [7] (c) (i) State the areas of operations of Internal Audit and its
features. (8 marks)
(ii) What is cut off procedure? Explain its significance in the context of
Auditing. (4 marks)
Answer:
(i) According to the Institute of Internal Auditors, internal audit
involves five areas of operations :
(i) Reliability and Internal auditors should review the reliability
integrity of and integrity of financial and operating
financial and information and the means used to identify,
operating measure, classify and report such information.
information
12.370 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(ii) Compliance with Internal auditor should review the systems

laws, policies, established to ensure compliance with those
plans, proce- policies, plans and procedures, laws and
dures and regulations which could have a significant
regulations impact on operations and reports and should
determine whether the organization is in
compliance thereof.
(iii) Safeguarding of Internal auditors should verify the existence of
Assets assets and should review the means of
safeguarding assets.
(iv) Economic and Internal auditor should ensure the economic
efficient use of and efficient use of resources available.
resources
(v) Accomplishing Internal auditor should review operation or
the established programmes to ascertain whether results are
objectives and consistent with established objectives and
goals for goals and whether the operations or
operations programmes are being carried out as planned.

Features of Internal Audit :

(a) It is an independent appraisal activity within the organization.
(b) It can be conducted by the staff of the entity or by an independent
professional appointed for that purpose.
(c) It is conducted for review of accounting, financial and other
operations and controls established within an organization.
(d) It is conducted as a service to the organization and is not a part of
the organization.
(e) It intends to furnish the analysis, appraisal, suggestions and
information concerning the activities reviewed to the management.
(f) Internal auditing functions as a continuous effort for promoting
effective control at cost reasonable cost.
 [Chapter  9] Internal Check, Internal Control and... O 12.371

(ii) Cut off procedure would mean a procedure adopted to give a delink
between two time periods prompted by accounting procedure or a
legal requirement.
Example: Date of accounting closing to ascertain the profit or loss - for
accounting procedure.
Ascertain the profits between pre and post incorporation periods - legal
requirement. Possible areas where cut off procedure has significant
impact are given below:
(a) Accounts receivable and accounts payable these are the most
susceptible to recording of transactions in the inappropriate
accounting period.
(b) Purchase bills or raising of sales invoice which requires to be
linked to the accounting period for determining the profit or loss of
the period.
It is the auditor’s duty to examine cut off points and ensure that the
transactions are recorded in the relevant period in which the
commercial transactions relate or take place.
Space to write important points for revision

2014 - June [5] {C} Answer the following:

(a) What is test checking in Audit Work? (2 marks)
Answer:
Test Checking
Test checking is concerned with selecting and examining a representative
sample from a large number of similar items. There is no hard and fast rule
of selecting item for the test checking. The justification for the test checking
lies in the theory of probability which states that a sample selected from a
series of items will tend to exhibit the same characteristics as present in the
population, i.e. full series of items. While test checking the following aspects
need to be considered:
(i) Presentation and disclosure.
(ii) Adherence to the generally accepted accounting practices.
(iii) Compliance with the statutory requirements.
 12.372 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(iv) Existence of errors and frauds.

(v) Arithmetical accuracy.
(vi) Materiality of the items involved.
Space to write important points for revision

2015 - June [1] Answer the question:

(i) What do you understand by test checking in Audit Work? (2 marks)
Answer:
Please refer 2014 - June [5] {C} (a) on page no. 371
Space to write important points for revision

2015 - June [4] (a) Comment on the following:

(iii) There is no need to design better internal controls in an EDP or
computerised system. (4 marks)
(iv) Internal check is a part and parcel of internal control. (4 marks)
Answer:
(iii) This is not true Computerization, automatically implies a constant
review of the system to increase the efficiency in producing reliable
data. As a result the internal controls are normally better designed
under computerized systems. Automatic checks are instituted and the
responsibilities of various people are clearly stated.
Answer:
(iv) Yes Internal control is a plan of organization and covers all methods
and procedures adopted by management to assist its objectives of
ensuring the orderly and efficient conduct of business, it includes
physical and financial control and covers internal check and internal
audit also. Hence, internal check is part of internal control.
Space to write important points for revision

2016 - June [3] Answer the question:

(b) What is Test Checking? (2 marks)
Answer:
Please refer 2014 - June [5] {C} (a) on page no. 371
Space to write important points for revision
 [Chapter  9] Internal Check, Internal Control and... O 12.373

2016 - Dec [10] (a) Why and how is Internal Audit necessary to the
Management? (8 marks)
Answer:
The need for internal audit has increased in demand due to the
following reasons:
(i) Increased size and complexity of businesses.
(ii) Enhanced compliance requirements.
(iii) Focus on risk management and internal controls to manage them.
(iv) Unconventional business models.
(v) Intensive use of information technology.
(vi) Stringent norms mandated by regulators to protect investors.
(vii) An increasingly competitive environment.
Internal Audit has become an important management tool for the
following reasons:
(i) Internal audit ensures compliance of Companies (Auditors Report)
Order, 2015.
(ii) It ensures compliance of accounting standards and policies.
(iii) It ensures reliability of MIS through internal audit's independent
appraisal and review.
(iv) It looks into the standard of efficiency of business operation.
(v) It can evaluate various problems independently and suggest
improvement.
(vi) This system makes the internal control system effective.
(vii) It ensures the adequacy, reliability, accuracy and understandability of
financial and operational data.
(viii) It performs as an integral part of 'Management by System'.
(ix) It can add valuable assistance to management in acquiring new
business, promoting new products and expansion or diversification of
business etc.
Space to write important points for revision

2017 - June [7] (b) ‘Checklist and Internal Control Questionnaire are not the
same.’ – Discuss. (4 marks)
 12.374 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer:
Difference Between a Checklist and Internal Control Questionnaire
S. Basis Check List Internal Control
No. Questionnaire
i. Point of It is issued at the It can be issued at any
Time commencement of audit point of time and reported
and reported back after back immediately.
completion of audit.
ii. Issued to It is issued to the audit It is issued to various people
staff to be followed by at different levels in the
them during audit and organization.
reported back at
completion.
iii. Contents It contains instructions to It contains questions to be
be followed by audit answered by the employees
assistants. of the organization.
iv. Objective It works as a guideline for This is used to collect the
audit staff so that no area information to know about the
remains unchecked. internal control system and
evaluate the weaknesses
therein.
Space to write important points for revision

2017 - Dec [7] (b) ‘An auditor applies various techniques to evaluate the
internal control system of an organization’—Discuss. (4 marks)
Answer:
Techniques for Evaluation of Internal Control System
(i) Narrative Record: It is a complete and exhaustive description of the
system. It is appropriate in circumstances where a formal control
system is lacking, like in the case of small businesses. Gaps in the
control system are difficult to identify using a narrative record.
 [Chapter  9] Internal Check, Internal Control and... O 12.375

(ii) Check List: It is a series of instructions that a member of the audit

staff is required to follow. They have to be signed/ initialed by the audit
assistant as proof for having followed the instructions given. A specific
statement is required for every weakness area.
(iii) Flow Chart: It is a pictorial representation of the internal control
system depicting its various elements such as operations, processes
and controls, which help in giving a concise and comprehensive view
of the organization's working to the auditor. The internal control
evaluation process becomes easier through a flow chart as a broad
picture of all the controls involved can be gauged in a glimpse.
(iv) Internal Control Questionnaire: This is the most widely used method
for collecting information regarding the internal control system and
involves asking questions to various people at different levels in the
organization. The questionnaire is in a pre- designed format to ensure
collection of complete and all relevant information. The questions are
formed in a manner that would facilitate obtaining full information
through answers in "Yes" or "No".
Space to write important points for revision

2018 - June [7] (b) “Internal Audit is an important tool for the management.” -
Discuss. (6 marks)
Answer:
Internal Audit is an important management tool for the following
reasons:
(a) Internal Audit ensures compliance of Companies (Auditors Report)
Order, 2016.
(b) It ensures compliance of accounting standards and policies.
(c) It ensures reliability of MIS through internal audit's independent appraisal
and review.
(d) It looks into the standard of efficiency of business operation.
(e) It can evaluate various problems independently and suggest
improvement.
(f) This system makes the internal control system effective.
 12.376 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(g) It ensures the adequacy, reliability, accuracy and understandability of

financial and operational data.
(h) It performs as an integral part of 'Management by system'.
(i) It can add valuable assistance to management in acquiring new
business, promoting new products and expansion or diversification of
business etc.
Space to write important points for revision

Repeatedly Asked Questions

No. Question Frequency
1 What is test checking?
14 - June [5] (a), 15 - June [1] (i),
16 - June [3] (b) 3 Times
2 ‘Checklist and Internal Control Questionnaire are not
the same.’ – Discuss.
14 - June [7] (c) (i), 17 - June [7] (b) 2 Times

Table Showing Marks of Compulsory Questions

Year 14 14 15 15 16 16 17 17 18 18
J D J D J D J D J D
Descriptive 2
Total 2
 10 VOUCHING AND VERIFICATION
THIS CHAPTER INCLUDES
 Meaning of Voucher  Audit Receipt
 Types of Vouchers  Audit Expenditure
 Meaning of Vouching  Verification of Assets and
 Teaming and Leading/Lapping Liabilities.
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical

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12.377
12.378 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. Voucher A voucher is a piece of substantiating
evidence, in the form of a written record of
expenditure, disbursement, or completed
transaction.
Examples of types of vouchers: Cash
Memo, Sale Invoice, Purchase Requisition
Slip, Purchase Invoice, Gate Keeper’s Note,
Bank Paying Slip, Bank Statements, Minutes
Book, etc.
2. Types of Vouchers i. Original and Collateral Vouchers:
Original vouchers are called primary
vouchers, and their copies or supporting
documents are called collateral vouchers.
ii. Internal and External Vouchers:
Vouchers may generate inside the
company (internal vouchers) or outside the
company (external vouchers).
iii. Missing Vouchers:
A missing voucher can be any of the
following: missing Cash Memo, missing
page in a Cash Collection Statement,
missing inward challan for goods received,
missing Inspection Report for material,
missing TDS Certificate for tax deductions
at source, missing Resolution to authorize
increase in borrowing power by the
company, missing Bank Statement for a
day or a month, etc.
 [Chapter  10] Vouching and Verification O 12.379

3. Vouching “Vouching is the examination by the auditor of

all documentary evidences, which are
available to support the authenticity of the
transaction entered in the client’s record.” -
Spicer and Pegler.
4. Teeming & Lading/ Teeming and Lading is a commonly followed
Lapping method of misappropriation of cash by
concealing cash shortages and covering them
through recoveries from another customer. It is
not uncommon in case of cash collections if
the internal check and internal control on cash
transactions are not proper.
5. Audit of Receipts (1) Cash Sales
(2) Sale of Assets
6. Audit of (1) Transactions with Directors
Expenditure i. Compliance with Sec 188 of Co.
Act, 2013: Check that any contract
entered into by the director or his
relatives etc. with the company is in
accordance with the provisions of
Section 188 of the Companies Act,
2013.
ii. Disclosure of interest by Director:
Every director of a company who is
directly or indirectly, concerned or
interested in a contract or agreement
entered or proposed to be entered into
with the company, must disclose his
interest to the company at the Board
meeting (Section 184).
iii. Compliance with Sec 197 of Co.
Act, 2013: The remuneration paid to
the directors of public companies or
the private companies which are the
12.380 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

subsidiaries of public companies

should be in accordance with the
provisions of Section 197 of the
Companies Act, 2013.
(2) Payment for Acquisition of Assets
i. Authorization: The payment for
acquisition of assets should be made
under proper authorization and be
duly supported by receipt for amount
paid.
ii. Ownership: Check the title deeds in
case of purchase of immovable
properties. Also ensure that the
ownership in case of the moveable
asset has been registered in the name
the purchaser.
iii. Existence: The auditor should also
verify the existence, value and the title
of the assets acquired.
iv. Compliance with Sec 179 of Co.
Act, 2013: In case of a company,
ensure that the provisions of Section
179 of the Companies Act, 2013 have
been complied with.
v. Capitalization of Assets: Check that
the cost of the asset purchased has
been properly capitalized in the books
of account. Thus, the amounts paid to
bring the asset to their present
condition or location and incurred upto
the asset being put into use should be
capitalized. Further such taxes (e.g.
CENVAT) which are recoverable from
the authorities shall not form the part
of cost of the asset.
 [Chapter  10] Vouching and Verification O 12.381

7. Verification of  Only the vouching to ascertain the

Assets and arithmetical accuracy is not enough, the
Liabilities auditor is supposed to go beyond that
while doing audit.
 In all types of transactions vouching is
must, but in case of capital items the
auditor is required to go beyond that and
verify the physical existence and evaluate
the assets and liabilities to arrive at true
and fair view of the state of affairs of
business.

SHORT NOTES

2017 - June [10] Write a short note:

(c) Audit of Inventories (4 marks)
Answer:
The following features of inventories have an impact on the related
audit procedures:
(i) By their very nature, inventories normally turn over rapidly.
(ii) Inventories are susceptible to obsolescence and spoilage. Further,
some of the items of inventory may be slow-moving while others may
follow a seasonal pattern of movement.
(iii) Inventories are normally movable in nature, although there may be
some instances of immovable inventories also, e.g., in the case of an
entity dealing in real-estate.
(iv) All the items of inventory may not be located at one place but may be
held at different locations such as factories and warehouses, or with
third parties such as selling agents.
 12.382 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(v) The individual items of inventory may not be significant in value, but
taken together, they normally constitute a significant proportion of total
assets and current assets of manufacturing, trading and certain
service entities.
(vi) Physical condition (e.g., stage of completion of work-in-process in
certain industries) and existence of certain items of inventories may be
difficult to determine.
(vii) Valuation of inventories may involve varying degrees of estimation,
including expert opinions, e.g., in the case of Jewellery.
Space to write important points for revision

2018 - Dec [10] Write short note:

(b) Physical verification of Inventory and Auditor’s responsibility thereof
(4 marks)

DESCRIPTIVE QUESTIONS

2009 - June [6] (b) State in brief the important points that should be
considered by an Auditor while conducting vouching. (4 marks)
Answer:
(A) It is important to note that in vouching of payments, the auditor does not
merely seek proof that money has been paid away, but keeps into
consideration the following relevant points:
i. Checking the relevant documentary evidence: It helps in assuring
the genuineness of the transaction and accuracy in its recording.
ii. Checking the authority on the basis of which the entry has been
made: It helps in assuring that the transaction has actually occurred.
iii. Confirming that the amount mentioned in the voucher has been
posted to the appropriate account: It helps in assuring the proper
classification according to accounting policies and practices.
iv. Checking that complete disclosure regarding the nature of the
transaction is made.
 [Chapter  10] Vouching and Verification O 12.383

(B) Thus, the general principles of vouching as well as auditing can be

listed as under:
(i) Genuineness
(ii) Accuracy
(iii) Authenticity
(iv) Authorization
(v) Classification
(vi) Disclosure
Space to write important points for revision

2011 - Dec [5] {C} Comment on the following statements based on legal
provisions (no mark for wrong reasons or justification):
(c) Vouching can be avoided. (2 marks)
Answer :
False. The vouching is fundamental stone on which accounting and auditing
stand. Vouching is very helpful in detecting errors and frauds. It also checks
various compliances as required by law. Thus vouching can not be avoided
in auditing.
Space to write important points for revision

2012 - June [5] {C} Comment on the following statements based on legal
provisions:
(b) Verification of assets and liabilities is very important function.
(2 marks)
Answer :
(b) Correct. The value, ownership, title and existence of various assets and
liabilities are to be checked and verified by the auditor before the
submission of his report. The verification is very important function of
auditing.
Space to write important points for revision

2013 - Dec [5] {C} Answer the following:

(c) Describe ‘Voucher’ and ‘Vouching’ (2 marks)
 12.384 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer:
Voucher : A Voucher is a piece of substantiating evidence, in the form of a
written record of expenditure, disbursement, or completed transaction.
Vouching : Vouching is the examination by the auditor of all documentary
evidences, which are available to support the authenticity of the transaction
entered in the client’s record.
Space to write important points for revision

2014 - June [6] (or) (b) (ii) What are the objects of verification of Assets and
liabilities. (4 marks)
Answer :
Verification of assets and liabilities is done with the following objects:
(i) To know whether the Balance Sheet exhibits a true and fair view of the
State of affairs of the business.
(ii) To find out whether the assets were in existence.
(iii) To find out the ownership and title of the assets.
(iv) To show correct valuation of assets and liabilities.
(v) To verify the arithmetical accuracy of the books of accounts.
(vi) To ensure that the assets have been recorded properly.
(vii) To detect frauds & errors, if any
(viii) To find out whether there is an adequate internal control regarding
acquisition, utilization and disposal of assets.
Space to write important points for revision

2015 - June [1] Answer the question:

(j) What is vouching? (2 marks)
Answer:
“Vouching is the examination by the auditor of all documentary evidences,
which are available to support the authenticity of the transaction entered in
the client’s record.” - Spicer and Pegler.
The act of examining all documentary evidences (vouchers) is referred to as
vouching. Its basic objective is to establish the authenticity of the transactions
recorded in the primary books of account. Vouching is said to be “the essence
of auditing” or may be termed as the “backbone of auditing” .
Space to write important points for revision
 [Chapter  10] Vouching and Verification O 12.385

2015 - June [4] Answer the questions:

(c) (iv) What do you understand by Teeming and Lading with respect to
misappropriation of cash? Explain the procedure that auditor has
to follow for its timely detection. (4 marks)
Answer:
Teeming & Lading is a commonly followed method of misappropriation of
cash by concealing cash shortages and covering them through recoveries
from another customer. It is not uncommon in case of cash collections if the
internal check and internal control on cash transactions are not proper. E.g.,
a salesman recovers ` 10,000 from customer C and misappropriates the
same, but to conceal the misappropriation, he declares ` 10,000 received
later from another customer D as received from C so that the balance of C
confirms to the client’s debtor list, and so on for recovery from E of same
amount declared as from D.
Teeming and lading may not amount to fraud, but negligence on the part of
the management and weaknesses in internal checks or controls may lead to
substantial amounts being misappropriated by the cashier. This may result
in a huge loss if he is not in a position to clear the debts when caught.
The auditor has to follow the following procedure for timely detection
of teeming and lading:
(i) Ascertain if the Cash Memos are consecutively numbered, and the
dates, name and amount as per the Daily Summary reconcile with
relevant cash receipt records.
(ii) Reconcile individual cash amounts as per receipts with records in the
Rough Cash Book.
(iii) Reconcile the receipts as recorded in the Rough Cash Book, main
Cash Book, pre-numbered Cash Memos, with counterfoils of the
pay-in-slips.
(iv) Ensure whether cash receipts are deposited in the bank on a timely
basis.
(v) Examine the Debtors Ledger, especially entries showing part
payments, to satisfy that the debtors concerned have indeed made
part payments.
(vi) Confirmations may be obtained from the debtors from time to time.
Space to write important points for revision
 12.386 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

2015 - Dec [4] Answer the question:

(a) (ii) State the main objects of verification of assets and liabilities.
(5 marks)
Answer:
Please refer 2014 - June [6] (Or) (b) (ii) on page no. 384
Space to write important points for revision

2016 - June [10] (b) What are the special considerations to be kept in the
mind during vouching? (7 marks)
Answer:
Please refer 2009 - June [6] (b) on page no. 382
Space to write important points for revision
 11 COMPANY AUDITOR
THIS CHAPTER INCLUDES
 Appointment of Auditors  Removal of Auditor
 Qualification of Company  Registration of Auditor
Auditor  Remuneration of Statutory
 Disqualification of Company Auditors
Auditor  Power and Duties of Auditors
 Manner of Rotation of Auditors  Auditor not to render certain
by the Companies on expiry of services
their term  Audit Committee
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical

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12.387
12.388 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. Object of audit  The main object of audit is to ensure that the
statement of accounts of the relevant financial
year truly and fairly reflect the state of affairs
of the company.
 Audit also provides a moral check on those
who are entrusted with the task of running
business and of keeping and maintaining the
books of account of the company.
 An audit of accounts is conducted with
two-fold purpose: (i) detection and prevention
of errors; (ii) detection and prevention of fraud.
2. Appointment of  The Act provides that every company shall, at
auditors each annual general meeting appoint an
auditor or auditors to hold office from the
conclusion of that meeting until the conclusion
of next annual general meeting.
 The Act also provides for methods of
appointment of auditors along with their
qualifications and disqualifications.
3. Auditor’s The Act provides that the auditor’s report shall be
report signed only by the person appointed as an auditor
of the company.
4. Appointment of Appointment of first auditor in case of every
first auditor company except government company or
company owned/ controlled by Central
Government/State Government/Central
Government and State Government [Section
139(6)] :
 [Chapter  11] Company Auditor O 12.389

• The first auditor of a company, other than a

Government company, shall be appointed by
the Board within thirty days from the date of
registration of the company and if the Board
fails to appoint such auditor, it shall inform the
members of the company and the members
shall make the appointment of first auditor
within ninety days of information at an extra
ordinary general meeting and such auditor
shall hold office till the conclusion of the first
annual general meeting.
• Appointment of first auditor shall be made by
Comptroller and Auditor-General of India
(CAG) within sixty days of registration of the
company. If CAG fails to appoint the first
auditor within given time then Board of such
company shall appoint first auditor within next
30 days.
 If Board fails to appoint the first auditor within
given time then it shall inform to members and
members shall make the appointment of first
auditor within 60 days of information at an
extra ordinary general meeting.
 The First Auditor shall hold office till the
conclusion of first AGM.
5. Appointment of Appointment of auditor shall be made by members
auditors at at First AGM and every subsequent 6th AGM. At
AGM (first AGM the first AGM, every company shall appoint an
and individual or a firm as an auditor. The auditor so
subsequent appointed shall hold office from the conclusion of
AGM) first AGM till the conclusion of 6th AGM.
12.390 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

6. Rotation of In case of an individual as auditor:

auditor (a) No individual shall be appointed or
re-appointed as auditor for more than 1 term
of 5 consecutive years.
(b) An individual auditor, who has completed his
term of 5 consecutive years, shall not be
eligible for re- appointment as auditor in the
same company for 5 years from the date of
completion.
In case of a firm as an auditor:
(a) No audit firm shall be appointed or
re-appointed as auditor for more than 2 terms
of 5 consecutive years.
(b) An audit firm which has completed its 2 terms
of 5 consecutive years, shall not be eligible for
re-appointment as auditor in the same
company for 5 years from the completion of
such terms
(c) If any firm/LLP which has one or more
partners who are also partners in the outgoing
audit firm/LLP cannot be appointed as
auditors during the 5 year period.
7. Appointment of  Casual vacancy arising by other than
an auditor in resignation: Whereas casual vacancy is
casual vacancy arising by other than resignation then vacancy
shall be filled the Board within 30 days.
 Casual vacancy arising due to resignation:
If casual vacancy is arising due to the
resignation of auditor, it shall be filled within
30 days by the Board of Directors, and the
appointment made by the Board shall be
approved in a general meeting convened
within 3 months from the date of
recommendation of the Board.
 [Chapter  11] Company Auditor O 12.391

8. Appointment of Casual vacancy shall be filled by the CAG within

auditor in 30 days. If CAG fails to fill the vacancy within
Casual given time then BOD shall fill the vacancy within
Vacancy in next 30 days.
case of Govt.
Company
9. Auditors not to (a) accounting and book keeping services;
render certain (b) internal audit;
cases (c) design and implementation of any financial
information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
10 Audit Constitution of an Audit committee is mandatory
Committee for the;
Section 177 (i) Every listed Public Company; and
(ii) Such other classes of the companies, as may
be prescribed.
As per the Rule 6 of the Companies (Meetings of
the Board and its Power) Rules, 2014 following
class of the companies have been prescribed for
this purpose;
(i) All public companies with a paid up share
capital ` 10 Crore or more;
(ii) All Public Companies having turnover of ` 100
Crore or more;
(iii) All Public Companies having in aggregate,
outstanding Loans, or borrowings and
debentures or deposits exceeding ` 50 Crore
or more.
In Section 177 of the Companies Act, 2013,—
(i) in sub-section (1), for the words "every listed
company", the words "every listed public
company" shall be substituted;
 12.392 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(ii) in sub-section (4), in clause (iv), after the

proviso, the following provisos shall be
inserted, namely:—
Provided further that in case of transaction,
other than transactions referred to in Section
188, and where Audit Committee does not
approve the transaction, it shall make its
recommendations to the Board:
Provided also that in case any transaction
involving any amount not exceeding one crore
rupees is entered into by a director or officer
of the company without obtaining the approval
of the Audit Committee and it is not ratified by
the Audit Committee within three months from
the date of the transaction, such transaction
shall be voidable at the option of the Audit
Committee and if the transaction is with the
related party to any director or is authorised by
any other director, the director concerned shall
indemnify the company against any loss
incurred by it:
Provided also that the provisions of this
clause shall not apply to a transaction, other
than a transaction referred to in Section 188,
between a holding company and its wholly
owned subsidiary company.

SHORT NOTES

2015 - Dec [4] Answer the question:

(a) (iii) Write a note on duties of a Company auditor.
(4 marks)
 [Chapter  11] Company Auditor O 12.393

Answer:
Duties of the company auditor are as follows:
(i) Whether the loans & advances made by the company on the basis of
security have been properly secured & the terms are not against the
interest of the company or its members;
(ii) Whether the transactions merely representing book-entries as
recorded in the books are not against the interest of the company;
(iii) The securities have been sold by Company other than Banking
Investment Company, at a price-less than purchase price;
(iv) Whether loans & advances made by the Company have been shown
as deposits.
(v) Personal expenses have been charged to revenue account;
(vi) Whether cash has actually been received in respect of any shares
shown in the books to have been allotted for cash.
(vii) Whether the position as stated in the books is correct, regular and is
not misleading.
Space to write important points for revision

DESCRIPTIVE QUESTIONS

2008 - Dec [7] (d) Statutory Auditor can be appointed as Internal Auditor of
the same company for the same period. Do you agree ? (2 marks)
Answer :
No. The statutory auditor cannot be appointed as an internal auditor for the
same company for the same period. The independence of auditor will not be
there.
Space to write important points for revision

2008 - Dec [8] (f) Audit Committee is only luxury to the company. Do you
agree ? (2 marks)
 12.394 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer :
False: Audit committee is not a luxury and it serves as communication
channel among various departments and has to interact with management,
internal auditor, statutory auditor and the public.
Space to write important points for revision

2009 - June [8] (d) (i) Ray & Bose, Chartered Accountants, who were
appointed as Auditor for Financial Year 2008-09 were removed during the
month of December 2008. Whether the said Auditor can claim any
compensation?
(ii) Statutory Auditor of the company is legally, bound to attend the AGM
of the company. State correct position. (1 + 1 = 2 marks)
Answer :
(i) The Auditor is entitled to full year remuneration. It is immaterial
whether he is removed before the expiry of his term or not.
Answer :
(ii) Section 146 of Companies Act, 2013, provides that the auditor shall
be entitled to attend any general meeting and to be heard at any
general meeting which he attends on any part which concerns him as
auditor. He is empowered to speak about company's accounts.
Whether he exercises this right is up to him.
Space to write important points for revision

2009 - Dec [5] {C} Comment on the following statements based on legal
provisions:
(d) M/s. S.S. & Associates, Chartered Accountants who were appointed as
Auditor by the members in A.G.M. refuses to accept the appointment. In
such cases Central Govt. only can appoint another Auditor. (2 marks)
(h) Auditor has no liability to the third party as there is no contract between
Auditor and third party. Do you agree? (4 marks)
Answer :
(d) When the appointed auditors refuse to take up the assignment, the
company should take recourse to Section 139 and hold an extra
ordinary general meeting for appointment of auditor, as Board of Director
 [Chapter  11] Company Auditor O 12.395

has no powers to appoint auditor in place of auditor resigned. The

refusal of auditor would be tantamount to assuming that he has
resigned.
Answer:
(h) The statement is incorrect. Liabilities to third party:
(i) No doubt there is no privity of contract, the third party can hold the
auditor liable for any fraud.
(ii) Generally, it appears that as there is no privity of contract between
auditor & third party he cannot be held liable and as he is never
appointed by third party he has nothing to do with such a party &
this was confirmed by the case of Le Lievre & Dennes VS Gould
1893.
(iii) Auditor has moral responsibility to third party.
(iv) If any body relying on the audited statement of a company, takes
any decision & suffers any loss because such statements were
false, the auditors will be responsible to them.
(v) If auditor had authorized the issue of a prospectus containing
Misleading statements, he would be held liable for damages to third
party, which has purchased the shares of the company on the
strength of such a misleading statement even though there might
not have been any privity of contract between the auditor & the
shareholder.
Space to write important points for revision

2009 - Dec [7] (b) Bright Ltd. was incorporated on 1.6.09. Mr. E who was
related to the Chairman of the Company was appointed as Auditor of the
company by the Director in its meeting held on 14.7.09. Whether the
appointment was valid? (3 marks)
Answer :
 Section 141 of Companies Act, 2013 deals with qualifications and
disqualifications of statutory auditor of the company.
 This section does not say that a relative to the chairman of the company
can not be appointed as statutory auditor of the company.
 12.396 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

 Regarding the second part, it is clear that Mr. E is first auditor of the
company.
 Appointment of auditor is governed by Section 139, which states that
first auditor should be appointed by the Board of Director, within one
month of the registration of the company.
 The company was incorporated on 1.6.09 and first auditor should have
been appointed on or before 1.7.09 which is not so in the cited case.
Hence his appointment is invalid.
Space to write important points for revision

2010 - June [5] {C} Comment on the following statements based on legal
provisions:
(b) Auditor is not liable in case of honorary Audit. (2 marks)
Answer :
(b) False : The auditor has to conduct and conclude his audit as per the
directives and guidelines given in the Companies Act, 2013. The
quantum of fees does not decide the scope, standard or strength of
audit. The auditor's liability exists for the audit conducted by him. It does
not matter whether he has conducted the audit with fees or on honorary
basis.
Space to write important points for revision

2010 - June [6] (e) Articles of Association of ABC Ltd. provides that Fixed
Deposit Receipts should not be shown to the statutory Auditor. Accordingly
Manager (Accounts) refused to show. State the legality. (2 marks)
Answer :
Restriction of the rights of statutory auditor : To enable the statutory
auditor to perform the duties, certain rights are vested in him vide Section
143 of the Companies Act, 2013, viz.
(i) Right to access the books and records at all times,
(ii) Right to acquire information and explanation from officers.
(iii) Right to attend AGM.
Space to write important points for revision
 [Chapter  11] Company Auditor O 12.397

2010 - Dec [5] {C} Comment on the following statements based on legal
provisions:
(b) Auditor, on receipt of appointment letter, is to inform to Central
Government within 45 days. (2 marks)
(c) The Auditor has nothing to do with inherent or control risk. (2 marks)
(d) Auditor demanded notice for Annual General Meeting but the Director of
the Company refused. (2 marks)
Answer :
(b) False. Auditor should inform the ROC within 30 days of receipt of
appointment.
Answer:
(c) True that the auditor has nothing to do with the inherent or control risk
however, he should decide the scope of his audit work depending upon
the merits of every case. He has to take all measures to bring the audit
risk to the minimum possible.
Answer:
(d) Section 146 of Companies Act, 2013, provides that the auditor shall be
entitled to attend any general meeting and to be heard at any general
meeting which he attends on any part which concerns him as auditor. He
is empowered to speak about company's accounts. Whether he
exercises this right is up to him. He has right to receive all notices to
general meeting.
Space to write important points for revision

2011 - June [5] {C} Comment on the following statements based on legal
provisions:
(c) Only officer on Special duty is called company Talent—do you agree?
(2 marks)
Answer :
False. Officer on special duty is one of the company-talents. Company talent
includes (i) an administrative staff (ii) an audit committee (iii) outside
management consultant (iv) other consultants.
Space to write important points for revision
 12.398 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

2011 - June [6] (c) The statutory Auditor submitted his report on purchases
relying on the verification Report carried on by the Internal Auditor. Whether
this was proper. (2 marks)
Answer :
Audit reports of the statutory auditor is his sole responsibility and the
responsibility is not by any means reduced, because of such reliance. Hence
there is professional negligence in the present case.
Space to write important points for revision

2011 - Dec [7] (d) Statutory auditor cannot avoid the generally accepted
fundamental assumption underlying the preparation of financial statements.
State such assumptions and actions to be taken if not followed. (2 marks)
Answer :
Generally accepted fundamental accounting assumptions are :
(i) Going concern : the enterprise is normally viewed as continuing its
operation for the foreseeable future. It is assumed that the enterprise
has neither the intention nor the necessity of liquidation or curtailing
materially the scale of its operations.
(ii) Consistency : It is assumed that accounting policies will be consistent
from one period to another.
(iii) Accrual : Revenues & cash are recognized as they are earned or
incurred.
Disclosure is necessary with details if these are not followed.
Space to write important points for revision

2012 - Dec [5] {C} Comment on the following statements based on legal
provisions:
(c) Auditor certified a statement in the Prospectus which was subsequently
found misleading. Auditor certified such statement as per advice of
management. Hence Auditor has no liability. (2 marks)
Answer :
As per Section 35 of Companies Act, 2013, an auditor is liable for certifying
misleading statement in the prospectus and he has to compensate for
damages suffered by the person.
Space to write important points for revision
 [Chapter  11] Company Auditor O 12.399

2012 - Dec [6] (b) State the Auditors’ duties towards shareholders in respect
of loan given by the Company.
(g) At the AGM, a resolution was passed by all the Shareholders restricting
some of the powers of a Cost Auditor. State the validity of the
Resolution. (2 marks each)
Answer :
(b) Auditors’ duties towards shareholders in respect of loan given by the
company is to inquire :-
(i) Whether the loans are properly secured and the terms are not
against the interest of the company.
(ii) Whether short term or long term loans are properly classified under
current or Non Current Assets.
(iii) Whether loans made by the company have been shown as fixed
assets.
(iv) Whether payment of Principal and interest are regular.
(v) Whether proper statutory registers are maintained.
(vi) To see that proper approval has been taken before giving any loan
to director.
Answer:
(g) The Company's Act, 2013 states the duties, responsibilities,
qualifications and liabilities of the auditors in its Sections 148 and 143.
Shareholders can not do any thing in any meeting regarding the
Companies Act, 2013. Resolution passed by shareholders can not be
imposed on provisions given in the Act. As such it is ultra vires and
therefore invalid for the shareholders to restrict, curtail, extend or amend
the duties and responsibilities of auditors as given in the Companies
Act, 2013.
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2013 - June [6] (b) Cost Accountant are appointed by Share-holders in

General Meeting. Is the appointment valid? Comment. (2 marks)
(d) Sec. 177 of Companies Act, 2013 lays down the Auditor’s duty as a
member of Audit Committee. (2 marks)
 12.400 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer :
(b) A Cost Accountant is not qualified for appointment as auditor of
company even of a private limited company.
In ection 148 of the Companies Act, 2013,—
(i) in sub-section (3),—
(a) for the words "Cost Accountant in practice", the words "cost
accountant" shall be substituted;
(b) in the Explanation, for the words "Institute of Cost and Works
Accountants of India", the words "Institute of Cost Accountants
of India" shall be substituted;
(ii) in sub-section (5), in the proviso, for the words "cost accountant in
practice", the words "cost accountant" shall be substituted.
Answer:
(d) This statement is false. Auditor is not a member of Audit Committee. He
has no right to vote. However he shall attend and participate at the
meetings of the Audit Committee (Sec. 177).
Space to write important points for revision

2013 - June [7] (b) Statutory Auditor can not be Internal Auditor of the
company — Offer your views. (2 marks)
(e) In addition to normal audit, the Statutory Auditor receives INR 50,000 for
rendering services as Taxation Advisor during 2012-13. What type of
disclosure is required under Schedule III of Companies Act, 2013?
(2 marks)
Answer :
(b) This statement is true.
The statutory auditor is required to comment on the report of Internal
Audit and performance of the Internal Auditor. If the statutory auditor
also works as Internal Auditor, it will not be possible for him to give an
independent and objective report u/s 143. He will not be able to
discharge his duties in proper and dispassionate manner. As such a
statutory Auditor of the company cannot be its Internal Auditor.
 [Chapter  11] Company Auditor O 12.401

Answer:
(e) When any remuneration is paid for additional work besides remuneration
for normal Audit such additional remuneration, fees expense or
otherwise must be disclosed in Profit & Loss A/c. separately as required
of schedule III of the Companies Act, 2013:
(a) As auditor.
(b) As advisor or in any other capacity in respect of:
(i) Taxation matters;
(ii) Company Law matters;
(iii) Management services;
(iv) Other services;
(v) Reimbursement of expenses.
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2013 - Dec [5] {C} Answer the following:

(d) What are the disqualifications for appointment of Statutory Auditor of a
Company? (2 marks)
Answer:
Section 141 of Companies Act, 2013 provides that none of the following
persons shall be qualified for appointment as auditor of a company.
(a) A body corporate.
(b) An officer or employee of the company.
(c) A person who is a partner, or who is in the employment, of an officer or
employee of the company.
(d) A person who is indebted to the company or has given any guarantee or
provided any security in connection with the indebtedness of any third
person to the company for amount exceeding ` one lakh.
(e) A person holding any security of that company after a period of any year
W.E.F. 13/12/2000.
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2014 - June [5] {C} Answer the following:

(c) Can a Cost Accountant be appointed as statutory auditor of a private
limited company by its shareholders in an Annual General Meeting?
(2 marks)
 12.402 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer:
No, a Cost Accountant be appointed as statutory of a private limited
company by its shareholders in an Annual General Meeting.
In Section 148 of the Companies Act, 2013,—
(i) in sub-section (3),—
(a) for the words "Cost Accountant in practice", the words "cost
accountant" shall be substituted;
(b) in the Explanation, for the words "Institute of Cost and Works
Accountants of India", the words "Institute of Cost Accountants of
India" shall be substituted;
(ii) in sub-section (5), in the proviso, for the words "cost accountant in
practice", the words "cost accountant" shall be substituted.
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2015 - June [4] Answer the questions:

(c) (iii) State the disqualifications of a company auditor. (4 marks)
Answer:
Please refer 2013 - Dec [5] {C} (d) on page no. 401
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2016 - June [8] (b) Discuss briefly the scope of Audit Committee in public
limited company. (8 marks)
Answer:
(b) Scope of Audit Committee:
An Audit Committee consists of three to five members formed to serve
as communication link among various departments. Audit Committee
has a fourfold relationship and therefore has to interact with
management, internal auditor, statutory auditor and the public.
The Scope of Audit Committee can be discussed as follows:
(i) Review of annual financial statements before submission to the
Board of Directors.
(ii) Selection of the Statutory Auditor.
(iii) Act as lies on between the Statutory Auditor and Board of Directors.
 [Chapter  11] Company Auditor O 12.403

(iv) Administrative control of the internal control functions through the

feedback between the Internal Auditor and the Audit Committee.
(v) Over seeing internal central operation.
(vi) Over seeing internal audit operations and feedback between internal
audit committee and developing the internal auditing authority
through broad based internal audit programming.
(vii) Review and approval of financial information for publication.
(viii) Review proposed changes in accounting system and procedures.
(viii) Help resolve differences between management, internal and
statutory auditor.
(ix) Report on the audit committee acting in the Annual Reports of Board
of Directors.
(x) Ensure reliability of organisation’s financial statements and
operational activities. To be effective and purposeful, the audit
committee should maintain the following-
(xi) Audit Committee should have the independence of management,
Statutory Auditor and Internal Auditor. The Board of Directors allows
full freedom to the audit committee to investigate into any areas of
operation.
(xii) The relation between the audit committee and management should
be cordial and congenial towards optimum efficiency and healthy
growth of the organization.
(xiii) There should be a regular line of communication through occasional
meetings with the management.
(xiv) There should be good communication relationship interwoven
among management, internal auditor and statutory auditor.
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2017 - June [8] (a) Who are the persons not qualified for appointment as an
Auditor of a company under Section 141 of the Companies Act, 2013?
(7 marks)
(b) Mention the services that an Auditor cannot render u/s 144 of the
Companies Act, 2013. (5 marks)
 12.404 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer:
(a) Section 141 of Companies Act, 2013 provides that none of the
following persons shall be qualified for appointment as auditor of a
company.
(a) A body corporate.
(b) An officer or employee of the company.
(c) A person who is a partner, or who is in the employment, of an officer
or employee of the company.
(d) A person who is indebted to the company or has given any
guarantee or provided any security in connection with the
indebtedness of any third person to the company for amount
exceeding ` one lakh.
(e) A person holding any security of that company after a period of any
year w.e.f. 13/12/2000.
(b) Auditor not to Render Certain Services [Section 144]
An auditor appointed under this Act shall provide to the company only
such other services as are approved by the Board of Directors or the
audit committee, as the case maybe, but which shall not include any of
the following services (whether such services are rendered directly or
indirectly to the company or its holding company or subsidiary company,
namely:
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed.
Provided that an auditor or audit firm who or which has been performing
any non-audit services on or before the commencement of this Act shall
comply with the provisions of this section before the closure of the first
financial year after the date of such commencement.
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 [Chapter  11] Company Auditor O 12.405

2017 - Dec [8] (a) Discuss the provisions under Section 139 (7) relating to
the appointment of the first auditor in a Government Company. How can an
auditor, duly appointed by a company, be removed before expiry of his term?
(4 + 3 = 7 marks)
(b) Discuss the duty of an auditor to report certain matters in the audit report
u/s 143(3). (5 marks)
Answer:
(a) Appointment of First Auditor in Case of a Government Company
[Section 139(7)]:
(i) In the case of a Government company or any other company owned
or controlled, directly or indirectly, by the Central Government, or by
any State Government, or Governments, or partly by the Central
Government and partly by one or more State Governments, the first
auditor shall be appointed by the Comptroller, and Auditor-General
of India within sixty days from the date of registration of the
company.
(ii) In case the Comptroller and Auditor-General of India does not
appoint such auditor within the aforesaid period, the Board of
Directors of the company shall appoint such auditor within the next
thirty days.
(iii) Further, in the case of failure of the Board to appoint such auditor
within the next thirty days, it shall inform the members of the
company who shall appoint such auditor within sixty days at an
extraordinary general meeting.
(iv) The auditor, so appointed, shall hold office till the conclusion of the
first annual general meeting.
Removal of Auditor before the Expiry of His Term:
The auditor appointed under section 139 may be removed from his office
before the expiry of his term subject to the fulfillment of the following
conditions under Section 140(1) read with Rule 7 of CAAR 2014.
(i) An application to the Central Government for removal of the auditor
shall be made in Form ADT-2. The application shall be accompanied
with fees as provided for this purpose under the Companies
(Registration Offices and Fees) Rules, 2014.
(ii) The application shall be made to the Central Government within
thirty days of the resolution passed by the Board.
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(iii) The company shall hold the general meeting within sixty days of
receipt of approval of the Central Government for passing the
special resolution for removal of the said auditor.
(iv) The auditor concerned shall be given a reasonable opportunity of
being heard.
(b) Duty Regarding Inclusion of Certain Matters in the Audit Report: As per
Section 143(3), the company auditor, in his audit report, shall clearly
state -
(i) Whether he has sought and obtained all the information and
explanations which to the best of his knowledge and belief were
necessary for the purpose of his audit and if not, the details thereof
and the effect of such information on the financial statements.
(ii) Whether, in his opinion, proper books of account as required by law
have been kept by the company and proper returns adequate for the
purposes of his audit have been received from branches not visited
by him.
(iii) Whether the report on the accounts of any branch office of the
company audited by a person other than the company's auditor has
been sent to him and the manner in which he has dealt with it in
preparing his report.
(iv) Whether the company's balance sheet and profit and loss account
dealt with in the report are in agreement with the books of account
and returns.
(v) Whether, in his opinion, the financial statements comply with the
accounting standards.
(vi) The observations or comments of the auditors on financial
transactions or matters which have any adverse effect on the
functioning of the company.
(vii) Whether any director is disqualified from being appointed as a
director under sub-section (2) of section 164.
(viii) Any qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected therewith.
(ix) Whether the company has adequate internal financial controls
system in place and the operating effectiveness of such controls.
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 [Chapter  11] Company Auditor O 12.407

2018 - June [8] (a) Discuss the provisions of Companies Act, 2013 as
regards reporting of frauds by Company Auditor. (6 marks)
Answer:
The Provisions of Companies Act, 2013 regarding reporting of frauds
by a company auditor are as follows:
1. For the purpose of sub-section (12) of Section 143, in case the auditor
has sufficient reason to believe that an offence involving fraud, is being
or has been committed against the company by officers or employees of
the company, he shall report the matter to the Central Government
immediately but not later than sixty days of his knowledge and after
following the procedure indicated herein below.
(i) auditor shall forward his report to the Board or the Audit Committee,
as the case may be, immediately after he comes to knowledge of
the fraud, seeking their reply or observations within forty-five days;
(ii) on receipt of such reply or observations the auditor shall forward his
report and the reply or observations of the Board or the Audit
Committee along with his comments (on such reply or observations
of the Board or the Audit Committee) to the Central Government
within fifteen days of receipt of such reply or observations;
(iii) in case the auditor fails to get any reply or observations from the
Board or the Audit Committee within the stipulated period of
forty-five days, he shall forward his report to the Central
Government along with a note containing the details of his report
that was earlier forwarded to the Board or the Audit Committee for
which he failed to receive any reply or observations within the
stipulated time.
2. The report shall be sent to the Secretary, Ministry of Corporate Affairs in
a sealed cover by Registered Post with Acknowledgement Due or by
Speed post followed by an e-mail in confirmation of the same.
3. The report shall be on the letter-head of the auditor containing postal
address, e-mail address and contact number and be signed by the
auditor with his seal and shall indicate his Membership Number.
 12.408 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

4. The report shall be in the form of a statement as specified in Form

ADT-4.
5. The provision of this rule shall also, mutatis mutandis, to a cost auditor
and a secretarial auditor during the performance of his duties under
Section 148 and Section 20,4 respectively.
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2018 - June [8] (b) Discuss about the manner in which rotation of Auditors
may be done by the company on expiry of their term. (6 marks)
Answer:
The Audit Committee shall recommend to the Board, the name of an
individual auditor or of an audit firm who may replace the incumbent auditor
on expiry of the term of such incumbent.
1. Where a company is required to constitute an Audit Committee, the
Board shall consider the recommendation of such committee, and in
other cases, the Board shall itself consider the matter of rotation of
auditors and make its recommendation for appointment of the next
auditor by the members in annual general meeting.
2. For the purpose of the rotation of the auditors-
(i) In case of an auditor (whether an individual or audit firm), the period
for which the individual or the firm has held office as auditor prior to
the commencement of the Act shall be taken into account for
calculating the period of five consecutive years or ten consecutive
years, as the case may be;
(ii) The incoming auditor or audit firm shall not be eligible, if such
auditor or audit firm is associated with the outgoing auditor or audit
firm under the same network of audit firms.
Explanation I : For the purposes of these rules, the term "same
network" includes the firms operating or functioning, hitherto or in
future under the same brand name, trade name or common control.
Explanation II: For the purpose of rotation of auditors,-
(a) A break in the term for a continuous period of five years shall be
considered as fulfilling the requirement of rotation;
 [Chapter  11] Company Auditor O 12.409

(b) If a partner who is in charge of an audit firm and also certifies

the financial statements of the company, retires from the said
firm and joins another firm of Chartered Accountants, such other
firm shall also be ineligible to be appointed for a period of five
years.
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2018 - Dec [8] (a) Discuss the functions and power of the Audit Committee.
(6 marks)
2018 - Dec [8] (b) Discuss the procedure for appointment for first Auditor of
the Company and his tenure. (6 marks)

PRACTICAL QUESTIONS
2008 - Dec [5] {C} Comment on the following statements based on legal
provision :
(g) ABC Ltd. in its meeting held on 30.09.08 appointed Mr. X as Auditor of
the company. Mr. X is holding Securities Valuing ` 500/- in that company
from 01.01.07. Can he accept the appointment ? (2 marks)
Answer :
False. A person holding any security of a company is disqualified for
appointment as statutory auditor of that company. In the light of above
provision, Mr. X cannot accept the appointment.
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2011 - June [5] {C} Comment on the following statements based on legal
provisions:
(e) M/s. A.B. Associates, Chartered Accountants were appointed as Auditor
of the Company in the month of Sept. 2010 at a fee of ` 3,00,000/- plus
other expense at actual. In the month of Dec. 10, the Auditor was
removed by the Company. Auditor claimed ` 3,00,000/- but the
Company paid ` 1,00,000/- being remuneration for 4 months from
September to December, 2010. (2 marks)
 12.410 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer :
The Auditors claim was correct. The auditors has right to receive
remuneration of the Audit work completed by him. He is also entitled to a full
years remuneration if he is removed during the year. (Homer Vs. Quiter
1908).
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2012 - June [6] (a) Newly formed ABC & Associates, Chartered Accountants
have received offer from 25 Public Ltd. Companies having a Paid-up Capital
of INR 10 lakh and 5 Private Companies with Paid-up Capital of INR 15 lakh
each. All the offers have been accepted. Comment on validity. (4 marks)
Answer :
Sec. 139 of Companies Act, 2013 provides that a person or a firm can
accept the appointment.
(i) As Auditor of 20 Companies in case of Companies having a paid up
share capital of less than ` 25 lakhs.
OR
(ii) 20 Companies out of which not more than 10 (ten) shall be companies
each of which has a paid up share capital of ` 25 lakhs or more
The ceiling of 20 companies does not apply to the Private Companies.
In the above case, since the paid up capital of all the public companies is
less than ` 25 lakhs, Auditor can accept appointment of maximum 20 Public
companies. They are to surrender the appointment of any 5 public
companies.
Besides they can accept appointment of all the 5 (five) private companies.
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Repeatedly Asked Questions

No. Question Frequency

1 State the disqualifications of a company auditor.

13 - Dec [5] (d), 15 - June [4] (c) (iii), 3 Times
17 - June [8] (a)
 [Chapter  11] Company Auditor O 12.411

Table Showing Marks of Compulsory Questions

Year 14 14 15 15 16 16 17 17 18 18
J D J D J D J D J D
Descriptive 2
Total 2
 12 COST AUDIT AND
SECRETARIAL AUDIT
THIS CHAPTER INCLUDES
 Cost Audit Provision of Section  Cost Audit Report
148 of the Companies Act  Section 204 of the Companies
 Applicability of Cost Audit Act, 2013
 Appointment of Cost Auditor  Procedures of Appointment of
 Remuneration of the Cost Secretarial Audit
Auditor
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical

For detailed analysis Login at www.scannerclasses.com

for registration and password see first page of this book.

12.412
 [Chapter  12] Cost Audit and Secretarial Audit O 12.413

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. Cost Auditor 1. Every company referred to in sub-rule (1)
shall inform the cost auditor concerned of
his or its appointment as such and file a
notice of such appointment with the
Central Government within a period of
thirty days of the Board Meeting in which
such appointment is made or within a
period of one hundred and eighty days of
the commencement of the financial year,
whichever is earlier, through electronic
mode, in form CRA-2,
2. After the expiry of thirty days, the
company shall issue formal letter of
appointment to the cost auditor.
3. Every cost auditor, who conducts an
audit of the cost records of a company,
shall submit the cost audit report along
with his or its reservations or
qualifications or observations or
suggestions, if any, inform CRA-3.
4. Every cost auditor shall forward his report
to the Board of Directors of the company
within a period of one hundred and eighty
days from the closure of the financial
year.
5. Every company covered under these
rules shall, within a period of thirty days
from the date of receipt of a copy of the
 12.414 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

cost audit report, furnish the Central

Government with such report alongwith
full information and explanation on every
reservation or qualification contained
therein, in form CRA-4 along with fees
specified in the Companies (Registration
Offices and Fees) Rules, 2014.
2. Secretarial Audit Companies required conducting secretarial
audit:
1. Every listed company and
2. Company belonging to other class of
companies: The other class of companies
are
• every public company having a
paid-up share capital of fifty crore
rupees or more; or
• every public company having a
turnover of two hundred fifty crore
rupees or more.

DESCRIPTIVE QUESTIONS
2010 - June [5] {C} Comment on the following statements based on legal
provisions:
(d) Cost Audit Report is submitted to the Company within 90 days from the
end of Company’s financial year. (2 marks)
Answer:
False : Cost audit report is submitted to the Central Govt. with a copy to
company within 180 days from the end of financial year to which the cost
audit report relates.
Space to write important points for revision
 [Chapter  12] Cost Audit and Secretarial Audit O 12.415

2011 - Dec [8] (b) Central Government issued order for audit of Cost
Accounts of ABC Ltd. In view of this, state the following:
(i) Who appoints the Cost Auditor ?
(ii) Whether Company's Statutory Auditor can conduct Cost Audit ?
(iii) To whom the Cost Audit report is submitted ?
(iv) Time limit within which such report is submitted by the Cost Auditor.
(4 marks)
Answer :
(i) Cost auditor is appointed by Board of Directors of the company with
the previous approval of the Central Government (Sec. 148)
Answer :
(ii) The statutory auditor of the company cannot be appointed as cost
auditor. Cost Auditor shall be a cost accountant within the meaning of
the Cost & Works Accountants Act, 1959.
Answer :
(iii) Cost audit report is submitted to the Central Government with copy to
the company in such form as may be prescribed.
Answer :
(iv) Report shall be submitted to the Central Govt. within such time as may
be prescribed.
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2013 - Dec [6] (b) (i) State the advantages of Cost Audit to Management and
Shareholders. (4 marks)
Answer:
Cost Audit is the verification of the correctness of cost accounts and of the
adherence to the cost accounting plan.
Advantage of Cost Audit:
To the Management :
(i) Management gets reliable data for its day to day operation like price
fixing, control, decision making, etc.
(ii) A close and continuous check on all wastage’s will be kept through a
proper system of reporting to management.
 12.416 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(iii) Inefficiencies in the working of the company will be brought to light to

facilitate corrective action.
(iv) Management by exception becomes possible through allocation of
responsibilities to individual managers.
(v) System of budgetary control and standard costing will be greatly
facilitated.
(vi) Reliable check on valuation of closing stock and work in-progress can
be established.
(vii) Helps in detection of frauds and errors.
To the shareholders : Cost Audit ensures that proper records are kept as
to purchases and utilization of material and expenses incurred on wages etc.
It also makes sure that the valuation of closing stock and work-in-progress
is on a fair basis. Thus, the shareholders are assured of a fair return on their
investment.
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2014 - June [7] (a) (iii) What is meant by cost audit? State the duties of a
cost auditor. (4 marks)
Answer:
Cost Audit
It is an audit process for verifying the cost of manufacture or production of
any article, on the basis of accounts as regards utilisation of material or
labour or other items of costs, maintained by the company. In simple words
the term cost audit means a systematic and accurate verification of the cost
accounts and records and checking of adherence to the objectives of the
cost accounting.
As per ICAI London “cost audit is the verification of the correctness of cost
accounts and of the adherence to the cost accounting plan”.
In cost audit, auditor has to perform the following duties:
• Examine the correctness of the cost records maintained by the concern;
and
 To report as to whether the cost accounting plans have been adhered
to or not.
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 [Chapter  12] Cost Audit and Secretarial Audit O 12.417

2015 - Dec [4] Answer the question:

(c) (ii) Briefly mention the provisions relating to Cost Audit. (8 marks)
Answer:
Cost Audit is an audit process for verifying the cost of manufacture or
production of any article, on the basis of accounts as regards utilisation of
material or labour or other items of costs, maintained by the company.
It is covered by Section 148 of the Companies Act, 2013. The audit
conducted under this section shall be in addition to the audit conducted
under Section 143.
As per Section 148 the Central Government may by order specify audit of
items of cost in respect of certain companies.
Further, the Central Government may, by order, in respect of such class of
companies engaged in the production of such goods or providing such
services as may be prescribed, direct that particulars relating to the utilisation
of material or labour or to other items of cost as may be prescribed shall also
be included in the books of account kept by that class of companies.
Applicability for Maintenance of Cost Records: Rule 3 of the Companies
(Cost Records and Audit) Rules, 2014 provides the classes of companies,
engaged in the production of goods or providing services, having an overall
turnover from all its products and services of ` 35 crore or more during the
immediately preceding financial year, required to include cost records in their
books of account. These companies include Foreign Companies defined in
sub-section (42) of Section 2 of the Act, but exclude a company classified as
a Micro enterprise or a Small enterprise including as per the turnover criteria
provided under Micro, Small and Medium Enterprises Development Act,
2006. The said rule has divided the list of companies into (A) Regulated
sectors and (B) Non- regulated sectors.
Maintenance of Cost Records: As per Rule 5 of the Companies (Cost
Records and Audit) Rules, 2014, every company under these rules including
all units and branches thereof, shall, in respect of each of its financial year,
is required to maintain cost records in Form CRA -1. The cost records shall
be maintained on regular basis in such manner as to facilitate calculation of
per unit cost of production or cost of operations, cost of sales and margin
for each of its products and activities for every financial year on monthly or
quarterly or half-yearly or annual basis.
 12.418 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Applicability of Cost Audit: Rule 4 of the Companies (Cost Records and

Audit) Rules, 2014 states the provisions related to the applicability of cost
audit depending on the turnover of the company as follows-
(i) Classes of companies specified under item (A) “Regulated Sectors”
are required to get its cost records audited if the overall annual
turnover of the company from all its products and services during the
immediately preceding financial year is ` 50 crore or more and the
aggregate turnover of the individual product(s) or service(s) for which
cost records are required to be maintained under Rule 3 is ` 25 crore
or more.
(ii) Classes of companies specified under item (B) “Non-Regulated
Sectors” are required to get its cost records audited if the overall
annual turnover of the company from all its products and services
during the immediately preceding financial year is ` 100 crore or more
and the aggregate turnover of the individual product(s) or service(s) for
which cost records are required to be maintained under Rule 3 is ` 35
crore or more.
Who can be Cost Auditor: The audit shall be conducted by a Cost
Accountant who shall be appointed by the Board of such remuneration as
may be determined by the members in such manner as may be prescribed.
It may be noted that no person appointed under Section 139 as an auditor
of the company shall be appointed for conducting the audit of cost records.
In Section 148 of the Companies Act, 2013,—
(i) in sub-section (3),—
(a) for the words "Cost Accountant in practice", the words "cost
accountant" shall be substituted;
(b) in the Explanation, for the words "Institute of Cost and Works
Accountants of India", the words "Institute of Cost Accountants of
India" shall be substituted;
(ii) in sub-section (5), in the proviso, for the words "cost accountant in
practice", the words "cost accountant" shall be substituted.
 [Chapter  12] Cost Audit and Secretarial Audit O 12.419

Appointment of Cost Auditor: Rule 6 of the Companies (Cost Records and

Audit) Rules, 2014 requires the companies prescribed under the said Rules
to appoint an Auditor within 180 days of the commencement of every
financial year. However, before such appointment is made, the written
consent of the cost auditor to such appointment and a certificate from him or
it shall be obtained.
The certificate to be obtained from the cost auditor shall certify that the-
(a) the individual or the firm, as the case may be, is eligible for appointment
and is not disqualified for appointment under the Companies Act, 2013,
the Cost and Works Accountants Act, 1959 and the rules or regulations
made thereunder;
(b) the individual or the firm, as the case may be, satisfies the criteria
provided in section 141 of the Companies Act, 2013 so far as may be
applicable;
(c) the proposed appointment is within the limits laid down by or under the
authority of the Companies Act, 2013; and
(d) the list of proceedings against the cost auditor or audit firm or any
partner of the audit firm pending with respect to professional matters of
conduct, as disclosed in the certificate, is true and correct.
Every referred company shall inform the cost auditor concerned of his or its
appointment as such and file a notice of such appointment with the Central
Government within a period of 30 days of the Board meeting in which such
appointment is made or within a period of 180 days of the commencement
of the financial year, whichever is earlier, through electronic mode, in Form
CRA -2, along with the fee as specified in Companies (Registration Offices
and Fees) Rules, 2014.
The cost auditor appointed as such shall continue in such capacity till the
expiry of 180 days from the closure of the financial year or till he submits the
cost audit report, for the financial year for which he has been appointed.
(ii) in sub-section (5), in the proviso, for the words "cost accountant in
practice", the words "cost accountant" shall be substituted.
Space to write important points for revision
 12.420 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

2016 - June [8] (a) State the objectives of cost audit from the point of view
of Government. (7 marks)
Answer:
The objective of cost audit from the point of view of government :
(i) To ensure whether the national resources are prudently and optimally
used.
(ii) To reduce cost of production of commodities and regularize their
distribution.
(iii) To determine whether particular industry should be given subsidy/grants.
(iv) To determine whether particular industry should be protected from
external competition.
(v) To make comparisons of cost parameters of different firms
manufacturing same product.
(vi) To assess the costs of the same product on different regions so as to
decide to grant incentives etc.
(vii) To fix the maximum price of a commodity.
(viii) To devise, apply and evaluate cost control measures.
Space to write important points for revision

2016 - Dec [9] (b) Explain the requirement of cost audit in brief.
(7 marks)
Answer:
Cost Audit:
Cost Audit represents the verification of cost accounts and check on the
adherence to cost accounting plan. Cost Audit ascertains the accuracy of
cost accounting records to ensure that they are in conformity with Cost
Accounting principles, plans, procedures and objective. Cost Audit comprise
of verification of the cost accounting records such as the accuracy of the cost
accounts, cost reports, cost statements, cost data and costing technique and
examination of these records to ensure that they adhere to the cost
accounting principles, plans, procedures and objective. Cost Audit is also a
form of statutory audit. As per Section 148, of Companies Act, 2013 the
Central Government, may direct specified companies to have its records cost
audited.
 [Chapter  12] Cost Audit and Secretarial Audit O 12.421

Cost Audit will prove to be useful to the management, society, shareholders

and the Government.
Usefulness to the (i) The management will get reliable data for its
Management: day-to-day operations like price fixing, control,
decision making, etc.
(ii) A close and continuous check an all wastages
will be kept through a proper system of
reporting to management.
(iii) Inefficiencies in the working of the company
will be brought to light to facilitate corrective
action.
(iv) Management by exception becomes possible
through allocation of responsibilities to
individual managers.
(v) System of budgetary control and standard
costing will be greatly facilitated.
(vi) Reliable check on valuation of closing stock
and work-in-progress can be established.,
(vii) Helps in detection of frauds and errors.
Usefulness to the (i) Cost audit is often introduced for the purpose
Society: of fixation of price. The prices so fixed are
based on the correct costing data and so the
consumers are saved from exploitation.
(ii) Price increase by the industry is not allowed
without proper justification as to increase in
cost of production; consumers are saved from
unreasonable price.
(iii) Cost Audit is also useful for the purpose of
Cost Control; Cost reduction and proper
utilisation of scarce resources.
Usefulness to Cost Audit ensures that proper records are kept as
Shareholders: to purchases and utilisation of material and
expenses incurred on wages, etc. It also makes sure
that the valuation of closing stock and
 12.422 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

work-in-progress is on a fair basis. Thus, the

shareholders are assured of a fair return on their
investment.
Usefulness to the (i) Where the government enters into a cost plus
Government: contract, cost audit helps the government to
fix the price of the contract.
(ii) Cost audit helps the fixation of selling prices of
essential commodities and thus, undue
profiteering is checked.
(iii) Cost audit enables the government to focus its
attention on inefficient units.
(iv) Cost audit enables the government to decide
in favour of giving protection to certain
industries.
(v) Cost audit facilitates settlement of Trade
Dispute.
(vi) Cost Audit promotes healthy competition
among units in the industry.
Space to write important points for revision

2017 - June [9] (b) Discuss the provisions of Cost Audit under Companies
Act 2013. (8 marks)
Answer :
Please refer 2015 - Dec. [4] (c) (ii) on page no. 417
Space to write important points for revision

2017 - Dec [9] (a) What is the procedure of appointing a cost auditor in a
company? (4 marks)
Answer:
Procedure for Appointment of a Cost Auditor:
The cost auditor is to be appointed by the Board of Directors (BOD) on the
recommendation of the Audit Committee, where the company is required to
have an Audit Committee. The cost auditor proposed to be appointed is
required to give a letter of consent to the Board of Directors.
 [Chapter  12] Cost Audit and Secretarial Audit O 12.423

The company shall inform the cost auditor concerned of his or its
appointment as such and file a notice of such appointment with the Central
Government within a period of thirty days of the Board meeting in which such
appointment is made or within a period of one hundred and eighty days of
the commencement of the financial year, whichever is earlier, through
electronic mode, in form CRA-2 along with the fee as specified in Companies
(Registration Offices and Fees) Rules, 2014.
Any casual vacancy in the office of a cost auditor, whether due to
resignation, death or removal, shall be filled by the Board of Directors (BOD)
within thirty days of occurrence of such vacancy and the company shall
inform the Central Government in Form CRA-2 within thirty days of such
appointment of cost auditor.
Space to write important points for revision

2018 - June [9] (a) What is the procedure to be followed for fixing the
remuneration of a Cost Auditor? (5 marks)
Answer:
Authority for fixing the Remuneration of a Cost Auditor:
Rule 14 of the Companies [Audit and Auditors] Rules, 2014 has laid down
the procedure of appointment and fixing the remuneration of a cost auditor.
lt states as follows:
Remuneration of the Cost Auditor: For the purpose of sub-section (3) of
Section 148 –
(a) In the case of companies which are required to constitute an audit
committee -
(i) The Board shall appoint an individual, who is a Cost Accountant, or
a firm of Cost Accountants in practice, as cost auditor on the
recommendations of the Audit Committee, which shall also
recommend remuneration for such cost auditor;
(ii) The remuneration recommended by the Audit Committee under (i)
shall be considered and approved by the Board of Directors and
ratified subsequently by the shareholders;
 12.424 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(b) In the case of other companies which are not required to constitute an
audit committee, the Board shall appoint an individual who is a cost
accountant or a firm of cost accountants in practice as cost auditor and
the remuneration of such cost auditor shall be ratified by shareholders
subsequently.
In Section 148 of the Companies Act, 2013,—
(i) in sub-section (3),—
(a) for the words "Cost Accountant in practice", the words "cost
accountant" shall be substituted;
(b) in the Explanation, for the words "Institute of Cost and Works
Accountants of India", the words "Institute of Cost Accountants of
India" shall be substituted;
(ii) in sub-section (5), in the proviso, for the words "cost accountant in
practice", the words "cost accountant" shall be substituted.
Space to write important points for revision

2018 - Dec [9] (a) Discuss the relevant provisions of Companies (Cost
Records and Audit) Rules, 2014 on applicability of Cost Audit to different
sectors. (6 marks)

Repeatedly Asked Questions

No. Question Frequency

1 Discuss the provisions of Cost Audit under

Companies Act 2013.
15 - Dec [4] (c) (ii), 17 - June [9] (b) 2 Times
 13 AUDIT REPORT
THIS CHAPTER INCLUDES
 Scope, Basic Elements and  Revision of The Audit Report
Significance of Audit Report  Audit of Abridged Financial
 Unqualified Opinion Statements
 Qualified Opinion/Report  Provision for Proposed
 Disclaimer of Opinion Dividend
 Piecemeal Opinion  Accounts of Liquidators/Report
 Adverse or Negative Report  Audit of Consolidated Financial
 CARO - Companies (Auditor’s Statements (CFS)
Report) Order, 2016  Audit Certificate.
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical

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for registration and password see first page of this book.

12.425
12.426 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

CHAPTER AT A GLANCE

S. Topic Important Highlights

No.
1. Audit Report “A Report is a statement of collected &
considered facts, so drawn up as to give clear
and concise information to persons who are
not already in possession of the full facts of
the subject matter of the report.”
2. Unqualified An opinion is said to be unqualified, when the
opinion Auditor concludes that the Financial
Statements give a true and fair view in
accordance with the financial reporting
framework used for the preparation and
presentation of the Financial Statements.
3. Disclaimer o f A Disclaimer of Opinion Report is given when
Opinion the Auditor is unable to form an overall
opinion about the matters contained in the
Financial Statements.
4. Adverse or An Adverse or Negative Report is given when
Negative Report the Auditor concludes that based on his
examination, he does not agree with the
affirmations made in the Financial
Statements/ Financial Report.
5. Caro – companies CARO – COMPANIES (AUDITOR’S
(Auditor’s Report) REPORT) ORDER, 2016 issued by the
Order, 2016 Central Government as per the power
granted under section 143(11) of the
Companies Act, 2013.
According to Sec 143, the auditor is required
to report on certain matters only if he is not
satisfied after his examination of the accounts
 [Chapter  13] Audit Report O 12.427

but after this new order, the auditor has to

make a statement on each of the specified
matters likewise in case of Govt. companies,
this order is in addition to the directions of the
Comptroller and Auditor General in India.
6. Audit Certificate Sometimes apart from an audit report for
general use, an auditor is often called upon to
give a certificate for special purpose. The
certificate should include the following: —
i. Auditor should see that there is a suitable
declaration by the management about
the subject matter.
ii. Auditor should give the certificate on his
letter head or on stationary carrying his
n a me a n d addre ss t o a vo id
misunderstanding.
iii. Auditor should clearly state his limitations
and indicate the extent to which he has
relied upon a technical expert if any.

DISTINGUISH BETWEEN
2013 - Dec [7] (a) (iii) Distinguish between ‘Qualified Report’ and ‘Adverse
Report’ of an Auditor. (4 marks)
Answer:
Distinguish between Qualified Report and Adverse Report :
Qualified Report Adverse Report

(i) A Qualified Audit Report is one An Adverse Report is given when the
in which an Auditor gives an Auditor concludes that based on his
opinion subject to certain examination, he does not agree with
reservations. the affirmations made in the Financial
Report.
 12.428 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(ii) Auditor’s reservation is The Auditor states that the financial

generally stated as; “Subject to statements do not present a true and
the above, we report that the fair view of the state of affairs and
Balance Sheet shows a true working results of the organization.
and fair view”.

(iii) The accounts present a true The accounts do not present a true
and fair view subject to certain and fair view on the whole.
reservations.

(iv) A Qualification is made in the An Adverse Report is given when the

Audit Report when the Auditor Auditor has his reservations on the
has reservation on specific true and fair view presented by the
item of material nature. Financial Statements.
Space to write important points for revision

2014 - Dec [1] Answer the question:

(g) What is the basic difference between audit report and audit certificate?
(2 marks)
Answer :
Basis Audit Report Audit Certificate
(i) Meaning Audit Report is a statement Audit Certificate is a written
of collected and considered confirmation of the accuracy
information so as to give a of the information stated
clear picture of the state of there in.
affairs of the business to the
persons who are not in
possession of the full facts.
(ii) Opinion Audit Report contains the Audit Certificate does not
opinion of the auditor on contain any opinion but only
the accounts, confirms the accuracy of the
figures with the books of
accounts.
 [Chapter  13] Audit Report O 12.429

(iii) Guarantee Audit Report may not Audit Certificate guarantees

guarantee correctness of absolute correctness of the
financial statement in figures & information
absolute terms, mentioned in the certificate.
Space to write important points for revision

2015 - June [4] Answer the question:

(b) (iii) Tabulate the differences between Clean Audit Report and Qualified
Audit Report. (4 marks)
Answer:
Distinguish between Clean Audit Report and Qualified Audit Report
Clean Audit Report Qualified Audit Report
The Auditor issues a Clean Report, A Qualified Audit Report is one
(also called as unconditional opinion) where an Auditor gives an opinion
when he does not have any subject to certain reservations.
reservation with regard to the matters
contained in the Financial
Statements.
In a Clean Report, the Auditor states The Auditor's reservation is generally
that the Financial Statements give a stated as - "Subject to the above, we
true and fair view of the state of report that the Balance Sheet shows
affairs and results for the period. a true and fair view."
The Auditor is justified in issuing a A Qualified Opinion should be
clean report if: expressed when the Auditor
concludes that:
(i) The accounts are prepared using (i) An Unqualified Opinion cannot
generally accepted accounting be expressed.
principles.
(ii) The Auditor has examined (ii) The effect of any disagreement
sufficient reliable evidence in with Management is not so
respect of transactions recorded material and pervasive as to
in the books. require an Adverse Opinion, or
 12.430 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(iii) The transactions recorded (iii) The Limitation on scope is not so

represent a true recording of the material and pervasive as to
events. require a Disclaimer of Opinion.
(iv) The transactions are within the
legal competence of the entity.
(v) There are no material mis-
statements in the Financial
Statements.
(vi) The Financial Statements
comply with the format and
disclosure requirements as per
the Statute.
Space to write important points for revision

2015 - Dec [4] Answer the question:

(b) (iii) Distinguish between audit report and audit certificate. (8 marks)
Answer:
Difference between Audit Report and Audit Certificate:
(i) Meaning Audit Report is a statement of collected and
considered information so as to give a clear picture
of the state of affairs of the business to the
persons who are not in possession of the full facts.
While Audit Certificate is a written confirmation of
the accuracy of the information stated there in.
(ii) Opinion Audit Report contains the opinion of the auditor on
the accounts, while Audit Certificate does not
contain any opinion but only confirms the accuracy
of the figures with the books of accounts.
(iii) Basis Audit Report is made out on the basis of
information obtained & books of account verified
by the auditor, while Audit Certificate is made out
on the basis of the particular data capable of
verification as regards accuracy.
 [Chapter  13] Audit Report O 12.431

(iv) Guarantee Audit Report may not guarantee correctness of

financial statement in absolute terms, while Audit
Certificate guarantees absolute correctness of the
figures & information mentioned in the Certificate.
(v) Coverage Audit Report always covers entire accounts of the
concern, while Audit Certificate covers only certain
part of the accounts of the concern.
(vi) Responsibility Audit Report does not hold auditor responsible for
anything wrong in the accounts, while Audit
Certificate makes an auditor responsible if
anything mentioned in the certificate found as
wrong later on.
(vii) Suggestion Audit Report may provide certain suggestions for
improvement while Audit Certificate does not
provide any such suggestion.
(viii) Nature Audit Report is based on the vouching &
verification of books of accounts, voucher, assets
& liabilities, while Audit Certificate is based on
checking arithmetical accuracy of the facts.
(ix) Scope Audit Report covers all transactions done during
the year, while the Audit Certificate is very
specific.
(x) Characteristics Audit Report is subjective as it is opinion oriented,
while Audit Certificate is objective as it is fact
oriented.
(xi) Form Audit Report is required to be presented in the
prescribed format, while Audit Certificate, except in
few cases, is not required to be presented in any
Standard format.
 12.432 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(xii) Address Audit Report is addressed to the members of the

company at large or appointing authority, while
Audit Certificate is addressed to particular person
or sometimes may include the words like “To
Whomsoever it may concern”.
Space to write important points for revision

2016 - June [9] (b) Distinguish between clean audit report and qualified audit
report. (7 marks)
Answer:
Clean Audit Report:
An opinion is said to be unqualified, when the Auditor concludes that the
Financial Statements give a true and fair view in accordance with the
financial reporting framework used for the preparation and presentation of
the Financial Statements. Or,
The Auditor gives a Clean or Unqualified Report, when he does not have
any significant reservation in respect of matters contained in the Financial
Statements.
An Unqualified Opinion indicates the following:
(a) The Financial Statements have been prepared using the Generally
Accepted Accounting Principles, which have been consistently applied,
(b) The Financial Statements comply with relevant statutory requirements
and regulations, and
(c) There is adequate disclosure of all material matters relevant to the
proper presentation of the financial information, subject to statutory
requirements, where applicable.
(d) Any changes in the accounting principles or in the method of their
application, and the effects thereof, have been properly determined and
disclosed in the Financial Statements.
Qualified Audit Report:
(i) A Qualified Audit Report is one where an Auditor gives an opinion on
the truth and fairness of Financial Statements, subject to certain
reservations.
 [Chapter  13] Audit Report O 12.433

(ii) The Auditor's Reservation is generally stated as: "Subject to the

above, we report that the Balance Sheet shows a true and fair view."
(iii) The overall impact of all reservations or qualification taken together is
not material enough to vitiate the overall true and fair view of Financial
Statements, but it is important that such a matter(s) should be brought
to the attention of the shareholders.
(iv) The Report should also give detailed reasons alongwith quantitative
impact on the qualifications on Financial Statements.
(v) A Qualified Opinion should be expressed when the Auditor concludes
that:
(a) An Unqualified Opinion cannot he expressed, or
(b) The effect of any disagreement with Management is not so
material and pervasive as to require an Adverse Opinion, or
(c) The Limitation on scope is not so material and pervasive as to
require a Disclaimer of Opinion.
Space to write important points for revision

2016 - Dec [10] (b) Distinguish between Audit Report and Audit Certificate.
(7 marks)
Answer:
Difference between Audit Report and Audit Certificate:
(i) Meaning: Audit Report is a statement of collected and considered
information so as to give a clear picture of the state of affairs of the
business to the persons who are not in possession of the full facts.
While Audit Certificate is a written confirmation of the accuracy of the
information stated there in.
(ii) Opinion: Audit Report contains the opinion of the auditor on the
accounts, while Audit Certificate does not contain any opinion but only
confirms the accuracy of the figures with the books of accounts.
(iii) Basis: Audit Report is made out on the basis of information obtained
& books of account verified by the auditor, while Audit Certificate is
made out on the basis of the particular data capable of verification as
regards accuracy.
 12.434 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(iv) Guarantee: Audit Report may not guarantee correctness of financial

statement in absolute terms, while Audit Certificate guarantees
absolute correctness of the figures & information mentioned in the
certificate.
(v) Coverage: Audit Report always covers entire accounts of the
concern, while Audit Certificate covers only certain part of the
accounts of the concern.
(vi) Responsibility: Audit Report does not hold auditor responsible for
anything wrong in the accounts, while Audit Certificate makes an
auditor responsible if anything mentioned in the certificate found as
wrong later on.
(vii) Suggestion: Audit Report may provide certain suggestions for
improvement while Audit certificate does not provide any such
suggestion.
(viii) Nature: Audit Report is based on the vouching & verification of books
of accounts, voucher, assets & liabilities, while Audit Certificate is
based on checking arithmetical accuracy of the facts.
(ix) Scope: Audit Report covers all transactions done during the year,
while the Audit Certificate is very specific.
(x) Characteristics: Audit Report is subjective as it is opinion oriented,
while Audit certificate is objective as it is fact oriented.
(xi) Form: Audit Report is required to be presented in the prescribed
format, while Audit Certificate, except in few cases, is not required to
be presented in any standard format.
(xii) Address: Audit report is addressed to the members of the company
at large or appointing authority, while Audit Certificate is addressed
to particular person or sometimes may include the words like "To
Whomsoever it may concern".
Audit report versus Audit certificate
(i) Audit report is an expression of opinion on the truth and fairness of the
accounts.
(ii) Audit certificate is authentication of true and correctness of the data or
fact certified.
(iii) The existence of opinion distinguishes a report from the certificate.
 [Chapter  13] Audit Report O 12.435

(iv) The example of audit report is report issued by statutory auditor of a

company under Section 143 of the Companies Act, 2013.
(v) The example for audit certificate is certification of consumption of
imported items to be submitted to the government department for
obtaining some license etc.
Space to write important points for revision

2017 - June [9] (a) Distinguish between Qualified Audit Report and Adverse
Report. (4 marks)
Answer:
Distinguish between Qualified Report and Adverse Report:
Qualified Report Adverse Report
(i) A Qualified Audit Report is one An Adverse Report is given when the
in which an Auditor gives an Auditor concludes that based on his
opinion subject to certain examination, he does not agree with
reservations. the affirmations made in the Financial
Report.
(ii) Auditor’s reservation is The Auditor states that the financial
generally stated as; “Subject to statements do not present a true and
the above, we report that the fair view of the state of affairs and
Balance Sheet shows a true working results of the organization.
and fair view”.
(iii) The accounts present a true The accounts do not present a true
and fair view subject to certain and fair view on the whole.
reservations.
(iv) A Qualification is made in the An Adverse Report is given when the
Audit Report when the Auditor Auditor has his reservations on the
has reservation on specific true and fair view presented by the
item of material nature. Financial Statements.
Space to write important points for revision
 12.436 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

2018 - June [9] (b) Distinguish between ‘Audit Report’ and ‘Audit Certificate’.
(7 marks)
Answer:
Basis Audit Report Audit Certificate
1. Meaning Audit Report is a statement While Audit Certificate is
of collected and considered a written confirmation of
information so as to give a the accuracy of the
clear picture of the state of information stated there
affairs of the business to in.
the persons who are not in
possession of the full facts.
2. Opinion Audit Report contains the While Audit Certificate
opinion of the auditor on does not contain any
the accounts. opinion, but only
confirms the accuracy of
the figures with the
books of accounts.
3. Basis Audit Report is made out While Audit Certificate is
on the basis of information made out on the basis of
obtained and books of the particular data
account verified by the capable of verification as
auditor. regards accuracy.
4. Guarantee Audit Report may not While Audit Certificate
guarantee correctness of guarantees absolute
financial statement in correctness of the
absolute terms. figures and information
mentioned in the
Certificate.
5. Coverage Audit Report always covers While Audit Certificate
entire accounts of the covers only, certain part
concern. of the accounts of the
concern.
 [Chapter  13] Audit Report O 12.437

6. Responsibility Audit Report does not hold While Audit Certificate

auditor responsible for makes an audit o r
anything wrong in the responsible, if anything
accounts. mentioned in the
certificate found as
wrong, later on.
7. Suggestion Audit Report may provide While Audit Certificate
certain suggestions for does not provide any
improvement. such suggestion.
8. Nature Audit Report is based on While Audit Certificate is
the vouching and based on checking
verification of books of arithmetical accuracy of
accounts, voucher, assets the facts.
and liabilities.
9. Scope Audit Report covers all W h i l e t h e A u d i t
transactions done during Certificate is very
the year. specific.
10. Characteristics Audit Report is subjective, While Audit Certificate
as it is opinion oriented. is objective, as it is fact
oriented.
11. Form Audit Report is required to While Audit Certificate,
be presented in the expect in few cases, is
prescribed format. not required to be
presented in any
standard format.
12. Address Audit report is addressed to While Audit Certificate is
the members of the addressed to particular
company at large or person or sometimes
appointing authority. may include the words
like "To whomsoever it
may concern."
Space to write important points for revision
 12.438 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

DESCRIPTIVE QUESTIONS
2008 - Dec [6] (a) What are the contents of good Audit Report?
(4 marks)
Answer :
The auditor’s report is clear writing expression of opinion of auditor on the
financial statements of the auditee. Auditing guidelines given in SA, have laid
down certain guidelines relating to contents of Audit Report viz.
(i) Title
(ii) Addressee
(iii) Opening or Introductory Paragraph
(iv) Scope Paragraph
(v) Opinion Paragraph
(vi) Date of the Report
(vii) Place of Signature
(viii) Auditor's Signature
Space to write important points for revision

2009 - Dec [8] (i) In course of audit, auditor advised to amend the Profit &
Loss A/c which was faulty but the directors did not follow his advice. As an
auditor, what you will do? (2 marks)
Answer :
As an auditor, I would qualify my report and state that financial statement do
not represent the true and fair view of the states of the affairs of the
company. I would also mention what is wrong in the profit and loss a/c and
what it should be. I will also quantify the incorrectness and justify my stand
on the issue.
Space to write important points for revision

2010 - June [7] (c) Statutory Auditor is to give a certificate regarding

compliance of corporate Governance which is annexed with the Director’s
Report. What are the documents and records to be checked by you before
signing of such certificate. (4 marks)
 [Chapter  13] Audit Report O 12.439

Answer :
The Corporate Governance Report requires following points to be checked
by auditor during the audit :
(i) Minutes of BOD’s meetings
(ii) Minute book of general body meeting
(iii) Minute book of Audit committee
(iv) Corporate Governance Report
(v) Mandatory annual intimations filed by each director about directorship
in other companies
(vi) Consistency of segment wise information with the segment information
disclosed in financial statements in according with AS - 17.
Space to write important points for revision

2010 - June [8] (d) Under what circumstances, Auditor has to Qualify his
report. (4 marks)
Answer :
Some situations calling for qualifications in Audit Reports are:
(i) Where the Auditors are unable to obtain all the information and
explanations which they consider necessary for the purposes of their
audit, e.g. -
(a) Absence of satisfactory documentary evidence of the existence of
ownership of the material assets, such as, title deeds in respect of
land,
(b) Absence of vouchers in respect of material payments made by the
Company,
(c) Destruction of books and records by fire or accident,
(d) Non-availability of books and records owing to unavoidable
circumstances, such as books and records of a foreign branch
with which no communication is possible.
(ii) Where proper books of accounts have not been kept in accordance
with the law.
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(iii) Where the Balance Sheet and P&L Account are not in agreement with
the books of account and returns.
(iv) When the information required by law is not furnished.
(v) When the accounts do not disclose a true and fair view like -
(a) Where the accounting practices followed by the Company are not
considered appropriate to the circumstances and nature of the
business e.g. treatment of HP Sales as outright sales,
(b) Where there has been a change in accounting principles or
procedures in relation to material items, such, valuation of stock,
depreciation, treatment of by-product cost, etc. without adequate
explanation and disclosure of effect of the change,
(c) Where difference of opinion with management has arisen
regarding valuation or realisability of assets, such as
Stock-in-Trade, Debtors, Loans & Advances or the extent of
liabilities, contingent or otherwise,
(d) Where income or expenditure is not properly reflected so as to
show a fair figure of profit for the year,
(e) Where information is not required by law to be disclosed but the
disclosure of which is considered essential by the Auditors in order
to show a true and fair view,
(f) Where there is a contravention of the provisions of the Companies
Act having a bearing upon the accounts and transactions of the
Company
(g) Where the Company has contravened the provisions of its
Memorandum and Articles of Association.
Space to write important points for revision

2010 - Dec [6] (e) How you will deal with in the Audit Report in respect of
Fixed Assets being maintained at Mumbai Branch Office of a foreign
company incorporated outside India. (2 marks)
 [Chapter  13] Audit Report O 12.441

Answer :
The auditor should report the following matters in his Audit Report :
Fixed assets :
(i) Company is maintaining proper records of fixed assets ;
(ii) Fixed assets are frequently verified by the management;
(iii) Material discrepancies found during verification are accounted properly
(iv) Any disposal of fixed assets has affected the going concern concept
or not.
Space to write important points for revision

2010 - Dec [8] (d) How an Auditor shall conduct and Report when he finds
any embezzlement of cash which considerably affects the financial position
of the Company? (2 marks)
Answer :
Auditor should qualify his report. He should attach the details of
embezzlement of cash with his report.
Space to write important points for revision

2011 - June [5] {C} Comment on the following statements based on legal
provisions:
(g) Importance of follow-up of Audit Report cannot be avoided. (2 marks)
Answer :
The importance and necessity of follow up arises due to fact that human
tendency is resistance to change and to delay the adoption of audit
recommendation. Even due to passing of time the concerned employee may
forget to implement the recommendations.
To achieve the full benefits of audit, defect and/or recommendations are
to be taken care of immediately.
The objectives of appraisal is dissipated unless the defects are corrected
or recommendations are implemented in time.
To avoid unhealthy tendencies the auditor will have to ensure close and
constant follow - up.
Space to write important points for revision
 12.442 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

2011 - June [6] (e) "Qualified" opinion and "Adverse" or "negative opinion"
in the Audit Report are same. —Comment. (2 marks)
(i) Unless the observations and recommendation set out in Audit Report are
considered, the objectives of appraisal is dissipated-offer your views.
(2 marks)
Answer :
(e) Please refer 2013 - Dec [7] (a) (iii) on page no. 427
Answer:
(i) This statement is correct: The importance of follow-up arises specially
due to the fact that human tendency (1) is to resistance to change and
(2) to delay the adoption of recommendation made by the auditors.
There is delay also to set right the deficiencies and irregularities
pointed out in the audit report.
It is not possible to set right the adverse opinion of the Auditor in one
sitting. Hence, periodical and regular follow-up is necessary by some
responsible staff of the company.
The Auditor/Internal Auditor does not have line authority to enforce
recommendations. He is to act in an advisory capacity.
Auditor is to pursue that recommendations are adhered to.
Progress of follow-up action on the report of auditors shall be
informed to the top management periodically as an item in the Board
meeting. Directors may fix up responsibility for time bound settlement for
better follow up and final disposal of the items of observations.
Space to write important points for revision

2011 - June [8] (c) What are the main points to be reported to the
shareholders by the Auditor—(limited to Eight such points). (4 marks)
Answer :
The auditor shall make a report to the members of the company on the
accounts examined by him and on every financial statements which are
required by or under this Act to be laid before the company in general
meeting and the report shall after taking into account the provisions of this
Act, the accounting and auditing standards and matters which are required
 [Chapter  13] Audit Report O 12.443

to be included in the audit report under the provisions of this Act or any rules
made thereunder or under any order made under sub-section (11) and to
the best of his information and knowledge, the said accounts, financial
statements give a true and fair view of the state of the company’s affairs as
at the end of its financial year and profit or loss and cash flow for the year
and such other matters as may be prescribed.
The auditor’s report shall also state:
(a) whether he has sought and obtained all the information and explanations
which to the best of his knowledge and belief were necessary for the
purpose of his audit and if not, the details thereof and the effect of such
information on the financial statements;
(b) whether, in his opinion, proper books of account as required by law have
been kept by the company so far as appears from his examination of
those books and proper returns adequate for the purposes of his audit
have been received from branches not visited by him;
(c) whether the report on the accounts of any branch office of the company
audited under sub-section (8) by a person other than the company’s
auditor has been sent to him under the proviso to that sub-section and
the manner in which he has dealt with it in preparing his report;
(d) whether the company’s balance sheet and profit and loss account dealt
with in the report are in agreement with the books of account and
returns;
(e) whether, in his opinion, the financial statements comply with the
accounting standards;
(f) the observations or comments of the auditors on financial transactions
or matters which have any adverse effect on the functioning of the
company;
(g) whether any director is disqualified from being appointed as a director
under sub-section (2) of Section 164;
(h) any qualification, reservation or adverse remark relating to the
maintenance of accounts and other matters connected therewith;
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(i) whether the company has adequate internal financial controls system in
place and the operating effectiveness of such controls;
(j) such other matters as may be prescribed.
Space to write important points for revision

2013 - Dec [7] (b) (i) State the parameters to be satisfied for issuing an
unqualified audit report? (4 marks)
Answer:
For issuing an unqualified Audit Report, the Auditor has to satisfy
himself that:
(i) Evidence Reasonable evidence is obtained in support of
transactions recorded in the books of account.
(ii) Standards Accounting entries passed in the books of
account are in conformity with the generally
applicable accounting principles and AS followed
consistently.
(iii) True and fair The financial statements prepared represent a
true and fair summary of the transactions that
took place during the year.
(iv) Classification The process of classification and aggregation
followed in the preparation of the financial
statement is fair and it does not hide a material
fact nor does it highlight something, which may
distort the real state of affairs.
(v) Format The form of Financial Statement is in accordance
with the form prescribed by law, if any.
(vi) Free of There are no material misstatement in the
Misstatements financial statement.
Space to write important points for revision
 [Chapter  13] Audit Report O 12.445

2017 - Dec [9] (b) Discuss the basic elements of an audit report.
(8 marks)
Answer:
The Basic Elements of the Auditors' Report are –
(i) Title: The Auditor's Report should have an appropriate title i.e.
"Auditor's Report". It should be distinguished from other Reports,
e.g. reports of officers of the entity, Board of Directors.
(ii) Addressee: The Auditor's Report should be appropriately
addressed as required by the circumstances of the engagement and
applicable laws and regulations. Ordinarily, the Auditor's Report is
addressed to the authority appointing the Auditor.
(iii) Opening or Introductory Paragraph:
(a) The Auditor's Report should identify the Financial Statements of
the entity that have been audited, including the date of and
period covered by the Financial Statements.
(b) The Report should include a Statement that the Financial
Statements are the responsibility of the entity's management
and a Statement that the responsibility of the Auditor is to
express an opinion on the Financial Statements based on the
audit.
(iv) Scope Paragraph:
(a) The Auditor's Report should describe the scope of the audit by
stating that the audit was conducted in accordance with
standards on auditing generally accepted in India.
(b) The Report should include a statement that the audit was
planned and performed to obtain reasonable assurance whether
the Financial Statements are free of material misstatement.
(c) The Auditor's Report should describe the Audit as including
examining, on a test basis, evidence to support the amounts
and disclosures in Financial Statements, assessing the
accounting principles used in the preparation of the Financial
Statements, assessing significant estimates made by
management, in the preparation of Financial Statements, and
evaluating the overall position of Financial Statements.
(d) The Report should include a statement by the Auditor that the
audit provides a reasonable basis for his opinion.
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(v) Opinion Paragraph: The Opinion paragraph of the Report should

indicate the Financial Reporting framework used to prepare the
Financial Statements. It should state the Auditor's opinion as to
whether the Financial Statements give a true and fair view in
accordance with the financial reporting framework and, where
appropriate, whether the Financial Statements comply with the
statutory requirements.
(vi) Date of the Report: The date of an Auditor's Report is the date on
which the Auditor signs the Report expressing an opinion on the
Financial Statements. The Auditor should not date the Report earlier
than the date on which the Financial Statements are signed or
approved by Management.
(vii) Place of Signature: The Report should name the specific location,
which is ordinarily the city where the Audit Report is signed.
(viii) Auditor's Signature: The Report should be signed by the Auditor
in his personal name. Where a Firm is appointed as the Auditor, the
Report should be signed in the personal name of the Auditor and in
the name of the Audit Firm. The Partner/ Proprietor signing the
Report should mention his ICAI Membership Number.
Space to write important points for revision

2018 - Dec [9] (b) What is a qualified Audit Report? Discuss the
circumstances when an Auditor shall qualify his report. (2+4=6 marks)

PRACTICAL QUESTIONS
2011 - June [7] (c) M/s. B.K. Associates, Chartered Accountants in addition
to normal yearly Audit, rendered services for Taxation, Company Law
matters etc. for which separate fees were received by them. While preparing
Audit Report what points should be covered in his Audit Report ?
(2 marks)
 [Chapter  13] Audit Report O 12.447

Answer :
Where in addition to the normal audit the same auditor is also required to
render services like taxation, management services, company law matters
and for which separate fees are received by the auditor, amount of such
additional fees/remuneration expenses or otherwise must be disclosed in the
financial statement and audit report separately under following heads in
order to give precise and correct information to the shareholders and others:
Tax representation
Company Law matters
Management Services
Other Service.
Space to write important points for revision

Important Highlights
Audit Report under CARO 2016
S.O. 1228(E): In exercise of the powers conferred by sub-sec. (11) of
Sec. 143 of the Companies Act, 2013. (18 of 2013) and in supersession
of the Companies (Auditor’s Report) Order, 2015 published in the Gazette
of India, Extraordinary, Part II, Sec. 3, Sub-sec. (ii), vide number S.O. 990
(E), dated the 10th April, 2015, except as respects things done or omitted
to be done before such supersession, the Central Government, after
consultation with the, committee constituted under proviso to sub-sec.
(11) of Sec. 143 of the Companies Act, 2013 hereby makes the following
Order, namely:
1. Short title, application and commencement:
(1) This Order may be called the Companies (Auditor’s Report) Order,
2016.
(2) It shall apply to every company including a foreign company as
defined in clause (42) of Sec. 2 of the Companies Act, 2013 (18
of 2013) [hereinafter referred to as the Companies Act], except:
12.448 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(i) a banking company as defined in clause (c) of Sec. 5 of the

Banking Regulation Act, 1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act,
1938 (4 of 1938);
(iii) a company licensed to operate under Sec. 8 of the
Companies Act;
(iv) a One Person Company as defined under clause (62) of Sec.
2 of the Companies Act and a small company as defined
under clause (85) of Sec. 2 of the Companies Act; and
(v) a private limited company, not being a subsidiary or holding
company of a public company, having a paid up capital and
reserves and surplus not more than rupees one crore as on
the balance sheet date and which does not have total
borrowings exceeding rupees one crore from any bank or
financial institution at any point of time during the financial
year and which does not have a total revenue as disclosed in
Scheduled III to the Companies Act, 2013 (including revenue
from discontinuing operations) exceeding rupees ten crore
during the financial year as per the financial statements.
2. Auditor’s report to contain matters specified in paragraphs 3 and 4:
Every report made by the auditor under Sec. 143 of the Companies
Act, 2013 on the accounts of every company audited by him, to which
this Order applies, for the financial years commencing on or after 1st
April, 2015, shall in addition, contain the matters specified in
paragraphs 3 and 4, as may be applicable:
Provided the Order shall not apply to the auditor’s report on
consolidated financial statements.
3. Matters to be included in the auditor’s report: The auditor’s report
on the accounts of a company to which this Order applies shall include
a statement on the following matters, namely:
(i) (a) whether the company is maintaining proper records showing
full particulars, including quantitative details and situation of
fixed assets;
 [Chapter  13] Audit Report O 12.449

(b) whether these fixed assets have been physically verified by

the management at reasonable intervals; whether any
material discrepancies were noticed on such verification and
if so, whether the same have been properly dealt with in the
books of account;
(c) whether the title deeds of immovable properties are held in
the name of the company. If not, provide the details thereof;
(ii) whether physical verification of inventory has been conducted at
reasonable intervals by the management and whether any
material discrepancies were noticed and if so, whether they have
been properly dealt with in the books of account;
(iii) whether the company has granted any loans, secured or
unsecured to companies, firms, Limited Liability Partnerships or
other parties covered in the register maintained under Sec. 189
of the Companies Act, 2013. If so,
(a) whether the terms and conditions of the grant of such loans
are not prejudicial to the company’s interest;
(b) whether the schedule of repayment of principal and payment
of interest has been stipulated and whether the repayments
or receipts are regular;
(c) if the amount is overdue, state the total amount overdue for
more than ninety days, and whether reasonable steps have
been taken by the company for recovery of the principal and
interest;
(iv) in respect of loans, investments, guarantees, and security whether
provisions of Secs. 185 and 186 of the Companies Act, 2013
have been complied with. If not, provide the details thereof.
(v) in case, the company has accepted deposits, whether the
directives issued by the Reserve Bank of India and the provisions
of Secs. 73 to 76 or any other relevant provisions of the
Companies Act, 2013 and the rules framed thereunder, where
applicable, have been complied with? If not, the nature of such
contraventions be stated; If an order has been passed by
12.450 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Company Law Board or National Company Law Tribunal or

Reserve Bank of India or any court or any other tribunal, whether
the same has been complied with or not?
(vi) whether maintenance of cost records has been specified by the
Central Government under sub-sec. (1) of Sec. 148 of the
Companies Act, 2013 and whether such accounts and records
have been so made and maintained.
(vii) (a) whether the company is regular in depositing undisputed
statutory dues including provident fund, employees’ state
insurance, income-tax, sales-tax, service tax, duty of customs,
duty of excise, value added tax, cess and any other statutory
dues to the appropriate authorities and if not, the extent of the
arrears of outstanding statutory dues as on the last day of the
financial year concerned for a period of more than six months
from the date they became payable, shall be indicated;
(b) where dues of income tax or sale tax or service tax or duty of
customs or duty of excise or value added tax have not been
deposited on account of any dispute, then the amounts
involved and the forum where dispute is pending shall be
mentioned. (A mere representation to the concerned
Department shall not be treated as a dispute).
(viii) whether the company has defaulted in repayment of loans or
borrowing to a financial institution, bank, Government or dues to
debenture holders? If yes, the period and the amount of default to
be reported (in case of defaults to banks, financial institutions, and
Government, lender wise details to be provided).
(ix) whether moneys raised by way of initial public offer or further
public offer (including debt instruments) and term loans were
applied for the purposes for which those are raised. If not, the
details together with delays or default and subsequent
rectification, if any, as may be applicable, be reported;
 [Chapter  13] Audit Report O 12.451

(x) whether any fraud by the company or any fraud on the Company
by its officers or employees has been noticed or reported during
the year; If yes, the nature and the amount involved is to be
indicated;
(xi) whether managerial remuneration has been paid or provided in
accordance with the requisite approvals mandated by the
provisions of Sec. 197 read with Schedule V to the Companies
Act? If not, state the amount involved and steps taken by the
company for securing refund of the same;
(xii) whether the Nidhi Company has complied with the Net Owned
Funds to Deposits in the ratio of 1:20 to meet out the liability and
whether the Nidhi Company is maintaining ten per cent
unencumbered term deposits as specified in the Nidhi Rules,
2014 to meet out the liability;
(xiii) whether all transactions with the related parties are in compliance
with Secs. 177 and 188 of Companies Act, 2013 where
applicable and the details have been disclosed in the Financial
Statements etc., as required by the applicable accounting
standards;
(xiv) whether the company has made any preferential allotment or
private placement of shares or fully or partly convertible
debentures during the year under review and if so, as to whether
the requirement of Sec. 42 of the Companies Act, 2013 have
been complied with and the amount raised have been used for the
purposes for which the funds were raised. If not, provide the
details in respect of the amount involved and nature of non-
compliance;
(xv) whether the company has entered into any non-cash transactions
with directors or persons connected with him and if so, whether
the provisions of Sec. 192 of Companies Act, 2013 have been
complied with;
(xvi) whether the company is required to be registered under Sec. 45-
IA of the Reserve Bank of India Act, 1934 and if so, whether the
registration has been obtained.
12.452 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

4. Reasons to be stated for unfavourable or qualified answers:

(1) Where, in the auditor’s report, the answer to any of the
questions referred to in paragraph 3 is unfavourable or qualified,
the auditor’s report shall also state the basis for such
unfavourable or qualified answer, as the case may be.
(2) Where the auditor is unable to express any opinion on any
specified matter, his report shall indicate such fact together with
the reasons as to why it is not possible for him to give his
opinion on the same.
Space to write important points for revision

Repeatedly Asked Questions

No. Question Frequency
1 Distinguish between audit report and audit
certificate.
14 - Dec [1] (g), 15 - Dec [4] (b) (iii),
18 - June [9] (b) 3 Times
2 Distinguish between Qualified Audit Report and
Adverse Report.
13 - Dec [7] (a) (iii), 17 - June [9] (a) 2 Times
 14 MISCELLANEOUS AUDIT
THIS CHAPTER INCLUDES
 Branch Audit  Audit of Hospital
 Joint Audit  Audit of Co-operative Societies
 Audit of Shares  Bank Audit
 Audit of Debentures  Audit of Trust
 Audit of Divisible  Audit of Municipalities and
Profit/Dividend Panchayats
 Audit of an Educational
Institution .
Marks of Objective, Short Notes, Distinguish Between, Descriptive & Practical Questions
Legend
Objective Short Notes Distinguish Descriptive Practical

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12.453
 12.454 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

SHORT NOTES

2017 - June [10] Write a short note:

(a) Audit of a Hospital (4 marks)
(d) Benefits offered by Joint Audit (4 marks)
Answer:
(a) Audit of Hospital
The following points are to be considered necessary for conducting
an audit of Hospital.
(i) Check the letter of appointment to ascertain the scope of
responsibilities.
(ii) Study the Charter or Trust Deed under which the hospital has been
set up and take a special note of the provisions affecting the
accounts.
(iii) Examine, evaluate and verify the system of internal check, internal
control and determine the nature, timing and the extent of the audit
procedures.
(iv) Vouch the entries in the Patient’s Bill Register with a copies of bill
issued. Test check the selected bills to see that these have been
correctly prepared taking into consideration the period of stay of
each patient as recorded in the Attendance Schedule.
(v) Vouch the collection from patients with copies of bills and entries in
Bills Register. Arrears of dues should be properly carried forward
and where these are deemed to be irrecoverable, they should be
written off under due authorizations.
(vi) Interest and/ or dividend income should be vouched with reference
to the Investment Register and Interest and Dividend warrants.
(vii) In case of legacies and donations which are received for specific
purposes, it should be ensured that any income therefrom is not
utilized for any other purposes.
 [Chapter  14] Miscellaneous Audit O 12.455

(viii) Where receipts of subscription show a significant deviations from

budgeted figures, it should be thoroughly inquired into and the
matter be brought to the notice of the trustees or the Managing
Committee.
(ix) Government grants or grants from local bodies should be verifies
with the reference to the correspondence with the concerned
authorities.
(x) Clear distinction should be made between the items of capital and
revenue nature.
(xi) The capital expenditure should be incurred under proper
authorization by a valid resolution of the trustees or the Managing
Committee.
(xii) Verify the system of internal check as regards purchases and issue
of stores, medicines etc.
(xiii) Examine that the appointment of the staff, payment of salaries etc.
are duly authorized.
(xiv) Physically verify the investments, fixed assets and inventories.
(xv) Check that adequate depreciation has been provided on all the
depreciable assets.
(d) Advantages of Joint Audit
Joint Audit basically implies pooling together resources and expertise of
more than one firm of auditors to render an expert job in a given time
period which may be difficult to accomplish acting individually. It
essentially involves sharing of the total work. This is by itself a great
advantage. In specific terms the advantages that flow may be the
following:
(i) Sharing of expertise
(ii) Advantage of mutual consultation
(iii) Lower work load
(iv) Better quality of performance
(v) Improved service to the client
(vi) Displacement of the auditor of the company often obviated.
 12.456 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(vii) In respect of multinational companies the work can be spread using

the expertise of the local firms which are in a better position to deal
with detailed work and the local laws and regulations.
(viii) Lower staff deployment cost
(ix) Lower cost to carry out the work
(x) A sense of healthy competition towards a better performance.
Space to write important points for revision

2017 - Dec [10] Write short notes (any three):

(a) Audit of Municipalities and Panchayats
(b) Audit of Bonus share issued by a company
(c) Branch Auditor
(d) Declaration of dividend by a company u/s 123 (4 × 3 = 12 marks)
Answer:
(a) Audit of Municipalities and Panchayats
The major objective of audit of Municipalities and Panchayats are
enumerated below;
(i) To ensure on the fairness and correctness of contents in the
Financial Statement.
(ii) To report on adequacy of internal control.
(iii) To ensure value of money is fully received on amount spent.
(iv) To detect the frauds and errors.
The following points are to be considered necessary for carrying on audit
of Municipalities and panchayats (Local Bodies);
(i) To ensure that the expediters incurred conform to the relevant
provision of the law and is in accordance with the financial Rules
and regulation formed by the compliant authority.
(ii) To encase that sanction is accorded by the competent authority
either special or general.
(iii) To encase that there is provision of funds for expenditure and is
authorized by competent Authority.
(iv) To ensure that where huge financial expenditure is made is run
economically and is expected to contribute growth.
 [Chapter  14] Miscellaneous Audit O 12.457

(b) Audit of bonus share issued by a company (Section 63)

The auditor should take note of the following points:
(i) Confirm that issue of Bonus Share was authorized by articles.
(ii) Verify the minutes of the Board meeting and ordinary resolution
passed in the general meeting in which the approval of members is
obtained
(iii) Check that the company has issue fully paid-up bonus shares to its
members only.
(iv) Confirm that the issue of bonus shares shall not be made by
capitalizing reserves created by the revaluation of assets.
(v) Check whether the company has made any default in payment of
interest or principal in respect of fixed deposits or debt securities
issued by it.
(vi) Check whether the company has made any default in payment of
statutory dues of the employees, such as, contribution to provident
fund, gratuity and bonus.
(vii) Whether the partly paid-up shares are made fully paid-up.
(viii) Check whether the bonus shares shall not be issued in lieu of
dividend.
(c) Branch Auditor
Branch Auditor may be appointed under Section 139 of 2013 Act to audit
the Accounts of Branch Office of a Company. Such person, who is
appointed as Branch Auditor, should be qualified for appointment as an
auditor of the Company under 2013 Act. The Branch Auditor shall
prepare a report on the Accounts of the Branch examined by him and
send it to Company's Auditor. The report of Branch Auditor will be dealt
by Company's auditor in the manner deemed fit. Branch auditor is
responsible to report fraud, as applicable to Company's auditor.
(d) Declaration of dividend by a company u/s 123
No dividend shall be declared or paid by a company for any financial
year except:
(a) out of the profits of the company for that year arrived at after
providing for depreciation in accordance with the provisions of
 12.458 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

subsection (2), or out of the profits of the company for any previous
financial year or years arrived at after providing for depreciation in
accordance with the provisions of that sub-section and remaining
undistributed, or out of both; or
(b) out of money provided by the Central Government or a State
Government for the payment of dividend by the company in
pursuance of a guarantee given by that Government.
Provided that a company may, before the declaration of any dividend
in any financial year, transfer such percentage of its profit for that
financial year as it may consider appropriate to the reserves of the
company.
Provided further that where, owing to inadequacy or absence of
profits in any financial-year, any company proposes to declare dividend
out of the accumulated profits earned by it in previous years and
transferred by the company to the free reserves, such declaration of
dividend shall not be made except in accordance with such rules as may
be prescribed in this behalf.
Provided also that no dividend shall be declared or paid by a
company from its reserves other than free reserves.
Provided also that no company shall declare dividend unless carried
over previous losses and depreciation net provided in previous year or
years are set off against profit of the company for the current year.
For the purposes of clause (a) of sub-section (1), depreciation shall
be provided in accordance with the provisions of Schedule II.
Space to write important points for revision

2018 - June [10] Write short notes (any three):

(a) Responsibility of a Joint Auditor
(b) Elements of ‘cost of inventory’ as per AS 2
(c) Audit of Education Institutions
(d) Auditor’s duty regarding Issue of Debentures. (4 × 3 = 12 marks)
 [Chapter  14] Miscellaneous Audit O 12.459

Answer:
(a) Responsibility of a Joint Auditor:
1. For the audit work divided among themselves, each joint auditor is
responsible only for the work allocated to him. Accordingly, among
other duties,
(i) Each joint auditor is required to scrutinize the audit report of the
branch/ divisions specifically allocated to him.
(ii) Each joint auditor is required to obtain and evaluate information
and explanations from the management of the divisions, zones
or units specifically allocated to him.
2. In respect of undivided work.
(i) In respect of decision taken jointly regarding the nature, timing
or extent of audit procedures to be performed by any of the joint
auditor. (However, they will be responsible only with respect to
the appropriateness of the decision, proper execution of the
audit procedures is the separate and specific responsibility of
the joint auditor concerned.)
(ii) In respect of matters which are brought to the notice of the joint
auditors by any one of them and on which there is an agreement
among them.
(iii) In respect of compliance with disclosure requirement (i.e. Notes
on accounts) of the relevant statute while examining the
financial statements.
(iv) For ensuring that the audit report complies with the
requirements of the relevant statute.
(b) Elements of 'Cost of Inventory' as per AS 2
Cost of inventory includes the following
1. Cost of purchase
2. Cost of conversion
3. Other costs incurred in bringing the inventories to their present
location and condition.
 12.460 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

1. Cost of purchase includes :

Purchase price, Duties and Taxes, Freight inward, other
expenditures directly attributable to the acquisition less duties and
taxes recoverable by enterprises from taxing authorities. Trade
discount, Rebate, Duty drawback, Other similar items.
2. Cost of conversion :
It consists of the cost directly related to the units + Systematic
Allocation of fixed and variable production overheads that are
incurred in converting material into finished goods.
Fixed Production overhead means Indirect cost of production that
remains relatively constant regardless of volume of production.
Allocation of fixed production overhead is done on normal capacity.
Variable Production overhead means indirect cost of production that
varies directly or nearly directly with the volume of production.
Allocation of variable production overhead is done on actual
production.
In case of Joint-products, when the cost of conversion of each
product is not identifiable separately, total cost of conversion is
allocated between the products on the rational and consistent basis,
if by-products, scrap or waste materials are not of material value,
they are measured at net realisable value, then the net realisable
value is deducted from cost of conversion. Net cost of conversion is
distributed among the main products.
3. Other Costs: Cost incurred in bringing the inventories to their
present location and condition.
(c) Audit of Education Institutions
The Special steps involved in the audit of an educational institution are
the following:
(i) Examine the Trust Deed, or Regulations in the case of school or
college and note all the provisions affecting accounts. In the case
of a university, refer to the Act of Legislature and the Regulations
framed there under.
 [Chapter  14] Miscellaneous Audit O 12.461

(ii) Read through the minutes of the meetings of the Managing

Committee or Governing Body, noting resolutions affecting accounts
to see that these have been duly complied with, specially the
decisions as regards the operation of bank accounts and
sanctioning of expenditure.
(iii) Check names entered in the Students' Fee Register for each month
or term, with the respective class registers, showing names of
students on rolls and test amount of fees charged; and verify that
there operates a system of internal check which ensures that
demands against the students are properly raised.
(iv) Check fees received by comparing counterfoils of receipts granted
with entries in the cash book and tracing the collections in the Fee
Register to confirm that the revenue from this source has been duly
accounted for.
(v) Total up the various columns of the Fees Register for each month
pre term to ascertain that fees paid in advance have been carried
forward and the arrears that are irrecoverable have been written off
under the sanction of an appropriate authority.
(vi) Check admission fees with admission slips signed by the head of
the institution and confirm that the amount had been credited to a
Capital Fund, unless the Managing Committee has taken a decision
to the contrary.
(vii) See that free studentship and concessions have been granted by a
person authorised to do so, having regard to the prescribed Rules.
(viii) Confirm that fines for late payment or absence, etc., have either
been collected or remitted under proper authority.
(ix) Confirm that hostel dues were recovered before students' accounts
were closed and their deposits of caution money refunded.
(x) Verity rental income from landed property with the rent rolls, etc.
(xi) Verify the inventories of furniture, stationery, clothing, provision and
all equipment, etc.
These should be checked by reference to Stock Register and values
applied to various items should be test checked.
 12.462 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(xii) Confirm that the refund of taxes deducted from the income from
investment (interest on securities, etc.) has been claimed and
recovered since the institutions are generally exempted from the
payment of income-tax.
(xiii) Verify the annual statements of accounts and while doing so see
that separate statements of account have been prepared as regards
Poor Boys Fund, Games Fund, Hostel and Provident Fund of Staff,
etc.
(d) Auditor's duty regarding Issue of Debentures:
(i) The auditor should verify that the prospectus had been duly filed
with the registrar before the date of allotment of debentures.
(ii) He should check the amount collected in the cash book with the
counterfoils of receipts issued to the applicants and also cross
check the amount into the application and allotment book.
(iii) He should examine the debenture trust deed and note the
conditions contained therein as to issue and repayment.
(iv) If the debentures are covered by a mortgage of a charge, it should
be verified that the charge has been correctly recorded in the
register of mortgage and charges" and it has also been registered
with the registrar of the companies.
(v) Compliance with SEBI guidelines should also be ensured.
(vi) Where debentures have been issued as fully paid up to vendors as
a part of the purchase consideration, the contract in this regard
should be checked.
Space to write important points for revision

2018 - Dec [10] Write short notes:

(a) Auditor’s duty regarding unclaimed dividend
(c) Audit of Co-operative Society (4 × 2 = 8 marks)
 [Chapter  14] Miscellaneous Audit O 12.463

DISTINGUISH BETWEEN

2017 - June [10] (b) Difference between Statutory Audit and Internal Audit.
(4 marks)
Answer:
Statutory Auditor and Internal Auditor
SL Basis Statutory Audit Internal Audit
No.
i. A p p o i n t i n g Statutory Auditor is Internal Auditor is appointed
Authority a p p o in t e d b y t h e by the Board.
shareholder in the
general meeting.
ii. Scope of the The scope of work is The scope of work includes
work defined in thethe adherence of
Companies Act. management policies and
procedures and identifies
the weakness in the internal
control.
iii. Removal of Statutory Auditor can be Internal Auditor can be
Auditor r e m o v e d b y t h e removed by the Board.
shareholders.
iv. Remuneration It is fixed by the It is fixed by the board.
shareholders.
v. Audit Report It is submitted to the It is submitted to the Board
appointing Authority. as a suggestion to improve
weakness in the internal
control.
Space to write important points for revision

2018 - Dec [10] (d) Difference between Statutory Audit and Internal Audit
(4 marks)
 12.464 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

DESCRIPTIVE QUESTIONS

2009 - Dec [5] {C} Comment on the following statements based on legal
provisions:
(g) ABC Ltd. has made provision for payment of dividend out of capital
redemption reserve fund. (2 marks)
Answer :
Capital redemption reserve cannot be used for distribution of dividend.
Dividends can be declared only out of current year of profits. The
fundamental principle underlying the payment of dividend is that the dividend
is return on capital and not return of capital. Therefore the following items are
not available for declaration or payment of dividend.
(i) Capital Redemption Reserve
(ii) Fixed assets revaluation reserve (subject to satisfaction of certain
conditions)
(iii) Excess amount of forfeiture/ reissue of shares.
(iv) Any specific reserve created out of specific provisions.
Space to write important points for revision

2009 - Dec [6] (f) As a Branch Auditor how you will conduct Branch Audit?
(3 marks)
Answer :
 The branch audit should be conducted in the same manner as other
statutory audits.
 The branch auditor has same powers, responsibility and liability as
statutory auditor.
 His basic objective is to record and report his opinion on the state of
affairs of the company as to whether the financial statements present the
true and fair view of the state of affairs of the company.
 He will check the books of accounts, call for explanation of the
concerned officials as required, collect internal and external evidence
and frame his opinion and report.
Space to write important points for revision
 [Chapter  14] Miscellaneous Audit O 12.465

2011 - Dec [5] {C} Comment on the following statements based legal
provisions:
(d) When a company appoints Joint Auditor, auditors' liability and
responsibility are increased because an auditor is made responsible for
the audit work of another auditor. (2 marks)
Answer :
According to the statement issued by the ICAI, it would not be correct to hold
an Auditor responsible for the work of another and each joint auditor will be
responsible only for the work allotted to him. The statement is false.
Space to write important points for revision

2012 - June [5] {C} Comment on the following statements based on legal
provisions:
(g) Dividend has been declared out of profit on re-issue of forfeited shares.
(2 marks)
Answer :
Profit on re-issue of forfeited shares is transferred to capital reserve. Capital
reserve is not available for distribution as dividend. The auditor should advise
the management not to distribute the profit on forfeited shares as dividend.
Space to write important points for revision

2012 - June [6] (b) Accounts of Mumbai Branch was audited by a firm of
Chartered Accountants of Mumbai. Even then the Company Auditor
demanded to visit Mumbai Branch, Director (Finance) could not agree. Offer
views. (2 marks)
Answer :
The Company auditor is entitled to visit the Branch office and has right to
access all books and accounts records etc of the branch. The Director
(Finance) cannot disallow the company auditor the right to visit Branches.
Space to write important points for revision

2012 - June [7] (b) Proposed dividend was not adjusted in the financial
statements. Offer your views. (2 marks)
 12.466 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer :
Proposed dividend by Directors should be disclosed in the financial
statements as per the requirement of Schedule III to Companies Act, 2013.
Though the dividend proposed is subject to approval of the shareholders in
the AGM, dividend proposal is one of the appropriation of Profits and as such
it should be taken in the preparation of the financial statement as per
schedule III.
Space to write important points for revision

2012 - Dec [7] (b) Company Auditor received the Branch Audit Report which
contains qualifications on matters specially required to be disclosed pursuant
to schedule III requirement. How this type of situation shall be dealt with by
the Auditor? (2 marks)
Answer :
Any audit should never be treated as an extension of any previous audit.
Every audit should be conducted and concluded in an independent manner.
It is for the current auditor to determine whether he wants to accept or reject
the report of branch auditor. If he rejects such report, he should give reasons
for such rejection and he should conduct his own audit on that matter and
frame his own report. As a matter of fact, he (current auditor) can deal with
the audit report of the branch auditor in any manner he deems fit.
Space to write important points for revision

2014 - June [5] {C} Answer the following:

(b) State the duties of Auditor in respect of issue of Debentures as co-lateral
security. (2 marks)
Answer:
Issue of Debentures as Collateral Security:
Debentures may be issued to creditors, bankers or any other person, without
receiving any cash thereon. Here it acts as a collateral security and becomes
real debentures in the event of the default of the loan. Usually the nominal
value of such debentures is more than that of the amount of loan.
 [Chapter  14] Miscellaneous Audit O 12.467

Auditor’s Duty:
(i) The auditor should see that such debentures do not appear in the
liabilities side of the balance sheet, but are shown by way of note
under the heading loan.
(ii) He should ensure that necessary entries have been made in the
register of mortgages and that the necessary papers are filed with the
registrar of companies.
(iii) He should also examine the loan agreement and confirm that it has
been approved by the Board.
Space to write important points for revision

2014 - June [7] (c) (ii) What are the matters to be considered while
conducting the audit of a charitable institution? (8 marks)
Answer:
Audit of a Charitable Institution:
When conducting the audit of a charitable institution, the auditor
should consider the following matters:
(i) The auditor should study the constitution of the charitable institution,
for example, whether it is set up under the Societies Registration Act
or as per Section 8 of the Companies Act, 2013 or as a trust.
(ii) Obtain a list of members of the governing body. This will help the
auditor in identifying whether any of the members of the governing
body has any interest in the charitable institution.
(iii) The auditor should obtain a copy of the budget sanctioned or the
financial statement. This would enable him to acquaint himself with the
different heads of income and expenditures of the institution.
(iv) Examination of the system of internal check, especially as regards the
accounting of the amounts collected.
(v) Check that the amounts received towards income have been duly
collected, received and deposited into the bank regularly and promptly.
(vi) These institutions receive subscriptions and donations which form the
major part of their collections. Therefore, the auditor should check the
following:
 12.468 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

 The amount or the rate of the annual subscription.

 Any instructions given by the donors as to the specific utilization of
donation.
 Adequacy of internal controls existing as regards unused receipt
books, counter foils, etc.
 Where subscriptions are received in advance these should be
properly dealt with in the accounts.
(vii) Verify the amounts of legacies received by reference to
correspondence with any figures other available information.
(viii) Where the institution has made any investments or given loans, the
amount of dividend and interest should be properly vouched with
reference to the counterfoils or dividend warrants received. It should
be ensured that such loans or grants are given under proper
authorizations.
(ix) If some property is given or taken on rent, then the auditor should
check the tenancy agreement, the rent slips and the authorized person
for the collection or payment, as the case may be, of the rent.
(x) Most of the organisations organize special functions such as concert
etc. The auditor should be careful in such cases. All the gross receipts
and outgoings are to be properly vouched by him. It should be ensured
that proper internal check was maintained as regards the receipts and
outgoings. For example, the person responsible for collection and
disbursements should be separate persons.
(xi) The expenditure of charitable institution is also one of the major areas
of concern. Thus, the auditor should verify that the expenditure is
made only for the charitable purpose. If the expenditure is not for the
charitable purpose, then the auditor should examine the implications
of applicable law and document for the same.
(xii) The auditor should physically verify the cash in hand, inventories and
fixed assets.
Space to write important points for revision

2014 - Dec [4] (a) Comment on the following:

(iv) The responsibilities of joint auditors are joint and several. (4 marks)
 [Chapter  14] Miscellaneous Audit O 12.469

Answer:
In respect of audit work divided among the joint auditors, each joint auditor
is responsible only for the work allocated to him, whether or not he has
prepared a separate report on the work performed by him. On the other
hand, all the joint auditors are jointly and severally responsible:
(1) in respect of the audit work which is not divided among the joint auditors
and is carried out by all of them;
(2) in respect of decisions taken by all the joint auditors concerning the
nature, timing or extent of the audit procedures to be performed by any
of the joint auditors. It may, however, be clarified that all the joint
auditors are responsible only in respect of the appropriateness of the
decisions concerning the nature, timing or extent of the audit procedures
agreed upon among them; proper execution of these audit procedures
is the separate and specific responsibility of the joint auditor concerned;
(3) in respect of matters which are brought to the notice of the joint auditors
by any one of them and on which there is an agreement among the joint
auditors;
(4) for examining that the financial statements of the entity comply with the
disclosure requirements of the relevant statute; and
(5) for ensuring that the audit report complies with the requirements of the
relevant statute.
Space to write important points for revision

2014 - Dec [4] Answer the question:

(b) (i) What are the matters to be considered while conducting the audit of
a hospital? (8 marks)
Answer:
Audit of Hospital
The following points are to be considered necessary for conducting an
audit of Hospital:
(i) Check the letter of appointment to ascertain the scope of
responsibilities.
(ii) Study the Charter or Trust Deed under which the hospital has been set
up and take a special note of the provisions affecting the accounts.
 12.470 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(iii) Examine, evaluate and verify the system of internal check, internal
control and determine the nature, timing and the extent of the audit
procedures.
(iv) Vouch the entries in the Patient’s Bill Register with a copies of bill
issued. Test check the selected bills to see that these have been
correctly prepared taking into consideration the period of stay of each
patient as recorded in the Attendance Schedule.
(v) Vouch the collection from patients with copies of bills and entries in
Bills Register. Arrears of dues should be properly carried forward and
where these are deemed to be irrecoverable, they should be written
off under due authorizations.
(vi) Interest and/ or dividend income should be vouched with reference to
the Investment Register and Interest and Dividend warrants.
(vii) In case of legacies and donations which are received for specific
purposes, it should be ensured that any income therefrom is not
utilized for any other purposes.
(viii) Where receipts of subscription show a significant deviations from
budgeted figures, it should be thoroughly inquired into and the matter
be brought to the notice of the trustees or the Managing Committee.
(ix) Government grants or grants from local bodies should be verified with
reference to the correspondence with the concerned authorities.
(x) Clear distinction should be made between the items of capital and
revenue nature.
(xi) The capital expenditure should be incurred under proper authorization
by a valid resolution of the trustees or the Managing Committee.
(xii) Verify the system of internal check as regards purchases and issue of
stores, medicines etc.
(xiii) Examine that the appointment of the staff, payment of salaries etc. are
duly authorized.
(xiv) Physically verify the investments, fixed assets and inventories.
(xv) Check that adequate depreciation has been provided on all the
depreciable assets.
Space to write important points for revision
 [Chapter  14] Miscellaneous Audit O 12.471

2015 - June [4] Answer the question:

(b) (i) What are the advantages of joint audit? (8 marks)
Answer:
Advantages of Joint Audit
Joint Audit basically implies pooling together resources and expertise of
more than one firm of auditors to render an expert job in a given time period
which may be difficult to accomplish acting individually. It essentially involves
sharing of the total work. This is by itself a great advantage. In specific terms
the advantages that flow may be the following:
(i) Sharing of expertise
(ii) Advantage of mutual consultation
(iii) Lower work load
(iv) Better quality of performance
(v) Improved service to the client
(vi) Displacement of the auditor of the company often obviated.
(vii) In respect of multinational companies the work can be spread using
the expertise of the local firms which are in a better position to deal
with detailed work and the local laws and regulations.
(viii) Lower staff deployment cost
(ix) Lower cost to carry out the work
(x) A sense of healthy competition towards a better performance.
Space to write important points for revision

2015 - Dec [1] Answer the question:

(h) State the auditor’s duties in respect of issue of redeemable debentures.
(2 marks)
Answer:
The auditor shall check the following:
• Whether the issue is permitted by the Articles of the Company?
• Whether the company has passed any resolution in the general meeting
or not?
• Whether the issue is as per the provision of the Companies Act, 2013?
• Whether proper entries have been made by the company if it is issued
is at par or at a premium or at a discount?
 12.472 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

• Whether the particulars regarding these debentures are properly

maintained and reported or not?
• Whether the amount obtained is properly utilized for the purpose for
which it was obtained?
Space to write important points for revision

2015 - Dec [4] Answer the question:

(b) (i) As an auditor of a company, how will you audit of re-issue of forfeited
shares? (4 marks)
Answer:
Re-issue of forfeited shares:
• The auditor should ascertain that the Board of Directors has the authority
under the Articles of Association of the company to reissue forfeited
shares. Check the relevant resolution of the Board of Directors.
• Vouch the amounts collected from persons to whom the shares have
been allotted and verify the entries recorded from re-allotment. Auditor
should check the total amount received on the shares including received
prior to forfeiture, is not less than the par value of shares.
• Verify that computation of surplus amount arising on the reissue of
shares credited to Capital Reserve Account and
• Where partly paid shares are forfeited for non-payment of call, and
re-issued as fully paid, the reissue is considered as an allotment at a
discount and compliance of the provisions of Section 53 is essential.
Space to write important points for revision

2016 - Dec [6] (b) Explain what are the sources for payment of Dividend.
(5 marks)
Answer:
No dividend shall be declared or paid by a company for any financial year
except — out of the profits of the company for that year arrived at after
providing for depreciation, or out of the profits of the company for any
previous financial year or years arrived at after providing for depreciation.
 [Chapter  14] Miscellaneous Audit O 12.473

Source for payment of Dividend:

Section 123 permits payment of Dividend out of following sources only:
 Profit for the year for which dividend is to be paid.
 Undistributed or accumulated profits of previous financial years.
 Money provided by Central Government or State Government for the
payment of dividends in pursuance of a guarantee given by that
Government.
Space to write important points for revision

2016 - Dec [8] (a) What aspects are required to be examined by the auditor
in conducting audit of Buy-back of shares by the company? (7 marks)
Answer:
Following areas are required to be examined by the auditor in
conducting audit of Buyback of shares by the company:
 Confirm that Buy-Back was authorized by articles.
 Verify the minutes of the Board meeting and special resolution passed
in the general meeting in which the approval of members is obtained.
 Where the buy-back has been authorised by the Board by means of a
resolution passed at its meeting then check that the buy-back is not
more than ten per cent, or less of the total paid-up equity capital and free
reserves of the company.
 Check that the no buy-back of any kind of shares or other specified
securities shall be made out of the proceeds of an earlier issue of the
same kind of shares or same kind of other specified securities.
 To check that the buy-back shall not be more than twenty-five per cent,
of the aggregate of paid-up capital and free reserves of the company. In
case of buy-back of equity shares in any financial year, the reference to
twenty-five per cent, in this clause shall be construed with respect to its
total paid-up equity capital in that financial year.
 To check that the ratio of the aggregate of secured and unsecured debts
owed by the company after buy-back is not more than twice the paid-up
capital and its free reserves.
 12.474 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

 To check that all the shares or other specified securities for buy-back
should be fully paid-up.
 To check whether the buy-back is made as per SEBI regulations in case
of buy-back of the shares or other specified securities listed on any
recognized stock exchange.
 To check that no offer of buy-back under this sub-section shall be made
within a period of one year reckoned from the date of the closure of the
preceding offer of buy-back.
 To ensure that buy-back shall be completed within a period of one year
from the date of passing of the special resolution, or as the case may be,
the resolution passed by the Board under clause (b) of subsection (2).
 Ensure that the buy-back has been done only out of the company's free
reserves or its securities premium account or out of the proceeds of any
shares or other specified securities other than out of the proceeds of an
earlier issue of the same kind of shares or same kind of other specified
securities.
 Ascertain that declaration of solvency was filed with the SEBI and/or the
Registrar of Companies before making buy-back but subsequent the
passing of the special resolution.
 To ensure that company shall extinguish and physically destroy the
shares or securities so bought back within seven days of the last date of
completion of buy-back.
 To ensure that the company shall not make a further issue of the same
kind of shares or other securities including allotment of new shares or
other specified securities within a period of six months except by way of
a bonus issue.
 Whether the company has maintained any register of the shares or
securities so bought.
 Check whether that the after the completion of the buy-back under this
section the company file with the Registrar and the Securities and
Exchange Board a return containing such particulars relating to the
buy-back within thirty days of such completion.
Space to write important points for revision
 [Chapter  14] Miscellaneous Audit O 12.475

PRACTICAL QUESTIONS

2010 - Dec [5] {C} Comment on the following statements based on legal
provisions:
(e) XYZ India Ltd. has a Branch Office in England. M/s. R.B. Dutta & Co.
Chartered Accountants were appointed as Auditor of the Company
whereas an Accountant qualified to act as Auditor in England was
appointed as Branch Auditor to conduct Audit of that Branch. Indian
Auditor opined this was not legally valid. (2 marks)
Answer :
As directed in Companies Act, 2013 u/s 143, the accounts of the branch
office of a company are required to be audited by :
1. The company's auditor appointed u/s 142 or
2. The person qualified for appointment as contemplated by Section 141 or
3. Where the branch office is situated in a foreign country, either of the
above or by an accountant duly qualified to act as auditor in accordance
with the laws of that foreign country (Section 143).
Space to write important points for revision

2011 - Dec [7] (b) Board of Directors of Evershine Ltd. in its meeting held on
11.08.2011 declared and paid final dividend of 30% for 2010-11. As an
Auditor how you will react ? (2 marks)
Answer :
As per provisions of Companies Act, 2013, on the basis of Board of
Director’s recommendation the shareholders in the Annual General Meeting
declare the final dividend. Board has power to declare interim dividend and
not final dividend.
It is presumed :
(i) The company transferred the amount of dividend to a separate bank
account within 5 days of declaration.
(ii) Paid or issued dividend warrant to all the entitled shareholders or their
mandates within 30 days of declaration.
 12.476 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Since action of the board of directors is not in accordance with the law, the
auditor shall check whether expost facto approval of the share holders has
been obtained.
The Auditor should qualify his report to this effect.
The Auditor should also to confirm whether the provision for the same has
been made in Part II of Schedule III to the Companies Act, 2013 and all
deviations shall be reported/qualified through his audit report without fail.
Space to write important points for revision

2013 - June [7] (f) ABC Ltd. has two branch offices in Chennai and
Hyderabad, for which Branch auditors were engaged. M/s APS & Co.
Chartered Accountants being statutory Auditor of ABC Ltd. is responsible in
respect of work entrusted to Branch Auditors also. Do you agree? Answer
based on rules. (2 marks)
Answer :
Section 143 of the Companies Act, 2013 provides that where the accounts
of any branch office are audited by a person other than the company’s
auditor the company’s auditor shall be entitled to visit the branch office, if he
deems it necessary to do so for the performance of his duties as auditor. He
shall also have access at all times to the books and accounts and vouchers
of the company maintained at the branch office.
The Council of the Institute of Chartered Accountants of India has
reviewed the relationship between the statutory Auditor and the Branch
Auditor and has come to the conclusion that the statutory auditors would not
be responsible in respect of work entrusted to the Branch Auditors. So in this
case APS & Co. is not responsible.
Space to write important points for revision
 [Chapter  14] Miscellaneous Audit O 12.477

Repeatedly Asked Questions

No. Question Frequency
1 Audit of a Hospital
14 - Dec [4] (b) (i),17 - June [10] (a) 2 Times
2 Benefits offered by Joint Audit
15 - June [4] (b) (i), 17 - June [10] (d) 2 Times
3 Difference between Statutory Audit and Internal
Audit 17 - June [10] (b), 18 - Dec - [10] (d) 2 Times

Table Showing Marks of Compulsory Questions

Year 14 14 15 15 16 16 17 17 18 18
J D J D J D J D J D
Descriptive 2
Total 2
 15 OBJECTIVE QUESTIONS
2017 - June [6] (a) Identify the correct alternative:
(i) Which of the following is not an audit risk?
(a) Inherent Risk
(b) Detection Risk
(c) Control Risk
(d) Omission Risk
(ii) Dividend cannot be paid out of
(a) current year’s profit after providing depreciation.
(b) undistributed profits for any previous financial year or years after
providing for depreciation.
(c) profit on revaluation of any fixed assets.
(d) money provided by the Central Government or a State
Government.
(iii) Permanent Audit File does not contain
(a) a record of study and evaluation of internal control system.
(b) significant audit observations of earlier years.
(c) copies of management letters.
(d) analysis of significant ratios and trends.
(iv) Audit Procedures to obtain audit evidences include
(a) Compliance Procedure
(b) Substantive Procedure
(c) Both (a) and (b)
(d) Neither (a) nor (b)
(v) A Cost Auditor submits his report to
(a) Board of Directors
(b) Government
(c) Shareholders
(d) Statutory Auditor

12.478
 [Chapter  15] Objective Questions O 12.479

(vi) The first Auditor of a Company shall be appointed by the Board of

Directors within
(a) 30 days from the date of registration.
(b) 90 days from the date of registration.
(c) 30 days from the date of first AGM.
(d) 1 year from the date of registration. (1 × 6 = 6 marks)
Answer:
(i) (d) Omission Risk
(ii) (c) profit on revaluation of any fixed assets
(iii) (c) copies of management letters
(iv) (c) Both (a) and (b)
(v) (a) Board of Directors
(vi) (a) 30 days from the date of registration
Space to write important points for revision

2017 - June [6] (b) Match the following items in Column ‘A’ with items shown
in Column ‘B’:
Column ‘A’ Column ‘B’
1. Responsibility of Joint Auditor A. Qualified Audit Report
2. Unable to form and overall B. SA 230
conclusion on Financial
Statement
3. Audit Report with reservations C. SA 299
4. Audit Documentation D. Disclaimer of Opinion
(1 × 4 = 4 marks)
Answer:
Column ‘A’ Column ‘B’
1. Responsibility of Joint Auditor C. SA 299
2. Unable to form an overall D. Disclaimer of Opinion
conclusion on Financial
Statement
 12.480 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

3. Audit Report with reservations A. Qualified Audit Report

4. Audit Documentation B. SA 230
Space to write important points for revision

2017 - June [6] (c) State whether the following statements are True or False:
(i) Audit Programme is a part of Current Audit File.
(ii) Internal audit is conducted by the staff of the entity or by an
independent professional appointed for that purpose.
(iii) The first auditor of a company is appointed by the shareholders of the
company at the general meeting.
(iv) A company auditor can render actuarial services to his client.
(1 × 4 = 4 marks)
Answer:
(i) True
(ii) True
(iii) False
(iv) False
Space to write important points for revision

2017 - Dec [6] (a) Identify the correct alternative:

(i) An auditor should submit a Disclaimer of Opinion when
(a) he is satisfied with the truth and fairness of financial statements.
(b) he has certain reservations as to the presentation of truth and
fairness in financial statements.
(c) some material information is not available.
(d) the effect of any disagreement with the management is not so
material.
(ii) In case of a company other than a Government Company, any casual
vacancy in the post of auditor is to be filled by the
(a) Board of Directors
(b) Managing Director
(c) Comptroller and Auditor General (CAG)
(d) Shareholders
 [Chapter  15] Objective Questions O 12.481

(iii) An Audit Committee should have a minimum of ______ number of

directors.
(a) 4
(b) 3
(c) 5
(d) 6
(iv) SA 530 stands for
(a) Audit Documentation
(b) Audit Sampling
(c) Responsibility of Joint Auditor
(d) Agreeing the terms of Audit Engagements
(v) Unpaid dividend standing at the credit of Unpaid Dividend A/c should
be transferred to Investor Education and Protection Fund
after ________ years of its remaining unpaid.
(a) six
(b) eight
(c) seven
(d) five
(vi) Which of the following services cannot be rendered by an auditor as
per Companies Act, 2013?
(a) Vouching
(b) Verification of assets and liabilities
(c) Issuing certificates on relevant matters
(d) Providing investment advisory services (1 × 6 = 6 marks)
Answer:
(i) C
(ii) A
(iii) B
(iv) B
(v) C
(vi) D
Space to write important points for revision
 12.482 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

2017 - Dec [6] (b) Match the following items in Column ‘A’ with items shown
in Column ‘B’:
Column ‘A’ Column ‘B’
1. Appointment of Company Auditor A. Current Audit File
2. Remuneration of a Company Auditor B. Section 139 of Companies
Act, 2013
3. Different accounting schedules such C. Permanent Audit File
as schedule of debtors and creditors
4. Analysis of significant ratios and D. Section 142 of Companies
trends Act, 2013
(1 × 4 = 4 marks)
Answer:
(1) B
(2) D
(3) A
(4) C
Space to write important points for revision

2017 - Dec [6] (c) State whether the following statements are true or false:
(i) As per Section 138 of Companies Act, 2013, no private company or
unlisted company is required to appoint an internal auditor.
(ii) Audit Memorandum is a detailed plan of audit work clearly specifying
the responsibilities of the audit staff and time allotted to perform the
same.
(iii) Substantive procedure is also known as test of control.
(iv) Cut-off procedures are adopted to allocate revenues and costs to the
proper accounting period. (1 × 4 = 4 marks)
Answer:
(i) False
(ii) False
(iii) False
(iv) True
Space to write important points for revision
 [Chapter  15] Objective Questions O 12.483

2018 - June [6] (a) Identify the correct alternative in each of the following
cases:
(i) If the Debentures are issued as collateral security either to Banks or
Creditors the Auditor needs to ensure that such issue is approved by
(a) Shareholders
(b) Board of Directors
(c) Debenture Trustee
(d) Audit Committee
(ii) As per SQC 1, Audit working papers should be retained for a period
of
(a) 2 years
(b) 5 years
(c) 7 years
(d) 10 years
(iii) Current Audit files contains
(a) Articles of Association and Memorandum of Association
(b) Analysis of significant ratios and trends
(c) Notes regarding significant Accounting policies
(d) Audit Programme
(iv) Form for maintenance of Cost Records of a Company is
(a) CRA - 1
(b) CRA - 2
(c) CRA - 3
(d) CRA - 4
(v) Secretarial Audit is applicable to every Public Company having a
turnover of
(a) ` 100 crores
(b) ` 150 crores
(c) ` 250 crores
(d) ` 200 crores
(vi) Statutory Auditor is appointed by the Shareholders in the
(a) General Meeting
(b) Statutory Meeting
(c) EGM
(d) Board Meeting (1 × 6 = 6 marks)
 12.484 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Answer:
(i) (b)
(ii) (c)
(iii) (d)
(iv) (a)
(v) (c)
(vi) (a)
Space to write important points for revision

2018 - June [6] (b) Match the following items in Column ‘A’ with items shown
in Column ‘B’:
Column ‘A’ Column ‘B’
1. Independent appraisal activity A Secretarial Audit Report
2. SA 700 B Section 123
3. Form MR 3 C Internal Audit
4. Declaration of dividend D Forming an opinion and
reporting on Financial
Statements
(1 × 4 = 4 marks)
Answer:
(1) (c)
(2) (d)
(3) (a)
(4) (b)
Space to write important points for revision

2018 - June [6] (c) State whether the following statements are True or False:
(i) Section 70 deals with the Audit of Debenture.
(ii) An Audit Committee should have 4 directors.
(iii) CARO - Companies (Auditor’s Report) Order, 2016 is applicable to
Banking Companies.
(iv) Internal Check is part of Accounting Control. (1 × 4 = 4 marks)
 [Chapter  15] Objective Questions O 12.485

(i) False
(ii) False
(iii) False
(iv) True
Space to write important points for revision

2018 - Dec [6] (a) Identify the correct alternative in each of the following
cases:
(i) Internal Auditor is appointed by
(a) Audit Committee
(b) Shareholders in General Meeting
(c) Extraordinary General Meeting
(d) Board of Directors
(ii) Cost Audit Report is submitted to Board of Directors in Form No.
(a) CRA - 1
(b) CRA - 2
(c) CRA - 3
(d) CRA - 4
(iii) Check list contains the instruction to be followed by the
(a) Internal Auditor
(b) External Auditor
(c) Audit Assistants
(d) Employee of the organisation
(iv) Form for Secretarial Audit Report is
(a) MR - 2
(b) MR - 3
(c) MR - 4
(d) MR - 5
(v) Permanent Audit file contains
(a) copies of management letters.
(b) audit programme.
(c) analysis of transaction and balances.
(d) analysis of significant ratios and trends.
 12.486 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(vi) Audit of debenture is covered under section

(a) 70
(b) 71
(c) 72
(d) 73 (1×6=6 marks)
2018 - Dec [6] (b) Match the following items in Column ‘A’ with items shown
in Column ‘B’:
Column ‘A’ Column ‘B’
(i) The authority for Government (a) Audit Programme
Audit
(ii) Details of Audit work to be (b) Comptroller and Auditor General
performed
(iii) Removal of Statutory Company (c) Audit Note Book
Auditor
(iv) Details about Name and (d) Section 140
Organisation Structure
(e) No match found
(1×4=4 marks)
2018 - Dec [6] (c) State whether the following statements are True or False:
(i) The Branch Auditor shall prepare report on the Accounts of the Branch
examined by him and send it to Audit Committee.
(ii) Maintenance of Cost Accounting Standards is mandatory as per
Section 143 of Companies Act.
(iii) Routine checking is a substitute of vouching.
(iv) Casual vacancy in the office of Cost Auditor is filled by Board of
Directors. (1×4=4 marks)
 June - 2018
CMA Inter Gr. II Paper - 12
Company Accounts and Audit

Section – A (Company Accounts)

Answer Question No. 1 and any three from Question Nos. 2, 3, 4 and 5.
1. (a) Choose the correct alternative:
(i) Premium on redemption of redeemable preference shares can
be paid out of
(a) Capital Redemption Reserve Account
(b) Existing Shares Premium Account
(c) Proceed of fresh issue of shares
(d) All of the above
(ii) Which of the following is not a component of Cash Flow
Statement?
(a) Cash payments to suppliers for goods and services
(b) Charging of Depreciation
(c) Cash advances and loans made to third parties
(d) Cash repayments of amounts borrowed
(iii) The Electricity Act, 2003 replaced which of the following three
existing legislations?
(a) The Indian Electricity Act, 1910
(b) The Electricity (Supply) Act, 1948
(c) The Electricity Regulatory Commissions Act, 1998
(d) All of the above
(iv) General Ledger of a Banking Company does not contain
(a) Control Accounts of all personal ledgers
(b) Assets Accounts
(c) Contra Accounts
(d) Balance Sheet
(v) Which of the following is a principle of insurance?
(a) Principle of indemnity
(b) Insurable interest
(c) Principle of uberrimae fidei
(d) All of the above
12.487
 12.488 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(vi) Underwriting commission payable on the shares taken up by the

promoters is
(a) 2.5%
(b) 2%
(c) 5%
(d) Nil (1 × 6 = 6 marks)
(b) Match the following items in Column ‘A’ with items shown in Column
‘B’:
Column ‘A’ Column ‘B’
1. Government Grants A. Capital Redemption Reserve
2. Redemption of Debentures B. AS 16
3. Un-guaranteed Residual Value C. AS 12
4 Borrowing Cost D. AS 19
(1 × 4 = 4 marks)
(c) State whether the following statements are True or False:
(i) Marked applications are those applications which bear the
stamp of an underwriter.
(ii) In order to spread the risk of under- subscription, the principal
underwriters may enter into subsidiary agreements with sub-
leasees.
(iii) When debentures are issued at discount, it is prudent to write off
the loss during the life of debentures.
(iv) Any surplus cash may be utilized by the company for buy-back
and avoid the payment of dividend tax. (1 × 4 = 4 marks)
2. (a) On 01.01.2017 Jay Ltd. had 2,000, 12% Debentures of ` 100 each.
On 01.05.2017 the company purchased 400 own Debentures at ` 97
cum-interest in the open market. Interest on debentures is payable
on 30th June and 31st December each year.
Required: Give the necessary journal entries assuming that the own
Debentures purchased were retained as investments till 31.12.2017,
on which date they were cancelled.
Assume that the company follows English Calendar Year.
(6 marks)
 Question Paper O 12.489

(b) M/s. Ayush Ltd. began construction of a new building on 1st January,
2017. It obtained ` 3,00,000 lakh special loan to finance the
construction of the building on 1st January ,2017 at an interest rate
of 12% p.a. The company’s other outstanding two non-specific loans
were:
Amount Rate of Interest

` 6,00,000 11% p.a.

` 11,00,000 13% p.a.

The expenditure that were made on the building project were as
follows:
Amount (`)
January, 2017 3,00,000
April, 2017 3,50,000
July, 2017 5,50,000
December, 2017 1,50,000
Building was completed on 31st December, 2017. Following the
principles prescribed in AS 16 on ‘Borrowing Cost’, calculate the
amount of interest to be capitalized and pass one Journal entry for
capitalizing the cost and borrowing in respect of the building.
(6 marks)
3. (a) The following are the summarized Balance Sheets of ABC Limited
as on 31st March, 2016 and 2017:
Liabilities 31.03.16 31.03.17 Assets 31.03.16 31.03.17
` ` ` `
Share Capital 4,60,000 4,60,000 Land and Building 3,00,000 3,00,000
Profit and Loss 32,000 46,000 Machinery 1,04,000 1,40,000
Balance
Reserve 1,20,000 1,20,000 Investments 2,20,000 1,48,000
8% Debentures 1,80,000 1,40,000 Stock 1,64,000 2,12,000
 12.490 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

Depreciation Fund 80,000 88,000 Debtors 1,34,000 86,000

Creditors 2,06,000 1,92,000 Cash 1,80,000 1,80,000
Outstanding expenses 26,000 24,000 Prepaid expenses 2,000 4,000
11,04,000 10,70,000 11,04,000 10,70,000
Additional Information :
(i) 10% Dividend was paid during 2016-17.
(ii) Old Machinery costing ` 24,000 (accumulated depreciation
` 12,000) was sold for ` 8,000.
(iii) 40,000 8% Debenture were redeemed by purchase from open
market at ` 96 for a debenture of ` 100 on 31.03.2017.
(iv) Investments worth ` 72,000 were sold at book value.
(v) Bad debt written off during the year ` 10,000.
Prepare a Statement of Cash Flow for the year ended 31.3.2017.
(8 marks)
(b) Given below are details of interest on advance of a Commercial
Bank as on 31.3.2017:
Particulars Interest Earned Interest Received
(` in Crore) (` in Crore)
Performing Assets
Term Loan 120 80
Cash Credit and Overdraft 750 620
Bills Purchased and Discounted 150 150
Non-Performing Assets
Term Loan 75 5
Cash Credit and Overdraft 150 12
Bills Purchased and Discounted 100 20
Find out the income to be recognized for the year ended 31st March,
2017. (4 marks)
 Question Paper O 12.491

4. ABC Limited has an authorized capital of ` 5,00,000 divided into 5,000

equity shares of ` 100 each. On 31.3.2018, 2,500 shares were fully
called up.
The following are the balance extracted from the ledger of the company
as on 31.3.2018:
` `
Inventory 50,000 Advertisement 3,800
Sales 4,25,000 Bonus 10,500
Purchases 3,00,000 Accounts receivable 38,700
Productive wages 70,000 Accounts payable 35,200
Discount allowed 4,200 Plant and Machinery 80,500
Discount received 3,150 Furniture 17,100
Insurance (year up to 30.06.2018) 6,720 Cash at bank 1,30,000
Salaries 18,500 Cash in hand 4,700
Rent 6,000 Reserves 25,000
General expenses 8,950 Loan from Managing Director 15,700
Profit and Loss A/c (cr.) 6,220 Bad debts 3,200
Printing and Stationary 2,400 Calls in arrears 5,000
Share capital 2,50,000
Also the following information are given:
(a) Closing inventory is ` 91,500
(b) Depreciation to be charged on plant and furniture at 15% and 10%
respectively
(c) Outstanding liabilities––wages at ` 5,200, salaries at ` 1,200 and
rent at ` 600
(d) Salesman are entitled to a commission of 1% on sales
(e) ` 4,000 are to be transferred to General reserves
(f) Dividend on paid up share capital is to be provided @ 5%
You are required to prepare Profit and Loss Statement for the year
ended 31.03.2018 and the Balance Sheet as on that date in
accordance with the Companies Act, 2013 in the Vertical Form along
with the Notes on Accounts. (12 marks)
 12.492 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

5. Write short notes on (any three):

(a) Geographical Segment as per AS-17
(b) Advantages of buy-back of shares
(c) Distinguish between Life and Non-Life Insurance
(d) Share Application money pending allotment. (4 × 3 = 12 marks)

Section - B
(Auditing)

Answer Question No. 6 and any three from Question Nos. 7, 8, 9 and 10.

6. (a) Identify the correct alternative in each of the following cases:

(i) If the Debentures are issued as collateral security either to
Banks or Creditors the Auditor needs to ensure that such issue
is approved by
(a) Shareholders
(b) Board of Directors
(c) Debenture Trustee
(d) Audit Committee
(ii) As per SQC 1, Audit working papers should be retained for a
period of
(a) 2 years
(b) 5 years
(c) 7 years
(d) 10 years
(iii) Current Audit files contains
(a) Articles of Association and Memorandum of Association
(b) Analysis of significant ratios and trends
(c) Notes regarding significant Accounting policies
(d) Audit Programme
(iv) Form for maintenance of Cost Records of a Company is
(a) CRA - 1
(b) CRA - 2
(c) CRA - 3
(d) CRA - 4
 Question Paper O 12.493

(v) Secretarial Audit is applicable to every Public Company having

a turnover of
(a) ` 100 crores
(b) ` 150 crores
(c) ` 250 crores
(d) ` 200 crores
(vi) Statutory Auditor is appointed by the Shareholders in the
(a) General Meeting
(b) Statutory Meeting
(c) EGM
(d) Board Meeting (1 × 6 = 6 marks)
(b) Match the following items in Column ‘A’ with items shown in
Column ‘B’:
Column ‘A’ Column ‘B’
1. Independent appraisal activity A Secretarial Audit Report
2. SA 700 B Section 123
3. Form MR 3 C Internal Audit
4. Declaration of dividend D Forming an opinion and reporting
on Financial Statements
(1 × 4 = 4 marks)
(c) State whether the following statements are True or False:
(i) Section 70 deals with the Audit of Debenture.
(ii) An Audit Committee should have 4 directors.
(iii) CARO - Companies (Auditor’s Report) Order, 2016 is applicable
to Banking Companies.
(iv) Internal Check is part of Accounting Control. (1 × 4 = 4 marks)
7. (a) Distinguish between Permanent and Current Audit File.
(6 marks)
(b) “Internal Audit is an important tool for the management.” - Discuss.
(6 marks)
 12.494 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

8. (a) Discuss the provisions of Companies Act, 2013 as regards reporting

of frauds by Company Auditor. (6 marks)
(b) Discuss about the manner in which rotation of Auditors may be done
by the company on expiry of their term. (6 marks)
9. (a) What is the procedure to be followed for fixing the remuneration of
a Cost Auditor? (5 marks)
(b) Distinguish between ‘Audit Report’ and ‘Audit Certificate’.
(7 marks)
10. Write short notes (any three):
(a) Responsibility of a Joint Auditor
(b) Elements of ‘cost of inventory’ as per AS 2
(c) Audit of Education Institutions
(d) Auditor’s duty regarding Issue of Debentures. (4 × 3 = 12 marks)

December - 2018
CMA Inter Gr. II Paper - 12
Company Accounts and Audit

Section – A
(Company Accounts)

Question No. 1 and any three from Question Nos. 2, 3, 4 and 5.

1. (a) Choose the correct alternative:

(i) Which of the following reserves cannot be used for the purpose
of issuing bonus shares?
(a) Revaluation Reserve
(b) Dividend Equalization Reserve
(c) Capital Redemption Reserve
(d) General Reserve
 Question Paper O 12.495

(ii) In Case of Life Insurance Business, Bonus may be of

(a) One type
(b) Two types
(c) Three types
(d) None of the above
(iii) Instalment of principal amount of long-term loan payable within
next 12 months is shown under Balance Sheet of a company
under the heading
(a) Non-current Assets
(b) Non-current Liabilities
(c) Current Assets
(d) Current Liabilities
(iv) Which of the following is not a condition of buy-back of
securities?
(a) Both fully and partly paid-up securities can be bought back.
(b) Buy-back must be authorised by the Articles of Association.
(c) Buy-back must be authorised by passing a special
resolution in general meeting.
(d) Buy-back should be completed within 1 year from the date
of passing of special resolution .
(v) A banking company is required to maintain _______ provision
on unsecured portion of doubtful advances.
(a) 25%
(b) 40%
(c) 50%
(d) 100%
(vi) Which of the following is correct?
(a) Debenture carries a fixed rate of dividend.
(b) A company limited by shares may issue irredeemable
preference shares.
(c) Unmarked applications are those applications that bear the
stamp of the underwriter.
(d) Except as provided in Section 54, a company shall not issue
shares at a discount. (1 × 6 = 6 marks)
 12.496 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(b) Match the following items in Column ‘A’ with items shown in
Column ‘B’:
Column ‘A’ Column ‘B’
(i) Functional Currency (a) Electricity Company
(ii) Surrender Value (b) AS 19
(iii) Service Line Development Charges (c) AS 11
(iv) Contingent Rent (d) Insurance Company
(e) No match found
(1 × 4 = 4 marks)
(c) State whether the following statements are True or False:
(i) The profit on forfeiture and re-issue of equity shares are credited
to Capital Redemption Reserve.
(ii) As per Companies Act 2013, companies are not permitted to
buy back their own shares out of securities premium.
(iii) Bonus is the share of profit which is payable by the insurance
company to the policyholders.
(iv) Interest on loan is included in ‘other operating expenses’ under
the Statement of Profit and Loss. (1 × 4 = 4 marks)
2. (a) Following is the extract of the Balance Sheet of Xeta Ltd. as at 31st
March, 2017:
Authorised Capital:
50,000 12% Preference shares of ` 10 each 5,00,000
4,00,000 Equity shares of ` 10 each 40,00,000
45,00,000
Issued and Subscribed Capital:
24,000 12% Preference shares of ` 10 each fully paid 2,40,000
2,70,000 Equity shares of ` 10 each, ` 8 paid up 21,60,000
 Question Paper O 12.497

Reserves and Surplus:

General Reserve 3,60,000
Securities Premium 1,00,000
Profit and Loss Account 6,00,000

On 1st April, 2017, the Company has made final call @ 2 each on
2,70,000 Equity shares. The call money was received by 20th April,
2017. Thereafter, the company decided to capitalize its reserves by
way of bonus at the rate of one share for every four shares held.
Show necessary journal entries in the books of the company and
prepare the extract of the Balance sheet as on 30th April, 2017 after
bonus issue. (7 marks)
(b) An enterprise operates through six segments, namely, A, B, C, D, E
and F. The relevant information about these segments are given in
the following table (amounts in `.’ 000):
A B C D E F Total
(segment)
1. Segment Revenue
(a) External Sales - 550 250 150 50 50 1050
(b) Inter Segment
Sales 100 100 50 200 - 50 500
2. Segment Results-Profit/
(Loss) (90) 25 (5) (15) 5 10 -
3. Segment Assets 30 50 10 20 10 5

Identify the reportable segments under (i) segment revenue criterion,

(ii) segment result criterion and (iii) segment asset criterion as per
AS17. (5 marks)
 12.498 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

3. (a) Following are the summarized Balance Sheets of Beta Ltd.

Liabilities 31.03.17 31.03.18 Assets 31.03.17 31.03.18
` ` ` `

Equity Share Land & Building 4,00,000 3,80,000

Capital (` 10) 4,00,000 5,00,000 P l a n t a n d
General Reserve 1,00,000 1,20,000 Machinery 3,00,000 3,38,000

Profit & Loss (Cr.) 61,000 61,200 Inventory 2,00,000 1,48,000

Bank Loan 1,40,000 _ Trade Receivable 1,60,000 1,28,400

Trade Payable 3,00,000 2,70,400 Cash in hand 1,000 1,200

Provision for Cash at Bank - 16,000

Taxation 60,000 70,000 Goodwill - 10,000

10,61,000 10,21,600 10,61,000 10,21,600

Additional Information:
(i) Dividend paid during the year ` 46,000.
(ii) Net profit for the year ` 1,32,200.
(iii) Depreciation written-off on building ` 20,000 and on machinery
` 28,000.
(iv) Income tax paid during the year ` 56,000.
(v) The following assets of another company were purchased for a
consideration of ` 1,00,000 and paid in shares.
Assets were: Inventory ` 40,000 and Machinery ` 50,000.
(vi) Further machinery was purchased for ` 50,000 during the year.
There was a sale of Machinery.
You are required to prepare a Cash Flow Statement as per AS 3.
(9 marks)
(b) From the following information calculate return on equity as per
Regulation 21 of the Central Electricity Regulatory Commission
(Terms and Conditions of Tariff) Regulation 2004:
(i) Date of commercial operation of COD = 01.04.2014
(ii) Approved opening capital cost as on 01.04.2014 = ` 30,00,000
(iii) Details of allowed additional capital expenditure:
 Question Paper O 12.499

Year 1 2 3 4
Additional Capital 2,00,000 60,000 40,000 20,000
Expenditure (`)
(3 marks)
4. The following is the Trial Balance of Omega Limited as on 31.03.2018:
(Figures in `.’000)
Debit Credit
Land at cost 220 Equity Capital (Shares of 300
` 10 each)
Plant and Machinery at cost 770 10% Debentures 200
Trade Receivables 96 General Reserve 130
Inventories (31.03.18) 86 Profit and Loss A/c 72
Bank 20 Securities Premium 40
Adjusted Purchases 320 Sales 700
Factory Expenses 60 Trade Payables 52
Administration Expenses 30 Provision for Depreciation 172
Selling Expenses 30 Suspense Account 4
Debenture Interest 20
Interim Dividend Paid 18
1,670 1,670
Additional Information:
(i) The Authorised Share Capital of the Company is 40,000, shares of
` 10 each.
(ii) The Company on the advice of independent valuer wish to revalue
the land at ` 3,60,000.
(iii) Declared final dividend @ 10% (over Interim Dividend of ` 18,000).
 12.500 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(iv) Suspense account of ` 4,000 represents cash received for the sale
of some of the machinery on 01.04.2017. The cost of the machinery
was ` 10,000 and the accumulated depreciation thereon being
` 8,000.
(v) Depreciation is to be provided on plant and machinery at 10% on
cost.
You are required to prepare Omega Limited’s Profit and Loss Statement
for the year ended 31.03.2018 and the Balance Sheet as on that date in
accordance with the Companies Act, 2013 in the Vertical Form along
with the Notes on Accounts. Ignore previous years’ figures and taxation.
(12 marks)
5. Write short notes on (any three):
(a) Related Party as per AS 18
(b) Re-insurance
(c) Forfeiture of Shares vis-a-vis reissue of Forfeited Shares
(d) Schedule III disclosure requirement in respect of cash and cash
equivalents. (4 × 3 = 12 marks)

Section – B
(Auditing)

Answer Question No. 6 and any three from Question Nos. 7, 8, 9 and 10
6. (a) Identify the correct alternative in each of the following cases:
(i) Internal Auditor is appointed by
(a) Audit Committee
(b) Shareholders in General Meeting
(c) Extraordinary General Meeting
(d) Board of Directors
(ii) Cost Audit Report is submitted to Board of Directors in Form No.
(a) CRA - 1
(b) CRA - 2
(c) CRA - 3
(d) CRA - 4
 Question Paper O 12.501

(iii) Check list contains the instruction to be followed by the

(a) Internal Auditor
(b) External Auditor
(c) Audit Assistants
(d) Employee of the organisation
(iv) Form for Secretarial Audit Report is
(a) MR - 2
(b) MR - 3
(c) MR - 4
(d) MR - 5
(v) Permanent Audit file contains
(a) copies of management letters.
(b) audit programme.
(c) analysis of transaction and balances.
(d) analysis of significant ratios and trends.
(vi) Audit of debenture is covered under section
(a) 70
(b) 71
(c) 72
(d) 73 (1×6=6 marks)
(b) Match the following items in Column ‘A’ with items shown in Column
‘B’:
Column ‘A’ Column ‘B’
(i) The authority for Government (a) Audit Programme
Audit
(ii) Details of Audit work to be (b) Comptroller and Auditor General
performed
(iii) Removal of Statutory Company (c) Audit Note Book
Auditor
(iv) Details about Name and (d) Section 140
Organisation Structure
(e) No match found
(1×4=4 marks)
 12.502 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

(c) State whether the following statements are True or False:

(i) The Branch Auditor shall prepare report on the Accounts of the
Branch examined by him and send it to Audit Committee.
(ii) Maintenance of Cost Accounting Standards is mandatory as per
Section 143 of Companies Act.
(iii) Routine checking is a substitute of vouching.
(iv) Casual vacancy in the office of Cost Auditor is filled by Board of
Directors. (1×4=4 marks)
7. (a) Discuss the method of obtaining Audit Evidences. (6 marks)
(b) Distinguish between Internal Control and Internal Check.
(6 marks)
8. (a) Discuss the functions and power of the Audit Committee.
(6 marks)
(b) Discuss the procedure for appointment for first Auditor of the
Company and his tenure. (6 marks)
9. (a) Discuss the relevant provisions of Companies (Cost Records and
Audit) Rules 2014 on applicability of Cost Audit to different sectors.
(6 marks)
(b) What is a qualified Audit Report? Discuss the circumstances when
an Auditor shall qualify his report. (2+4=6 marks)
10. Write short notes (any three):
(a) Auditor’s duty regarding unclaimed dividend
(b) Physical verification of inventory and Auditor’s responsibility thereof
(c) Audit of Co-operative Society
(d) Difference between Statutory Audit and Internal Audit
(4×3=12 marks)


 Question Paper O 12.503

FOR NOTES
12.504 O Scanner CMA Inter Gr. II Paper 12B (2016 Syllabus)

FOR NOTES