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PRIME/46th ME/O/IPC 1
THE SOCIETY OF AUDITORS AND PRIME ACADEMY
46th SESSION - IPC - MODEL PRACTICE EXAM
PAPER 5 - ADVANCED ACCOUNTING
No. of Questions: 7 Total Marks: 100
No. of Pages: 5 Time Allowed: 3 hrs
1.
A.
(i) Vasudha Ltd. provides following information:
Raw Material stock holding period: 3.5 months
Work-in-progress holding period: 1 month Finished goods holding period: 4.5 months
Debtor’s collection period : 6 months
You are required to compute the operating cycle of Vasudha Ltd. What would happen if the
trade payables of the company are paid in 14 months-whether these should be classified as
current or non-current liability?
(ii) The management of Kshitij Ltd. contends that the work in progress is not valued since it is
difficult to ascertain the same in view of the multiple processes involved. They opine that
the value of opening and closing work in progress would be more or less the same.
Accordingly, the management had not separately disclosed the work in progress in its
financial statements. Comment in line with Revised Schedule VI. (5 Marks)
B. Aksat International Limited has given machinery on lease for 36 months, and its useful life is 60
months. Cost & fair market value of the machinery is INR 5, 00,000. The amount will be paid in
3 equal annual installments and the lessee will return the machinery to lessor at termination of
lease. The unguaranteed residual value at the end of 3 years is INR 50,000. IRR of investment is 10% and present value of annuity factor of ` 1 due at the end of 3 years at 10% IRR is 2.4868
and present value of INR 1 due at the end of 3rd year at 10% IRR is 0.7513.
You are required to comment with reason whether the lease constitute finance lease or operating
lease. If it is finance lease, calculate unearned finance income. (5 Marks)
C. Balance Sheet of Anurag Trading Co. on 31st March, 2017 is given below:
Liabilities Amount(INR) Assets Amount(INR)
Capital 50,000 Fixed Assets 69,000
Profit and Loss
A/c
22,000 Stock in Trade 36,000
10% Loan 43,000 Trade Receivables 10,000
Trade Payables 18,000 Deferred Expenditure 15,000
1,33,000
Bank 3,000
__________
1,33,000
Additional Information:
(i) Remaining life of fixed assets is 5 years with even use. The net realizable value of fixed
assets as on 31st March, 2018 was INR 64,000.
(ii) Firm’s sales and purchases for the year 2017-18 amounted to INR 5 lacs and INR 4.50
lacs respectively.
(iii) The cost and net realizable value of the stock were INR 34,000 and INR 38,000 respectively.
(iv) General Expenses for the year 2017-18 were INR 16,500.
(v) Deferred Expenditure is normally amortized equally over 4 years starting from F.Y. 2016-
17 i.e. INR 5,000 per year.
PRIME A
CADEMY
PRIME/46th ME/O/IPC 2
(vi) Out of debtors worth INR 10,000, collection of INR 4,000 depends on successful re-design
of certain product already supplied to the customer.
(vii) Closing trade payable is INR 10,000, which is likely to be settled at 95%.
(viii) There is pre-payment penalty of INR 2,000 for Bank loan outstanding.
Prepare Profit & loss Account for the year ended 31st March, 2018 by assuming it is not a
Going Concern. (5 Marks)
D. Rainbow Limited borrowed an amount of INR 150 crores on 1.4.2016 for construction of boiler
plant @ 11% p.a. The plant is expected to be completed in 4 years. Since the weighted average
cost of capital is 13% p.a., the accountant of Rainbow Ltd. capitalized INR 19.50 crores for the
accounting period ending on 31.3.2017. Due to surplus fund out of INR 150 crores, income of
INR 3.50 crores was earned and credited to profit and loss account. Comment on the above treatment of accountant with reference to relevant accounting standard. (5 Marks)
2.
A. X, Y and Z are in partnership sharing profits and losses in the ratio of 5:4:4. The Balance Sheet
of the firm as on 31st March, 2017 is as below:
Liabilities INR Assets INR
X’s Capital 60,000 Factory Building 96,640
Y’s Capital 40,000 Plant and Machinery 65,100
Z’s Capital 50,000 Trade Receivable 21,600
Y’s Capital 18,000 Inventories 49,560
Trade Payable 66,000 Cash at Bank 1,100
2,34,000 2,34,000
On Balance Sheet date, all the three partners have decided to dissolve their partnership. Since
the realisation of assets was protracted, they decided to distribute amounts as and when feasible and for this purpose they appoint Z who was to get as his remuneration 1% of the value
of the assets realised other than cash at bank and 10% of the amount distributed to the
partners.
Assets were realized piecemeal as under:
INR
First installment 74,600
Second installment 69,301
Third installment 40,000
Last installment 28,000
Dissolution expenses were provided for estimated
amount of
The creditors were settled finally for
INR 12,000
INR 63,600
You are required to prepare a statement showing distribution of cash amongst the partners by
"Highest Relative Capital Method". (16 Marks)
3.
A. Following is the summarized Balance Sheet of Complicated Ltd. as on 31st March, 2017:
Amount (INR)
Equity shares of INR 10 each fully paid up 12,50,000
Bonus shares 1,00,000
Share option outstanding Account 4,00,000
Revenue Reserve 15,00,000
Securities Premium 2,50,000
Profit & Loss Account 1,25,000
Capital Reserve 1,00,000
Revaluation Reserve 1,00,000
PRIME A
CADEMY
PRIME/46th ME/O/IPC 3
Unpaid dividends 1,00,000
12% Debentures (Secured) 18,75,000
Advance from related parties (Unsecured) 10,00,000
Current maturities of long term borrowings 16,50,000
Application money received for allotment due for refund
2,00,000
86,50,000
Fixed Assets 46,50,000
Current Assets 40,00,000
86,50,000
The Company wants to buy back 25000 equity shares of INR10 each, on 1st April, 2017 at
INR20 per share. Buy back of shares is duly authorized by its Articles and necessary resolution
has been passed by the Company towards this. The payment for buy back of shares will be
made by the Company out of sufficient bank balance available shown as part of Current Assets.
Comment with your calculations, whether buy back of shares by the Company is within the
provisions of the Companies Act, 2013. If yes, pass necessary journal entries towards buy back
of shares and prepare the Balance Sheet after buy back of shares. (12 Marks)
B. Mention the ways by which Redeemable Debentures may be redeemed under the Companies Act, 2013. (4 Marks)
4.
A. Given below is the Balance Sheet of OM Limited as on 31.3.2017:
Liabilities INR Assets INR
Share Capital: Fixed Assets:
14%, 1,60,000 cumulative preference Land 1,60,000
shares of INR100 each fully paid up 16,00,000 Buildings 6,40,000
32,000 equity shares of INR100 each, Plant and Machinery 21,60,000
INR 60 per share paid up 19,20,000 Patents 1,60,000
Reserves and Surplus NIL Investments NIL
Secured Loans: Current Assets
14% debentures 9,20,000 Inventory at cost 4,00,000
(Having a floating charge on all assets) Sundry debtors 9,20,000
Interest accrued on above Cash at bank 2,40,000
Debentures 1,28,800 Profit and Loss A/c 9,60,000
(Also having a floating charge as above)
Loan on mortgage of land and building 6,00,000
Unsecured Loan NIL
Current liabilities
Trade payables 4,71,200
56,40,000
56,40,000
On 31.3.2017 the company went into voluntary liquidation. The dividend on 14% preference shares was in arrears for one year. Sundry creditors include preferential creditors amounting
to INR 1, 20,000.
The assets realized the following sums:
Land INR 3,20,000; Buildings INR 8,00,000; Plant and machinery INR 20,00,000; Patent INR
2,00,000; Inventory INR 6,40,000; Sundry debtors INR 8,00,000. The expenses of liquidation amounted to INR 1, 17,736. The liquidator is entitled to a
commission of 2% on all assets realized (except cash at bank) and 2% on amounts among
unsecured creditors other than preferential creditors. All payments were made on 30th June,
2017. Interest on mortgage loan shall be ignored at the time of payment.
Prepare the liquidator’s final statement of account (8 Marks)
PRIME A
CADEMY
PRIME/46th ME/O/IPC 4
B. From the following information as on 31st March, 2018 of Xeta Insurance Co. Ltd. engaged in
fire insurance business, prepare the Revenue Account, reserving 40% of the net premiums for
unexpired risks and an additional reserve of INR 7,00,000:
C.
Particulars Amount INR
Reserve for unexpired risk on 31st March, 2017 15,00,000
Additional reserve on 31st March, 2017 3,00,000
Claims paid 19,20,000
Estimated liability in respect of outstanding claims on 31st March, 2017 1,95,000
Estimated liability in respect of outstanding claims on 31st March, 2018 2,70,000
Expenses of management (including INR 90,000 in connection with claims) 8,40,000
Re-insurance premium paid 2,25,000
Re-insurance recoveries 60,000
Premiums 33,60,000
Interest and dividend (gross before TDS) 1,50,000
Profit on sale of investments 30,000
Commission 3,50,000
(8 Marks)
5.
A. X Ltd. granted 500 stock options to its employees on 1.4.2014 at INR 50 per share. The vesting
period is 2½ years and the maximum exercise period is one year. Market price on that date is
INR 140 per share. All the options were exercised on 30.06.2017. Pass journal entries giving
suitable narrations, if the face value of equity share is INR 10 per share. (8 Marks)
B. Venus Limited recently made a public issue in respect of which the following information is
available:
(i) No. of partly convertible debentures issued 4, 00,000; face value and issue price of INR 100
per debenture.
(ii) Convertible portion per debenture - 80%, date of conversion - on expiry of 7 months from the date of closing of issue.
(iii) Date of closure of subscription list - 01.06.2017, date of allotment - 01.07.2017, Rate of
interest on debentures - 10% p.a. payable from the date of allotment. Value of equity share
for the purpose of conversion –INR 40 (Face value INR 10)
(iv) Underwriting commission - 3% (v) No. of debentures applied for 3,00,000
(vi) Interest payable on debentures - half yearly on 30th September and 31st March.
Write relevant journal entries for all transactions arising out of the above during the year ended
on 31st March, 2018 (including cash and bank entries). (8 Marks)
6.
A. The summarized Balance Sheet of M/s. A Ltd. and M/s. B Ltd. as on 31.03.2017 were is as
under:
Liabilities A Ltd.
INR
B Ltd. INR
Assets A Ltd. INR B Ltd. INR
Share Capital: Freehold
Property
3,00,000 2,40,000
40,000 Equity Share Plant & Machinery
60,000 40,000
Of INR 10 each, Fully
paid
4,00,000 - Motor
Vehicle
30,000 20,000
30,000 Equity Shares Trade
Receivables
2,00,000 80,000
PRIME A
CADEMY
PRIME/46th ME/O/IPC 5
Of INR 10 each, Fully paid
- 3,00,000 Inventory 2,30,000 1,80,000
General Reserve 2,40,000 - Cash at
Bank
80,000 40,000
Profit & Loss Account 50,000 50,000
Trade Payables 2,10,000 1,30,000
6% Debentures -
9,00,000
1,20,000
6,00,000
9,00,000
6,00,000
M/s. A Ltd. and M/s. B Ltd. carry on business of similar nature and they agreed to amalgamate.
A new Company, M/s. AB Ltd. is formed to take over the Assets and Liabilities of M/s. A Ltd. and M/s. B Ltd. on the following basis:
Assets and Liabilities are to be taken at Book Value, with the following exceptions:
(a) Goodwill of M/s. A Ltd. and M/s. B Ltd. is to be valued at INR 1, 40,000 and INR 40,000
respectively. (b) Plant & Machinery of M/s. A Ltd. are to be valued at INR 1, 00,000.
(c) The Debentures of M/s. B Ltd. are to be discharged, by the issue of 6% Debentures of M/s.
AB Ltd., at a premium of 5%.
You are required to:
(i) Compute the basis on which shares in M/s. AB Ltd. will be issued to Shareholders of the existing Companies assuming nominal value of each share of M/s. AB Ltd. is INR 10.
(ii) Draw up a Balance Sheet of M/s. AB Ltd. as on 1st April, 2017, when Amalgamation is
completed.
(iii) Pass Journal entries in the Books of M/s. AB Ltd. for acquisition of M/s. A Ltd. and M/s. B
Ltd. (16 Marks)
7.
A. What are the differences between Life insurance and other forms of insurance? (4 Marks)
B. Under what circumstances, an LLP can be wound up by the Tribunal. (4 Marks)
C. What do you mean by “Weighted average number of equity shares outstanding during the
period” and why is it required to be calculated? Compute weighted average number of equity
shares in the following case:
No. of shares
1st April, 2017 Balance of Equity Shares 5,00,000
30th June, 2017 Balance Shares issued for cash 1,00,000
15th January, 2018 Equity Shares bought back 50,000
31st March, 2018 Balance of Equity Shares 5,50,000
(4 Marks)
D. Write the LISTS which should accompany the Statement of Affairs, in case of a winding up by Court. (4 Marks)
E. Pass necessary Journal Entries (with narration) in the books of branch to rectify or adjust the
following:
(i) Branch Paid INR 24,000 as salary to HO Supervisor and the amount was debited to Salaries
Account by the branch. (ii) Head Office Expenses allocated to branch were INR 22,500, but these expenditure were not
recorded by the branch.
(iii) HO collected INR 50,000 directly from the customer on branch’s behalf.
(iv) Branch has sent remittance of INR 1, 20,000 but the same has not yet been received by HO.
(4 Marks)
PRIME A
CADEMY
PRIME/46th
ME/O/IPC 1
THE SOCIETY OF AUDITORS AND PRIME ACADEMY 46th SESSION - IPC - MODEL PRACTICE EXAM
PAPER 4 - ADVANCED ACCOUNTING - SUGGESTED ANSWERS 1. A. (i) M/s Heera & Co Patna Branch Trial Balance In (US$) As on 31st March 2016
Conversion rate per US$ (Rs)
Dr. US$
Cr US$
Stock on 1.4.15 55 5454.55
Purchases and sales 58 13793.10 20689.66
Sundry debtors and creditors
60 6666.67 5000
Bills of exchange 60 2000 4000
Wages and salaries 58 9655.17
Rent rates and taxes 58 6206.90
Sundry charges 58 2758.62
Plant 6000
Bank balance 60 7000
USA office a/c 29845.35
59535.01 59535.01
Trading and P&L for the year ended 31 march 2016
US($) US($)
To opening stock 5454.55 By sales 20689.66
To purchases 13793.10 By closing stock (420,000/60)
7000.00
To wages and salaries 9655.17 By gross loss c/d 1213.16
28902.82 28902.82
To gross loss c/d 1213.16 By net loss 13778.68
To rent rates and taxes
6206.90
To sundry charges 2758.62
To depreciation on plant (US$ 6000*0.6)
3600
13778.68 13778.68
Balance sheet of Patna Branch as on 31st March 2016
Liabilities US$ Assets US$ US$
USA office a/c 29845.35 Plant 6000.00
Less: net loss (13778.68) 16066.67 Less: Dep (3600) 2400.00
Sundry creditord
5000 Closing stock 7000.00
Bills payable 4000 Sundry debtors 6666.67
Bills receivable 2000.00
Bank balance 7000.00
25066.67 25066.67
PRIME A
CADEMY
PRIME/46th
ME/O/IPC 2
B. Determination of Nature of Lease
Present value of unguaranteed residual value at the end of 3rd year = INR 50,000 x 0.7513 = INR 37,565 Present value of lease payments = INR 5, 00,000 – INR 37,565 = INR 4, 62,435 The percentage of present value of lease payments to fair value of the equipment is (INR 4, 62,435/ INR 5, 00,000) x 100 = 92.487%. Since, lease payments substantially cover the major portion of the fair value; the lease constitutes a finance lease. Calculation of Unearned Finance Income Annual lease payment = INR 4, 62,435/ 2.4868 =INR 1, 85,956 (approx.) Gross investment in the lease = Total minimum lease payments + unguaranteed residual value = (INR 1, 85,956 × 3) + INR 50,000 = INR 5, 57,868 + INR 50,000 = INR 6, 07,868 Unearned finance income = Gross investment - Present value of minimum lease Payments and unguaranteed residual value = INR 6, 07,868 – INR 5, 00,000 = INR 1, 07,868
C. Para 10 of AS 16 ‘Borrowing Costs’ states “To the extent that funds are borrowed specifically for the purpose of obtaining a qualifying asset, the amount of borrowing costs eligible for capitalisation on that asset should be determined as the actual borrowing costs incurred on that borrowing during the period less any income on the temporary investment of those borrowings.” The capitalization rate should be the weighted average of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. Hence, in the above case, treatment of accountant of Rainbow Ltd. is incorrect. The amount of borrowing costs capitalized for the financial year 2016-2017 should be calculated as follows:
(INR in Crores)
Actual interest for 2016-2017 (11% of INR 150 crores) Less: Income on temporary investment from specific borrowings Borrowing costs to be capitalized during year 2016-2017
16.50 (3.50)
____________ 13.00
2. A. Statement showing distribution of cash amongst the partners
Trade Payable
Y’s Loan X (INR) Capitals Y (INR)
Z (INR)
Balance Due 66,000 18,000 60,000 40,000 50,000
On 1st Installment amount with the firm INR(1100 + 74,600)
75,700
Less: Dissolution expenses provided for
(12,000)
63,700
Less: Z’s remuneration of 1% on (746)
PRIME A
CADEMY
PRIME/46th
ME/O/IPC 3
assets realized (74,600 x 1%) 62,954
Less: Payment made to Trade Payables
(62,954)
(62,954)
Balance due Nil 3046
2nd installment realised 69,301
Less: Z’s remuneration of 1% on assets realized (69,301 x 1%)
(693)
68,608
Less: Payment made to Trade Payables
(646) 67,962
(646) 2,400
Less: Payment for Y’s loan A/c (18,000) (18,000)
Amount available for distribution to partners
49,962 Nil
Less: Z’s remuneration of 10% of the amount distributed to partners (49,962 x 10/110)
(4,542)
Balance to be distributed to partners on the basis of HRCM
45,420
Less: Paid to Z (W.N.1) (2,000) (2,000)
43,420 48,000
Less: Paid to X and Z in 5:4 (W.N.1) (18,000) (10,000) - (8,000)
Balance due 25,420 50,000 40,000 40,000
Less: Paid to X, Y & Z in 5:4:4 25,420 Nil
(9,778) (7,821) (7,821)
Amount of 3rd installment 40,000 40,222 32,179 32,179
Less: Z’s remuneration of 1% on assets realized (40,000 x 1%
(400) 39,600
Less: Z’s remuneration of 10% of the amount distributed to partners (39,600 x 10/110)
(3,600) 36,000
Less: Paid to X, Y, Z in 5:4:4 for (W.N.1)
(36,000) Nil
(13,846) 26,376
(11,077) 21,102
(11,077) 21,102
Amount of 4th and last installment
28,000
Less: Z’s remuneration of 1% on assets realized (28,000 x 1%)
(280) 27,720
Less: Z’s remuneration of 10% of the amount distributed to partners (27,720 x 10/110)
(2,520) 25,200
Less: Paid to X, Y and Z in 5:4:4 (25,200) Nil
(9,692 (7,754) (7,754)
Loss suffered by partners 16,684 13,348 13,348
PRIME A
CADEMY
PRIME/46th
ME/O/IPC 4
Working Note: (i) INR 1100 added to the first installment received on sale of assets represents the Cash in Bank (ii) The amount due to Creditors at the end of the utilization of First Installment is INR 3046. However,
since the creditors were settled for INR 63,600 only the balance INR 646 were paid and the balance INR 2400 was transferred to the Profit & Loss Account.
Highest Relative Capital Basis
X INR Y INR Z INR
Balance of Capital Accounts (A) 60,000 40,000 50,000
Profit sharing ratio 5 4 4
Capital Profit sharing ratio 12,000 10,000 12,500
Capital in profit sharing
ratio taking Y’s Capital as base (B) 50,000 40,000 40,000
Excess of X’s Capital and Z’s Capital (A-B) =(C) 10,000 Nil 10,000
Again repeating the process
Profit sharing ratio 5 4
Capital Profit sharing ratio 2,000 2,500
Capital in profit sharing
ratio taking X’s Capital as base (D) 10,000 8,000
Excess of Z’s Capital (C-D)=(E) Nil 2,000
Therefore, firstly INR 2,000 is to be paid to Z, and then X and Z to be paid in proportion of 5:4 upto INR 18,000 to bring the capital of all partners X, Y and Z in proportion to their profit sharing ratio. Thereafter, balance available will be paid in the profit sharing ratio 5:4:4 to all partners viz X Y and Z.
3. A. Determination of Buy back of maximum no. of shares as per the Companies Act, 2013
1. Shares Outstanding Test
Particulars (Shares)
Number of shares outstanding (INR 12,50,000 + INR 1,00,000)/ INR 10
1,35,000
25% of the shares outstanding 33,750
2. Resources Test: Maximum permitted limit 25% of Equity paid up capital + Free Reserves
Particulars
Paid up capital (INR) INR 13,50,000
Free reserves (INR) (15,00,000 + 2,50,000 + 1,25,000) INR 18,75,000
Shareholders‘ funds (INR) INR 32,25,000
25% of Shareholders fund (INR) INR 8,06,250
Buy back price per share INR 20
Number of shares that can be bought back (shares) 40,312
Actual Number of shares for buy back 25,000
PRIME A
CADEMY
PRIME/46th
ME/O/IPC 5
3. A. Debt Equity Ratio Test: Loans cannot be in excess of twice the Equity Funds post Buy Back
Particulars INR
(a) Loan funds (INR) (18,75,000+10,00,000+16,50,000 + 1,00,000 + 2,00,000)
48,25,000
(b) Minimum equity to be maintained after buy back in the ratio of 2:1 (INR) (a/2)
24,12,500
(c) Present equity/shareholders fund (INR) 32,25,000
(d) Future equity/shareholders fund (INR) (see W.N.) (32,25,000 – 2,70,833) (e) Maximum permitted buy back of Equity (INR) [(d) – (b)]
29,54,167*
5,41,667
(f) Maximum number of shares that can be bought back @ INR 20 per share
27,083 Shares
(g) Actual Buy Back Proposed Shares 25,000
Summary statement determining the maximum number of shares to be bought back
Particulars Number of shares
Shares Outstanding Test 33,750
Resources Test 40,312
Debt Equity Ratio Test 27,083
Maximum number of shares that can be bought back [least of the above]
27,083
Company qualifies all tests for buy-back of shares and conclusion is that it can buy maximum 27,083 shares on 1st April, 2016. However, company wants to buy-back only 25,000 equity shares @ INR 20. Therefore, buy-back of 25,000 shares, as desired by the company is within the provisions of the Companies Act, 2013. Journal Entries for buy-back of shares
Debit (INR) Credit (INR)
(a) Equity shares buy-back account Dr. To Bank account (Being buy back of 25,000 equity shares of INR 10 each @ INR 20 per share)
5,00,000 5,00,000
(b) Equity share capital account Dr. Securities premium account To Equity shares buy-back account (Being cancellation of shares bought back)
2,50,000 2,50,000
5,00,000
(c) Revenue reserve account Dr. To Capital redemption reserve account (Being transfer of free reserves to capital redemption reserve to the extent of nominal value of capital bought back through free reserves)
2,50,000 2,50,000
PRIME A
CADEMY
PRIME/46th
ME/O/IPC 6
Balance Sheet of Complicated Ltd. as on 1st April, 2016
Particulars Note No Amount INR
EQUITY AND LIABILITIES 1 Shareholders' funds (a) Share capital (b) Reserves and Surplus 2 Non-current liabilities (a) Long-term borrowings 3 Current liabilities (a) Other current liabilities Total ASSETS 1 Non-current assets (a) Fixed assets 2 Current assets (40,00,000-5,00,000) Total
1 2
3
4
11,00,000 22,25,000
28,75,000
19,50,000
81,50,000
46,50,000 35,00,000
81,50,000
Notes to Accounts
(INR) (INR)
1. Share Capital Equity share capital 1,10,000 Equity shares of INR 10 each
11,00,000
2. Reserves and Surplus Profit and Loss A/c Revenue reserves 15,00,000 Less: Transfer to CRR (2,50,000) Securities premium 2,50,000 Less: Utilization for share buy-back (2,50,000) Share Option Outstanding Account Capital Reserve Revaluation Reserve Capital Redemption Reserve
1,25,000
12,50,000
-
4,00,000 1,00,000 1,00,000 2,50,000
22,25,000
3. Long-term borrowings Secured 12% Debentures Unsecured loans
18,75,000 10,00,000
28,75,000
4. Other Current Liabilities Current maturities of long term borrowings Unpaid dividend Application money received for allotment due for refund
16,50,000
1,00,000 2,00,000
19,50,000
Working Note: Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation method.
PRIME A
CADEMY
PRIME/46th
ME/O/IPC 7
Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’. Then (INR 32, 25,000 – x) – INR 24, 12,500 = y ------------ (1)
Or 2x = y -------------- (2) By solving the above equation we get x = INR 2, 70,833 and y = INR 5, 41,667
B. Redemption of debentures must be done according to the terms of issue of debentures and any deviation will be treated as a default by the company. Redemption by paying off the debt on account of debentures issued can be done in one of the following four methods viz: (a) By payment in lump sum at the end of a specified period of time; (b) By payment in annual installments; (c) By purchasing its own debentures in the open market. (d) By conversion into shares in full or in part depending on the terms of issue.
4. A. OM Ltd. Liquidator’s Final Statement of Account
Receipts Value Realised
Payments (INR)
Payments (INR)
Assets Realised:
Cash at Bank 2,40,000 Liquidator’s Remuneration (W.N. 1)
1,02,224
Sundry Debtors 8,00,000 Liquidation Expenses 1,17,736
Inventory 6,40,000 Debenture holders:
Plant and Machinery 20,00,000 14% Debentures 9,20,000
Patent 2,00,000 Interest Accrued (W.N. 2) 1,61,000 10,81,000
Surplus from Securities
(W.N. 3) 5,20,000 Preferential 1,20,000
Unsecured 3,51,200 4,71,200
Preference Shareholders:
Preference Share Capital 16,00,000
Arrears of Dividend 2,24,000 18,24,000
44,00,000
Equity Shareholders (W.N.4) : INR 25.12 per share on 32,000 shares
8,03,840 44,00,000
Working Notes:
INR
1 Liquidator’s remuneration: 2% on assets realised (2% of INR 47,60,000) 2% on payments to unsecured creditors (2% on INR 3,51,200)
95,200
7,024
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1,02,224
2 Interest accrued on 14% Debentures: Interest accrued as on 31.3.2016 Interest accrued upto the date of payment i.e. 30.6.2016
1,28,800 32,200
1,61,100
3 Surplus from Securities: Amount realised from Land and Buildings (INR 3,20,000 + INR 8,00,000) Less: Mortgage Loan
11,20,000
(6,00,000)
5,20,000
4 Amount payable to Equity Shareholders: Equity share capital (paid up) Less: Amount available for equity shareholders Loss to be borne by equity shareholders Loss per equity share (INR11,16,160/32,000) Amount payable to equity shareholders for each equity share (60-34.88)
19,20,000 (8,03,840)
11,16,160
34.88
25.12
B. FORM B– RA Name of the Insurer: Xeta Insurance Company Limited
Registration No. and Date of registration with IRDA: …………………….. Revenue Account for the year ended 31st March, 2016
Particulars Schedule Amount ( (INR)
Premium earned (net) 1 29,81,000
Profit on sale of investment 30,000
Others -
Interest and dividend (gross) Total (A)
1,50,000 ____________
31,61,000
Claims incurred (Net) 2 20,25,000
Commission 3 3,50,000
Operating expenses related to insurance 4 7,50,000
Total (B) 31,25,000
Operating profit from insurance business (A) – (B)
36,000
Schedule –1 Premium earned (net)
INR
Premium received 33,60,000
Less: Premium on reinsurance ceded (2,25,000)
Net Premium 31,35,000
Less: Adjustment for change in Reserve for Unexpired risk (as per W.N.)
(1,54,000)
Total premium earned 29,81,000
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Schedule -2 Claims incurred (net)
INR
Claims paid Add: Expenses regarding claims Less: Re-insurance recoveries
19,20,000 90,000
20,10,000 (60,000)
Add: Claims outstanding as on 31st March, 2016
19,50,000 2,70,000
22,20,000
Less: Claims outstanding as on 31st March, 2015 (1,95,000)
20,25,000
Schedule -3 Commission
INR
Commission paid 3,50,000
Schedule-4 Operating expenses related to Insurance Business
INR
Expenses of management (INR 4,20,000 – INR 45,000) 3,75,000
Working Note: Calculation for change in Reserve for Unexpired risk:
INR
Reserve for Unexpired Risk as on 31st March, 2016
12,54,000
Additional Reserve as on 31st March, 2016 7,00,000 19,54,000
Less: Reserve for Unexpired Risk as on 31st March, 2015
15,00,000
Additional Reserve as on 31st March, 2015 3,00,000 (18,00,000)
1,54,000
5.
A. Journal entries in the books of X Ltd.
Date Particulars Debit (INR) Credit (INR)
31.03.12 Employees Compensation Expense A/c Dr. To Employees Stock Option Outstanding A/c (Being compensation expenses recognized in respect of 500 option granted to employees at discount of `90 each, amortized on straight line basis over 2½ years)
18,000
18,000
Profit & Loss Account Dr. To Employee Compensation Expense A/c (Being compensation expense of the year transferred to profit and loss account)
18,000 18,000
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31.03.13 Employee Compensation Expense A/c Dr. To Employees Stock Option Outstanding A/c (Being compensation expenses recognized in respect of 500 option granted to employees at discount of INR 90 each, amortized on straight line basis over 2½ years)
18,000 18,000
Profit & Loss Account Dr. To Employee Compensation Expense A/c (Being compensation expense of the year transferred to profit and loss account)
18,000 18,000
31.03.14 Employee Compensation Expense A/c Dr. To Employees Stock Option Outstanding A/c (balance of compensation expenses amortized INR 45000 less INR 36000)
9,000 9,000
Profit & Loss Account Dr. To Employee Compensation Expense A/c (Being compensation expense of the year transferred to profit and loss account)
9,000 9,000
30.06.14 Bank Account (INR 50 x 500) Dr. Employees Stock Option Outstanding A/c Dr. (INR 90 x 500) To Equity Share Capital Account To Securities Premium Account (Being exercise of 500 stock option at a price of INR 50 per share)
25,000 45,000
5,000 65,000
Notes: 1. Total employees compensation expenses
= 500 x (INR 140-INR 50) = INR 45,000 2. Employees compensation expense has been written off during 2½ years on straight line basis as under:
Ist Year = INR 18,000 (for full year) IInd Year = INR 18,000 (for full year) IIIrd Year = INR 9,000 (for half year)
B. In the books of Venus Ltd. Journal Entries
Date Particulars Debit (INR) Credit (INR)
01.06.13 01.07.13
Bank Account To Debenture Application A/c (Being Application money received on 3,00,000 debentures @ INR 100 each) Debenture Application Account Underwriters Account To 10% Debentures Account (Being Allotment of 3,00,000 debentures to applicants and 1,00,000 debentures to
Dr. Dr. Dr.
3,00,00,000
3,00,00,000 1,00,00,000
3,00,00,000
4,00,00,000
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underwriters)
Underwriting Commission To Underwriters Account (Being commission payable to underwriters on 4, 00,000 debentures of INR 100 each @ 3%)
Dr. 12,00,000 12,00,000
Bank Account To Underwriters Account (Being amount received from underwriters on settlement of account)
Dr. 88,00,000 88,00,000
30.09.13 Debenture Interest Account To Bank Account (Being interest paid on debentures for 3 months from 01.07.2013 to 30.09.2013 on INR 4, 00, 00,000 @ 10% p.a.)
Dr. 10,00,000 10,00,000
31.12.13 10% Debentures Account To Equity Share Capital Account To Securities Premium Account (Being conversion of 80% of debentures into shares @ INR 40 per share with face value of INR 10 each)
Dr. 3,20,00,000 80,00,000
2,40,00,000
31.03.14 Debenture Interest Account To Bank Account (Being interest paid on debentures for the half year)
Dr. 12,00,000 12,00,000
Profit and Loss A/c To Debenture Interest A/c (Being debenture interest for the year charged to Profit & Loss A/c)
Dr. 22,00,000 22,00,000
Working note:- Calculation of debenture interest for the half year ended 31st March, 2014
INR
On INR 80,00,000 for 6 Months @ 10% p.a. 4,00,000
On INR 3,20,00,000 for 3 Months @ 10% p.a. 8,00,000
Total 12,00,000
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6. A. Calculation of Purchase consideration (or basis for issue of shares of AB Ltd.)
A Ltd. B Ltd.
Purchase Consideration: INR INR
Goodwill 1,40,000 40,000
Freehold property 3,00,000 2,40,000
Plant and Machinery 1,00,000 40,000
Motor vehicles 30,000 20,000
Inventory 2,30,000 1,80,000
Trade receivables 2,00,000 80,000
Less: Liabilities: 6% Debentures (1, 20,000 x 105%)
80,000 10,80,000
-
40,000 6,40,000
(1,26,000)
Trade payables (2,10,000) (1,30,000)
Net Assets taken over 8,70,000 3,84,000
To be satisfied by issue of shares of AB Ltd. @ INR 10 each
87,000 38,400
Balance Sheet AB Ltd. as at 1st April, 2014
Particulars Note No Amount
1 2 3
(a) (a) (a)
EQUITY AND LIABILITIES Shareholders' funds Share capital Non-current liabilities Long-term borrowings Current liabilities Trade payables (21,00,000+1,30,000) Total
1 2
12,54,000
1,26,000
3,40,000 17,20,000
1 2
(a) i ii (a) (b) (c)
ASSETS Non-current assets Fixed assets Tangible assets Intangible assets Current assets Inventories (2,30,000+1,80,000) Trade receivables (2,00,000+80,000) Cash and cash equivalents (80,000+40,000) Total
3 4
7,30,000 1,80,000
4,10,000 2,80,000
1,20,000
17,20,000
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Notes to accounts
INR INR
1.
Share Capital Equity share capital 1,25,400 shares of INR 10 each (All the above shares are issued for consideration other than cash)
12,54,000
2. Long-term borrowings Secured 6% Debentures
1,26,000
3. Tangible assets Freehold property A Ltd. B Ltd.
3,00,000 2,40,000
5,40,000
Plant and Machinery A Ltd. B Ltd.
1,00,000
40,000
1,40,000
Motor vehicles A Ltd. A Ltd. B Ltd.
30,000 20,000
50,000 7,30,000
4. Intangible assets Goodwill A Ltd. B Ltd.
1,40,000 40,000
1,80,000
Journal Entries In the books of AB Ltd.
Particulars Amount INR Amount INR
Business purchase account Dr. To Liquidator of A Ltd. account
12,54,000 8,70,000
To Liquidator of B Ltd. account 3,84,000
(Being the amount of purchase consideration payable to liquidator of A Ltd. and B Ltd. for assets taken over)
Goodwill Dr. Freehold property Dr. Plant and Machinery Dr. Motor vehicles Dr. Trade receivables Dr. Inventory Cash at Bank Dr. To Trade payables To Business purchase account (Being assets and liabilities of A Ltd. taken over)
1,40,000 3,00,000 1,00,000
30,000 2,00,000 2,30,000
80,000
2,10,000 8,70,000
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Goodwill Dr. Freehold property Dr. Plant and Machinery Dr. Motor vehicles Dr. Trade receivables Dr. Inventory Dr. Cash at Bank Dr. To Trade payables To 6% Debentures of B Ltd. To Business purchase account (Being assets and liabilities of B Ltd. taken over)
40,000 2,40,000
40,000 20,000 80,000
1,80,000 40,000
1,30,000 1,26,000 3,84,000
6% Debentures of B Ltd. Dr. To 6% debentures (Being issue of 6% debentures to debenture holders of B Ltd.
1,26,000 1,26,000
Liquidator of the A Ltd. account Dr. Liquidator of the B Ltd. account Dr. To Equity share capital account Being the allotment of equity shares of INR 10 each, as per the agreement for discharge of purchase consideration)
8,70,000 3,84,000
12,54,000
Note: (1) It is assumed that the nominal value of debentures of B Ltd. is INR 100 each. (2) It has been presumed that 6% Debentures of M/s B Ltd. are discharged at premium of 5% by issue of 6% Debentures of M/s AB Ltd. At par.
7. A.
Life Insurance Other forms of Insurance
1. Timing of Payment of Claim
Insurable amount is payable either on the happening of the event (death) or at the maturity
Reimbursement of loss or liability incurred will be paid at the happening of the uncertain event only.
2. Value of Policy Insurance can be done for any value depending upon the premiums the insured is willing to pay
The sum payable under it is limited to the amount of loss actually suffered or the liability incurred, notwithstanding the amount of policy.
3. Duration of Contract
These are long term contracts running over the number of years.
These are only for one year though renewable after year.
4. Assurance Life insurance is also known by another term ‘assurance’ since the insured gets an assured sum.
Policies covering other than life are known as insurance policies.
5. Determination of Liability
Actuaries periodically estimate the liability under existing policies. On that basis a valuation balance sheet is prepared to determine the profit
A portion of the premium is carried forward as a provision for unexpired liability and the balance net of claims and expenses is taken as profit or loss.
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B. Under following circumstances, an LLP can be wound up by the Tribunal: (1) If the LLP decides that it should be wound up by the Tribunal; (2) If for a period of more than six months, the number of partners of the LLP is reduced below two; (3) If the LLP is unable to pay its debts; (4) If the LLP has acted against the interests of the integrity and sovereignty of India, the security of the state or public order; (5) If the LLP has defaulted in the filing of the Statement of Account and Solvency with the Registrar for five consecutive financial years; (6) If the Tribunal is of the opinion that it is just and equitable that the LLP be wound up.
C. As per AS 20, “Earnings Per Share”, the weighted average number of equity shares outstanding during
the period reflects the fact that the amount of shareholders’ capital may have varied during the period as a result of a larger or lesser number of shares outstanding at any time. For the purpose of calculating basic earnings per share, the number of equity shares should be the weighted average number of equity shares outstanding during the period.
Computation of weighted average number of shares outstanding during the period
Date No. of equity shares Period outstanding
Weights (months)
Weighted average number of shares
(1) (2) (3) (4) (5) = (2) x (4)
1st April, 2014 5,00,000 (Opening 3 months 3 /12 1,25,000
30th June 2014
6,00,000 (after Additional issue)
6.5 months 6.5/12 3,25,000
15th Jan, 2015
5,50,000 (after Buy back)
2.5 months 2.5/2 1,14,583
31st March, 2015
5,50,000 (Balance) 0 month 0/12 -
Total 5,64,583
D. Statement of Affairs should accompany the following eight lists in case of winding up by the court:
List A: Full particulars of every description of property not specifically pledged and included in any other list are to be set forth in this list. List B: Assets specifically pledged and creditors fully or partly secured. List C: Preferential creditors for rates, taxes, salaries, wages and otherwise. List D: List of debenture holders secured by a floating charge. List E: Unsecured creditors. List F: List of preference shareholders. List G: List of equity shareholders. List H: Deficiency or surplus account.
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E. Journal Entries in the Books of Branch
Particulars Amount INR Amount INR
1. Head office account Dr. To Salaries account (Being the rectification of salary paid on behalf of H.O.)
24,000 24,000
2. Expenses account Dr. To Head office account (Being the allocated expenditure by the head office recorded in branch books)
22,500 22,500
3. Head office account Dr. To Debtors account (Being the adjustment of collection from branch debtors)
50,000 50,000
4. No Entry in branch books
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THE SOCIETY OF AUDITORS AND PRIME ACADEMY
46th
SESSION - IPC - MODEL PRACTICE EXAM
PAPER 6 – AUDITING AND ASSURANCE
No. of Questions: 7 Total Marks: 100
No. of Pages: 2 Time Allowed: 3 hrs
Question No.1 is compulsory.
Attempt any five questions from the remaining six questions.
1. Discuss the following :
(a) Advantages and disadvantages of Joint Audit. ( 5 Marks )
(b) „‟Statements” and „‟Guidance Notes‟‟ of ICAI-wheather mandatory or recommendatory ?
( 5 Marks )
(c) Shares issued at a discount. ( 5 Marks )
(d) “Inquiry is one of the audit procedure to obtain audit evidence‟‟. Discuss. ( 5 Marks )
2. State with reasons (in short) whether the following statements are correct or incorrect : (Answer
any eight)
(i) The Statutory Auditor is required to verify inventory physically.
(ii) Contingent liabilities are provided for in the accounts if they crystallize between the
end of the accounting year and tht date of signing the audit report.
(iii) “The environment in which internal control operates has no relationship with
effectiveness of the specific control procedure”.
(iv) “One of the techniques used gathering evidence is substantial review”.
(v) Surprise checks are part of internal check.
(vi) An auditor is considered to lack Independence, if the partner of the audit firm owns the
building in which the client‟s business is situated”.
(vii) Auditor‟s lien onhis client‟s books and record is not unconditional.
(viii) Cut-off procedures are generally applied to trading transactions.
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(ix) Comptroller and Auditor General of India can be removed by the Prime minister of
India on the recommendation of his Council of Ministers.
(x) Emphasis of Matter paragraph in the Auditor‟s Report is a substitute of Disclaimer of
Opinion. ( 8*2=16 Marks )
3. How will you Vouch?Verify the following ?
(a) Floating Charge. ( 4 Marks )
(b) Endowmwnt Polices. ( 4 Marks )
(c) Personal Expenses of Directors. ( 4 Marks )
(d) Wages paid to Seasonal Labourers. ( 4 Marks )
4.
(a) What are the Procedures to be performed by the auditor in expressing opinion on „going
concern‟ assumption . ( 6 Marks )
(b) Write a short note on „‟Cost Audit”. ( 6 Marks )
(c) Write a short note on “Government Expenditure Audit”. ( 4 Marks )
5.
(a) ABC Ltd. Having Rs.40 lacs paid upcapital, Rs.9.50 lacs reserves and turnover of last three
consecutive financial years, immediately preceding the financial yerar under audit, being
Rs.4.90 crores, Rs 4.50 crores and Rs.6 crores, but does not have any internal audit system. In
view of the management, Internal audit system is not mandatory.Comment as an Auditor.
( 6 Marks )
(b) Distinguish between Internal Control Questionnaire and Internal Control Evaluation.
( 4 Marks )
(c) Write a short note on “Permanent Audit File”. ( 6 Marks )
6.
(a) What are the auditor‟s responsibilities for detection of Frauds and Errors? ( 6 Marks )
(b) Indicate the fctors which make it appropriate for an auditor to send a new Engagement Letter
for a recurring audit. ( 6 Marks )
(c) Under what circumstances the retiring auditor cannot be reappointed? ( 4 Marks )
7. Write short notes on any four of the following :
(a) Powers of C & AG in connection with the performance of his duties. ( 4 Marks )
(b) Director‟s responsibility statement. ( 4 Marks )
(c) Physical Verification of fixed assets “at reasonable intervals”. ( 4 Marks )
(d) Auditing through the computer. ( 4 Marks )
(e) Personal Expenses of Directors met by the company. ( 4 Marks )
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THE SOCIETY OF AUDITORS AND PRIME ACADEMY 46th SESSION - IPC - MODEL PRACTICE EXAM
PAPER 6 – AUDITING & ASSURANCE - SUGGESTED ANSWERS
1. a) Advantages and disadvantages of Joint Audit.
Joint Audit: The practices of appointing chartered accountants as joint auditors is quite widespread in big companies and corporations, joint audit basically implies pooling together the resources and expertise of more than one firm of auditors to render an expert job in a given time period which may be difficult to accomplish acting individually. It essentially involves sharing of the total work. When more than one auditor is appointed to audit large entities, such auditors are called joint auditors. Joint auditors have a collective responsibility to report on the financial statements. SA 299, "Joint Audit" deals with duties, rights and professional responsibilities of joint auditors. Advantages and disadvantages of joint audit are as follows- Advantages of Joint Audit (i) Pooling and sharing of expertise. (ii) Advantage of mutual consultation. (iii) Lower work load. (iv) Better quality of work performance. (v) Improved service to the client. (vi) Displacement of the auditor of the company taken over in a take-over often obviated. (vii) In respect of multinational companies, the work can be spread using the expertise if the (viii) Local firms which are in a better position to deal with detailed work and the local laws and
regulations. (ix) Lower staff development costs. (x) Lower costs to carry out the work. (xi) A sense of healthy competition towards a better performance. Disadvantages of Joint Audit (i) The fees being shared. (ii) Psychological problem where firms of different standing are associated in the joint audit. (iii) General superiority complexes of some auditors. (iv) Problems of coordination of the work. (v) Areas of work of common concern being neglected. (vi) Uncertainty about the liability for the work done. (vii) Lack of clear definition of responsibility.
b) Statements and Guidance Notes of ICAI — whether Mandatory or Recommendatory Statements- The 'Statements' have been issued with a view to securing compliance by members on matters which, in the opinion of the Council, are critical for the proper discharge of their functions. 'Statements' therefore are mandatory. Accordingly, while discharging their attest function, it will be the duty of the members of the Institute to ensure that statements are followed and complied with. Guidance Notes- 'Guidance Notes' are primarily designed to provide guidance to members on matters which may arise in the course of their professional work and on which they may desire assistance in resolving issues which may pose difficulty. Guidance Notes are recommendatory in nature. A member should ordinarily follow recommendations in a guidance note relating to an auditing matter except where he is satisfied that in the circumstances of the case, it may not be necessary to do so.
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Similarly, while discharging his attest function, a member should examine whether the recommendations in a guidance note relating to an accounting matter have been followed or not. If the same have not been followed, the member should consider whether keeping in view the circumstances of the case, a disclosure in his report is necessary. There are, however a few guidance notes in case of which the Council has specifically stated that they should be considered as mandatory on members while discharging their attest function.
c) Issue of Shares at a Discount: According to section 53 of the Companies Act, 2013, a company shall not issue shares at a discount, except in the case of an issue of sweat equity shares provided under section 54 of the Companies Act, 2013. Any share issued by a company at a discounted price shall be void. Where a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees and every officer who is in default shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees, or with both.
d) Inquiry — Audit Procedure to obtain Audit Evidence: Inquiry consists of seeking information of knowledgeable persons, both, financial and non- financial, within the entity or outside the entity. Inquiry is used extensively throughout the audit in addition to other audit procedures. Inquiries may range from formal written inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry process. Responses to inquiries may provide the auditor with information not previously possessed or with corroborative audit evidence. Alternatively, responses might provide information that differs significantly from other information that the auditor has obtained, for example, information regarding the possibility of management override of controls. In some cases, responses to inquiries provide a basis for the auditor to modify or perform additional audit procedures. Although corroboration of evidence obtained through inquiry is often of particular importance, in the case of inquiries about management intent, the information available to support management's intent may be limited. In these cases, understanding management's past history of carrying out its stated intentions, management's stated reasons for choosing a particular course of action, and management's ability to pursue a specific course of action may provide relevant information to corroborate the evidence obtained through inquiry. In respect of some matters, the auditor may consider it necessary to obtain written representations from management and, where appropriate, those charged with governance to confirm responses to oral inquiries.
2. a) Incorrect: Physical verification of inventories is the responsibility of the management of the entity.
However, where the inventories are material and the auditor is placing reliance upon the physical count by the management, the auditor should attend the stock-taking.
b) True: AS 29 "Provisions, Contingent Liabilities and Contingent Assets", a provision should be recognised when, an enterprise has a present obligation as a result of a past event; it is
probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation. Furthermore, As per AS 4 "Contingencies and Events Occurring after the Balance Sheet Date", adjustments to assets and liabilities are required for events, occurring between the balance sheet date and the date on which the financial statements are approved, that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date.
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c) False: The environment in which internal control operates has an impact on the effectiveness of the
specific control procedure. For example, strong control environment in association with effective internal audit system strengthen the internal control system.
d) False: One of the techniques used for obtaining evidence is analytical review procedure which consists of studying significant ratios and trends. (SA 500 "Audit Evidence")
e) Incorrect: Surprise checks are part of normal audit procedures and the results of such checks are important to the auditor in deciding the scope of his audit and submitting his report thereon.
f) False: According to the Guidance Note issued by the ICAI on "Independence of Auditors", "Independence implies that the judgment of a person is not subordinate to the wishes or directions of another person who might have engaged him or to his own self-interest." In this case of Renting of building to the client does not affect the independence.
g) True: The auditor can exercise his lien on client's books and records subject to the following conditions- (a) Document retained must belong to the client who owes the money. (b) Documents must have come into possession of the auditor on the authority of the client. They must not have been received through irregular or illegal means. In case of a company client, they must be received on the authority of the Board of Directors. (c) The auditor can retain the documents only if he has done work on the documents assigned to him. (d) Such of the documents can be retained which are connected with the work on which fees have not been paid
h) True: They cover the areas of purchases, sales, inventories to ensure that transaction of one year do not get recorded in the following year or preceding year to ensure 'matching' and true and fair view of the accounts.
i) False: The Comptroller and Auditor General of India cannot be removed by the Prime Minister of India on the recommendation of his Council of Ministers. He can be removed on the ground of proven mis behavior or incapacity, when each House of Parliament decides to do so by majority of not less than 2/3 of the members of the house present and voting.
j) Incorrect: As per SA 706 "Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor's Report", the inclusion of an Emphasis of Matter paragraph in the auditor's report does not affect the auditor's opinion. Whereas the auditor shall disclaim an opinion when he is unable to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor concludes that the possible effects on the financial statements of undetected misstatements could be both material and pervasive. Therefore, an Emphasis of Matter paragraph is not a substitute for the auditor expressing a disclaimer of opinion.
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3. a) Floating Charge: Floating charge refers to a general charge on some or all the assets of an enterprise
which is not attached to any specific assets and is given as a security against a debt. It has the effect of creating an immediate charge on the property of the company leaving the company to deal with the same in the ordinary course of business, but subject to the limitations imposed in the instrument of creating the charge. The floating charge, however, becomes fixed or crystallized and the trade payable becomes entitled to proceed against the assets on which the charge was created, on violation of any of the terms of the instruments creating the charge. This charge is also required to be registered within 30 days of its creation under section 77 of the Companies Act, 2013.
b) Endowment Policies (i) Ascertain the specific purpose for which the endowment policy is taken, e.g., Sinking Fund policies
for redemption of debentures, redemption of leases or policies taken for other similar purposes, etc
(ii) Verify the terms and conditions of policies and ensure that all such conditions are in force and being followed.
(iii) Check that premium has been deposited in time and the policy is in force. (iv) Examine that proper disclosures have been made in the financial statements in respect of items for
which the policy has been taken.
c) Personal Expenses of Directors (i) Check the articles of association, service contract, minutes of general meeting, etc., to check the
authorization for such payment. (ii) Enquire to ensure that personal expenses are not camouflaged in any other revenue items as
contemplated under section 143(1) of the Companies Act, 2013. (iii) Ascertain compliance with disclosure according to requirements of Schedule III to the Companies
Act, 2013. (iv) Check documentary evidences to examine the payments reimbursed.
d) Wages paid to Seasonal Labourers (i) Ascertain and evaluate the internal control system for recruitment and usage of seasonal labourers. (ii) Examine that these labourers are hired on proper authority and the rates of pay are authorized at
appropriate levels. (iii) Ensure that the attendance is properly checked by the Time Keeping Department. (iv) Check that the certificate regarding work done by the labourers has been given by the proper
person, in case the labourers have been appointed on a per piece basis. (v) Check the computation of wages payable to the labourers, after taking into account the deductions. (vi) Confirm that all the payments to the labourers have been acknowledged. (vii) See the time and job records, to ensure that the labourers have been paid for time worked. See the
treatment of abnormal idle time. (viii) Reconcile the number of seasonal labourers on payroll as per the Personnel Department's
records vis-a-vis the number of labourers to whom the wages have beenpaid, to ensure that there are no ghost workers. This assumes greater importance, if the seasonal labourers are hired on temporary basis, and not on permanent payroll.
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4. a) Procedures to be performed by the Auditor in Expressing Opinion on 'Going
Concern' Assumption: As per SA 570, "Going Concern", the following are the relevant procedures that are relevant in this connection- (i) Analyze and discuss cash flow, profit and other relevant forecasts with management. (ii) Analyze and discuss the entity's latest available interim financial statements. (iii) Review the terms of debentures and loan agreements and determine whether any of the terms
have been breached. (iv) Read minutes of the meetings of shareholders, those charged with governance and relevant
committees for reference to financing difficulties. (v) Inquire of the entity's legal counsel regarding the existence of litigation and claims and the
reasonableness of management's assessments of their outcome and the estimate of their financial implications.
(vi) Confirm the existence, legality and enforceability of arrangements to provide or maintain financial support with related and third parties and assess the financial ability of such parties to provide additional funds.
(vii) Evaluate the entity's plans to deal with unfilled customer orders. (viii) Perform audit procedures regarding subsequent events to identify those that either mitigate or
otherwise affect the entity's ability to continue as a going concern. (ix) Confirm the existence, terms and adequacy of borrowing facilities. (x) Obtain and review reports of regulatory actions. (xi) Determine the adequacy of support for any planned disposals of assets.
b) Cost Audit: Cost Audit is covered by Section 148 of the Companies Act, 2013. The audit conducted under this section shall be in addition to the audit conducted under section 143 of the Companies Act, 2013.As per the section 148 the Central Government may by order specify audit of items of cost in respect of certain companies. The audit shall be conducted by a Cost Accountant in Practice who shall be appointed by the Board of such remuneration as may be determined by the members in such manner as may be prescribed. No person appointed under section 139 as an auditor of the company shall be appointed for conducting the audit of cost records. The auditor conducting the cost audit shall comply with the cost auditing standards ("cost auditing standards" mean such standards as are issued by the Institute of Cost and Works Accountants of India, constituted under the Cost and Works Accountants Act, 1959, with the approval of the Central Government).The qualifications, disqualifications, rights, duties and obligations applicable to auditors under this Chapter X of the Companies Act, 2013 shall, so far as may be applicable, apply to a cost auditor appointed under this section and it shall be the duty of the company to give all assistance and facilities to the cost auditor appointed under this section for auditing the cost records of the company. The report on the audit of cost records shall be submitted to the Board of Directors of the company and company shall within 30 days from the date of receipt of a copy of the cost audit report prepared furnish the Central Government with such report along with full information and explanation on every reservation or qualification contained therein.
c) Government Expenditure Audit: It is one of the major components of Government audit. The mains aim is to ensure that- (i) The expenditure incurred conforms to the relevant provisions of the statutory enactments and is
also in accordance with the financial rule and regulation. This is called audit against "rules and orders".
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(ii) There is proper sanction either special or general accorded by the competent authority for all expenditure. This is known as audit of sanctions.
(iii) There are provisions or budget of funds out of which expenditure can be met. This is called audit against provisions of fund.
(iv) The expenditure is incurred with due regard to broad and general principle of propriety. This is called propriety audit.
(v) That the programmes, schemes and projects where large expenditure has been incurred are being run economically and yielding results. This is known as performance audit.
5. a) Applicability of Provisions of Internal Audit: As per section 138 of the Companies Act, 2013, the
following class of companies (prescribed in rule 13 of Companies (Accounts) Rules, 2014) shall be required to appoint an internal auditor or a firm of internal auditors, namely- (i) every listed company; (ii) every unlisted public company having-
paid up share capital of Z 50crore or more during the preceding financial year; or
turnover of Z 200crore or more during the preceding financial year; or
outstanding loans or borrowings from banks or public financial institutions exceeding Z 100 crore or more at any point of time during the preceding financial year; or
outstanding deposits of Z 25crore or more at any point of time during the preceding financial year; and
(iii) every private company having-
turnover of Z 200crore or more during the preceding financial year; or
outstanding loans or borrowings from banks or public financial institutions exceeding Z 100 crore or more at any point of time during the preceding financial year.
Thus, any of the condition is required to be satisfied for the applicability of the provision. The internal auditor to be appointed shall either be a chartered accountant whether engaged in practice or not or a cost accountant, or such other professional as may be decided by the Board to conduct internal audit of the functions and activities of the companies auditor may or may not be an employee of the company. In the instant case, JKT Ltd. is having paid up capital less than Z 50crore and turnover less than Z 200 hundred crore. Further, maximum outstanding loan or borrowings from public financial institution and maximum outstanding deposits have not been given. Therefore, it is assumed that outstanding loans or borrowings from banks or public financial institutions and outstanding deposits are also not exceeding the prescribed limits for applicability of the provisions of internal audit. Thus, any of the condition in respect of paid up capital, turnover, outstanding loans or outstanding deposits is not satisfied. So, the company is not liable for internal audit as per section 138 of the Companies Act, 2013.
b) Distinguish between Internal Control Questionnaire and Internal Control Evaluation. Internal Control Questionnaire: This is a comprehensive series of questions concerning internal control. This is the most widely used form for collecting information about the existence, operation and efficiency of internal control in an organisation. An important advantage of the questionnaire approach is that oversight or omission of significant internal control review procedures is less likely to occur with this method. With a proper questionnaire, all internal control evaluation can be completed at one time or in sections. The review can more easily be made on an interim basis. The questionnaire form also provides an orderly means of disclosing control defects. It is the general practice to review the internal control system annually and record the review in detail.
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In the questionnaire, generally questions are so framed that a 'Yes' answer denotes satisfactory position and a 'No' answer suggests weakness. Provision is made for an explanation or further details of 'No' answers. In respect of questions not relevant to the business, Not Applicable' reply is given. The questionnaire is usually issued to the client and the client is requested to get it filled by the concerned executives and employees. If on a perusal of the answers, inconsistencies or apparent incongruities are noticed, the matter is further discussed by auditor's staff with the client's employees for a clear picture. The concerned auditor then prepares a report of deficiencies and recommendations for improvement.
c) Permanent Audit File: In the case of recurring audits, some working paper files may be classified as permanent audit files. Normally, auditor may consider classifying such papers as permanent which are required in case of recurring audit assignments. This file contains paper of continuing importance to succeeding audits. A permanent audit file normally includes- (i) Information concerning the legal and organisational structure of the entity. In the case of a
company, this includes the Memorandum and Articles of Association. In the case of a statutory corporation, this includes the Act and Regulations under which the corporation functions.
(ii) Extracts or copies of important legal documents, agreements and minutes relevant to the audit. (iii) A record of the study and the evaluation of the internal controls related to the accounting system.
This might be in the form of narrative descriptions, questionnaires or flow charts, or some combination thereof.
(iv) Copies of audited financial statements for previous years. (v) Analysis of significant ratios and trends. (vi) Copies of management letters issued by the auditor, if any. (vii) Record of communication with the retiring auditor, if any, before acceptance of the appointment as
auditor. (viii) Notes regarding significant accounting policies. (ix) Significant audit observations of earlier years.
6. a) Auditor's Responsibilities for Detection of Fraud and Error: As per SA 240 "The Auditor's Responsibilities
Relating to Fraud in an Audit of Financial Statements", an auditor conducting an audit in accordance with SAs is responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with the SAs. The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one resulting from error. This is because fraud may involve sophisticated and carefully organized schemes designed to conceal it, such as forgery, deliberate failure to record transactions, or intentional misrepresentations being made to the auditor. Such attempts at concealment may be even more difficult to detect when accompanied by collusion. Collusion may cause the auditor to believe that audit evidence is persuasive when it is, in fact, false. The auditor's ability to detect a fraud depends on factors such as the skillfulness of the perpetrator, the frequency and extent of manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved. While the auditor may be able to identify potential opportunities for fraud to be perpetrated, it is difficult for the auditor to determine whether misstatements in judgment areas such as accounting estimates are caused by fraud or error.
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Furthermore, the risk of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud, because management is frequently in a position to directly or indirectly manipulate accounting records, present fraudulent financial information or override control procedures designed to prevent similar frauds by other employees. When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of professional skepticism throughout the audit, considering the potential for management override of controls and recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud. As Per SA 200 "Overall Objectives of the Independent Auditor and the conduct of an audit in accordance with standards on auditing", the purpose of an audit is to enhance the degree of confidence of intended users in the financial statements. This is achieved by the expression of an opinion by the auditor on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework. An audit conducted in accordance with the auditing standards generally accepted in India is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. The fact that an audit is carried out may act as a deterrent, but the auditor is not and cannot be held responsible for the prevention of fraud and error. The auditor's opinion on the financial statements is based on the concept of obtaining reasonable assurance; hence, in an audit, the auditor does not guarantee that material misstatements, whether from fraud or error, will be detected. Therefore, the subsequent discovery of a material misstatement of the financial statements resulting from fraud or error does not, in and of itself, indicate:
failure to obtain reasonable assurance,
inadequate planning, performance or judgment,
absence of professional competence and due care, or,
failure to comply with auditing standards generally accepted in India. This is particularly the case for certain kinds of intentional misstatements, since auditing procedures may be ineffective for detecting an intentional misstatement that is concealed through collusion between or among one or more individuals among management, those charged with governance, employees, or third parties, or involves falsified documentation. Whether the auditor has performed an audit in accordance with auditing standards generally accepted in India is determined by the adequacy of the audit procedures performed in the circumstances and the suitability of the auditor's report based on the result of these procedures. In planning and performing his examination the auditor should take into consideration the risk of material misstatement of the financial information caused by fraud or error. He should inquire with the management as to any fraud or significant error, which has occurred in the reporting period, and modify his audit procedures, if necessary. If circumstances indicate the possible existence of fraud and error, the auditor should consider the potential effect of the suspected fraud and error on the financial information. If he is unable to obtain evidence to confirm, he should consider the relevant laws and regulations before expressing his opinion. The auditor also has the responsibility to communicate the misstatement to the appropriate level of management on a timely basis and consider the need to report to it then changed with governance. He may also obtain legal advice before reporting on the financial information or before withdrawing from the engagement. The auditor should satisfy himself that the effect of fraud is properly reflected in the financial information or the error is corrected in case the modified procedures performed by the auditor confirm the existence of the fraud. The auditor should also consider the implications of the frauds and errors, and frame his report appropriately. In case of a fraud, the same should be disclosed in the financial statement. If adequate disclosure is not made, there should be a suitable disclosure in his audit report.
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Further, as per sub-section (12) of section 143 of the Companies Act, 2013, if an auditor of a company, in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the company by officers or employees of the company, he shall immediately report the matter to the Central Government within 60 days of his knowledge and after following the prescribed procedure. The auditor is also required to comment under clause (xii) of Para 3 of CARO, 2015 whether any fraud on or by the company has been noticed or reported during the year. If yes, the nature and the amount involved is to be indicated.
b) Factors which make it appropriate for sending a New Engagement Letter for Recurring Audit: As per SA 210, "Agreeing the Terms of Audit Engagements", on recurring audits, the auditor shall assess whether circumstances require the terms of the audit engagement to be revised and whether there is a need to remind the entity of the existing terms of the audit engagement. The auditor may decide not to send a new audit engagement letter or other written agreement each period. However, the following factors may make it appropriate to revise the terms of the audit engagement or to remind the entity of existing terms- (i) Any indication that the entity misunderstands the objective and scope of the audit. (ii) Any revised or special terms of the audit engagement. (iii) A recent change in senior management or board of directors. (iv) A significant change in ownership. (v) A significant change in nature or size of the entity's business. (vi) A change in legal or regulatory requirements. (vii) A change in the financial reporting framework adopted in the preparation of the financial
statements. (viii) A change in other reporting requirements.
c) Circumstances where Retiring Auditor cannot be reappointed: In the following circumstances, the retiring auditor cannot be reappointed- (i) A specific resolution has not been passed to reappoint the retiring auditor. (ii) The auditor proposed to be reappointed does not possess the qualification prescribed under
section 141 of the Companies Act, 2013. (iii) The proposed auditor suffers from the disqualifications under section 141 (3), 141(4)and 144 of the
Companies Act, 2013. (iv) He has given to the company notice in writing of his unwillingness to be reappointed. (v) A resolution has been passed in AGM appointing somebody else or providing expressly that the
retiring auditor shall not be reappointed. (vi) A written certificate has not been obtained from the proposed auditor to the effect that the
appointment or reappointment, if made, will be in accordance within the limits specified under section 141(3)(g) of the Companies Act, 2013.
7. a) Powers of C & AG in connection with the performance of his duties.
Power of Comptroller and Auditor General of India in performance of Duties: The Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act, 1971 gives the following powers to the C&AG in connection with the performance of his duties- (i) To inspect any office of accounts under the control of the Union or a State Government including
office responsible for the creation of the initial or subsidiary accounts. (ii) To require that any accounts, books, papers and other documents which deal with or are otherwise
relevant to the transactions under audit, be sent to specified places.
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(iii) To put such questions or make such observations as he may consider necessary to the person in charge of the office and to call for such information as he may require for the preparation of any account or report which is his duty to prepare.
In carrying out the audit, the C&AG has the power to dispense with any part of detailed audit of any accounts or class of transactions and to apply such limited checks in relation to such accounts or transactions as he may determine.
b) Director's Responsibility Statement: According to section 134(3) (c) of the Companies Act, 2013, the report of board of directors on annual accounts shall also include a 'Director's Responsibility Statement' However, the provisions related to Director's Responsibility Statement are provided under section 134(5) of the Companies Act, 2013 which requires to state that- (i) in the preparation of the annual accounts, the applicable accounting standards had been followed
along with proper explanation relating to material departures; (ii) the directors had selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and prudent so as to give a true and fair view of the state of affairs of the company at the end of the financial year and of the profit and loss of the company for that period;
(iii) the directors had taken proper and sufficient care for the maintenance of adequate accounting records in accordance with the provisions of this Act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities;
(iv) the directors had prepared the annual accounts on a going concern basis; (v) the directors, in the case of a listed company, had laid down intemal financial controls to be
followed by the company and that such internal financial controls are adequate and were operating effectively. Here, the term Internal financial controls" means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company's policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information; and
(vi) the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.
c) Physical Verification of Fixed Assets "at reasonable intervals": Clause 3(i)(b) of CARO, 2015 requires the
auditor to comment whether the fixed assets of the company have been physically verified by the management at reasonable intervals; whether any material discrepancies were noticed on such verification and if so, whether the same have been properly dealt with in the books of account. "Reasonable Intervals" depends upon the circumstances of each case. The factors to be considered in this regard includes the number of assets, nature of assets, relative value of assets, difficulty in verifications, situation and spread of the assets etc. The management may decide about the periodicity of physical verification of fixed assets considering the above factors while an annually verification may be reasonable; it may impracticable to carry out the same in some cases. Even in such cases the verification program should be such that all assets are verified at least once in every three years where verification of all assets is not made during the year, it will be necessary for the auditor to report the fact, but if he is satisfied regarding the frequency of verification, he should also make a suitable comment to that affect. The auditor is required to state whether any material discrepancies were noticed on verification and, if so, whether the same have been properly dealt with in the books of account.
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It would be appropriate for the auditor to obtain a management representation letter confirming that the fixed assets are physically verified by the company in accordance with the policy of the company. The management representation letter should also mention the periodicity of the physical verification of fixed assets. The letter should also include the details of the material discrepancies noticed during the physical verification of the fixed assets. If no discrepancies were noticed during the physical verification, the management representation letter should also mention this fact.
d) Auditing through the Computer Approach: The sophistication of computers has finally reached the point where auditors can no longer audit around the system. They are forced to treat the computers as the target of the audit and audit through it. Auditing through the computer requires that the auditor submits data to the computer for processing. The results are then analysed for the processing reliability and accuracy of the computer programme. Technical and other developments that necessitated this approach include the following- On-line data entry. Elimination or reduction of print-outs. Real time files updating. The auditor can use the computer to test the logic and controls existing within the system; and the records produced by the system. Depending upon the complexity of the application system being audited, the approach may be fairly simple or require extensive technical competence on the part of the auditor. There are several circumstances where auditing through the computer approach must be used- (i) The application system processes large volumes of input and produces large volumes of output that
make extensive direct examination of the validity of input and output difficult. (ii) Significant parts of the internal control system are embodied in the computer system. For example,
in an online banking system a computer program may batch transactions for individual tellers to provide control totals for reconciliation at the end of the day's processing.
(iii) The logic of the system is complex and there are large portions that facilitate use of the system for efficient processing.
(iv) Because of cost-benefit considerations, there are substantial gaps in the visible audit trail. The primary advantage is that the auditor has increased power to effectively test a computer system. The range and capability of tests that can be performed increases and the auditor acquires greater confidence that data processing is correct. By examining the system's processing the auditor also can assess the system's ability to cope with environment change. The primary disadvantages of the approach are the high costs sometimes involved and the need for extensive technical expertise when systems are complex. However, these disadvantages are really spurious if auditing through computer is the only viable method of carrying out the audit.
e) Personal Expenses of Directors (i) Check the articles of association, service contract, minutes of general meeting, etc., to check the
authorisation for such payment. (ii) (ii) Enquire to ensure that personal expenses are not camouflaged in any other revenue items as
contemplated under section 143(1) of the Companies Act, 2013. (iii) Ascertain compliance with disclosure according to requirements of Schedule Ill to the Companies
Act, 2013. (iv) Check documentary evidences to examine the payments reimbursed.
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THE SOCIETY OF AUDITORS AND PRIME ACADEMY
46th
SESSION - IPC - MODEL PRACTICE EXAM
PAPER 7 – INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT
No. of Questions: 14 Total Marks: 100
No. of Pages: 2 Time Allowed: 3 hrs
Question No. 1 is compulsory
Answer and five questions from rest
SECTION – A
1) a) What is a server? Explain any four kinds of servers based on the service they provide.
b) Write about the advantages and disadvantages of three tier system.
c) Discuss about FCAPS model of network management.
d) What are the components of SCM
e) Write about the types of application based on processing. ( 5 X 2 = 10 Marks )
2) A bicycle shop in a city hires bicycles by the day at different rates for different models as given below:
In order to attract customers, the shopkeeper gives a discount of 15 percent to all those customers,
who hire a bicycle for more than one-week period. Further to attract women customer, he gives additional
discount of 10 percent irrespective of hire period. For
Every bicycle hired; a security deposit of ` 25 must be paid. Draw a flow chart to print out the details of
each customer such as name of customer, bicycle model number, number of days a bicycle is hired for,
hire charges, discount and total charges including deposits. (8 Marks)
3) a) What are the components of telecommunication network?
b) What is BPR? What are the key success factors for BPR? ( 2 X 4 = 8 Marks )
4) a) What do you understand by operating systems? Discuss the various operations performed by
operating system
b) Explain in brief: Circuit switching, packet switching and message switching. ( 2 X 4 = 8 Marks )
5) a) Discuss boundary controls in detail
b) Explain the various models of cloud based on services ( 2 X 4 = 8 Marks )
Model No. Hire rate per day
Model No. 1 10
Model No. 2 9
Model No. 3 8
Model No. 4 7
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6)
a) Differentiate between DMIAC and DMADV
b) Differentiate between Rule Based Access Control and Role Based Access Control
( 2 x 4 = 4 Marks ) 7) Answer any four
a) PDCA cycle
b) XBRL – Expand and explain
c) Hardware Virtualization
d) Internetwork processors
e) FSTC – Expand and explain ( 5 x 2 = 10 Marks )
SECTION – B
Question No. 8 is compulsory
Answer and five questions from rest
8) a) Strategy is partly proactive and partly reactive - Explain
b) Briefly explain the need for turnaround strategy
c) What are the support activities as per value chain analysis
d) Briefly explain the elements of marketing mix
e) Explain the four generic strategies as discussed by Glueck and Jauch. ( 5 x 3 = 15 Marks )
9) a) Answer whether following statements are correct with reason ( 2 x 2 = 4 Marks )
a. Strategy is a substitute for sound, alert and responsible management.
b. Question marks in a BCG matrix represent low growth rate and high market share
b) Explain the concept of “Customer Relationship Management (CRM)” and identify its key
benefits also. (3 Marks)
10) Management of a sick company asks you advice for retrenchment strategy. What will be your advice and
why? (7 Marks)
11) a) Explain about network and hour grass structure of organization (4 Marks)
b) What are the points to be considered for writing an effective mission statement? (3 Marks)
12) Distinguish between the following
a) Transformational and transactional leadership (4 Marks)
b) Concentrate and conglomerate diversification (3 Marks)
13) a) What is bench marking and what are the steps involved in it? (4 Marks)
b) Distinguish between Logistics management and Supply chain management. (3 Marks)
14) a) Write about Michel Porter’s five force model of competition. (4 Marks)
b) Explain about Strategic Business Unit (or) PLC (3 Marks)
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THE SOCIETY OF AUDITORS AND PRIME ACADEMY 46th SESSION - IPC - MODEL PRACTICE EXAM
PAPER 7 - INFORMATION TECHNOLOGY & STRATEGIC MANAGEMENT- SUGGESTED ANSWERS
SECTION A - INFORMATION TECHNOLOGY
1. a) Server: Server is a computer or device on a network dedicated to run one or more services to serve the
needs of the users of the other computer on the network.
File server
Print server
Network Server
Database server
Application server
Web server
Mail server b) Advantages:
Clear separation of user interface control and data presentation
Dynamic load balancing
Change management Disadvantages:
Increased need for traffic management
Current tools are more complex
Maintenance tools are inadequate c) FCAPS model:
Fault management is to recognize, isolate, correct and log faults that occur in the network.
Configuration management monitors network and system configuration information
Accounting management is concerned with tracking network utilization information
Performance management measures network performance data
Security management controls access to the network d) Components of SCM:
Procurement
Operation
Distribution
Integration e) Types of application based on processing:
Batch processing – Processing of large set of data in a specific way
Online processing – Data is processed while it is entered, usually only has to wait for a short time response
Real time processing – It is a subset of online processing, where is output is provided as soon as input is acquired through sensors
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3. a) Components of telecommunication network:
Terminals: It is the starting and ending point in a telecommunication network
Telecommunication processers: They support data transmission and reception between terminals and computers by providing a variety of control and support function. Some of them are: NIC, modem, multiplexers etc.
Telecommunication media: They connect the receiver and the sender. It is of two types namely guided and unguided media.
Computers: Computers of all sizes and types are connected through media to platform their assignments.
Telecommunication control software: This consists of programs that controls telecommunication activities and manage the telecommunication networks.
b) Business Process Reengineering: It is the fundamental rethinking and radical redesign of processes to achieve dramatic improvement in critical, contemporary measures of performance such as cost, quality, service and speed. The key success factors for BPR are:
Organization wide commitment
BPR team composition
Business need analysis
Adequate IT infrastructure
Effective change management
Ongoing continuous improvement
4. a) Operating system is a set of computer program that manages computer hardware resources and acts
as interface between computer application programs. Their functions are:
Performing hardware functions
User interfaces
Hardware Independence
Memory management
Task management
File management
Network capability
Logical access security
b) Circuit switching: When two nodes communicate with each other over a dedicated communication path, it is called circuit switching. Packet switching: The entire message is broken into smaller transmission units called packets. Different packets follow different paths, and at the destination they are re-ordered. Message switching: No physical path is established between sender and receiver. The whole message is treated as a data unit and transferred entirely which contains the entire data being delivered from the source to destination node.
5. a) Boundary controls: Boundary controls are the mechanisms that authenticate users to authorize
resources that they are permitted to access.
Cryptography
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Passwords
PIN
Identification card
Bio metric devices b) Service model of cloud computing:
Infrastructure as a service: Gives access to server hardware, bandwidth and other fundamental computing resources.
Software as a service: It offers complete software on a cloud
Platform as a service: It provides access to the basic operating software and optional services to develop and use software applications
Network as a service: The user can get network related services
6. a) DMIAC: Define, Measure, Analyse, Improve, Control. It is a method applied for existing processes.
DAMDV: Define, Measure, Analyse, Design, Verify. It is a method applied for new processes.
b) RBAC and RAC: Role based access control gives access based on who you are whereas rule based access control gives access based on other attributes
7. a) PDCA: PDCA cycle is related with TQM. It is an abbreviation for Plan, Do, Check and Act. b) XBRL: Extensible Business Reporting Language is a freely available and global standard for exchanging
business information through reporting managed by a global non-profit consortium, namely XBRL International.
c) Hardware virtualization: Hardware Virtualization or Platform Virtualization refers to the creation of a virtual machine that acts like a real computer with an operating system. Software executed on these virtual machines is separated from the underlying hardware resources.
d) Internetwork processors: Telecommunication networks are interconnected by special purpose communication processers called internetwork processors such as switches, routers, bridges etc.
e) FSTC: Financial Services Technology Corporation is a consortium of banks and clearing houses that has designed an electronic cheque. Modeled on the traditional paper cheque, this new cheque is initiated electronically, and uses digital signature for signing and endorsing.
SECTION B - STRATEGIC MANAGEMENT 8. a) A company’s strategy is a blend of proactive actions on the part of the managers to improve the
market position and financial performance and as needed reactions and unanticipated developments and fresh market conditions
b) Turnaround is needed when an enterprise's performance deteriorates to a point that it needs a radical change of direction in strategy, and possibly in structure and culture as well. It is a highly targeted effort to return an organization to profitability and increase positive cash flows to a sufficient level. It is used when both threats and weaknesses adversely affect the health of an organization so much that its basic survival is difficult.
c) Procurement, Technology development, Human resource management and infrastructure d) Product, price, place and promotion e) Stability, expansion, retrenchment and combination
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9. a. False – Strategy cannot be a substitute for sound management. But, strategy is a tool for sound
management. b. False – Question marks represent high growth rate and low market share b) Customer Relationship Management (CRM): CRM is a system which aims at improving the relationship
with existing customers, finding new prospective customers, and winning back former customers. Key benefits of a CRM module are as under:
Improved customer relations
Increase customer revenues
Maximize up-selling and cross-selling
10. Retrenchment strategy: A sick company has accumulated huge losses that have eroded its net worth. Retrenchment becomes necessary for coping up with hostile and adverse situations in the environment and when any other strategy looks like suicidal. When a company is facing losses, they have to follow retrenchment strategy which reduces the scope of the activity of the business. This is done through diagnosing the problem areas in the business. These steps result different kind of strategies. They are: turnaround, disinvestment and liquidation.
11. a) Network structure: Network structure involves virtual elimination of in house business functions.
Many operations are outsourced. It is also called as virtual organization because it is composed of a series of project groups or collaborations linked which constantly change. Hourglass structure: The role played by middle management is diminishing as tasks performed by them are increasingly replaced by technological tools. Hourglass structure of an organization consists of three layers with constricted middle layer.
b) Mission statement: Following statement to be considered:
Should establish special identity for the business
It should target the customers which they are trying to satisfy
Unique
It should not be relating to making profit
12. a) Transactional and transformational leadership: Transformational leadership style use charisma and
enthusiasm to inspire people to exert them for the good of the organization. Transformational leadership style may be appropriate in turbulent environments, in industries at the very start or end of their life-cycles, in poorly performing organizations when there is a need to inspire a company to embrace major changes. Transactional leadership style focus more on designing systems and controlling the organization’s activities and are more likely to be associated with improving the current situation. Transactional leaders try to build on the existing culture and enhance current practices.
b) Concentrate and conglomerate diversification: In concentric diversification, the new business is linked to the existing business through process, technology or marketing. The new product is a spin off from existing products. But in conglomerate diversification, no such linkage exists. New business are disjointed for the old one in all the ways
PRIME A
CADEMY
PRIME/46th
ME/O/IPC 6
13. a) Benchmarking: Benchmarking is an approach of setting measures and measuring productivity based
on best industry practices. Benchmarking helps industry by way of learning from its best process and practices. Steps involved in benchmarking are:
Identifying the need for the benchmarking
Clearly understanding the existing business processes
Identifying the best processes
Comparison of own processes and performance with that of the others
Prepare a report and implement the steps to bridge the gap
Evaluation
b) Logistics management and supply chain management: Supply chain is an extension of logistics management. Logistical activities typically include management of inbound and outbound of goods, transportation and warehousing, handling of material, fulfilment of orders etc. Supply chain management includes more aspects apart from logistics function. It is a tool of business transformation and involves delivering the right product to the right place and at the right price.
14. a) Michel Porter’s five force model:
Rival sellers
Threat of new entrants
Substitute products
Bargaining power of suppliers
Bargaining power of customers b) SBU: SBU is the unit of a company that has separate mission and objectives and which can be planned
independently from other businesses of the company. PLC: It is a ‘s’ shaped curve which exhibits the relationship of sale with respect of time for a product that passes through the four successive stages of introduction, growth, maturity and decline.
PRIME A
CADEMY
