FINAL COURSE

GROUP – I

REVISION TEST PAPERS

MAY, 2024

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)
New Delhi

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 ¤ The Institute of Chartered Accountants of India

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Edition : February, 2024

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 Contents
Page Nos.

Objective & Approach ............................................................................................................ i – vi

Objective of RTP .................................................................................................................................. i

Planning & Preparing for Examination ...................................................................................... ii

Subject-wise Applicability .............................................................................................................. iii

Paper-wise

Paper 1: Financial Reporting .......................................................................................... 1 – 41

Paper 2: Advanced Financial Management ............................................................ 42 – 72

Paper 3: Advanced Auditing, Assurance and Professional Ethics .................. 73 – 99

Applicability of Standards/Guidance Notes/Legislative Amendments etc.

for May, 2024 – Final Examination ....................................................................... 100 – 101

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 REVISION TEST PAPER, MAY, 2024 – OBJECTIVE & APPROACH
(Students are advised to go through the following paragraphs carefully to
derive maximum benefit out of this RTP)
I. Objective of Revision Test Paper
Revision Test Papers are one among the many educational inputs
provided by the Board of Studies (BOS) to its students. Popularly
referred to as RTP by the students, it is one of the very old publications
of the BOS whose significance and relevance from the examination
perspective has stood the test of time.
The primary objectives of the RTP are:
x To help students get an insight of their preparedness for the
forthcoming examination;
x To update them on the latest developments relevant for the
forthcoming examination in select subjects;
x To enhance the confidence level of the students adequately.
Students must bear in mind that the RTP contains a variety of questions
based on different topics of the syllabi and thus a comprehensive study
of the entire syllabus is a pre-requisite before answering the questions
of the RTP. In other words, in order to derive maximum benefit out of
the RTPs, it is advised that before proceeding to solve the questions
given in the RTP, students ought to have thoroughly read the Study
Materials and Statutory Update/Judicial Update, wherever applicable.
The topics on which the questions are set herein have been carefully
selected and meticulous attention has been paid in framing different
types of questions. Detailed answers are provided to enable the
students to do a self-assessment and have a focused approach for
effective preparation.
Live Learning Classes by renowned subject experts conducted free of
charge in virtual mode for the students of Foundation, Intermediate and
Final levels provide the students much required support in preparing for
their exams conveniently at home as these classes can be accessed live
or viewed later as recorded lectures through hand-held devices such as
smart phones, laptops, I-pads, tablets, etc. anytime anywhere. Further,

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 REVISION TEST PAPER FINAL EXAMINATION

students are advised to attempt the Multiple-Choice Questions (MCQs)

at MCQ Paper Practice Portal which is a holistic platform for self-
assessment within the stipulated timeframe.
Students are welcome to send their suggestions for fine tuning the RTP
to the Joint Director, Board of Studies, The Institute of Chartered
Accountants of India, A-29, Sector-62, Noida 201309 (Uttar Pradesh).
RTP is also available on BOS Knowledge Portal at https://boslive.icai.org
for downloading.
II. Planning and preparing for examination
Ideally, when the RTP reaches your hand, you must have finished reading
the relevant Study Materials of all the subjects. Get a good grasp of the
concepts/ provisions/ amendments/ cases discussed therein.
After reading the Study Materials and Update thoroughly, then, proceed
to solve the questions given in the RTP on your own. RTP is an effective
tool to revise and refresh the concepts and provisions discussed in the
Study Material. RTPs are provided to you to help you assess your level
of preparation. Hence, you must solve the questions given therein on
your own and thereafter compare your answers with the answers given
therein.
Examination tips
How well a student fares in the examination depends upon the level and
depth of his preparation. However, there are certain important points
which can help a student better his performance in the examination.
These useful tips are given below:
y Reach the examination hall well in time.
y As soon as you get the question paper, read it carefully and
thoroughly. You are given separate 15 minutes for reading the
question paper.
y Plan your time so that appropriate time is awarded for each
question.
y First impression is the last impression. The question which you can
answer in the best manner should be attempted first.

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y Always attempt to do all questions. Therefore, it is important that

you must finish each question within allocated time. Keep
sometime for checking the answers as well.
y Read the question carefully more than once before starting the
answer to understand very clearly as to what is required.
y Answer all parts of a question one after the other; do not answer
different parts of the same question at different places.
y Write in neat and legible hand-writing.
y Always be concise and write to the point and do not try to fill
pages unnecessarily.
y There must be logical expression of the answer.
y In case a question is not clear, you may state your assumptions
and then answer the question.
y Check your answers carefully and underline important points
before leaving the examination hall.
y In case of case scenario based MCQs, read the facts given in the
case attentively. Also, read each MCQ based thereon and all the
options carefully, before choosing the correct answer.
III. Subject-wise Applicability

PAPER 1: FINANCIAL REPORTING

For Paper 1 : Financial Reporting April, 2023 edition of the study material
is applicable. The syllabus of Financial Reporting focuses on Ind AS
integrated with Ethics and Technology. The Study Material has been
divided into four modules for ease of handling by students.
For understanding the coverage of syllabus, it is important to read the
Study Material along with the reference to Study Guidelines. It contains
the detailed topic-wise exclusions from the syllabus. The Study
Guidelines is given as part of “Applicability of Standards/Guidance
Notes/Legislative Amendments etc. for May, 2024 – Final Examination”
appended at the end of this Revision Test Paper.

iii MAY 2024 EXAMINATION

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 REVISION TEST PAPER FINAL EXAMINATION

You have to read the Study Material thoroughly to attain conceptual

clarity. Tables, diagrams and flow charts have been extensively used to
facilitate easy understanding of concepts. Examples and Illustrations
given in the Study Material would help you understand the application of
concepts. Thereafter, work out the questions at the end of each chapter
to hone your problem-solving skills. Compare your answers with the
answers given to test your level of understanding.
Thereafter, solve the questions given in this RTP independently and
compare the same with the answers given to assess your level of
preparedness for the examination. The Revisionary Test Paper (RTP) of
Financial Reporting contains twenty questions and their answers.
Answers to the questions have been given in detail along with the
working notes for easy understanding and comprehending the steps in
solving the problems. The answers to the questions have been presented
in the manner which is expected from the students in the examination.
The students are expected to solve the questions under examination
conditions and then compare their solutions with the solutions given in
the Revisionary Test Paper and further strategize their preparation for
scoring more marks in the examination.

PAPER 2: ADVANCED FINANCIAL MANAGEMENT

Basically, the subject of Advanced Financial Management is to acquire the
ability to apply financial management theories and techniques in strategic
decision making. The major topics from which numerical questions are
normally asked are as follows:
x Risk Management
x Advanced Capital Budgeting Decisions.
x Security Analysis & Valuation
x Portfolio Management
x Mutual Fund
x Derivatives
x Foreign Exchange Exposure and Risk Management

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 REVISION TEST PAPER FINAL EXAMINATION

x International Financial Management

x Interest Rate Risk Management
x Business Valuation
x Mergers and Acquisitions
Accordingly, the detail of the topics, on which questions in this
Revisionary Test Paper are based, is as follows:

Question Topic
No.
1 Case Scenario (Securitization)
2 Case Scenario (Security Analysis)
3 Derivatives Analysis & Valuation
4 Derivatives Analysis & Valuation
5 Business Valuation
6 Foreign Exchange Exposure and Risk Management
7 Foreign Exchange Exposure and Risk Management
8 Advanced Capital Budgeting Decisions
9 Interest Rate Risk Management
10 Mutual Fund
11 Portfolio Management
12 Security Valuation
13 International Financial Management
14 A theoretical Question
15 A theoretical Question

PAPER 3: ADVANCED AUDITING, ASSURANCE AND

PROFESSIONAL ETHICS
RTP is a tool to refresh your knowledge which you have acquired while
doing conceptual study from Study Material and other modes of
knowledge like student journal, saransh, bare acts etc.

v MAY 2024 EXAMINATION

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 REVISION TEST PAPER FINAL EXAMINATION

This RTP of Advanced Auditing, Assurance and Professional Ethics is

relevant for May 2024 Examination. Total 20 Questions consisting of case
scenario based multiple choice questions, independent multiple choice
questions and descriptive questions have been taken from the entire
syllabus divided into Nineteen chapters.
These 20 questions are taken from different topics like Quality Control,
General Auditing Principles and Auditor’s Responsibilities, Materiality, Risk
Assessment and Internal Control, Reporting, Related Services, Prospective
Financial Information and Other Assurance Services, Digital Auditing and
Assurance, Group Audits, Special Features of Audit of Banks & Non-
Banking Financial Companies, Audit of Public Sector Undertakings,
Internal Audit, Sustainable Development Goals (SDG) & Environment,
Social and Governance (ESG) Assurance and Professional Ethics and
Liabilities of Auditors etc. of different level. Some of the questions given
in the RTP are descriptive i.e. direct theory questions (Knowledge and
Comprehension) based whereas some of them are practical case studies
based i.e. application-oriented theory question (Application and Analysis /
Evaluation and Synthesis). The name of the chapter is clearly indicated
before each question.
Examples and illustrations given in the Study Material would help you
understand the application of concepts. Work out the exercise questions
at the end of each chapter and then, compare your answers with the
answers given to test your level of understanding. Thereafter, solve the
MCQs and case scenarios based MCQs uploaded in MCQ Paper Practice
Dashboard to assess your level of understanding and hone your analytical
and problem-solving skills.
Finally, solve the questions given in this RTP independently and compare
the same with the answers given to assess your level of preparedness for
the examination.

vi MAY 2024 EXAMINATION

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© The Institute of Chartered Accountants of India
 PAPER – 1:
FINANCIAL REPORTING

QUESTIONS

Case Scenario - I
FA Ltd. is a company which manufactures aircraft parts and engines and sells
them to large multinational companies like Boeing and Airbus Industries.
Following are the details of some of the transactions entered into by the
company:
i. On 1 st April 20X2, the company began the construction of a new
production line in its aircraft parts manufacturing shed.
Costs relating to the production line are as follows:

Details Amount
` in lakhs
Costs of the basic materials (list price ` 12.5 lakhs less 10.00
20% trade discount)
Recoverable goods and services tax incurred but not 1.00
included in the purchase cost
Employment costs of the construction staff for three 1.20
months till 30 th June 20X2
Other overheads directly related to the construction 0.90
Payments to external advisors relating to the 0.50
construction
Expected dismantling and restoration costs 2.00

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 REVISION TEST PAPER FINAL EXAMINATION

The production line took two months to make ready for use and was
brought into use on 31 st May 20X2.
The other overheads were incurred during the two-month period
ended on 31 st May 20X2. They included an abnormal cost of
` 0.3 lakhs caused by a major electrical fault.
The production line is expected to have a useful economic life of eight
years. After 8 years, FA Ltd. is legally required to dismantle the plant in
a specified manner and restore its location to an acceptable standard.
The amount of ` 2 lakhs included in the cost estimates is the amount
that is expected to be incurred at the end of the useful life of the
production line. The appropriate discount rate is 5%. The present
value of ` 1 payable in 8 years at a discount rate of 5% is
approximately ` 0.68.
Four years after being brought into use, the production line will require
a major overhaul to ensure that it generates economic benefits for the
second half of its useful life. The estimated cost of the overhaul, at
current prices, is ` 3 lakhs.
No impairment of the plant had occurred by 31 st March 20X3.
ii. During the year ended 31 st March 20X3, FA Ltd. provided consultancy
services to a customer regarding the installation of a new production
system related to aircraft parts. The system has caused the customer
considerable problems, so the customer has taken legal action against
the Company for the loss of profits that has arisen as a result of the
problems with the system. The customer has claimed damages to the
tune of ` 1.6 lakhs.
The legal department of FA Ltd. considers that there is a 25% chance
the claim can be successfully defended. The legal department further
stated that they are reasonably confident the Company is covered by
insurance against these types of loss. The accountant feels nothing
needs to be provided for this claim as the Company is suitably covered
against any possible losses.

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FINANCIAL REPORTING

iii. FA Ltd. has an associate company, Flynet Limited. Following are the
information of Flynet Limited for the year ended 31 st March 20X3:

Particulars ` in lakhs
Net Income after taxes 120
Decrease in accounts receivables 20
Depreciation 25
Increase in inventory 10
Increase in accounts payable 7
Decrease in wages payable 5
Tax charge for the year (deferred tax liabilities) 15
Profit from sale of land 2

On the basis of the facts given above, chose the most appropriate
answer to Questions 1 to 5 below based on the relevant Indian
Accounting Standards (Ind AS).

1. Which of the following items need to be capitalized in determining the

cost of Production Line?
(a) Abnormal cost of ` 0.3 lakhs
(b) Recoverable GST of ` 1 lakhs
(c) Initial estimate of the costs of dismantling and removing the item
and restoration of site of ` 2 lakhs
(d) Initial estimate of the costs of dismantling and removing the item
and restoration of site of ` 1.36 lakhs
2. Calculate the company’s associate Flynet Ltd.’s cash flow from
operations.
(a) ` 158 lakhs
(b) ` 170 lakhs
(c) ` 174 lakhs
(d) None of the above

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3. What accounting treatment should be done in FA Ltd.’s books for the

year ending 31 st March 20X3, as the customer has taken legal action
against the Company on the loss of profits that has arisen as a result of
the problems with the system?
(a) Nothing needs to be provided for claim instituted by the
customer as the Company is suitably covered against any
possible losses.
(b) Provision of ` 1.6 lakhs should be recognised with a
corresponding charge to profit or loss.
(c) Provision of ` 0.4 lakhs as per best possible outcome should be
recognised with a corresponding charge to profit or loss.

(d) Contingent Liability would be disclosed in the 31 st March 20X3

financial statements. Charge to profit or loss if any would be
recognised in the period when the claim is settled.
4. Compute the total amount to be charged to the Statement of Profit
and Loss with respect to Production Line for the year ending
31st March 20X3 and the balance of Provision for Dismantling Cost
carried to Balance Sheet.
(a) ` 1.70 lakhs; ` 1.36 lakhs
(b) ` 1.42 lakhs; ` 1.70 lakhs
(c) ` 1.76 lakhs; ` 1.42 lakhs
(d) ` 1.42 lakhs; ` 1.76 lakhs
5. Compute the cost of the production Line to be capitalized initially on
31st May, 20X2.
(a) ` 13.26 lakhs
(b) ` 14.60 lakhs

(c) ` 13.96 lakhs

(d) ` 15.76 lakhs

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FINANCIAL REPORTING

Case Scenario - II
HS Limited (HSL) is a car manufacturing company. During the year, HSL has
entered into many transactions, details of which are given below.
i. With the intention to expand, HSL has entered into a Share Purchase
Agreement ("SPA") with the shareholders of FM Limited to purchase
30% stake in FM Limited as at 1 st June 20X2 at a price of ` 30 per share.
As per the terms of SPA, HSL has an option to purchase an additional
25% stake in FM Limited on or before 15 th June 20X2 at a price of ` 30
per share. Similarly, the selling shareholder has an option to sell
additional 25% stake in FM Limited on or before 15 th June, 20X2 to HSL
at a price of ` 30 per share. The decisions on relevant activities of
FM Limited are made in Annual General Meeting / Extraordinary
General Meeting (AGM / EGM). A resolution in AGM / EGM is passed
when more than 50% votes are cast in favour of the resolution. An
AGM / EGM can be called by giving atleast 21 days advance notice to
all shareholders.
ii. During the year, HSL issued Compulsory Convertible Debentures
("CCDs") on a private placement basis for ` 100 lakh. Each CCD is
convertible into 5 shares at the end of 4 years from the date of issue
and an annual interest is payable at the rate of 6% p.a. At initial
recognition, HSL recognized a liability component of compound
instrument at ` 20,79,063. HSL also incurred expenses of ` 2,00,000 in
connection with the issue of the instrument. Nature of expenses
includes fees paid to legal advisors, registration and regulatory fees.
iii. HSL acquired a 40% stake in NM Limited as at 1 st January, 20X2 for
` 8,00,000 and classified the investment in NM Limited as an associate.
As at 1 st January, 20X2, the carrying amount and fair value of plant &
equipment of NM Limited is ` 3,00,000 and ` 5,00,000 respectively with
remaining useful life of 5 years (i.e. 20 quarters). From
st st
1 January, 20X2 to 31 March, 20X2, NM Limited generated a profit of
` 50,000.
iv. While selling a car, HSL provides a trade discount of 1% on the sale
price which is mentioned on the invoice. HSL provides a credit period
of 7 days to its customers, however if paid upfront then HSL gives an

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 REVISION TEST PAPER FINAL EXAMINATION

additional cash discount of 2%. HSL also provides a voucher worth

` 500 with a validity of 1 year which can be used at an apparel store.
On the basis of the facts given above, chose the most appropriate
answer to Questions 6 to 10 below based on the relevant Indian
Accounting Standards (Ind AS).
6. At what amount HSL shall carry its investments in NM Limited in its
consolidated financial statements as at 31 st March, 20X2?
(a) ` 8,00,000
(b) ` 8,20,000
(c) ` 8,16,000
(d) ` 8,10,000
7. How should HSL account for the trade discount, cash discount and
voucher given to customers on sale of a car?
(a) Trade discount shall be reduced from the revenue however cash
discount and value of voucher shall be charged as expenses.
(b) Trade discount and cash discount both shall be reduced from the
revenue however value of voucher shall be charged as expenses.
(c) Trade discount, cash discount and value of voucher shall be
charged as expenses.
(d) Trade discount, cash discount and value of voucher shall be
reduced from revenue.
8. What shall be the accounting treatment of directly attributable
expenses of ` 2 lakh incurred in connection with the issue of
Compulsory Convertible Debentures?
(a) Entire ` 2,00,000 shall be recognized as expenses in the
statement of profit and loss in the current year.
(b) Entire ` 2,00,000 shall be reduced from equity in the current year.
(c) A proportion of ` 1,58,419 shall be reduced from equity and
Balance of ` 41,581 shall be recognized as interest cost over the
period of 4 years using an effective interest method.

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FINANCIAL REPORTING

(d) Entire ` 2,00,000 shall be recognized as interest cost over the

period of 4 years using effective interest method.
9. With more acquisitions, at the end of the year, HSL has investments in
2 subsidiaries, 3 associates and 1 joint venture. Which of the following
statements is correct in relation to accounting of these investments in
separate financial statements?
(a) HSL is required to measure all such investments at cost.
(b) HSL has an option to account for the investments in associates
and joint ventures using the equity method of accounting and
carry the investments in subsidiaries at cost.
(c) HSL has an option for each investment to measure either at cost
or in accordance with Ind AS 109.
(d) HSL has an option to measure all such investments either at cost
or in accordance with Ind AS 109. The option is available for
each category of investments separately (i.e. subsidiaries,
associates and joint venture).
10. With respect to the SPA entered by HSL, determine the date when HSL
gained control over FM Limited
(a) 1st June, 20X2.
(b) 15th June, 20X2.
(c) On the date of AGM/EGM
(d) On the date when the resolution for AGM/EGM is issued.

Ind AS 103 ‘Business Combinations’

11. On 1 st April 20X1, Pride Limited acquired 30% of the ordinary shares of
Famous Limited for ` 4,000 crores. Pride Limited accounts for its
investment in Famous Limited using the equity method as prescribed
under Ind AS 28. On 31 st March 20X2, Pride Limited recognized its
share of the net asset changes of Famous Limited using equity method
accounting as follows:

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 REVISION TEST PAPER FINAL EXAMINATION

Share of profit ` 350 crore

Share of exchange difference in OCI ` 50 crore
Share of revaluation reserve of PPE in OCI ` 25 crore

The carrying amount of the investment in the associate on

31st March 20X2 is therefore ` 4,425 crore (4,000 + 350 + 50 + 25).
On 1st April 20X2, Pride Limited acquired the remaining 70% of
Famous Limited for cash ` 12,500 crore.
The following additional information is relevant at that date:
Fair Value of 30% interest in Famous Limited as on ` 4,500 crore
1st April 20X2
Fair Value of Net Identifiable Assets of ` 15,000 crore
Famous Limited as on 1 st April 20X2

You are required to

(i) Determine the acquisition date for Pride Ltd.
(ii) Determine the gain on previously held interest in Pride Ltd. and
suggest the accounting treatment on acquisition date as per
Ind AS 103.
(iii) Compute the amount of goodwill arising on the acquisition of
Famous Ltd.
(iv) Pass necessary journal entry on the acquisition date.
Professional and Ethical Duty of a Chartered Accountant
12. Astra Ltd. is a listed entity which operates in the defence and fibre
optics sector. It supplies fibre optic cables and racks in the domestic
country. This activity is only a trading activity for Astra Ltd. as it
procures goods from pre-approved suppliers, and after inspection,
sells the goods to IT companies. The sale contract requires Astra Ltd.
to deliver these goods to the IT companies’ locations (i.e., delivery on
site). Payment terms are 30 days after the invoice date to Astra Ltd.

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FINANCIAL REPORTING

Ms. Suparna Dasgupta, a chartered accountant, has recently joined

Astra Ltd. as the Head of the Finance Department.
The Chief Operating Officer (also the executive director) of Astra Ltd. is
Ms. Padmaja Srinivasan, a mechanical engineer with an MBA from
Harvard University, who rose through the ranks through her excellent
skills in project management, marketing, and customer management.
Her remuneration includes a bonus computed as a percentage of
turnover achieved during the year, and an additional incentive for
achieving an EBITDA in excess of 15% of turnover.
Astra Ltd. has sold fibre optic cables amounting to ` 2 crores (invoice
dated 31 st March 20X2) to Ethernet Bullet Ltd., a company providing
high-speed internet connectivity services through fibre optic cables as
well as dedicated leased lines. The service unit of Ethernet Bullet Ltd.
is located next to the factory of Astra Ltd. Though the goods were not
moved to Ethernet Bullet Ltd.’s service unit, Astra Ltd. recognized the
sale for the year, based on the contention that the service unit is
adjacent, and hence the transfer can happen within a few minutes.
The annual results are due for board approval, for the year ending
31st March, and require the sign-off of Ms. Suparna Dasgupta.
Ms. Suparna Dasgupta has been given a 40% increment on joining
Astra Ltd., which enables her to comfortably pay off her housing loan
mortgage every month. Additionally, she is also given perquisites in
the form of business class travel, an exclusive chauffeur-driven car and
stock options of the company. Accordingly, she has stated that she
cannot afford to lose this job as the salary and perquisites are among
the best in the country.
Ms. Padmaja Srinivasan has communicated to Ms. Suparna Dasgupta
that many more benefits will accrue if she agrees to present the
numbers without any modifications. She has also said that the
company would not hesitate to replace Ms. Suparna Dasgupta should
she disagree with the contentions above.

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 REVISION TEST PAPER FINAL EXAMINATION

Required:
Discuss the potential conflicts which are arising in the above scenario
and the ethical principles that would guide Ms. Suparna Dasgupta in
responding to the situation.
Ind AS 22 ‘Income Taxes’
13. Joy Ltd. wishes to calculate tax base of its assets and liabilities as on
31st March 20X5. The Balance Sheet has been adjusted by current tax
expense.
Summarised Balance Sheet as on 31 st March 20X5:

ASSETS `
Non-current Assets
Property, Plant and Equipment 12,00,000
Intangible Assets-Product Development Costs 60,000
Investment in Subsidiary - Pall Ltd. 4,40,000
Current Assets
Trade Investments 2,08,000
Trade Receivables 6,26,000
Inventories 3,04,000
Cash and Cash Equivalents 1,80,000
TOTAL ASSETS 30,18,000
EQUITY & LIABILITIES `
Equity
Share Capital 12,00,000
Accumulated Profits 7,37,438
Revaluation Surplus 88,000
Non-current Liabilities
Deferred Income - Government Grants 40,000
Liability for Product Warranty Costs 16,000

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FINANCIAL REPORTING

Deferred Tax Liability (From 20X3-20X4) 22,162

Current Liabilities
Trade Payables 7,64,000
Health Care Benefits for Employees 70,000
Current Tax Liability 80,400
TOTAL EQUITY & LIABILITIES 30,18,000

Notes:
(a) Depreciation expense for the year 20X4-20X5 allowable in
accordance with tax laws is ` 2,06,000. Accounting depreciation
included in operating costs is ` 1,70,000. Cost of PPE is
` 16,00,000 and Joy Ltd has deducted expenses of ` 4,16,000 in
its tax returns prior to the financial year 20X4-20X5. Moreover, as
on 31 st March 20X5, Joy Ltd for the first time revalued its
property, plant and equipment to fair value of ` 12,00,000
(revaluation surplus = ` 88,000).
(b) In 20X1-20X2, Joy Ltd incurred product development costs of
` 1,00,000. These costs were recognized as an asset and being
amortized over useful period of 10 years. For tax purposes,
Joy Ltd deducted full product development costs in 20X1-20X2.
(c) Trading investments were acquired in 20X3-20X4 with cost of
` 2,30,000. These investments are classified at fair value through
profit and loss and thus recognized at their fair value. Fair value
adjustments are not tax deductible.
(d) Bad debt provision amounts to ` 1,30,000 and relates to
2 debtors:
o Debtor A - ` 80,000 (receivable originated in 20X2-20X3
and 100% provision was recognized in 20X3-20X4) and
o Debtor B - ` 50,000 (receivable originated in 20X3-20X4 and
100% provision was recognized in 20X4-20X5).
Tax law allows deduction of 20% of provision for debtors overdue
for more than 1 year, another 30% for debtors overdue for more

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 REVISION TEST PAPER FINAL EXAMINATION

than 2 years and remaining 50% for debtors overdue for more
than 3 years.
(e) Joy Ltd accounts for inventory obsolescence provision. New
provision created in 20X4-20X5 was ` 10,800 (total provision:
` 18,000). This provision is not tax deductible, as it is a general
provision.
(f) Government grants are not taxable. Government grant received
in 20X4-20X5 is appearing in the balance sheet.
(g) In 20X4-20X5, Joy Ltd made a further provision for product
warranty of ` 5,000. Such provisions for product warranty costs
are not tax deductible until the claims are paid or settled. During
the year 20X4-20X5, warranty claims were paid/settled for
` 6,200.
(h) During the year 20X4-20X5, Joy Ltd introduced health care
benefits for employees. The expenses are allowable as a
deduction in tax only when benefits are paid but in line with Ind
AS 19, such liability is recognized in profit or loss when
employees provide service.
Calculate temporary differences and deferred tax for Joy Ltd as on
31st March 20X5 assuming the tax rate is 32%.
Ind AS 23 ‘Borrowing Costs’
14. PQR Limited is engaged in Tourism business in India. The company
has planned to construct a Holiday Resort (Qualifying Asset) at Shimla.
The cost of the project has been met out of borrowed funds of
` 100 lakhs at the rate of 12% p.a. ` 40 lakhs were disbursed on
1st April 20X2 and the balance of ` 60 lakhs were disbursed on
1st June 20X2. The site planning work commenced on 1 st June 20X2,
since the Chief engineer of the project was on medical leave. The
company commenced physical construction on 1 st July 20X2 and the
work of construction continued till 30 th September 20X2 and thereafter
the construction activities stopped due to landslide on the road which
leads to construction site. The road blockages have been cleared by
the government machinery by 31 st December 20X2. Construction

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activities resumed on 1 st January 20X3 and has completed on 28 th

February 20X3.
The date of opening has been scheduled for 1 st March 20X3, but
unfortunately, the District Administration gave permission for opening
on 16th March 20X3, due to lack of safety measures like fire
extinguishers which had not been installed by then.
Determine the amount of borrowing cost to be capitalized towards
construction of the resort when
(i) Landslide is not common in Shimla and delay in approval from
District Administration Office is minor administrative work
leftover.
(ii) Landslide is common in Shimla and delay in approval from
District Administration Office is major administrative work
leftover.
Ind AS 10 ‘Events Occurring After the Balance Sheet Date’ and
Ind AS 109 ‘Financial Instruments’
15. The company has made sales of ` 60,00,000 to a customer SS LLP on
31st December 20X2. The normal credit is for one month. However,
sometimes, it goes upto 2 months. The company expects to receive
payment by 28th February 20X3. However, no payment has been
received till 31 st March 20X3. On 15 th April 20X3, the sales department
of the company became aware that the customer is passing through
financial crisis and has major cash flow problems.
The company has agreed to allow the customer to settle the debt by
31st March 20X4, by which time the customer is confident that the
cashflow problem will be resolved.
The company expects that an annual interest of 9% (i.e. effective
interest rate) can be received against any money lent out, yet it
allowed the customer an interest-free payment period.
Determine the amount to be shown as 'trade receivable' from SS LLP in
the books of the company as on 31 st March 20X3.

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Ind AS 2 ‘Inventories’
16. B Limited has valued its stock held for distribution as free items on
claim by customers (on offers) at zero. The customers have a right to
claim the free item within 14 days from the date of invoice. If the time
limit of 14-day exceeds, the claim is foregone by the customer.
The majority of the free items require online registration by the buyers
for participation in the contest conducted by the respective brand
which needs to be done by the buyers within 3 days from the date of
invoice.
Out of it, a few items under this category were found damaged. The
replacement cost of such items would be ` 2,50,000.
Determine whether the entity has to book loss of inventory or provide
for replacement cost of the goods that need to be given as free items
to customers as per the principles of Ind AS.
Ind AS 7 ‘Statement of Cashflows’
17. Following is the Balance Sheet of Mars Ltd: ` in Lakhs

Particulars 31.3.20X3 31.3.20X2

ASSETS
Non-Current Assets
Property, Plant and Equipment 450 410
Intangible asset 90 90
Deferred Tax Asset (net) 45 45
Other Non-current Asset 95 85
Total Non-current Assets 680 630
Current Assets
Financial Asset
Investments 100 60
Trade Receivables 580 600

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Cash and Cash Equivalents 300 300

Inventories 800 700
Other Current Assets 160 120
Total Current Assets 1,940 1,780
Total Assets 2,620 2,410
Equity and Liabilities
Equity
Equity Share Capital 280 250
Other Equity 980 820
Total Equity 1,260 1,070
Non-current Liabilities
Financial Liabilities
Borrowings 360 300
Other Non-current Liabilities 90 80
Total Non-current Liabilities 450 380
Current Liabilities
Financial Liabilities
Trade Payable 455 450
Bank Overdraft 410 420
Other current liabilities 45 90
Total Current Liabilities 910 960
Total Liabilities 1,360 1,340
Total Equity and Liabilities 2,620 2,410

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Additional Information:
(a) Profit before tax for the year is ` 200 lakhs and provision for tax
is ` 40 lakhs.
(b) Property, Plant and Equipment purchased during the year
` 100 lakhs.
(c) Current liabilities include Capital creditors of ` 25 lakhs as at
31st March 20X3 (Nil – 31st March 20X2)
(d) Long Term Borrowings raised during the year ` 120 lakhs.
From the information given, prepare a Statement of Cash Flows
following the Indirect Method. Assume that Bank overdraft is an
integral part of the entity’s cash management.
Ind AS 115 ‘Revenue from Contracts with Customers’
18. A property sale contract includes the following:
(a) Common areas
(b) Construction services and building material
(c) Property management services
(d) Golf membership
(e) Car park
(f) Land entitlement
Whether they could be considered as separate performance
obligations as per the requirements of Ind AS 115?
Ind AS 110 ‘Consolidated Financial Statements’
19. At the beginning of its current financial year, AB Limited holds 90%
equity interest in BC Limited.
During the financial year, AB Limited sells 70% of its equity interest in
BC Limited to PQR Limited for a total consideration of ` 56 crore and
consequently loses control of BC Limited.
At the date of disposal, fair value of the 20% interest retained by
AB Limited is ` 16 crore and the net assets of BC Limited are fair valued
at ` 60 crore.

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These net assets include the following:

(a) Debt investments classified as fair value through other
comprehensive income (FVOCI) of ` 12 crore and related FVOCI
reserve of ` 6 crore.
(b) Net defined benefit liability of ` 6 crore that has resulted in a
reserve relating to net measurement losses of ` 3 crore.
(c) Equity investments (considered not held for trading) of
` 10 crore for which irrevocable option of recognising the
changes in fair value in FVOCI has been availed and related
FVOCI reserve of ` 4 crore.
(d) Net assets of a foreign operation of ` 20 crore and related
foreign currency translation reserve of ` 8 crore.
In consolidated financial statements of AB Limited, 90% of the above
reserves were included in equivalent equity reserve balances, with the
10% attributable to the non-controlling interest included as part of the
carrying amount of the non-controlling interest.
What would be the accounting treatment on loss of control in the
consolidated financial statements of AB Limited?
Ind AS 102 ‘Share-Based Payments’
20. Fashion India Ltd. (FIL) entered into an agreement with RFD Ltd. on
10th August, 20X2 for purchasing a machinery. The agreement has a
clause that FIL will have to settle the consideration of machinery
purchased by issuing its equity shares. FIL agreed to the clause and
the order was confirmed. Machinery was supplied vide invoice dated
25th October, 20X2 and delivered on 1 st November, 20X2. The agreed
purchase consideration was ` 150 Lakhs and the fair value of the
machinery supplied was estimated to be ` 160 Lakhs. As agreed, FIL
issued 1,00,000 equity shares of face value ` 100 each to RFD Ltd.
As per Ind AS 102 ‘Share Based Payment’, what should be the price and
the date for recording the machinery purchased from RFD Ltd.?

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SUGGESTED ANSWERS/HINTS

Answer to Case Scenario I

1. Option (d): Initial estimate of the costs of dismantling and removing
the item and restoration of site of ` 1.36 lakhs

Reason:
As per para 16(c) of Ind AS 16, elements of cost of PPE includes the
initial estimate of the costs of dismantling and removing the item and
restoring the site on which it is located, the obligation for which an
entity incurs either when the item is acquired or as a consequence of
having used the item during a particular period for purposes other
than to produce inventories during that period.

2. Option (b): ` 170 lakhs

Reason:
Cash flow from operating activities – Indirect method

Particulars ` in lakhs
Net Income after taxes 120
Add /(Less) No- cash or non-operating item:
Depreciation 25
Profit from sale of land (2)
Tax charges for the year (deferred tax liabilities) 15
158
Decrease in accounts receivables 20
Increase in inventory (10)
Increase in accounts payable 7
Decrease in wages payable (5)
Cash flow from operations 170

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3. Option (b): Provision of ` 1.6 lakhs should be recognized with a

corresponding charge to profit or loss.

Reason:
In accordance with Ind AS 37 ‘Provisions, Contingent Liabilities and
Contingent Assets’, the claim made by the customer needs to be
recognised as a liability in the financial statements for the year ended
31st March 20X3.
The standard stipulates that a provision should be made when, at the
reporting date:
– An entity has a present obligation arising out of a past event.
– There is a probable outflow of economic benefits.
– A reliable estimate can be made of the outflow.
Since all three of the above conditions are satisfied here, a provision is
required to be made.
The provision should be measured at the amount the entity would
rationally pay to settle the obligation at the reporting date.
Where there is a range of possible outcomes, the individual most likely
outcome is often the most appropriate measure to use.
In this case, a provision of ` 1.6 lakhs seem appropriate, with a
corresponding charge to profit or loss.
4. Option (c): ` 1.76 lakhs; ` 1.42 lakhs
5. Option (a): ` 13.26 lakhs
Reason for 4 & 5:
Statement showing computation of cost of production line

Particulars ` in lakhs
Purchase cost 10.00
GST – recoverable goods and services tax not included -
Employment costs during the period of getting the 0.80
production line ready for use [(1.2/3 month) x 2 month]

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Other overheads – abnormal costs of ` 0.3 lakhs have 0.60

been excluded (0.90- 0.30)
Payment to external advisors – directly attributable 0.50
cost
Dismantling costs – recognized at present value
(2 lakhs x 0.68) 1.36
Total 13.26

Provision for dismantling cost carried to Balance Sheet

Particulars ` in lakhs
Non-current liabilities (` 2 lakhs x 0.68) 1.36
Add: Finance cost (1.36 x 5% x 10/12) 0.06
Net book value – carried to Balance Sheet 1.42

Extract of Statement of Profit and Loss

Particulars ` in lakhs
Depreciation (W.N.) 1.70
Finance cost (1.36 x 5% x 10/12) 0.06
Amounts carried to Statement of Profit & Loss 1.76

Working Note:
Calculation of depreciation charge

Particulars ` in lakhs
The asset is split into two depreciable components out
of the total capitalization amount of 13.26 lakhs:
x Depreciation for ` 3 lakhs with a useful economic
life of four years (3 lakhs x ¼ x 10/12). 0.63
(This is related to a major overhaul to ensure that
it generates economic benefits for the second half
of its useful life)

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x Depreciation for ` 10.26 lakhs (13.26 – 3.00) with a

useful economic life of eight years will be:
` 10.26 lakhs x 1/8 x 10/12 1.07
Total depreciation to be charged to Statement of
Profit and Loss for the year ended 31 st March 20X3 1.70

Answer to Case Scenario II

6. Option (c): ` 8,16,000

Reason:
As per para 10 of Ind AS 28, under the equity method, on initial
recognition the investment in an associate or a joint venture is
recognised at cost, and the carrying amount is increased or decreased
to recognise the investor’s share of the profit or loss of the investee
after the date of acquisition.
Accordingly,
Cost of investment for 40% stake on acquisition date ` 8,00,000
Add: Share of post-acquisition profit and loss (50,000 x 40%) ` 20,000
Less: Share of post-acquisition loss due to additional
depreciation [{(5,00,000 – 3,00,000)/20} x 40%] (` 4,000)
` 8,16,000

7. Option (d): Trade discount, cash discount and value of voucher shall
be reduced from revenue

Reason
Discounts and vouchers are incentives given to customers. For
Incentives, Paragraph 70 of Ind AS 115, inter-alia, states that
consideration payable to a customer includes cash amounts that an
entity pays, or expects to pay, to the customer (or to other parties that
purchase the entity’s goods or services from the customer).
Consideration payable to a customer also includes credit or other items
(for example, a coupon or voucher) that can be applied against
amounts owed to the entity (or to other parties that purchase the

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entity’s goods or services from the customer). An entity shall account

for consideration payable to a customer as a reduction of the
transaction price and, therefore, of revenue.
Therefore, cash incentives (payments given to the customer) would be
considered as a reduction in the transaction price and in the
measurement of revenue when the goods are delivered.

8. Option (c): A proportion of ` 1,58,419 shall be reduced from equity

and balance of ` 41,581 shall be recognised as interest cover over the
period of 4 years using effective interest method

Reason
Compulsory convertible debentures with annual interest payout is a
compound financial instrument. As per the information given in the
question the liability element to be initially recognised is ` 20,79,063.
Hence the equity element would be ` 79,20,937 (1,00,00,000 –
20,79,063). Transaction cost of ` 2,00,000 will be apportioned in equity
and liability component in the ratio of 79,20,937 : 20,79,063, which
would be as follows:
Transaction cost attributable to equity = 2,00,000 x (79,20,937 /
1,00,00,000) = ` 1,58,419
Transaction cost attributable to liability = 2,00,000 x (20,79,063 /
1,00,00,000) = ` 41,581

9. Option (d): HSL has an option to measure all such investments either
at cost or in accordance with Ind AS 109. The option is available for
each category of investments separately (i.e. subsidiaries, associates,
and joint venture)

Reason
As per para 10 of Ind AS 27, when an entity prepares separate financial
statements, it shall account for investments in subsidiaries, joint
ventures and associates either: (a) at cost, or (b) in accordance with
Ind AS 109. The entity shall apply the same accounting for each
category of investments.

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In the present case, investment in subsidiaries, associates and joint

ventures are considered to be different categories of investments.
Further, Ind AS 27 requires accounting for the investment in
subsidiaries, joint ventures and associates either at cost, or in
accordance with Ind AS 109 for each category of Investment. Thus, an
entity can carry its investments in subsidiaries at cost and its
investments in associates or joint ventures as financial assets in
accordance with Ind AS 109 in its separate financial statements.

10. Option (a): 1st June, 20X2

Reason
Paragraph 10 of Ind AS 110 ‘Consolidated Financial Statements’, states
that an investor has power over an investee when the investor has
existing rights that give it the current ability to direct the relevant
activities, i.e. the activities that significantly affect the investee’s
returns.
As per the facts given in the question, HSL. has 15 days to exercise the
option to purchase 25% additional stake in FM Ltd., which will give it
majority voting rights of 55% (30% + 25%). This is a substantive
potential voting rights which is currently exercisable.
Further, the decisions on relevant activities of FM Ltd. are made in
AGM / EGM. An AGM / EGM can be called by giving atleast 21 days
advance notice. A resolution in AGM / EGM is passed when more than
50% votes are cast in favour of the resolution. Thus, the existing
shareholders of FM Ltd. are unable to change the existing policies over
the relevant activities before the exercise of option by HSL. HSL can
exercise the option and get voting rights more than 50% at the date of
AGM / EGM. Accordingly, the option contract gives HSL the current
ability to direct the relevant activities even before the option contract
is settled. Therefore, HSL controls FM Ltd. as at 1 st June, 20X2.

11. (i) Acquisition date for accounting of business combination is

The date on which the acquirer obtains control of the acquiree is
generally the date on which the acquirer legally transfers the
consideration, acquires the assets and assumes the liabilities of
the acquiree. In the given case, the acquisition date is

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1st April, 20X2 i.e. when Pride Ltd. acquired 100% holding of
Famous Ltd.
(ii) Computation of gain on previously held interest
An entity shall discontinue the use of the equity method from the
date when its investment ceases to be an associate or a joint
venture. If the investment in an associate becomes a investment
in a subsidiary, the entity shall account for its investment in
accordance with Ind AS 103 and Ind AS 110.
Ind AS 103 provides that in a business combination achieved in
stages, the acquirer is required to remeasure the previously held
equity interest at its acquisition date fair value and recognise any
gain or loss in profit or loss or other comprehensive income, as
appropriate. In prior reporting periods, the acquirer may have
recognised changes in the value of its equity interest in the
acquiree in other comprehensive income. If so, the amount that
was recognised in the other comprehensive income shall be
recognised on the same basis as would be required if the
acquirer had disposed directly of the previously held equity
interest.
The gain on previously held equity interest in Famous Ltd. is
calculated as follows:

Fair value of 30% interest as on 1 st April, 20X2 ` 4,500 crore

Carrying value of 30% investment as on
31st March, 20X2 (` 4,425 crore)
Gain on previously held interest ` 75 crore
Unrealised gain previously recognised in OCI ` 50 crore
Total gain recognised in Profit and loss ` 125 crore

(iii) Computation of goodwill

For 70% share ` 12,500 crore

For 30% share ` 4,500 crore
Total amount of purchase consideration ` 17,000 crore

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Less: Fair value of net identifiable assets (` 15,000 crore)

Goodwill ` 2,000 crore

(iv) Journal Entry on 1 st April, 20X2

` in crore
Net Identifiable Assets Dr. 15,000
Goodwill (W.N.1) Dr. 2,000
Foreign currency translation reserve Dr. 50
PPE revaluation reserve Dr. 25
To Cash 12,500
To Investment in Associate – Famous 4,425
Ltd.
To Retained Earnings (W.N.) 25
To Gain on previously held interest 125
recognised in profit and loss (Refer
point (ii) above)

Working Note:
The credit to retained earnings represents the reversal of the
unrealised gain of ` 25 crore in OCI related to the revaluation of PPE.
In accordance with Ind AS 16, this amount is not reclassified to profit
or loss.
12. Presentation of Revenue numbers:
Ind AS 115 ‘Revenue from Contracts with Customers’ requires revenue
to be recognized only on satisfaction of the performance obligations
under the contract. It is crucial that the performance obligations be
identified at the commencement of the contract, so that the trigger
points for revenue recognition become identifiable.
Management would always have an incentive to present higher
revenue numbers. In the given case, the fact that the COO is given an
incentive for revenues and EBITDA indicates that revenue is a potential
area for material misstatement, given the personal interest of the COO
in the same.

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The sale of fibre optic cable cannot be recognized on 31 st March 20X2

as the goods are not yet transferred to the customer Ethernet Bullet
Ltd.’s factory premises, which is one of the critical obligations of
Astra Ltd. The contention of the COO that it takes merely a few
minutes to shift the goods, and hence the sale can be recognized does
not hold true. One can always cross-question as to why the movement
of goods did not happen if it was merely a few minutes job. It could
be a possibility that the goods may not be packed, or there may still be
some pending inspection of the goods before transferring the same
etc. In view of this, the performance obligation under this contract has
not been completed, and hence booking the revenue has resulted in an
overstatement of revenue by ` 2 crores, and a consequent inflation of
profits, assuming that Astra Ltd. is making profit on this sale
transaction. Additionally, booking this sale has resulted in an
understatement of inventory as at the reporting date of
31st March 20X2.
In view of the above, multiple conflicts of interest arise for Ms. Suparna
Dasgupta:
(a) Pressure to present favourable revenue figures and chartered
accountant’s personal circumstances
The chartered accountant is under pressure to present favourable
numbers, notably in favour of the COO, thereby increasing the
incentives to the COO, and in turn benefiting with the continued
job prospects. Thus, the ethical and professional standards
required of the accountant are at odds with the pressures of her
personal circumstances.
(b) Duty to stakeholders
The directors have a duty to act in the best interests of the
company’s stakeholders. While higher revenue numbers do
indicate a good growth trajectory of the company, recognizing
the revenue before fulfilling the performance obligations, or
incorrectly booking grant income as revenue, results in
misleading the stakeholders about the actual performance of the
entity, thereby actually becoming detrimental to the
stakeholders.

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Ethical principles guiding the chartered accountant’s response

By exhibiting bias in reporting higher revenue figures due to the risk of
losing the job, objectivity stands compromised. Knowingly disclosing
incorrect information compromises integrity, and erring in complying
with Ind AS requirements, though continuing to report so in the
financial statements, results in displaying absence of professional
competence.
Appropriate action
In the given case, the chartered accountant faces an ethical dilemma,
and must apply her moral and ethical judgment. As a professional, she
is responsible for presenting the truth, and to avoid indulging in
‘creative accounting practices’ due to pressure.
The chartered accountant accordingly must put the interests of the
company and professional ethics first and insist that the financial
statements represent correct revenue numbers, in compliance with the
relevant Ind AS. Being an advisor to the directors, she must prevent
deliberate misrepresentation / fraudulent financial reporting,
regardless of the personal consequences. The accountant should not
allow any undue influence from the directors to override her
professional judgment or integrity. This is in the long-term interests of
the company,
Further, knowingly providing incorrect information is regarded as
professional misconduct. To prevent such misconduct, the chartered
accountant should not sign off on the financial statements containing
incorrect financial information. By adhering to the ethical principles,
the chartered accountant will maintain her professional integrity and
contribute to the trust and reliability placed in the work expected from
her.
However, if she signs the financial statements containing the inflated
revenue numbers, Ms. Suparna Dasgupta would be guilty of
professional misconduct under Clause I of Part II of Second Schedule
to the Chartered Accountants Act, 1949. The Clause states that a
member of the Institute, whether in practice or not, shall be guilty of
professional misconduct, if he contravenes any of the provisions of this

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Act or the regulations made thereunder, or any guidelines issued by

the Council. As per the Council guidelines, a member of the Institute
who is an employee shall exercise due diligence and shall not be
grossly negligent in the conduct of his duties.
13. Calculation of temporary differences and deferred tax for Joy Ltd.
as on 31 st March, 20X5 Amount in `

Item Carrying Tax Temporar Taxable/ DTA /

amount base y Deductible (DTL) at
Difference 32%

Property Plant & 12,00,000 9,78,000 2,22,000 Taxable (71,040)

Equipment (W.N.1)

Product
Development
Costs 60,000 0 60,000 Taxable (19,200)

Trading
investments 2,08,000 2,30,000 (22,000) Deductible 7,040

Trade receivables 6,26,000 7,06,000 (80,000) Deductible 25,600

(W.N.2)

Inventories 3,04,000 3,22,000 (18,000) Deductible 5,760

Deferred income
– Government
grants (40,000) 0 (40,000) Excluded 0

Liability for
product warranty
costs (16,000) 0 (16,000) Deductible 5,120

Health care
benefits for
employees (70,000) 0 (70,000) Deductible 22,400

Total Deferred
Tax Asset 65,920

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Total Deferred
Tax Liability (90,240)

Net Deferred Tax

Liability (24,320)

Working Notes:
1. Property Plant & Equipment as per tax records

`
Cost of PPE 16,00,000
Less: Current tax depreciation (2,06,000)
Less: Previous year tax depreciation (4,16,000)
Tax base 9,78,000

2. Trade receivables – Provision for doubtful debts:

`
Calculation of cost for tax records
Carrying amount 6,26,000
Add back: Bad debt provision 1,30,000
Cost A 7,56,000
Debtor A – ` 80,000 from 20X2-20X3
!1 year – 20% deducted in 20X3-20X4 16,000
!2 years – 30% deducted in 20X4-20X5 24,000
Already deducted for tax 40,000
Debtor B- ` 50,000 from 20X3-20X4
!1 year – 20% deducted in 20X4-20X5 10,000
Total deduction for tax purpose B (50,000)
Tax base of trade receivables A-B 7,06,000

14. As per Ind AS 23 ‘Borrowing Costs’, the commencement date for

capitalisation of borrowing cost on qualifying asset is the date when
the entity first meets all of the following conditions:

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(a) it incurs expenditures for the asset;

(b) it incurs borrowing costs; and
(c) it undertakes activities that are necessary to prepare the asset for
its intended use or sale.
Further, an entity also does not suspend capitalising borrowing costs
when a temporary delay is a necessary part of the process of getting
an asset ready for its intended use or sale. For example, capitalisation
continues during the extended period that high water levels delay
construction of a bridge, if such high-water levels are common during
the construction period in the geographical region involved.
An entity shall cease capitalising borrowing costs when substantially all
the activities necessary to prepare the qualifying asset for its intended
use or sale are complete.
Further, paragraph 23 explains that an asset is normally ready for its
intended use or sale when the physical construction of the asset is
complete even though routine administrative work might still continue.
If minor modifications, such as the decoration of a property to the
purchaser’s or user’s specification, are all that are outstanding, this
indicates that substantially all the activities are complete.
In the given case since the site planning work started for the project on
1st June, 20X2, the commencement of capitalisation of borrowing cost
will begin from 1 st June, 20X2.
(i) When landslide is not common in Shimla and delay in
approval from District Administration Office is minor
administrative work leftover
In such a situation, suspension of capitalisation of borrowing cost
on construction work will be considered for 3 months i.e. from
October, 20X2 to December, 20X2 and cessation of capitalisation
of borrowing cost shall stop at the time of completion of physical
activities.
Accordingly, the borrowing cost to be capitalized will be
effectively for 6 months i.e. from 1 st June, 20X2 to

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30th September, 20X2 and then from 1 st January, 20X3 to

28th February, 20X3 i.e. total 6 months. The amount of borrowing
cost will be ` 6,00,000 (1,00,00,000 x 6/12 x 12%).
(ii) When landslide is common in Shimla and delay in approval
from District Administration Office is major administrative
work leftover
Since landslides are common in Shimla during the monsoon
period, there shall be no suspension of capitalisation of
borrowing cost during that period.
Further, an asset can be considered to be ready for its intended
use only on receipt of approvals and after compliance with
regulatory requirements such as “Fire Clearances” etc. These are
very important to declare the asset as ready for its scheduled
operation.
In the given case, obtaining the safety approval is a necessary
condition that needs to be complied with strictly and before
obtaining the same the entity will not be able to use the building.
Accordingly, it is appropriate to continue capitalisation until the
said approvals are obtained.
Hence, the capitalisation of the borrowing cost will be for 9.5
months i.e. from 1 st June, 20X2 till 15 th March, 20X3. The amount
of borrowing cost will be ` 9,50,000 (1,00,00,000 x 9.5/12 x 12%).
15. Ind AS 10 ‘Events after the Reporting Date’, classify an event as
adjusting if it provides additional evidence of conditions existing at the
reporting date. In this case the additional information relates to
evidence of impairment of a financial asset since the customer had
financial difficulties prior to 31 st March 20X3.
Ind AS 109 ‘Financial Instruments’ requires financial assets to be
reviewed at each reporting date for evidence of impairment. Such
evidence exists here because although the customer is expected to pay
the amount due the payment date has been deferred. As per para
B5.5.33 of Ind AS 109, for a financial asset that is credit-impaired at the
reporting date, but that is not a purchased or originated credit-
impaired financial asset, an entity shall measure the expected credit

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losses as the difference between the asset’s gross carrying amount and
the present value of estimated future cash flows discounted at the
financial asset’s effective interest rate. Any adjustment is recognized in
the profit or loss as an impairment gain or loss. Further, para B5.5.44
of Ind AS 109 provides that expected credit losses shall be discounted
to the reporting date, not to the expected default or some other date,
using the effective interest rate determined at initial recognition or an
approximation thereof.
In such circumstances, Ind AS 109 requires that the financial asse t be
re-measured to the present value of the expected future receipt,
discounted (in the case of a trade receivable) using effective interest
rate. Therefore, in the financial statements for the year ended
31st March 20X3, asset should be measured at ` 55,04,587 (` 60,00,000/
1.09) and an impairment loss of ` 4,95,413 (` 60,00,000 – ` 4,95,413)
recognised in profit and loss.
In the year ended 31 st March 20X4, interest income of ` 4,95,413
(` 55,04,587 x 9%) should be recognised in the profit and loss.
16. Ind AS 2 deals with write-off in value of inventory. The stock of free
items is valued at zero by the company. The question of “Loss of
Inventory ` 2,50,000” does not arise as the claim of free stock is subject
to various conditions like claim within 14 days, online registration
within 3 days, etc. which are all contingent in nature.
A provision shall be recognised when:
(a) an entity has a present obligation (legal or constructive) as a
result of a past event;
(b) it is probable that an outflow of resources embodying economic
benefits will be required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation.
If these conditions are met, provision shall be recognised.
Here, provision is to be made for goods to be distributed because sale
took place in the reporting year and assuming that the registration for
the contest are received whereby there is a high probability that the

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customer can claim the free items within 14 days from the date of
invoice. Further, a reliable estimate of the claim of ` 2,50,000 can be
made. Hence provision of ` 2,50,000 is to be made for in the reporting
year’s financial statements.
Further, on expiry of the time period, where claim had not been made
by the customers, reversal of provision will be done in the next
financial year.
17. Statement of Cash Flows for the year ended 31 st March, 20X3

(`
` in (` in
lakhs) lakhs)
Cash flows from operating activities
Profit before taxation 200
Adjustments for non-cash items:
Depreciation [410 - (450 - 100)] 60
260
Increase in inventories (800 - 700) (100)
Decrease in trade receivables (600 - 580) 20
Increase in other non-current assets (Refer Note (10)
2) (95 - 85)
Increase in other current assets (160 - 120) (40)
Increase in non-current liabilities (Refer Note 2) 10
(90 - 80)
Decrease in trade payables (455 – 25 - 450) (20)
Other current liabilities (Refer Note 1) [(90+40)-45] (85)
Net cash generated from operating activities 35
Cash flows from investing activities
Cash paid to purchase PPE (100-25) (75)
Cash paid to acquire investment (100-60) (40)
Net cash outflow from investing activities (115)

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Cash flows from financing activities

Raising of equity share capital (280 - 250) 30
Long-term borrowings raised during the year 120
Long-term borrowings repaid during the year
(300 + 120) - 360] (60)
Net cash outflow from financing activities 90
Increase in cash and cash equivalents during the
year 10
Cash and cash equivalents at the beginning of the
year (420-300) (120)
Cash and cash equivalents at the end of the year
(410-300) (110)

Notes:
1. Other current liabilities are assumed to consist of provision for
taxation.
2. Other non-current assets and other non-current liabilities pertain
to working capital items.
18. Paragraph 22 of Ind AS 115 provides that at contract inception, an
entity evaluates the promised goods or services to determine which
goods or services (or bundle of goods or services) are distinct and
therefore constitute a performance obligation.

A performance obligation is a promise in a contract to transfer to the

customer either:

- a goods or service (or a bundle of goods or services) that is

distinct; and

- series of distinct goods or services that are substantially the same

and that have the same pattern of transfer to the customer.

As per paragraph 27 of Ind AS 115, a goods or service that is promised

to a customer is distinct if both of the following criteria are met:

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(a) the customer can benefit from the goods or service either on its
own or together with other resources that are readily available to
the customer (i.e. the goods or service is capable of being
distinct); and

(b) the entity’s promise to transfer the goods or service to the

customer is separately identifiable from other promises in the
contract (i.e. the promise to transfer the goods or service is
distinct within the context of the contract).

Each performance obligation is required to be accounted for

separately. The facts and circumstances of each contract should be
carefully considered to determine the performance obligations.

However, based on the above guidance, the following table in general

discusses whether the common goods and services in property sale
contract should be considered as separate performance obligation or
not:

Goods / Whether a Reason

Service separate
performance
obligation
(PO) or not
Common areas Unlikely to be Common areas are unlikely to
separate PO be a separate PO because the
interests received in common
areas are typically undivided
interests that are not separable
from the property itself.
However, if the common areas
were sold separately by the
developer, then they could be
considered as a separate PO
provided that it is distinct in the
context of the contract.

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Construction Unlikely to be Construction services and

services and separate PO building materials can meet the
building first criterion as they are items
materials that can be used in conjunction
with other readily available
goods or services. However, the
developer would be considered
to be providing a significant
integration service as it is
bringing together all the
separate elements to deliver a
completed building.
Property Likely to be Property management services
management separate PO and golf membership are likely
services and to be separate PO as they may
Golf be used in isolation or with the
membership property already acquired, i.e.,
management services can be
used with the property.
These types of services are not
significantly customised,
integrated with, or dependent
on the property. This is because
there is no change in their
function with or without the
property. Also, a property
management service could be
undertaken by a third party.
Car park and Analysis Items such as car parks and land
Land required entitlements generally meet the
entitlement first criterion – i.e., capable of
being distinct – as the buyer
benefits from them on their
own.

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Whether the second criterion is

met depends on the facts and
circumstances. For example, if
the land entitlement can be sold
separately or pledged as security
as a separate item, it may
indicate that it is not highly
dependent on, or integrated
with, other rights received in the
contract.
In an apartment scenario, the
customer can receive an
undivided interest in the land on
which the apartment block sits.
This type of right is generally
considered a highly inter-related
with the apartment itself.*

*However, if title to the land is transferred to the buyer separately – for

example in a single party development – then the separately identifiable
criterion may be met.
19. Paragraph 25 of Ind AS 110 states that, “if a parent loses control of a
subsidiary, the parent:
(a) derecognises the assets and liabilities of the former subsidiary
from the consolidated balance sheet.
(b) recognises any investment retained in the former subsidiary at
its fair value when control is lost and subsequently accounts for
it and for any amounts owed by or to the former subsidiary in
accordance with relevant Ind AS. That fair value shall be
regarded as the fair value on initial recognition of a financial
asset in accordance with Ind AS 109 or, when appropriate, the
cost on initial recognition of an investment in an associate or
joint venture.

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(c) recognises the gain or loss associated with the loss of control
attributable to the former controlling interest.”
Paragraph B98(c) of Ind AS 110 states that, on loss of control over a
subsidiary, a parent shall reclassify to profit or loss, or transfer directly
to retained earnings if required by other Ind AS, the amounts
recognised in other comprehensive income in relation to the subsidiary
on the basis specified in paragraph B99.
As per paragraph B99, if a parent loses control of a subsidiary, the
parent shall account for all amounts previously recognised in other
comprehensive income in relation to that subsidiary on the same basis
as would be required if the parent had directly disposed of the related
assets or liabilities. Therefore, if a gain or loss previously recognised in
other comprehensive income would be reclassified to profit or loss on
the disposal of the related assets or liabilities, the parent shall
reclassify the gain or loss from equity to profit or loss (as a
reclassification adjustment) when it loses control of the subsidiary. If a
revaluation surplus previously recognised in other comprehensive
income would be transferred directly to retained earnings on the
disposal of the asset, the parent shall transfer the revaluation surplus
directly to retained earnings when it loses control of the subsidiary.
In view of the basis in its consolidated financial statements, AB Limited
shall:
(a) re-classify the FVOCI reserve in respect of the debt investments
of ` 5.4 crore (90% of ` 6 crore) attributable to the owners of the
parent to the statement of profit or loss in accordance with
paragraph B5.7.1A of Ind AS 109, Financial Instruments which
requires that the cumulative gains or losses previously recognised
in OCI shall be recycled to profit and loss upon derecognition of
the related financial asset. This is reflected in the gain on
disposal. Remaining 10% (i.e., ` 0.6 crore) relating to non-
controlling interest (NCI) is included as part of the carrying
amount of the non-controlling interest that is derecognised in
calculating the gain or loss on loss of control of the subsidiary.

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(b) transfer the reserve relating to the net measurement losses on the
defined benefit liability of ` 2.7 crore (90% of ` 3 crore)
attributable to the owners of the parent within equity to retained
earnings. It is not reclassified to profit or loss. The remaining 10%
(i.e., ` 0.3 crore) attributable to the NCI is included as part of the
carrying amount of NCI that is derecognised in calculating the gain
or loss on loss of control over the subsidiary. No amount is
reclassified to profit or loss, nor is it transferred within equity, in
respect of the 10% attributable to the non-controlling interest.
(c) reclassify the cumulative gain on fair valuation of equity
investment of ` 3.6 crore (90% of ` 4 crore) attributable to the
owners of the same parent from OCI to retained earnings under
equity as per paragraph B5.7.1 of Ind AS 109, Financial
Instruments, which provides that in case an entity has made an
irrevocable election to recognise the changes in the fair value of
an investment in an equity instrument not held for trading in OCI,
it may subsequently transfer the cumulative amount of gains or
loss within equity. The remaining 10% (i.e., ` 0.4 crore) related to
the NCI are derecognised along with the balance of NCI and not
reclassified to profit and loss.
(d) reclassify the foreign currency translation reserve of ` 7.2 crore
(90% × ` 8 crore) attributable to the owners of the parent to
statement of profit or loss as per paragraph 48 of Ind AS 21 ‘The
Effects of Changes in Foreign Exchange Rates’, which specifies
that the cumulative amount of exchange differences relating to
the foreign operation, recognised in OCI, shall be reclassified
from equity to profit or loss on the disposal of foreign operation.
This is reflected in the gain on disposal. Remaining 10% (i.e.,
` 0.8 crore) relating to the NCI is included as part of the carrying
amount of the NCI that is derecognised in calculating the gain or
loss on the loss of control of subsidiary, but is not reclassified to
profit or loss in pursuance of paragraph 48B of Ind AS 21, which
provides that the cumulative exchange differences relating to
that foreign operation attributed to NCI shall be derecognised on
disposal of the foreign operation, but shall not be reclassified to
profit or loss.

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The impact of loss of control over BC Limited on the consolidated

financial statements of AB Limited is summarised below: (`` in crore)

Particular Amount Amount P&L RE

(Dr) (Cr) Impact Impact

Gain / Loss on Disposal on

Investments

Bank 56

Non-controlling interest 6
(Derecognised)

Investment at FV (20% 16
Retained)

Gain on Disposal (P&L) 18 18

balancing figure

De-recognition of total net 60

assets of subsidiary

Reclassification of FVTOCI
reserve on debt instruments
to profit or loss

FVTOCI reserve on debt 5.4

instruments (6 cr. x 90%)

To Profit and loss 5.4 5.4

Reclassification of net
measurement loss reserve
to profit or loss

Reserve and Surplus 2.7 -2.7

To Net measurement 2.7

loss reserve (FVTOCI)
[(3 cr. x 90%)]

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Reclassification of FVTOCI
reserve on equity
instruments to retained
earnings

FVTOCI reserve on equity 3.6

instruments (4 crux 90%)

To Reserve and Surplus 3.6 3.6

Foreign currency translation

reserve reclassified to profit
or loss

Foreign currency translation 7.2

reserve (FVOCI) [8 cr. x 90%]

To Profit and loss 7.2 7.2

Total 30.6 0.9

20. As per para 10 of Ind AS 102, for equity settled share-based payment
transactions, the entity shall measure the goods or services received,
and the corresponding increase in equity, directly, at the fair value of
the goods or services received, unless that fair value cannot be
estimated reliably. If the entity cannot estimate reliably the fair value
of the goods or services received, the entity shall measure their value,
and the corresponding increase in equity, indirectly, by reference to
the fair value of the equity instruments granted. Here, since the fair
value of the asset received can be estimated reliably, the price for
recording the machinery would be ` 160 lakhs.
Further, as per para 7 of Ind AS 102, the control is assumed to be
transferred on the date the delivery is received which is
1st November, 20X2. Therefore, this will be the date for recognizing
the machinery in the books.
Property, plant and equipment Dr. ` 160 lakhs
To Equity share capital ` 100 lakhs
To Securities premium ` 60 lakhs

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ADVANCED FINANCIAL
MANAGEMENT

QUESTIONS

Securitization
1. Grow More Ltd. an NBFC is in the need of funds and hence it sold its
receivables to MAC Financial Corporation (MFC) for ` 100 million. MFC
created a trust for this purpose called General Investment Trust (GIT)
through which it issued securities carrying a different level of risk and
return to the investors. Further, this structure also permits the GIT to
reinvest surplus funds for short term as per their requirement.
MFC also appointed a third party, Safeguard Pvt. Ltd. (SPL) to collect the
payment due from obligor(s) and passes it to GIT. It will also follow up
with defaulting obligor and if required initiate appropriate legal action
against them.
Based on above scenario, answer the following questions:
I. The securitized instrument issued for ` 100 million by the GIT falls
under category of ……….
(a) Pass Through certificate (PTCs)
(b) Pay Through Security (PTS)
(c) Stripped Security
(d) Debt Fund.
II. In the above scenario, the Originator is………………….
(a) Grow More Ltd.
(b) MAC Financial Corporation (MFC)

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(c) General Investment Trust (GIT)

(d) Safeguard Pvt. Ltd.
III. In the above scenario, the General Investment Trust (GIT) is
a/an………………….
(a) Obligor
(b) Originator
(c) Special Purpose Vehicle (SPV)
(d) Receiving and Paying Agent (RPA)
IV. In the above scenario, the Safeguard Pvt. Ltd. (SPL) is
a/an………………
(a) Obligor
(b) Originator
(c) Special Purpose Vehicle (SPV)
(d) Receiving and Paying Agent (RPA)
V. Which of the following statement holds true?
(a) When Yield to Maturity in market rises, prices of Principle
Only (PO) Securities tend to rise.
(b) When Yield to Maturity in market rises, prices of Principle
Only (PO) Securities tend to fall.
(c) When Yield to Maturity in market falls, prices of Principle
Only (PO) Securities tend to fall.
(d) When Yield to Maturity in market falls, prices of Principle
Only (PO) Securities remain the same.
Security Analysis
2. You are a financial analyst at a prominent investment firm and have
been tasked with empirically verifying the weak form of Efficient Market
Hypothesis (EMH) Theory for the XYZ Stock Index, a collection of diverse
stocks. You decided to conduct three different tests to assess whether
the stock market follows the principles of the weak form of EMH.

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Test 1
For the past five years, you collected daily price changes of the stocks in the
XYZ Stock Index. You calculated correlation coefficients for different lag
periods and analyzed whether past price changes exhibit any significant
correlation with future price changes. You considered price changes to be
serially independent. The results indicated that most auto correlation
coefficients are close to zero and statistically insignificant, suggesting those
past price changes do not predict future price changes.
Test 2
You further investigated the randomness of price changes in the XYZ
Stock Index. Analyzing the sequence of daily price changes, you count
the number of runs where price changes are consistently positive or
negative. Upon comparing the observed number of runs with the
expected number based on randomness, you find that they align closely,
supporting the idea that price changes follow a random pattern.
Test 3
To examine the efficacy of trading strategies based on historical price
trends, you implemented a simple trading rule for the XYZ Stock Index.
The rule involves buying when the price crosses a moving average of 5%
threshold and selling when it crosses another 7% threshold. Over a
period of testing, you computed the returns generated by the trading
strategy. The results revealed that the returns are not consistently better
than random chance, implying that past price trends do not reliably
predict future price movements.
Conclusion:
After conducting the three tests the evidence supports the weak form of
Efficient Market Theory for the XYZ Stock Index you concluded that past
price trends do not reliably predict future price movements.
Based on the above information answer the following questions:
I. Test 1 is …………………
(a) Serial Correlation test
(b) Filter Rules test

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(c) Run test

(d) Variance Ratio test
II. Test 2 is ………………….
(a) Serial Correlation test
(b) Filter Rules test
(c) Run test
(d) Variance Ratio test
III. Test 3 is ………………
(a) Serial Correlation test
(b) Filter Rules test
(c) Run test
(d) Variance Ratio test.
IV. The Filter Rule Test should not be applied for buy and hold strategy
if…………….
(a) the behavior of stock price changes is predictable.
(b) the behavior of stock price changes is dependent on past
trends.
(c) the behavior of stock price changes is correlated.
(d) the behavior of stock price changes is random.
V. Results of your studies support the……………
(a) Semi-strong EMH Theory
(b) Strong EMH Theory
(c) Random Walk Theory
(d) Markowitz Theory
Derivatives Analysis and Valuation
3. Mr. Shyam an investor is not sure about the expected price movement of
the stock of Delta Corporation’s share. His friend Adi advised him to go for
option contracts if he wants to play in the market with limited risk. Adi

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advised him to follow below mentioned Strategy.

(1) Purchase one 3-month call option with a premium of ` 30 and an
exercise price of ` 550.
(2) Purchase one 3-month put option with a premium of ` 5 and an
exercise price of ` 450.
Delta Corporation’s stock is currently selling at ` 500.
Demonstrate the net pay off position of Mr. Shyam at the expiry of option
after 3-months if the price of Delta Corporation’s stock happens to be:
(i) No change in price
(ii) falls at ` 350
(iii) rises to ` 600.
Assume the option lot size is 100.
4. The price of ACC stock on 31 December 2022 was ` 220 and the Futures
price on the same stock on the same date, i.e., 31 December 2022 for
March 2023 was ` 222. Other features of the Futures contract and
related information are as follows:
Time to expiration - 3 months (0.25 year)
Borrowing rate - 15% p.a.
Annual Dividend on the stock - 25% payable before 31.03. 2023
Face Value of the Stock - ` 10
Advise the investor the course of action to be followed by him so as to
earn Risk free income if he can sell the stock short at spot price.
Business Valuation
5. The following information is given for 3 companies that are identical
except for their capital structure:

Orange Grape Apple

Total invested capital 1,00,000 1,00,000 1,00,000
Debt/assets ratio 0.8 0.5 0.2
Pre-tax cost of debt 16% 13% 15%

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Cost of equity 26% 22% 20%

Operating Income (EBIT) 25,000 25,000 25,000
The tax rate is uniform 35% in all cases.
Required:
(i) Compute the Weighted Average Cost of Capital of each company.
(ii) Tabulate the Economic Valued Added (EVA) of each company.
(iii) If the industry PE ratio is 11x and stock prices of Orange, Grape
and Apple are ` 14.30, ` 15.95 and ` 15.73 respectively then
calculate the no. of shares issued by each company.
(iv) Advise whether same Industry PE ratio can be used to calculate
market price of share of each company.
(v) Tabulate market Capitalisation for each of the Companies.
Foreign Exchange Exposure and Risk Management
6. JKL Ltd., an Indian company has an export exposure of JPY 10,000,000
receivable December 31, 2022. Japanese Yen (JPY) is not directly quoted
against Indian Rupee.
The current spot rates are:
INR/US $ = ` 82.22
JPY/US$ = JPY 132.34
It is estimated that Japanese Yen will depreciate to 154 against US $ and
Indian Rupee to depreciate to ` 85 against US $.
Forward rates as on date for 31 st December 2022 are as follows:
INR/US $ = ` 86.50
JPY/US$ = JPY 140.35
Required:
(i) Evaluate the expected loss based on estimated rates if the hedging
is not done.
(ii) Justify the decision to take forward cover even if actual rates on
December 31, 2022 happens to be as follows:

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INR/US $ = ` 86.25
JPY/US$ = JPY 140.85
Note: Make calculation of ¥ rate in ` upto 4 decimal points.
7. A UK based exporter exported goods to USA. The Invoice amount is
$ 7,00,000 and credit period is 3 months. Exchange rates in London are
as follows: -
Spot Rate ($/£) 1.5865 – 1.5905
3-month Forward Rate ($/£) 1.6100 – 1.6140
Rates of interest in Money Market:

Deposit Loan
$ 7% 9%
£ 5% 8%

Justify your stand to choose money market hedge (including steps)

instead of Forward Contract.
Note: Make calculation upto 2 decimal points.
Advanced Capital Budgeting Decisions
8. X Ltd. is considering its new project with the following details:

Sr. No. Particulars Figures

1. Initial capital cost ` 400 Cr.
2. Annual unit sales 5 Cr.
3. Selling price per unit ` 100
4. Variable cost per unit ` 50
5. Fixed costs per year ` 50 Cr.
6. Discount Rate 6%

Required:
(i) Tabulate the NPV of the project. Does it represent the actual
outcome? Comment.

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(ii) Examine the impact of 2.5 percent adverse variance in each of the
variables on the project’s NPV. Decide which variable is having
maximum effect?
(iii) Critically analyse the Sensitivity analysis as method of
incorporating risk in capital budgeting decisions.
Consider Life of the project as 3 years.
Interest Rate Risk Management
9. A Inc. and B Inc. intend to borrow $ 200,000 and $ 200,000 in ¥
respectively for a time horizon of one year. The prevalent interest rates
are as follows:
Company ¥ Loan $ Loan
A Inc 5% 9%
B Inc 8% 10%
The prevalent exchange rate is $ 1 = ¥ 120.
They entered in a currency swap under which it is agreed that B Inc will
pay A Inc @ 1% over the ¥ Loan interest rate which the later will have to
pay as a result of the agreed currency swap whereas A Inc will reimburse
interest to B Inc only to the extent of 9%.
Keeping the exchange rate invariant, assess and analyse the opportunity
gain or loss component of the ultimate outcome, resulting from the
designed currency swap.
Mutual Fund
10. There are two Mutual Funds viz. D Mutual Fund Ltd. and K Mutual Fund
Ltd. Each having close ended equity schemes.
NAV as on 31-12-2022 of equity schemes of D Mutual Fund Ltd. is ` 70.71
(consisting 99% equity and remaining cash balance) and that of K Mutual
Fund Ltd. is ` 62.50 (consisting 96% equity and balance in cash).

Following is the other information:

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Particular Equity Schemes

D Mutual Fund K Mutual Fund
Ltd. Ltd.
Sharpe Ratio 2 3.3
Treynor Ratio 15 15
Standard deviation 11.25 5
Risk free rate of return (R f) 7%

There is no change in portfolios during the next month and annual

average cost is ` 3 per unit for the schemes of both the Mutual Funds.
Required:
(i) Tabulate the expected NAVs of both the schemes if share market
goes down by 5% within a month.
(ii) Advise which mutual fund should an investor choose from the
perspective of risk per unit of return.
Note: For calculation purpose, consider 12 months in a year and ignore
number of days for a particular month.
Portfolio Management
11. An investor has decided to invest ` 1,00,000 in the shares of two
companies, namely, ABC and XYZ. The projections of returns from the
shares of the two companies along with their probabilities are as follows:

Probability ABC (%) XYZ (%)

0.20 12 16
0.25 14 10
0.25 -7 28
0.30 28 -2

Required:
(i) Comment on return and risk of investment in individual shares.
(ii) Compare the risk and return of these two shares with a Portfolio of
these shares in equal proportions.

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(iii) Advise the proportion of each of the above shares to formulate a

minimum risk portfolio.
Security Valuation
12. Mr. Amit is happy with the investment in a company as it is paying good
dividend for the last few years. Last year it paid a dividend of ` 2 per
share. The share is currently trading at ` 150 per share. He is of view that
if he applies dividend discount model, the share is undervalued. As a
financial expert examine his view that dividend discount model
represents the fair value.
You being an expert is required to evaluate the market value of the
share of the company.

Profit after tax of the company ` 290 crores

Equity capital of company ` 1,300 crores
Par value of share ` 40 each
Debt ratio of company (Debt/ Debt + Equity) 27%
Long run growth rate of the company 8%
Beta 0.1; risk free interest rate 8.7%
Market returns 10.3%
Capital expenditure per share ` 47
Depreciation per share ` 39
Change in Working capital ` 3.45 per share

Note: Round off figures (e.g. EPS etc.) upto 2 decimal points.
International Financial management
13. Mr. Vishwas, a friend of Mr. Pramod who is one of the Directors of
Ashirwad Limited, is a citizen of Mauritius. His immediate family
members including his parents, born in India are residing in India. He
has many friends in different parts of India, due to which he happens to
visit India on frequent basis. He along with Mr. Pramod evince interest
in setting up business in India and formally incorporate a company to
commence their operations. Accordingly, a company is called “Aerious
Private Ltd.” got incorporated in Mumbai.

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To start with he received a business proposal from one of his friends

Nimish a consultant. It is estimated that in equivalent terms the business
shall require an initial investment of MUR 100 Million and thereafter
MUR 2 Million each year will be needed as working capital fund.
He wished to evaluate whether the business proposal is viable or not.
The information related to exchange rate and inflation rate is as follows:
Spot Rate for 1 Mauritian Dollar (MUR) = 1.88 Indian Rupee (INR)
The inflation in India is 6% and in Mauritius is 5%.
It is expected that this inflation rate will remain unchanged for the next
4 years.
INR 8 Crore out of initial investment shall be required for setting up a
plant. The useful life of the plant is 4 years. At the end of 4 th year
estimated salvage value of this plant shall be INR 80 lakhs. Depreciation
of the plant shall be charged on the basis of straight-line method.
40 % of the investment shall be through debt funds from Mauritius at
the cost of 10% (post tax) while remaining funds shall be arranged by
him and his friends. They expect a rate of return of 12% on their funds.
Expected revenues & costs (excluding depreciation) in real term are as
under:
Year 1 2 3 4
Revenues (` Crore) 6.00 7.00 8.00 8.00
Costs (` Crore) 3.00 4.00 4.00 4.00

Assume that applicable tax rate in India is 30%. Since there is Double tax
avoidance agreement between India and Mauritius, the company is not
required to pay tax in Mauritius if tax has been paid in India.
The applicable inflation rates for revenues & costs are as follows:

Year Revenues Costs

1 10% 12%
2 9% 10%
3 8% 9%
4 7% 8%

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He wants an expert opinion for the same investment proposal.

Demonstrate whether investment in this project is viable option or not.
Note: 1. Round off calculations upto 4 decimal points.
2. Show INR calculations in Crore and MUR calculations in
Million.
Theoretical Questions
14. Succession planning is a good way for companies to ensure that
businesses are fully prepared to promote and advance all employees—
not just those who are at the management or executive levels. Explain
the above statement.
15. In the current scenario of globalization and growth in information and
communication technologies etc. the responsibilities of CFOs have been
drastically expanded. Explain.

SUGGESTED ANSWERS/HINTS
1.

I (b)
II (b)
III (c)
IV (d)
V (b)
2.

I (a)
II (c)
III (b)
IV (d)
V (c)
3. Total premium paid on purchasing a call and put option
= (` 30 per share × 100) + (` 5 per share × 100)
= ` 3,000 + ` 500 = ` 3,500

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(i) Net Pay-off if there is no change in price

In this case, Mr. Shyam exercises neither the Call option nor the
Put option as both will result in a loss for him.
Ending value = - ` 3,500 + Zero gain = - ` 3,500
i.e. Net loss is ` 3,500
(ii) Net Pay-off if price falls at ` 350
Since the price of the stock is below the exercise price of the Call,
it will not be exercised. Only Put is valuable hence it is exercised.
Ending value = – ` 3,500 + ` [(450 – 350) × 100] = – ` 3,500 +
` 10,000 = ` 6,500
? Net gain is ` 6,500
(iii) Net Pay-off if price rises to ` 600
In this situation, the put is worthless since the price of the stock
exceeds the Put’s exercise price. Only Call is valuable and hence it
is exercised.
Ending value = - ` 3,500 + ` [(600 – 550) × 100] = - ` 3,500 +
` 5,000 = ` 1,500
? Net Gain is ` 1,500
4. Based on the above information, the futures price for ACC stock on
31 December 2022 should be:
Spot price + Interest Portion – Dividend
= 220 + (220 x 0.15 x 0.25) – (0.25 x 10) = 225.75
Thus, as per the ‘cost of carry’ criteria, the Futures price is ` 225.75, which is
more than the actual price of ` 222 on 31 March 2023. This would give rise
to earn riskless arbitrage opportunity of ` 3.75 i.e. (225.75 - 222)
Advise to the Arbitrager.
1. Short sell one unit of stock at spot price for ` 220.
2. Deposit ` 220 at 15% p.a. for 3 months.
3. Buy a 3-month Futures contract for one unit of stock of ACC at
` 222.

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After 3 months
1. Take money out of the Bank.
2. Take delivery by paying ` 222 and return the unit of stock to the
party whom short sell was made along.
3. Pay the Dividend amount to the buyer whom short sell was made.
Total Inflow = 220 + (220 x 0.15 x 0.25) = ` 228.25
Total Outflow = 222 + 2.50 = ` 224.50
Net Gain to the Arbitrager = Total Inflow – Total Outflow
= ` 228.25 - ` 224.50
= ` 3.75
Thus, the arbitrager earns ` 3.75 per share without involving any risk.
5. (i) Calculation of WACC of each company
Orange Grape Apple
Total debt (`) 80,000 50,000 20,000
Post tax Cost of debt 10.40% 8.45% 9.75%
Equity Fund (`) 20,000 50,000 80,000

WACC
Orange: (10.4 x 0.8) + (26 x 0.2) = 13.52%
Grape: (8.45 x 0.5) + (22 x 0.5) = 15.225%
Apple: (9.75 x 0.2) + (20 x 0.8) = 17.95%
(ii) Economic Valued Added (EVA) of each company

Orange Grape Apple

WACC 13.52 15.225 17.95
EBIT (1-T) (A) 16,250 16,250 16,250
WACC x Invested Capital (B) 13,520 15,225 17,950
EVA [(A) – (B)] 2,730 1,025 -1,700

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Orange would be considered as the best investment since the EVA

of the company is highest and its weighted average cost of capital
is the lowest.
(iii) No. of shares issued by each company
Orange Grape Apple
EBIT (`) 25,000 25,000 25,000
Interest (`) 12,800 6,500 3,000
Taxable Income (`) 12,200 18,500 22,000
Tax 35% (`) 4,270 6,475 7,700
Net Income (`) 7,930 12,025 14,300
Stock Price (EPS x PE 14.30 15.95 15.73
Ratio) (`)
No. of shares (7930x11)/ (12025x11)/1 (14300x11)/1
14.30 5.95 5.73
= 6100 = 8293 = 10000

(iv) Since the three entities have different capital structures, they
would be exposed to different degrees of financial risk. The PE
ratio should therefore be adjusted for the risk factor.
(v) Market Capitalisation
Orange Grape Apple
Estimated Stock Price (`) 14.30 15.95 15.73
No. of shares 6,100 8,293 10,000
Estimated Market Cap (`) 87,230 1,32,273.35 1,57,300
6. Since the direct quote for ¥ and ` is not available it will be calculated by
cross exchange rate as follows:
`/$ x $/¥ = `/¥
82.22/132.34 = 0.6213
Spot rate on date of export 1 ¥ = ` 0.6213
Estimated Rate of ¥ for Dec.31, 2022 = ` 0.5519 (` 85/¥ 154)

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Forward Rate of ¥ for Dec.31, 2022 = ` 0.6163 (` 86.50/ ¥ 140.35)

(i) The expected loss without hedging

Value of export at the time of export ` 62,13,000

(` 0.6213 x ¥ 10,000,000)
Expected payment to be received on 31 st Dec. ` 55,19,000
2022 as per estimated rates (` 0.5519 x
¥ 10,000,000)
Loss ` 6,94,000

(ii) (a) Hedging of loss under Forward Cover

Value of export at the time of export ` 62,13,000

(` 0.6213 x ¥ 10,000,000)
Payment expected to be received under ` 61,63,000
Forward Cover
(` 0.6163 x ¥ 10,000,000)
Loss ` 50,000

Thus, by taking forward cover loss is reduced to ` 50,000

from ` 6,94,000
(b) Actual Rate of ¥ on December 2022 = ` 0.6124 (` 86.25/
¥ 140.85)

Value of export at the time of export ` 62,13,000

(` 0.6213 x ¥ 10,000,000)
Payment to be received on 31 st Dec. 2022 as ` 61,24,000
per actual rate (` 0.6124 x ¥ 10,000,000)
Loss ` 89,000
From the above solution, we can find that net loss in actual
situation is ` 89,000 while net loss when taken Forward Cover
is only ` 50,000. Hence, the decision to take Forward Cover is
justified even if the actual rate happens to be as prescribed.
7. Amount expected to be received under Money Market Hedge.
Identify: Foreign currency is an asset. Amount $ 7,00,000.

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Create: $ Liability.
Borrow: In $. The borrowing rate is 9% per annum or 2.25% per quarter.
Amount to be borrowed: 7,00,000 / 1.0225 = $ 6,84,596.58
Convert: Sell $ and buy £. The relevant rate is the Ask rate, namely,
1.5905 per £,
(Note: This is an indirect quote).
Amount of £s received on conversion is 4,30,428.53 (6,84,596.58 /
1.5905).
Invest: £ 4,30,428.53 will be invested at 5% for 3 months and get
£ 4,35,808.89
Settle: The liability of $ 6,84,596.58 at interest of 2.25 per cent quarter
matures to $7,00,000 receivable from customer.
Using forward rate, amount receivable is = 7,00,000 / 1.6140 =
£ 4,33,705.08
Amount received through money market hedge = £ 4,35,808.89
Gain = £ 4,35,808.89– £ 4,33,705.08= £ 2103.81
Justification: By following the prescribed steps under hedging we
found the exporter receives £ 4,33,705.08 by using forward cover while
he receives £ 4,35,808.89 through money market hedge. Thus, money
market hedge helps exporter to receive £ 2103.81 more than the amount
received using Forward contract. Hence it is more beneficial.
8. (i) Calculation of Net Cash Inflow per year
Particulars Amount (``)
A Selling price per unit 100
B Variable cost per unit 50
C Contribution per unit (A - B) 50
D Number of units sold per year 5 Cr.
E Total Contribution (C × D) ` 250 Cr.
F Fixed cost per year ` 50 Cr.
G Net cash inflow per year (E - F) ` 200 Cr.

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Calculation of Net Present Value (NPV) of the Project

Year Year Cash Flow PV factor Present Value (PV)
(`` in Cr.) @ 6% (`` in Cr.)
0 (400.00) 1.000 (400.00)
1 200.00 0.943 188.60
2 200.00 0.890 178.00
3 200.00 0.840 168.00
Net Present Value 134.60

Here, NPV represent the most likely outcomes and not the actual
outcomes. The actual outcome can be lower or higher than the
expected outcome.
(ii) Sensitivity Analysis considering 2.5 % Adverse Variance in each
variable
Particulars Base Initial Selling Variable Fixed Units
capital Price per Cost Per Cost Per sold per
cost Unit Unit Unit year
increased Reduced increased increased reduced
to ` 410 to ` 97.5 to to to 4.875
crore ` 51.25 ` 51.25 crore
(`
`) (`
`) (`
`) (`
`) (`
`) (`
`)
A Selling price 100 100 97.50 100 100 100
per unit
B Variable 50 50 50 51.25 50 50
cost per
unit
C Contribution 50 50 47.50 48.75 50 50
per unit
(A - B)
(`` in Cr.) (`` in Cr.) (`` in Cr.) (`
` in Cr.) (`` in Cr.) (`` in Cr.)
D Number of 5 5 5 5 5 4.875
units sold
per year
(units in
Crores)
E Total 250 250 237.50 243.75 250 243.75

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Contributio
n
(C × D)
F Fixed cost 50 50 50 50 51.25 50
per year
G Net Cash 200 200 187.50 193.75 198.75 193.75
Inflow per
year (E - F)
H PV of Net 534.60 534.60 501.19 517.89 531.26 517.89
cash Inflow
per year
(G × 2.673)
I Initial 400 410 400 400 400 400
capital cost
J NPV (H - I) 134.60 124.60 101.19 117.89 131.26 117.89
K Percentage - -7.43% -24.82% -12.41% -2.48% -12.41%
Change in
NPV

The above table shows that by changing one variable at a time by 2.5%
(adverse) while keeping the others constant, the impact in percentage
terms on the NPV of the project can be calculated. Thus, the change in
selling price has the maximum effect on the NPV by 24.82%.
Advantages of Sensitivity Analysis:
Following are the main advantages of Sensitivity Analysis:
(1) Critical Issues: This analysis identifies critical factors that impinge
on a project’s success or failure.
(2) Simplicity: It is a simple technique.
Disadvantage of Sensitivity Analysis
Following are the main disadvantages of Sensitivity Analysis:
(1) Assumption of Independence: This analysis assumes that all
variables are independent i.e. they are not related to each other,
which is unlikely in real life.

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(2) Ignore probability: This analysis does not look to the probability
of changes in the variables
9. Opportunity gain of A Inc under currency swap
Receipt Payment Net
Interest to be remitted to B. Inc
in $ 2,00,000 х 9% = $18,000 ¥21,60,000
Converted into ($18,000 х ¥120)
Interest to be received from B. ¥14,40,000 -
Inc in $ converted into Y (6% х
$2,00,000 х ¥120)
Interest payable on Y loan - ¥12,00,000
¥14,40,000 ¥33,60,000
Net Payment ¥19,20,000 -
¥33,60,000 ¥33,60,000
$ equivalent paid ¥19,20,000 х $16,000
(1/¥120)
Interest payable without swap $18,000
in $
Opportunity gain in $ $ 2,000

Opportunity gain of B inc under currency swap

Receipt Payment Net
Interest to be remitted to A. Inc in $12,000
($ 2,00,000 х 6%)
Interest to be received from A. Inc $18,000
in Y converted into $ = ¥
21,60,000/ ¥120
Interest payable on $ loan@10% - $20,000
$18,000 $32,000
Net Payment $14,000 -
$32,000 $32,000

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Y equivalent paid $14,000 X ¥120 ¥16,80,000

Interest payable without swap in ¥ ¥19,20,000
($2,00,000 X ¥ 120 X 8%)
Opportunity gain in Y ¥ 2,40,000

Alternative Solution
Cash Flows of A Inc
(i) At the time of exchange of principal amount
Transactions Cash Flows
Borrowings $2,00,000 X ¥120 + ¥240,00,000
Swap - ¥240,00,000
Swap +$2,00,000
Net Amount +$2,00,000
(ii) At the time of exchange of interest amount

Transactions Cash Flows

Interest to the lender ¥240,00,000 X 5% ¥12,00,000
Interest Receipt from B ¥2,00,000 X 120 X 6% ¥14,40,000
Inc.
Net Saving (in $) ¥2,40,000/¥120 $2,000
Interest to B Inc. $2,00,000 X 9% -$18,000
Net Interest Cost -$16,000
A Inc. used $2,00,000 at the net cost of borrowing of $16,000 i.e.,
8%. If it had not opted for swap agreement the borrowing cost
would have been 9%. Thus, there is saving of 1%.
Cash Flows of B Inc
(i) At the time of exchange of principal amount

Transactions Cash Flows

Borrowings + $2,00,000
Swap - $2,00,000

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Swap $2,00,000 X ¥120 +¥240,00,000

Net Amount +¥240,00,000
(ii) At the time of exchange of interest amount

Transactions Cash Flows

Interest to the lender $2,00,000X10% - $20,000
Interest Receipt from A Inc. +$18,000
Net Saving (in ¥) -$2,000X¥120 - ¥2,40,000
Interest to A Inc. $2,00,000X6%X¥120 - ¥14,40,000
Net Interest Cost - ¥16,80,000

B Inc. used ¥240,00,000 at the net cost of borrowing of ¥16,80,000

i.e. 7%. If it had not opted for swap agreement the borrowing cost
would have been 8%. Thus, there is saving of 1%.
10. Working Notes:
(I) Decomposition of Funds in Equity and Cash Components

D Mutual K Mutual
Fund Ltd. Fund Ltd.
NAV on 31.12.14 ` 70.71 ` 62.50
% of Equity 99% 96%
Equity element in NAV ` 70 ` 60
Cash element in NAV ` 0.71 ` 2.50

(II) Calculation of Beta

(a) D Mutual Fund Ltd.
E(R) - R f E(R) - R f
Sharpe Ratio = 2 = =
σD 11.25

E(R) - Rf = 22.50
E(R) - R f 22.50
Treynor Ratio = 15 = =
βD βD

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βD = 22.50/15 = 1.50
(b) K Mutual Fund Ltd.
E(R) - R f E(R) - R f
Sharpe Ratio = 3.3 = =
σK 5

E(R) - Rf = 16.50
E(R) - R f 16.50
Treynor Ratio = 15 = =
βK βK

βK = 16.50/15 = 1.10
(III) Decrease in the Value of Equity

D Mutual K Mutual
Fund Ltd. Fund Ltd.
Market goes down by 5.00% 5.00%
Beta 1.50 1.10
Equity component goes down 7.50% 5.50%

(IV) Balance of Cash after 1 month

D Mutual K Mutual
Fund Ltd. Fund Ltd.
Cash in Hand on 31.12.14 ` 0.71 ` 2.50
Less: Exp. Per month ` 0.25 ` 0.25
Balance after 1 month ` 0.46 ` 2.25

(i) NAV after 1 month

D Mutual K Mutual
Fund Ltd. Fund Ltd.
Value of Equity after 1 month
70 x (1 - 0.075) ` 64.75 -
60 x (1 - 0.055) - ` 56.70
Cash Balance 0.46 2.25
` 65.21 ` 58.95

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(ii) Computation to find out more beneficial Mutual fund:

D Mutual K Mutual
Fund Fund
E(R) - RF (a) 22.50 16.50
Risk free rate of return (b) 7 7
Expected Return (a+b) =(c) 29.50 23.50
Standard deviation (d) 11.25 5
Risk per unit Return (d/c) 0.38 0.21

Since risk per unit return of D is more than K, hence investor

shall choose K Mutual fund from the perspective of risk per
unit of return.
11. (i)

Probability ABC (%) XYZ (%) 1X2 (%) 1X3 (%)

(1) (2) (3) (4) (5)
0.20 12 16 2.40 3.20
0.25 14 10 3.50 2.50
0.25 -7 28 -1.75 7.00
0.30 28 -2 8.40 -0.60
Average return 12.55 12.10
Hence the expected return from ABC = 12.55% and XYZ is 12.10%

Probability (ABC- (ABC- 1X3 (XYZ- (XYZ- (1)X(6)

ABC ) ABC)2 XYZ) XYZ)2
(1) (2) (3) (4) (5) (6)
0.20 -0.55 0.3025 0.06 3.9 15.21 3.04
0.25 1.45 2.1025 0.53 -2.1 4.41 1.10
0.25 -19.55 382.2025 95.55 15.9 252.81 63.20
0.30 15.45 238.7025 71.61 -14.1 198.81 59.64
167.75 126.98
V 2 ABC = 167.75(%) 2; V ABC = 12.95%
V 2 XYZ = 126.98(%) 2; V XYZ = 11.27%

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(ii) In order to find risk of portfolio of two shares, the covariance

between the two is necessary here.

Probability (ABC-ABC) (XYZ-XYZ) 2X3 1X4

(1) (2) (3) (4) (5)
0.20 -0.55 3.9 -2.145 -0.43
0.25 1.45 -2.1 -3.045 -0.76
0.25 -19.55 15.9 -310.845 -77.71
0.30 15.45 -14.1 -217.845 -65.35
-144.25
V 2P = (0.52 x 167.75) + (0.5 2 x 126.98) + 2 x (-144.25) x 0.5 x 0.5
V 2P = 41.9375 + 31.745 – 72.125
V 2P = 1.5575 or 1.56(%)
V P = 1.56 = 1.25%
E (Rp) = (0.5 x 12.55) + (0.5 x 12.10) = 12.325%
Hence, the return is 12.325% with the risk of 1.25% for the
portfolio. Thus, the portfolio results in the reduction of risk by the
combination of two shares.
(iii) For constructing the minimum risk portfolio, the condition to be
satisfied is

σ X2 - rAX σ A σ X σ 2X - Cov.AX
XABC = or =
σ 2A + σ X2 - 2rAX σ A σ X σ 2A + σ 2X - 2 Cov.AX

σX = Std. Deviation of XYZ

σA = Std. Deviation of ABC
rAX= Coefficient of Correlation between XYZ and ABC
Cov.AX = Covariance between XYZ and ABC.
Therefore,
126.98 - (-144.25) 271.23
% ABC = = = 0.4650 or 46.50%
126.98 + 167.75 - [2 × (-144.25)] 583.23

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% ABC = 46.50%,
% XYZ = (1 – 0.4650) = 0.5350 = 53.50%
` 1,300crores
12. No. of Shares = = 32.50 Crores
` 40
PAT
EPS =
No.of shares
` 290 crores
EPS = = ` 8.92
32.5 crores

Calculation of value per share using Free Cash Flow to Equity as basis:
FCFE = Net income – [(1-b) (capex – dep) + (1-b) ( ΔWC )]
FCFE = 8.92 – [(1-0.27) (47-39) + (1-0.27) (3.45)]
= 8.92 – [5.84 + 2.52] = ` 0.564
Cost of Equity (K e)= Rf + ß (Rm – Rf)
= 8.7 + 0.1 (10.3 – 8.7) = 8.86%

FCFE(1 g) 0.56(1.08) 0.6048

Po = = = = ` 70.33
Ke  g 0.0886 - 0.08 0.0086

Calculation of value per share using dividend discount model:

D0 (1+ g) 2(1.08) 2.16
Po = = = = ` 251.16
k e -g 0.0886-.08 0.0086

From the above we can see that value per share on the basis of dividend
discount model is more than the value per share on the basis of free
cash flow to equity model.
In the dividend discount model, the analyst considers the stream of
expected dividends to value the company’s stock. It is assumed that the
company follows a consistent dividend payout ratio which can be less
than the actual cash available with the firm.
A stock’s intrinsic value based on the dividend discount model may not
represent the fair value for the shareholders because dividends are
distributed in the form of cash from profits. In case the company is

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maintaining healthy cash in its balance sheet then it means that dividend
pay-out is low which could result in undervaluation of the stock.
In the case of free cash flow to equity model a stock is valued on the
cash flow available for distribution after all the reinvestment needs of
capex and incremental working capital are met. Thus, using the free cash
flow to equity model provides a better measure for valuations in
comparison to the dividend discount model.
Thus, the view of Mr. Amit that dividend discount model represents the
fair value is incorrect. The share is not under-valued rather it is
overvalued if we take “free cash flow to equity model” into
consideration.
13. To evaluate whether investment in same project is a viable option or not,
we shall compute the NPV of the project.
Working Note:
(1) Expected Exchange Rates

End of Year INR INR/MUR

1 (1  0.06)
INR 1.88 x 1.8979
(1  0.05)
2 (1  0.06)
INR 1.8979 x 1.9160
(1  0.05)
3 (1  0.06)
INR 1.9160 x 1.9342
(1  0.05)
4 (1  0.06)
INR 1.9342 x 1.9526
(1  0.05)

(2) Initial Investment = MUR 100 Million x INR 1.88 = INR 18.80 crore
Working Capital (Year 1) = MUR 2 Millionx1.8979 = INR 0.3796 crore
Working Capital (Year 2) = MUR 2 Millionx1.9160 = INR 0.3832 crore
Working Capital (Year 3) = MUR 2 Millionx1.9342 = INR 0.3868 crore
Working Capital (Year 4) = MUR 2 Millionx1.9526 = INR 0.3905 crore
(3) WACC = 40% x 10% + 60% x 12% = 11.20%
(4) Inflation adjusted Revenue

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Year Revenue (``) Revenue (Inflation Adjusted) (``)

1 6.00 crore 6.00 crore x 1.10 = 6.60 crore
2 7.00 crore 7.00 crore x 1.10 x 1.09 = 8.393 crore
3 8.00 crore 8.00 crore x 1.10 x 1.09 x 1.08 = 10.3594
crore
4 8.00 crore 8.00 crore x 1.10 x 1.09 x 1.08 x 1.07
= 11.0845 crore

(5) Inflation adjusted Cost

Year Cost (``) Cost (Inflation Adjusted) (`)

1 3.00 crore 3.00 crore x 1.12 = 3.3600 crore
2 4.00 crore 4.00 crore x 1.12 x 1.10 = 4.9280 crore
3 4.00 crore 4.00 crore x 1.12 x 1.10 x 1.09 = 5.3715 crore
4 4.00 crore 4.00 crore x 1.12 x 1.10 x 1.09 x 1.08
= 5.8012 crore
(6) Annual cash flows (` Crore)

Year 1 2 3 4
Revenue 6.600 8.393 10.3594 11.0845
Less: Cost 3.360 4.928 5.3715 5.8012
Less: Depreciation 1.800 1.800 1.800 1.800
Profit before Tax (PBT) 1.440 1.665 3.1879 3.4833
Tax @ 30% 0.432 0.4995 0.9564 1.0450
Profit after Tax 1.008 1.1655 2.2315 2.4383
Add: Depreciation 1.800 1.800 1.800 1.800
Cash Flows 2.808 2.9655 4.0315 4.2383

NPV of the Project

Year 0 1 2 3 4
Initial Investment (18.80)
(` Crore)

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Working Capital - (0.3796) (0.3832) (0.3868) (0.3905)

(` Crore)
Scrap Value (` Crore) 0.8000
W.C Recovered 1.5401
(` Crore)
Annual Cash flows 2.8080 2.9655 4.0315 4.2383
Net Cash Flow (18.80) 2.4284 2.5823 3.6447 6.1879
Exchange Rate 1.88 1.8979 1.9160 1.9342 1.9526
Cash Flows (in Million (100) 12.7952 13.4776 18.8434 31.6906
MUR)
PVF@11.20% 1 0.8993 0.8087 0.7273 0.6540
Present value (in (100) 11.5067 10.8993 13.7048 20.7257
Million MUR)

Net Present Value = - MUR 43.1635 Million

Advise: Since NPV of the project is negative the proposal is not a
viable option for investment.
14. Succession planning is the process of identifying the critical positions
within an organization and developing action plans for individuals to
assume those positions. A succession plan identifies future need of
people with the skills and potential to perform leadership roles.
Taking a holistic view of current and future goals, this type of
preparation ensures that the right people are available for the right jobs
today and in the years to come. It can also provide a liquidity event,
which enables the transfer of ownership in a going concern to rising
employees.
Need for succession planning can be explained below:
™ Risk mitigation – If existing leader quits, then searches can take
six-nine months for suitable candidate to close. Keeping an
organization without leader can invite disruption, uncertainty,
conflict and endangers future competitiveness.
™ Cause removal – If the existing leader is culpable of gross
negligence, fraud, wilful misconduct, or material breach while
discharging duties and has been barred from undertaking further

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activities by court, arbitral tribunal, management, stakeholders or

any other agency.
™ Talent pipeline – Succession planning keep employees motivated
and determined as it can help them obtaining more visibility around
career paths expected, which would help in retaining the knowledge
bank created by company over a period of time and leverage upon
the same.
™ Conflict Resolution Mechanism – This planning is very helpful in
promoting open and transparent communication and settlement
of conflicts.
™ Aligning – In family owned business succession planning helps to
align with the culture, vision, direction and values of the business.
15. Traditionally, the main role of CFO was concentrated to wealth
maximisation for shareholders by taking care of financial health of an
organization and overseeing and implementing adequate financial
controls.
However, in recent time because of globalization, growth in information
and communications, pandemic situation etc. their range of
responsibilities has been drastically expanded, driven by complexity, and
changing expectations.
Now a days in addition to fulfilling traditional role relating to
governance, compliances and controls, and business ethics as a part of
the leadership of role CFOs are also expected to contribute their support
in strategic and operational decision making.
In post-pandemic time their role has been advanced in the following
areas in addition to traditional role:
a. Risk Management: Now a days the CFOs are expected to look
after the overall functioning of the framework of Risk Management
system of an organisation.
b. Supply Chain: Post pandemic supply chain management system
has been posing the challenge for the company to maintain the
sustainable growth. Since CFOs are care takers of finance of the
company, considering the financial viability of the Supply Chain
Management their role has now become more critical.

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c. Mergers, acquisitions, and Corporate Restructuring: Since in

recent period to maintain the growth and capture the market
share there has been a spate of Mergers and Acquisitions and
hence the role of CFOs has become more crucial because these are
strategic decision and any error in them can lead to collapse of the
whole business.
d. Environmental, Social and Governance (ESG) Financing: With
the evolving of the concept of ESG their role has been shifted from
traditional financing to sustainability financing.
Thus, from above discussion it can be concluded that in today’s time
CFOs are taking a leadership role in Value Creation for the organisation
and that too on sustainable basis for a longer period.

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ADVANCED AUDITING,
ASSURANCE AND
PROFESSIONAL ETHICS

QUESTIONS

PART A: Multiple Choice Questions

Integrated Case Scenario 1.
Mr. Ayush, the proprietor of BCD & Co Chartered Accountants, was appointed to
audit the financial statements of Amrita Industries Private Limited for the
Financial Year 2022-23. These financial statements were prepared in accordance
with the Dutch GAAP and the terms & conditions specified in the contract
between Amrita Industries Private Limited and Dutch Industries b.v. (Pvt. Ltd is
known as b.v. in Dutch). One of the terms and conditions of the contract was to
get the financial statements audited from an independent auditor. The contract
also stipulated auditors to take into account misstatements of € 5000 or more
while framing their report. Any misstatements identified below this threshold did
not require correction or adjustment in terms of stipulation in contract. While
planning audit, the audit team had also determined performance materiality at
€ 10000 and overall materiality at € 200000.
The following information extracted from general purpose financial statements of
Amrita Industries Pvt. Ltd. prepared in accordance with provisions of the
Companies Act, 2013 is given as under: -
(Figures in ` crores)

Particulars FY 22-23 FY 21-22

Turnover 300 250
Borrowings from bank 100 75
Paid up capital 25 25

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The borrowings from bank consisted of working capital credit facilities only. The
company had been enjoying such credit facilities with a sanctioned amount of
`75 crore in Financial Year 21-22. The credit facilities were enhanced to ` 100
crore at beginning of Financial Year 22-23. Outstanding balance in above credit
facilities has never crossed sanctioned limits at any time during each of the above
years.
Mr. Shubham, partner at BB & Associates, Chartered Accountants firm, was
appointed as engagement partner for audit of general-purpose financial
statements of Amrita Industries Private Limited for FY 2022-23. Before finalising
audit plan, BB & Associates asked for internal audit reports. However,
management informed him that there was no internal audit team or function in
the organization.
During the course of audit of general-purpose financial statements, Mr. Anand,
an audit executive performed risk assessment procedures, test of controls and
substantive procedures. He performed a trend analysis to compare the
purchases of raw materials in various months. He also performed purchase–
production–sale cycle analysis to understand inventory holding. Besides going
through the company’s internal control manuals and visiting company’s plant,
inquiries were also made with company’s information system personnel to
provide information about control failures. Diligent inquiries were also made
from company’s marketing personnel regarding contractual arrangements with
customers. Inquiries were also made from company’s in-house legal counsel and
communications were also made with company’s external legal counsel by
sending a letter of inquiry.
While issuing the report, BCD & Co inserted an Other Matter Paragraph in the
Audit Report specifying the use of a special purpose financial reporting
framework for preparing and presenting the financial statements. On the other
hand, BB & Associates decided to issue an adverse opinion on all financial
statement except for cash flow statement and an unmodified opinion on cash
flow statement. As per BB & Associates, the cash flow statement was prepared as
per the required method, and hence, it did reflect the appropriate figures.

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On the basis of the abovementioned facts, you are required to answer the
following MCQs:
1. The audit team of BCD & Co were not sure which materiality to choose
to evaluate the effect of identified misstatements on the audit and of
uncorrected misstatements, if any, on the financial statements in order
to form an opinion and to conclude as to whether the auditor has
obtained reasonable assurance about whether the financial statements
as a whole are free from material misstatement, whether due to fraud or
error. You are required to guide the audit team by selecting the
appropriate option from below:
(a) In the case of special purpose financial statements, management may
agree with the intended users on a threshold below which
misstatements identified during the audit will not be corrected or
otherwise adjusted. The existence of such a threshold does not
relieve the auditor from the requirement to determine materiality in
accordance with SA 320 for purposes of planning and performing the
audit of the special purpose financial statements.
(b) In the case of special purpose financial statements, management may
agree with the intended users on a threshold below which
misstatements identified during the audit will not be corrected or
otherwise adjusted. The existence of such a threshold is sufficient to
comply with the requirement of determining materiality in
accordance with SA 320 for purposes of planning and performing the
audit of the special purpose financial statements.
(c) In the case of special purpose financial statements, misstatements
based on consideration of the financial information needs of the
intended users are considered material and pervasive. However, the
auditor needs to follow the threshold limit provided in terms of the
contract, and such thresholds should be considered as the
performance materiality for planning and performing the audit.
(d) The auditor is required to comply with each requirement of an SA
unless, in the circumstances of the audit, the entire SA is not relevant,
or the requirement is not relevant because it is conditional and the
condition does not exist. In the case of an audit of special purpose

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financial statements, the requirements of SA 320 are not applicable in

entirety.
2. Mr. Manish, the audit manager of BCD & Co., objected to the insertion
of the Other Matter Paragraph in the audit report. According to him,
there is no such requirement to insert Other Matter Paragraph to
disclose the use of a Special Purpose Framework. Whether contention of
Mr. Manish is in order?
(a) The auditor’s report on special purpose financial statements shall
include an Other Matter paragraph alerting users of the auditor’s
report that the financial statements are prepared in accordance
with a special purpose framework and that, as a result, the
financial statements may not be suitable for another purpose.
(b) To avoid misunderstandings, the auditor shall mention that the
financial statements are prepared in accordance with a special
purpose framework and, therefore, may not be suitable for another
purpose in Management’s Responsibility section. Adding an Other
Matter Paragraph for this will result in duplication of the matter,
and the same should be avoided.
(c) The auditor may consider it appropriate to indicate that the
auditor’s report is intended solely for the specific users and may
not be suitable for another purpose by adding a Key Audit Matter
in the Key Audit Matter Paragraph.
(d) The auditor’s report on special purpose financial statements shall
include an Emphasis of Matter paragraph alerting users of the
auditor’s report that the financial statements are prepared in
accordance with a special purpose framework and that, as a result,
the financial statements may not be suitable for another purpose.
3. Mr. Chitrang, the audit manager at BB & Associates Chartered
Accountant, is seeking your guidance in drafting separate opinions on
the cash flow statement and Other Financial Statements. Guide the audit
manager by selecting the appropriate option from below:
(a) When the auditor considers it necessary to express an adverse
opinion or disclaim an opinion on the financial statements as a
whole, the auditor’s report shall not include an unmodified opinion

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with respect to the same financial reporting framework on a single

financial statement or one or more specific elements, accounts or
items of a financial statement.
(b) The expression of a disclaimer of opinion regarding the results of
operations, and cash flows, where relevant, and an unmodified
opinion regarding the financial position is allowed. In this case, the
auditor has expressed a disclaimer of opinion on the financial
statements as a whole and separate opinion on cash flows.
(c) The expression of an unmodified opinion on financial statements
prepared under a given financial reporting framework and, within
the same report, the expression of an adverse opinion on the same
financial statements under the same financial reporting framework
is permissible.
(d) An adverse opinion or a disclaimer of opinion relating to a specific
matter described within the Basis for Opinion section does not
limit the auditor's responsibility to issue an unmodified opinion on
identified matters that would not require a modification of the
auditor’s opinion.
4. The company has violated provisions of the Companies Act, 2013 by not
appointing an internal auditor. Which of following statement is likely to
be correct reason necessitating appointment of internal auditor and for
matters relating to appointment of internal auditor for the financial year
2022-23 in described situation in accordance with provisions of law?
(a) The company was required to appoint internal auditor during
financial year 2022-23 as it fulfilled necessary condition relating to
turnover during financial year 2021-22. Such an internal auditor
may have been either an individual or a partnership firm only.
(b) The company was required to appoint internal auditor during
financial year 2022-23 as it fulfilled all necessary conditions
relating to turnover, borrowings from banks and paid up capital
during financial year 2022-23. Such an internal auditor may have
been either an individual, a partnership firm or a body corporate.

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(c) The company was required to appoint internal auditor during

financial year 2022-23 as it fulfilled necessary condition relating to
turnover during financial year 2021-22. Such an internal auditor
may have been either an individual, a partnership firm or a body
corporate.
(d) The company was required to appoint internal auditor during
financial year 2022-23 as it fulfilled necessary conditions relating
to turnover and borrowings from banks during financial year
2022-23. Such an internal auditor may have been either an
individual or a partnership firm.
5. Mr. Anand, an audit executive, has performed various procedures during
the course of audit. Which of the following procedure/combinations of
procedures is/are not likely to be considered as risk assessment
procedures?
(a) Performing trend analysis, going through company’s internal
control manuals and visiting company’s plant
(b) Inquiries from company’s marketing personnel and with in-house
legal counsel
(c) Communication with company’s external legal counsel by sending
a letter of inquiry
(d) Inquiries made with company’s information system personnel to
provide information about control failures and going through
company’s internal control manuals
Independent MCQs
6. Safe Health Insurance Limited is a company working in the field of
health insurance sector. It is now using a claim management system
where incoming claims can be immediately identified on the website
itself. A form is issued to the customer who signs it. The details are
verified by the system against data present in it. Such system has
allowed faster processing of claims, error-free data validation and
increased customer satisfaction.
In respect of situation regarding working of insurance company in health
insurance sector, which of following technologies has likely been used?

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(a) Internet of things

(b) Data analytics
(c) Robotic process automation
(d) Power BI
7. Bansal Arora & Co., a Chartered Accountants firm, is currently
performing an audit for Wool Ltd., a sizable manufacturing company.
Mr. Bhavesh Bansal, an experienced audit engagement partner, holds
the responsibility of ensuring that the audit engagement aligns with the
professional standards, adheres to regulatory requirements, and
complies with the legal obligations. His duties encompass the overall
supervision, direction, and the final issuance of the audit report.
While conducting the audit, the engagement team encounters a
complex issue pertaining to the valuation of the company's inventory.
Within the team, there are difference of opinions on how to address this
matter, resulting in a contentious situation.
What is Mr. Bhavesh’s responsibility in this situation?
(a) Mr. Bhavesh shall adhere to the firm’s policies only for addressing
and resolving differences of opinion.
(b) Mr. Bhavesh should secure management’s representation
concerning the valuation and proceed with further audit
procedures.
(c) Mr. Bhavesh should ensure that appropriate consultation occurs
within the engagement team and, if necessary, with individuals at
an appropriate level within or outside the firm.
(d) Mr. Bhavesh should communicate the issue to the client's
management for resolution.
8. ALEXA Private Limited has been operating in India for the past 15 years
with three group companies – one subsidiary in India and the other two
in Singapore and Germany. The acquisitions of these subsidiaries were
gradual, with control obtained after initial investments. The statutory
auditors have determined that all group companies are significant for
the audit of consolidated financial statements. For the year ending

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March 31, 2023, the audited financial statements of all components are
available, except for the German company, whose audit has been
delayed and won't be completed before the release date of the
consolidated financial statements (CFS) of the parent company.
The financial statements of the German company for the consolidation
audit of CFS, what could be the possible situation?
(a) Since the audit of the German company is in progress, its financial
statements subject to audit can be considered by the auditor of
the parent company. Audited and signed financials can be
provided to auditors even after the release of audited CFS, as this
is a matter of documentation only.
(b) If the auditor does not receive audited financial statements of the
German company, he should modify his audit report.
(c) The management should provide management accounts to the
auditors of CFS, and the auditor can mention this point in the
"other matters" paragraph in his audit report, which is an
acceptable approach.
(d) The auditor should exclude the financial statements of the German
company from the CFS.
PART B: DESCRIPTIVE QUESTIONS
Standards on Auditing, Statements and Guidance Notes
General Auditing Principles and Reporting
9. While conducting the audit of Quantum Mechanics Limited, Mr. Manoj,
the audit manager, identified significant payments made by the
company for legal and retainership fees related to litigation. The
litigation pertained to the Thirunelly manufacturing plant, situated on
forest land reserved for the Elephant Corridor, which was declared
illegally constructed. The company had received a notice to
decommission the plant by 31-05-2022, but it had challenged
decommissioning order in the High Court and matter was still pending
there. The company had not disclosed any information related to the
litigation in its financial statements for Financial Year 2022-23. The
Thirunelly plant accounted for over 75% of the company's annual

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production, and the audit team expressed concerns that

decommissioning could significantly disrupt operations and potentially
lead to bankruptcy.
The audit was near to completion. When Mr. Manoj sought advice from
audit partner Mr. Shalabh on this matter, he suggested that no
immediate action was necessary from the auditors, as the matter was
still pending in Kerala High Court.
However, Mr. Manoj feels that situation requires action from auditors
and to be indicated in the report. Whose view seems to be appropriate?
Comment with reference to applicable Standards on Auditing.
10. You are appointed as Statutory Auditor of Supreme Ltd. and are in the
midst of conducting Annual Audit for the financial year ending on
31st March, 2023. During the course of audit, you come across a
situation involving recording of purchases amounting to ` 1.50 crores
from a company incorporated on 18 th March, 2023. Upon further inquiry,
you discover that purchases have been booked at the instance of one of
the directors. Further, despite this entry in books, no payment was made
and there is lack of documentary or other evidence validating these
purported purchases. How would you deal in the given situation?
Materiality, Risk assessment and Internal Control
11. While assessing the impact of uncorrected misstatements in the audit of
Manhattan Constructions Private Limited, Mr. Sushil encountered a
significant issue related to the calculation of materiality on Sales. The
initial materiality calculation was based on estimated figures provided by
the management. Notably, during the estimation of full-year sales, the
management extrapolated from the actual amount of 11 months to
derive the 12 months of sales. However, given the nature of Manhattan
Constructions as a company in the construction sector, where monthly
sales exhibit substantial variations, a unique challenge emerged.
The actual sales for the last month deviated significantly from the
estimated sales due to an unforeseen increase in stamp duty rates
imposed by the government in that region. As a result, the last month's
actual sales represented only 25% of the estimated sales. Now, Mr.
Sushil is confronted with a dilemma regarding the appropriate approach

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to evaluate uncorrected misstatements using the previously calculated

materiality. Kindly Guide Mr. Sushil in the light of relevant Standards on
Auditing.
Related Services
12. Brown Enterprises Limited has huge funds locked up in its trade
receivables standing at around ` 100 crores as on 31 st December, 2023.
The management of the company wants to evaluate validity of the trade
receivables to ensure reliability of financial reporting at the year end.
The accounts department has provided a list of trade receivables to the
management containing about 1000 names, their balances and
contact/communication details spread in different parts of the country.
The company’s management has requested CA. Karuna to take up this
assignment and prepare a report for management in accordance with
professional standards. Despite not being statutory auditor of the
company, she decides to accept above engagement.
(a) By explaining nature of engagement described above, discuss
whether it was proper for her to accept such engagement.
(b) While reporting, which precautions should be taken by her so that
readers of the report do not misunderstand its scope?
Prospective Financial Information and Other Assurance Services
13. STAR Limited has outsourced its payroll processing functions to a service
organization - Little Solutions Private Limited. Little Solutions Private
Limited is responsible for accurate preparation of payrolls and timely
remittance of statutory dues to the government authorities on behalf of
the company. Little Solution Private Limited’s controls related to timely
remittance of payroll deductions to government authorities are relevant
to the company as late remittances could result in interest and penalties
resulting in liabilities for the company.
The auditors of STAR Limited want to be sure about description, design
and operating effectiveness of controls at Little Solutions throughout
the year. In this regard, they require an assurance report from auditors
of Little Solutions Private Limited.

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(a) Why the auditors of STAR Limited require an assurance report

from the auditors of Little Solutions Private Limited? Which
engagement and quality control standard casts such kind of
responsibility upon the auditor?
(b) Which type of report should be provided by the auditors of Little
Solutions? Justify with reasons.
(c) State matters on which opinion is to be provided by the auditors
of Little Solutions.
Digital Auditing and Assurance
14. Certain studies have suggested that increase in cyber-attacks and rise in
global payment processing cost have hit global banking and finance
industries enormously. Therefore, such industries are going to place
reliance on new technologies such as Blockchain. Blockchain is based on
a decentralized and distributed ledger that is secured through
encryption. Each transaction is validated by the blockchain participants,
creating a block of information that is replicated and distributed to all
participants. However, such technology comes with its weaknesses and
associated risks.
What are common risks for Blockchain technology? Also discuss
probable audit implications where such technology can be used.
Special Features of Audit of Banks and Non-Banking Financial Companies
15. PDSJ & Associates are Statutory Auditors of a scheduled Commercial
Bank for the year 2023-24. While evaluating internal control over
advances, it came to their notice that classification of term loan
borrower accounts into SMA as well as NPA is done in the system on the
following lines:
• In case full dues are not received on a particular due date, a borrower
account is immediately considered as overdue on the very next day.
For example, if due date of loan account is 31st March, 2023 and
dues are not received on 31st March, 2023, it shall be considered as
overdue on 1st April, 2023.
• If it continues to remain overdue, then account is tagged as SMA-1
on 1st May, 2023.

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• If it continues to remain overdue further, then account is tagged as

SMA-2 on 31st May, 2023.

• If it continues to remain overdue even after being tagged as SMA-2,

it is classified as NPA on 30th June, 2023.

Evaluate above control designed by bank in the system for the purpose
of exercising control over such advances in compliance to regulatory
guidelines.
Audit of Public Sector Undertakings
16. Comptroller & Auditor General appointed Saha & Associates, a
Chartered Accountant firm, to conduct Performance audit of herbal Ltd.,
a public sector undertaking of Government of India. The firm conducted
the audit with a view to check that all the expenses of the unit are in
conformity with the public interest and publicly accepted customs. The
audit report submitted by the audit firm was rejected by C&AG. Give
your opinion on the action of C&AG.
Internal Audit
17. CA. Sanjana has recently joined as Chief Internal Auditor of Up Scale
Limited, a listed company. Her subordinate staff in internal audit
department brings to her knowledge many prior audit issues highlighted
in the previous internal audit reports which are still open. Does she have
any responsibilities in this regard? How should she proceed in this
situation?
Sustainable Development Goals (SDG) & Environment, Social and
Governance (ESG) Assurance
18. SEBI has made Business Responsibility and Sustainability Report (BRSR)
mandatory for certain listed companies. It is an evolutionary step in
Environment, Social and Governance (ESG) reporting. Discuss the nature
of ESG reporting. How can corporates contribute to Sustainable
Development Goals (SDGs)?

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Professional Ethics & Liabilities of Auditors

19. (a) Comment on the following with reference to the provisions of the
Chartered Accountant Act 1949:
(1) CA. Pankaj accepted professional work of acting as valuer
under direct taxes. He charges fees on a percentage of the
property valued.
(2) CA. Anita joined as an audit executive in a CA firm on April 1,
2023. Despite receiving multiple reminders from ICAI, she
has failed to respond with her appointment date and submit
her membership certificate.
(b) Mr. Johny, a chartered accountant, was invited to a seminar on
bank audits to give a presentation on the process of conducting
such audits. During his presentation, he provided examples from
his clients’ experiences and shared the significant information
about clients with the intention of aid in understanding of
audience on the topic. Does above situation have implications in
relation to the professional ethics?
20. CA. Tanya, the auditor of KBC Pvt. Ltd. has delegated following works to
his articles and staff:
i. Issue of audit queries during the course of audit.
ii. Issue of memorandum of cash verification and other physical
verification.
iii. Letter forwarding draft observations/financial statements.
iv. Issuing acknowledgements for records produced.
v. Signing financial statements of the company.

Is this correct as per the Professional Ethics and ICAI’s guidelines and
pronouncements?

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SUGGESTED ANSWERS/HINTS

PART A: Answers to Multiple Choice Questions

1. (a)
2. (d)
3. (a)
4. (c)
5. (c)
6. (c)
7. (c)
8. (b)
PART B: Answers to Descriptive Questions
9. In accordance with SA 250, “Consideration of Laws and Regulations in an
Audit of Financial Statements”, if the auditor concludes that the non-
compliance has a material effect on the financial statements and has not
been adequately reflected in the financial statements, the auditor shall
in accordance with SA 705, “Modifications to the Opinion in the
Independent Auditor’s Report”, express a qualified or adverse opinion
on the financial statements.
In the specific case of Quantum Mechanics Limited, where significant
legal and retainership fees have been paid related to a lawsuit
concerning the Thirunelly manufacturing plant, the auditor needs to
assess the impact of non-compliance on the financial statements. Given
that the Thirunelly plant constitutes over 75% of the company's annual
production and the audit team believes that decommissioning the plant
could potentially lead to bankruptcy, the non-disclosure of such a
significant matter would have a material and pervasive impact on the
financial statements.
Contrary to the audit partner's suggestion that no action is necessary as
the matter is pending in the Kerala High Court, the requirements of SA
250 and SA 705 necessitate a different approach. The auditor should

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express either a qualified or an adverse opinion on the financial

statements based on the level of impact of non-disclosure. Further,
above situation involves pending legal or regulatory proceedings
against the entity that may, if successful, result in claims that the entity
may not be able to satisfy. It is an example of events or conditions that
may cast a significant doubt on entity’s ability to continue as a going
concern. However, no disclosure is made in financial statements about
the material uncertainty. SA 570, “Going Concern” also mandates auditor
to express a qualified or an adverse opinion in accordance with SA 705,
if adequate disclosure is not made about material uncertainty in
financial statements. As a non-disclosure of such a significant matter
would have material and pervasive impact of financial statements,
adverse opinion in this situation appears appropriate. Therefore, Mr.
Manoj’s view seems to be proper.
10. SA 240, "The Auditor’s Responsibilities Relating to Fraud in an Audit of
Financial Statements," emphasize that fraud can be perpetrated by
management override of controls, such as the creation of fictitious
journal entries, particularly towards the end of an accounting period, to
manipulate operating results or achieve specific objectives.
In the case of Supreme Ltd., where purchases of ` 1.50 crore were
recorded at year-end without supporting evidence, it became apparent
during the investigation that the company had entered fictitious journal
entries to manipulate the operating results.
Given this situation, the auditor would align their approach based on the
impact of the misstatement resulting from such fictitious journal entries.
If, due to fraud or suspected fraud, the auditor encounters exceptional
circumstances that cast doubt on their ability to continue the audit, they
must assess the professional and legal responsibilities applicable. This
includes considering reporting obligations to those who appointed the
auditor or, in some cases, to regulatory authorities. The appropriateness
of withdrawal from the engagement is also a consideration, where
legally permitted.
Furthermore, the auditor is mandated to report in accordance with
Section 143(12) of the Companies Act, 2013. According to Section
143(12) read with Rule 13 of Companies (Audit & Auditor's) Rules, 2014,

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if the auditor, during the performance of their duties, has reason to

believe that an offence of fraud involving an amount of `1 crore or more
has been committed by the company's officers or employees, reporting
to the Central Government is required in the prescribed manner.
Additionally, reporting obligations extend to Clause (xi) of Paragraph 3
of Companies (Auditor’s Report) Order, 2020. The auditor is obligated to
disclose whether any fraud by the company or against the company by
its officers or employees has been observed or reported during the year.
If affirmative, the nature and amount involved are to be indicated. This
comprehensive reporting framework ensures transparency, adherence to
legal requirements, and protection of stakeholders' interests in the face
of potential fraudulent activities.
11. As per SA 450 “Evaluation of Misstatements Identified during the Audit”,
the auditor is required to reassess materiality, in accordance with SA 320
“Materiality in Planning and Performing an Audit”, before evaluating the
impact of uncorrected misstatements. This reassessment is crucial to
confirm the ongoing appropriateness of materiality in light of the
entity's actual financial results.
The determination of materiality under SA 320 often relies on estimates
of the entity's financial results, given that the actual results may not be
known during the early stages of the audit. Therefore, before the auditor
proceeds to assess the effect of uncorrected misstatements, it becomes
necessary to adjust the materiality calculated under SA 320 based on the
now available actual financial results.
SA 320 outlines that, as the audit progresses, materiality may be revised
for the financial statements as a whole or for specific classes of
transactions, account balances, or disclosures. This revision is prompted
by the auditor's awareness of information that would have led to a
different initial determination. Typically, significant revisions occur
before the evaluation of uncorrected misstatements. However, if the
reassessment of materiality under SA 320 results in a lower amount, the
auditor must reconsider performance materiality and the
appropriateness of the audit procedures' nature, timing, and extent. This
is crucial for obtaining sufficient and appropriate audit evidence on
which to base the audit opinion.

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In the present case involving Manhattan Constructions Private Limited, it

has been identified that the materiality calculated at the beginning of
the audit for Sales was based on estimates provided by the
management. The management extrapolated sales for the full year using
the actual amount of 11 months, but since the company experiences
significant monthly variations in sales, the actual sales for the last month
were only 25% of the estimated figure. This discrepancy arose due to an
unexpected increase in stamp duty rates by the government in that
region.
In this audit scenario, Mr. Sushil, the auditor, must review and re-assess
the materiality initially determined under SA 320 to ensure its continued
validity in light of the actual financial results. If the re-assessed
materiality is lower than the previously calculated amount, Mr. Sushil
must reconsider performance materiality and the appropriateness of the
nature, timing, and extent of further audit procedures. This meticulous
approach is essential to gather sufficient and appropriate audit
evidence, enabling Mr. Sushil to form an independent and objective
opinion on the financial statements of Manhattan Constructions Private
Limited.
12. (a) The above situation involves an engagement to perform agreed-
upon procedures. In such an engagement, the auditor is engaged by
the client to issue a report of factual findings based on specified
procedures performed on specified subject matter of specified
elements, accounts or items of a financial statement.
The management has requested CA. Karuna to take up the
assignment and prepare report for management in accordance
with professional standards. Such type of engagement and its
reporting falls in purview of SRS 4400. The reference to auditor in
SRS 4400 does not imply that a person performing related services
need necessarily be the auditor of entity’s financial statements.
Hence, a person performing related services need not necessarily
be auditor of entity’s financial statements. Therefore, it was proper
for CA. Karuna to accept above engagement.

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(b) While reporting, she should take following precautions so that

readers of report do not misunderstand its scope: -
y A statement that the procedures performed do not constitute
either an audit or a review and, as such, no assurance is
expressed.
y A statement that, had the auditor performed additional
procedures, an audit or a review, other matters might have
come to light that would have been reported.
y A statement that the report is restricted to those parties that
have agreed to the procedures to be performed.
y A statement (when applicable) that the report relates only to
the elements, accounts, items or financial and non-financial
information specified and that it does not extend to the entity’s
financial statements taken as a whole.
13. When the user entity uses the services of a service organisation,
objectives of auditor of user entity are:
(a) To obtain an understanding of the nature and significance of the
services provided by the service organisation and their effect on
the user entity’s internal control relevant to the audit, sufficient to
identify and assess the risks of material misstatement and
(b) To design and perform audit procedures responsive to those risks.
Therefore, it is in line with above requirements, that auditors of
STAR Limited require an assurance report from auditors of Little
Solutions Private Limited. SA 402 casts such responsibility on user
auditors.
In accordance with requirements of SAE 3402, auditors of Little
Solutions Private Limited should provide a type 2 report to
auditors of STAR Limited. As auditors of STAR Limited want to be
sure about description, design and operating effectiveness of
controls at Little Solutions Pvt. Ltd. throughout the year and type 2
report deals with such matters, type 2 report should be provided
by the auditors of the Little Solutions Pvt. Ltd. Type 2 report is a
report on the description, design and operating effectiveness of

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controls at a service organization whereas type 1 report is a report

on the description and design of controls at a service organization.
(c) The opinion of auditors of Little Solutions Pvt. Ltd. would state
whether, in all material respects, based on suitable criteria: -
y The description fairly presents the service organization’s system
that had been designed and implemented throughout the
specified period;
y The controls related to the control objectives stated in the
service organization’s description of its system were suitably
designed throughout the specified period and
y The controls tested, which were those necessary to provide
reasonable assurance that the control objectives stated in the
description were achieved, operated effectively throughout the
specified period.
14. The strengths of blockchain can also be its weaknesses. The inability to
reverse transactions and to access data without the required keys make
the system secure but also means that organisations need specific
protocols and management processes to ensure that they are not locked
out and have clear contingency plans. Operating through network nodes
could also expose the organisation to cyber-attacks and data hacks, so
security issues are important.
Auditors should consider the appropriate governance and security
around the transactions. Although blockchain’s core security premise
rests on cryptography, there are risk factors associated with it. As
blockchain interacts with legacy systems and business partners, concerns
related to insecure application programming interfaces (APIs), data
confidentiality and privacy cannot be ignored. Weak blockchain
application development protocols are something auditors cannot
overlook. Similarly, data privacy laws and regulations may be an area of
concern as data are communicated across geographic boundaries.
Auditors must be able to determine whether the data put on blockchain
will expose the enterprise for non-compliance with applicable laws and
regulations.

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Auditors should also ensure that the organisation has the necessary data
management processes which complies with regulations. The regulatory
landscape is still evolving for blockchain so audit teams should check
that compliance managers are following developments constantly and
adapting processes accordingly.
15. The design of above control instituted by bank in its system is not in
accordance with the regulatory guidelines. Any amount due to the bank
under any credit facility is ‘overdue’ if it is not paid on the due date
which is fixed by the bank, the borrower accounts are flagged as
overdue by the banks as part of their day-end processes for the due
date.
Classification of borrower accounts as SMA as well as NPA is done as
part of day-end process for the relevant date. SMA or NPA classification
date is the calendar date for which the day end process is run. In other
words, the date of SMA/NPA reflects the asset classification status of an
account at the day-end of that calendar date.
In the given situation, due date of a loan account is March 31, 2023, and
full dues are not received by the bank before it runs the day-end process
for this date, the date of overdue shall be March 31, 2023 and not 1st
April, 2023.
If it continues to remain overdue, then this account shall get tagged as
SMA-1 upon running day-end process on April 30, 2023 [i.e. upon
completion of 30 days of being continuously overdue]. Accordingly, the
date of SMA-1 classification for that account shall be April 30, 2023.
Similarly, if the account continues to remain overdue, it shall get tagged
as SMA-2 upon running day-end process on May 30, 2023 and if
continues to remain overdue further, it shall get classified as NPA upon
running day-end process on June 29, 2023.
16. In the provided scenario, Saha & Associates, a Chartered Accountant
firm, was appointed by the Comptroller and Auditor General (C&AG) to
conduct a Performance Audit of Herbal Ltd., a Public Sector Undertaking
(PSU) of the Government of India. The audit, however, primarily focused
on verifying that all expenses of the unit were in conformity with public

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interest and publicly accepted customs, which does not align with the
essence of a Performance Audit.
A Performance Audit is characterized as an impartial and systematic
examination of evidence aimed at providing an independent assessment
of the performance of a government organization, program, activity, or
function. The ultimate goal is to furnish information that enhances
public accountability and aids decision-making by entities responsible
for oversight or corrective action.
In the context of PSUs, Performance Audits are conducted by the C&AG,
specifically through various subordinate offices of the Indian Audit and
Accounts Department (IAAD). The auditing process adheres to manuals
and standards set by the C&AG, guiding subordinate offices in
evaluating the economy, efficiency, and effectiveness of policies,
programs, organizations, and management.
The objectives of Performance Auditing encompass promoting
accountability by aiding governance and oversight bodies in enhancing
performance and fostering transparency by providing insights into the
management and outcomes of diverse government activities. The focus
is on areas where adding value holds the greatest potential for
development, thereby encouraging responsible parties to take
appropriate actions.
The Regulations on Audit and Accounts issued by C&AG outline that the
responsibility for developing measurable objectives, performance
indicators, and measurement systems rests with Government
departments or Heads of entities. They are further required to define
intermediate and final outputs and outcomes in measurable and
monitorable terms, standardize unit delivery costs, and benchmark the
quality of outputs and outcomes.
Therefore, the rejection of the audit report submitted by Saha &
Associates by the C&AG is warranted. This is because the audit
conducted by the firm, which primarily aimed at checking the conformity
of expenses to public interest and accepted customs, does not align with
the comprehensive nature of Performance Audits, which evaluate various
aspects of economy, efficiency, and effectiveness.

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17. In the given situation, CA. Sanjana has recently joined as Chief Internal
Auditor in Up Scale Limited, a listed company. As a Chief Internal
Auditor, CA. Sanjana is responsible for continuously monitoring the
closure of prior audit issues through timely implementation of action
plans included in past audits. This shall be done with a formal
monitoring process, elements of which are pre-agreed with
management and those charged with governance. The responsibility to
implement the action plans remains with the management. In
monitoring and reporting of prior audit issues, the responsibility of the
CA. Sanjana as internal auditor is usually in the form of an “Action Taken
Report (ATR) of previous audits”. The term “Monitoring and Reporting”
refers to the periodic tracking of issues raised during prior audits and
evaluation of the corrective actions undertaken by the auditee to resolve
them and to report any open and pending matters to the management
and those charged with governance.
CA. Sanjana should review whether follow-up action is taken by the
management on the basis of his report. If no action is taken within a
reasonable time, she should draw the management’s attention to it.
Where the management has not acted upon the suggestions or not
implemented the prescribed recommendations, she should ascertain the
reasons thereof.
Where the management has accepted recommendations of the CA.
Sanjana and initiated the necessary action, she should periodically
review the manner and the extent of implementation of the
recommendations and report to the management highlighting the
recommendations which have not been implemented fully or partly.
18. Environment, Social and Governance (ESG) reporting is all about
disclosure of information, data, metrics that explain the added value in
following three areas:
Environment
Environmental stands for corporate climate policies, energy use, waste,
pollutions, natural resource conservation, and treatment of animals. It
includes the natural resources that every entity absorbs for its
functioning like that of coal, electricity, water and so on. Processing this

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energy into products / services which will leave behind certain wastes
like that of carbon emissions, water discharges, e-wastes and so on.
Thus, one is dependent on the environment for carrying out its
operations.
Social
It addresses the relationships the entity has and the reputation it fosters
with people and institutions in the communities where you do business
and the value chain involved. It further includes labour relations,
diversity, and inclusions. Every company operates within a broader and
diverse society.
Governance
It is the internal system of practices, controls, and procedures entity
adopts in order to govern itself, make effective investment decisions,
comply with the law, and meet the needs of all stakeholders. Every
entity, which is itself a legal creation, requires governance.
ESG reporting can be both quantitative and qualitative in nature.
Qualitative reports tend to describe a company’s strategy or policy
around the relevant topics, while a quantitative approach includes
metrics, and key performance indicators (KPIs) linked to each area in
order to measure progress against goals and report on achievements.
Naturally, a mixed approach that makes use of both qualitative and
quantitative information tends to add the maximum value to the quality
of disclosures.
United Nations members states adopted Sustainable Development to
provide a blueprint which mentioned the Sustainable Development
Goals (SDGs). They recognized that ending poverty and other
deprivations must go hand in hand with strategies that improve health
and education, reduce inequality, and spur economic growth – all while
tackling climate change and working to preserve our oceans and forests.
Corporates can contribute to SDGs due to their capacity to provide
solutions necessary for meeting SDGs. Companies can lead in innovation
and contribute to achievement of Sustainable Development Goals.

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19. (a) (1) Restriction on fees based on a Percentage: According to

Clause (10) of Part I of First Schedule to the Chartered
Accountants Act, 1949, a Chartered Accountant in practice shall
be deemed to be guilty of professional misconduct if he
charges or offers to charge, accepts or offers to accept in
respect of any professional employment fees which are based
on a percentage of profits or which are contingent upon the
findings, or results of such employment, except as permitted
under any regulations made under this Act.
However, Regulation 192 exempts Chartered Accountants in
practice to charge fees based on a percentage of profits or
contingent upon findings or results for professional work for
certain professional services.
Regulation 192 specifically states that in the case of a valuer
for the purposes of direct taxes and duties, the fees may be
based on a percentage of the value of the property valued.
Conclusion: Consequently, CA. Pankaj shall not be deemed
to be guilty of professional misconduct, as he is within the
permissible scope of charging fees based on a percentage of
the property valued.
(2) Failed to Supply Information Called For: In accordance
with Clause (2) of Part III of the First Schedule to the
Chartered Accountants Act, 1949, a member, whether in
practice or not, is considered to be engaged in professional
misconduct if he fails to provide the information requested
or does not comply with the requirements set forth by the
Institute, Council, or any of its Committees, including the
Director (Discipline), Board of Discipline, Disciplinary
Committee, Quality Review Board, or the Appellate Authority.
Conclusion: Therefore, in the given scenario, CA. Anita has
neglected to respond to the Institute's letters seeking

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confirmation of her appointment date and has not submitted

her membership certificate. Consequently, she is deemed to
be guilty of professional misconduct as given in Clause (2) of
Part III of the First Schedule to the Chartered Accountants
Act, 1949.
(b) Disclosure of Client’s Information: Confidentiality is one of
fundamental principles governing professional ethics. Clause (1) of
Part I of the Second Schedule to the Chartered Accountants Act,
1949, addresses professional misconduct related to the disclosure
of information by a chartered accountant in practice concerning
the business of their clients. Such disclosure to any person other
than the client, without the client's consent or unless mandated by
prevailing law, is considered a breach of conduct. The Code of
Ethics emphasizes that this duty continues even after the
completion of the assignment, except when disclosure is necessary
for the performance of professional duties.
In the provided case, CA. Johny disclosed significant information
about his client's business without obtaining the client's consent,
believing that it would enhance the audience's understanding of
the topic.
Conclusion: Therefore, this action of CA. Johny constitutes
professional misconduct under Clause (1) of Part I of the Second
Schedule to the Chartered Accountants Act, 1949.
20. As per Clause (12) of Part I of the First Schedule of the Chartered
Accountants Act, 1949, a Chartered Accountant in practice is deemed to
be guilty of professional misconduct if he allows a person not being a
member of the institute in practice or a member not being his partner to
sign on his behalf or on behalf of his firm, any balance sheet, profit and
loss account, report or financial statements.
The Council has clarified that the power to sign routine documents on
which a professional opinion or authentication is not required to be

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expressed may be delegated in the following instances and such

delegation will not attract provisions of this clause:
(i) Issue of audit queries during the course of audit.
(ii) Asking for information or issue of questionnaire.
(iii) Letter forwarding draft observations/financial statements.
(iv) Initiating and stamping of vouchers and of schedules prepared for
the purpose of audit.
(v) Acknowledging and carrying on routine correspondence with
clients.

(vi) Issue of memorandum of cash verification and other physical

verification or recording the results thereof in the books of the
clients.
(vii) Issuing acknowledgements for records produced. Raising of bills
and issuing acknowledgements for money receipts.
(ix) Attending to routine matters in tax practice, subject to provisions
of Section 288 of Income Tax Act.
(x) Any other matter incidental to the office administration and
routine work involved in practice of accountancy.

In the instant case, CA. Tanya, the auditor of KBC Pvt. Ltd. has delegated
certain task to his articles and staff such as issue of audit queries during
the course of audit, issue of memorandum of cash verification and other
physical verification, letter forwarding draft observations/financial
statements, issuing acknowledgements for records produced and
signing financial statements of the company.

Therefore, CA. Tanya is correct in allowing first four tasks i.e. issue of
audit queries during the course of audit, issue of memorandum of cash
verification and other physical verification, letter forwarding draft
observations/financial statements, issuing acknowledgements for
records produced to his staff and articles.

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However, if the person signing the financial statements on his behalf is

not a member of the institute in practice or a member not being his
partner to sign on his behalf or on behalf of his firm, CA. Tanya is wrong
in delegating signing of financial statements to his staff.
Conclusion: In view of this, CA. Tanya would be held guilty of
professional misconduct for allowing the person signing the financial
statements on his behalf to his articles and staff under Clause 12 of
Part 1 of First Schedule of the Chartered Accountants Act, 1949.

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 Applicability of Standards / Guidance Notes / Legislative
Amendments etc. for May, 2024 Examination
Final Course

Paper 1: Financial Reporting

(I) List of topic-wise exclusions from the syllabus
(1) (2) (3)
S. No. in the Topics of the Exclusions
syllabus syllabus
3. Application of Indian Indian Accounting
Accounting Standard (Ind AS) 16
Standards (Ind AS) ‘Property, Plant and
with reference to Equipment’
General Purpose x Appendix B- Stripping
Financial Statements Costs in the Production
Phase of a Surface Mine
(iv) Ind AS on Indian Accounting
Assets and Standard (Ind AS) 37
Liabilities of the ‘Provisions, Contingent
Financial Liabilities and Contingent
Statements Assets’
x Appendix A: Rights to
Interests arising from
Decommissioning,
Restoration and
Environmental
Rehabilitation Funds
x Appendix B: Liabilities
arising from Participating
in a Specific Market —
Waste Electrical and
Electronic Equipment
x Indian Accounting
Standard (Ind AS) 29:
(vii) Other Ind AS Financial Reporting in
Hyperinflationary
Economies

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x Indian Accounting
Standard (Ind AS) 104:
Insurance Contracts
x Indian Accounting
Standard (Ind AS) 106:
Exploration for and
Evaluation of Mineral
Resources
x Indian Accounting
Standard (Ind AS) 114:
Regulatory Deferral
Accounts

(II) Limited discussion of Accounting Standards has been given at relevant

places in the form of differences of particular provision in Ind AS vis-à-
vis AS. Accounting Standards do not form part of the syllabus.
However, with respect to AS 7, AS 9, AS 19 and AS 22 where there are
significant differences between Ind AS and AS, questions on these
Accounting Standards (i.e. AS 7, AS 9, AS 19 and AS 22) testing
differential treatments in both the set of standards (i.e. Ind AS and AS)
may be asked in the examination.

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