PRIME/41st ME/IPC 1

ATTA No. of Pages: 6 Total Marks: 100 No of Questions: 7 Times Allowed: 3 Hrs

Question no 1 is compulsory Answer any five from the remaining six questions

Wherever necessary suitable assumptions should be made by the candidates Working notes should form part of answer

1. a) Cost of a machine acquired on 01.04.2011 was ` 5,00,000. The machine is expected to realize

` 50,000 at the end of its working life of 10 years. Straight-line depreciation of ` 45,000 per year has been charged up to 2013-2014. For and from 2014-15, the company switched over to 15% p.a. reducing balance method of depreciation in respect of the machine. The new rate of depreciation is based on revised useful life of 15 years. The new rate shall apply with retrospective effect from 01.04.2011. State how would you deal with the above in the annual accounts of the Company for the year ended 31st March, 2015 in the light of AS 5.

b) Viva Ltd. received a specific grant of ` 30 lakhs for acquiring the plant of ` 150 lakhs during 2007-08 having useful life of 10 years. The grant received was credited to deferred income in the balance sheet. During 2010-11, due to non-compliance of conditions laid down for the grant, the company had to refund the whole grant to the Government. Balance in the deferred income on that date was ` 21 lakhs and written down value of plant was ` 105 lakhs. (i) What should be the treatment of the refund of the grant and the effect on cost of the fixed

asset and the amount of depreciation to be charged during the year 2010-11 in profit and loss account?

(ii) What should be the treatment of the refund, if grant was deducted from the cost of the plant during 2007-08 assuming plant account showed the balance of ` 84 lakhs as on 1.4.2010?

c) A Company follows April to March as its financial year. The Company recognizes cheques dated 31st March or before, received from customers after balance sheet date, but before approval of financial statement by debiting ‘Cheques in hand account’ and crediting ‘Debtors account’. The ‘cheques in hand’ is shown in the Balance Sheet as an item of cash and cash equivalents. All cheques in hand are presented to bank in the month of April and are also realized in the same month in normal course after deposit in the bank. State with reasons, whether the collection of cheques bearing date 31st March or before, but received after Balance Sheet date is an adjusting event and how this fact is to be disclosed by the company?

d) X Ltd. sold JCB Machine having WDV of ` 50 Lakhs to Y Ltd for ` 60 Lakhs and the same JCB was

leased back by Y Ltd to X Ltd. The lease is operating lease. Comment according to relevant Accounting Standard if: (i) Sale price of ` 60 Lakhs is equal to fair value (ii) Fair Value is ` 50 Lakhs and sale price is `45 Lakhs. (iii) Fair value is ` 55 Lakhs and sale price is ` 62 lakhs (iv) Fair value is ` 45 Lakhs and sale price is ` 48 Lakhs. (4 x 5 = 20 Marks)

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2. A, R and M were carrying on business in partnership sharing profits and losses in the ratio of 5 : 4 : 3 respectively. The Trial Balance of the firm as on 31st March, 2013 was the following:

Particulars Dr (`) Cr (`)

Plant and machinery 105000 0

Stock 60200 0

Sundry debtors 85000 0

Sundry creditors 0 105200

Capital Ac: A 0 70000

R 0 50000

M 0 30000

Drawings Ac A 30000 0

R 25000 0

M 20000 0

Depreciation on P&M 0 35000

Trading profit for the year 0 129800

Cash at bank 94800

420000 420000

Additional Information: (a) Interest on Capital Accounts at 10% on the amount standing to the credit of Partners' Capital

Accounts at the beginning of the year was not provided before preparing the above Trial Balance. (b) On 31st March, 2013 they formed a Private Limited Company Anagha (P) Ltd. to take over the

partnership business. (c) You are further informed as under :

(i) Plant and Machinery is to be transferred at ` 80,000. (ii) Equity Shares of ` 10 each of the company are to be issued to the partners at par in such

numbers to ensure that by reason of their share holdings alone, they will have the same rights of sharing profits and losses as they had in the partnership. Balance, if any in their Capital Accounts, will be settled by giving 7.5% Preference Shares at par.

(iii) Before transferring the business, the partners withdrew by cash from partnership the following amounts over and above the drawings as shown in the Trial Balance : (a) A — ` 20,000; (b) R — ` 10,600; (c) M — ` 14,200.

(iv) All assets and liabilities except Plant and Machinery and the Bank Balance are to be transferred at their value in the books of the partnership as at 31st March, 2013.

You are required to prepare:

Profit and Loss Adjustment Account for the year ending 31st March, 2013.

Capital Accounts showing all the adjustments required to dissolve the partnership.

A statement showing the number of shares of each class to be issued by the company to each of the partners to settle their accounts.

Balance Sheet of the company Anagha (P) Ltd. as on 31.03.2013 after takeover of the business. (16 Marks)

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3. a) Gemini Ltd. came up with public issue of 30,00,000 Equity shares of ` 10 each at ` 15 per share. A, B

and C took underwriting of the issue in 3 : 2 : 1 ratio. Applications were received for 27,00,000 shares. The marked applications were received as under:

A 8,00,000 shares B 7,00,000 shares C 6,00,000 shares

Commission payable to underwriters is at 5% on the face value of shares. (i) Compute the liability of each underwriter as regards the number of shares to be taken up. (ii) Pass journal entries in the books of Gemini Ltd. to record the transactions relating to

underwriters. (8 Marks)

b) From Department A sells goods to Department B at a profit of 25% on cost and to Department C at 10% profit on cost. Department B sells goods to A and C at a profit of 15% and 20% on sales, respectively. Department C charges 20% and 25% profit on cost to Department A and B, respectively. Department Managers are entitled to 10% commission on net profit subject to unrealized profit on departmental sales being eliminated. Departmental profits after charging Managers‘ commission, but before adjustment of unrealized profit are as under:

`

Department A 72,000

Department B 54,000

Department C 36,000

Stock lying at different departments at the end of the year are as under :

Dept. A ` Dept. B ` Dept. C `

Transfer from Department A — 30,000 22,000

Transfer from Department B 28,000 — 24,000

Transfer from Department C 12,000 10,000 —

Find out the correct departmental Profits after charging Manager’s commission. (8 Marks)

4. Platinum Limited has decided to reconstruct the Balance Sheet since it has accumulated huge losses. The following is the draft Balance Sheet of the company as on 31st March, 2014 before reconstruction:

Liabilities Amount (`) Assets Amount (`)

Share Capital 50,000 shares of ` 50 Goodwill 22,00,000

each fully paid up 25,00,000 Land & Building 42,70,000

1,00,000 shares of ` 50 Machinery 8,50,000

each ` 40 paid up 40,00,000 Computers 5,20,000

Capital Reserve 5,00,000 Inventories 3,20,000

8% Debentures of ` 100 each 4,00,000 Trade receivables 10,90,000

12% Debentures of ` 100 each 6,00,000 Cash at Bank 2,68,000

Trade payables 12,40,000 Profit & Loss Account 7,82,000

Outstanding Expenses 10,60,000

Total 1,03,00,000 Total 1,03,00,000

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Following is the interest of Mr. Shiv and Mr. Ganesh in Platinum Limited: Mr. Shiv ` Mr. Ganesh `

8% Debentures 3,00,000 1,00,000 12% Debentures 4,00,000 2,00,000 Total 7,00,000 3,00,000

The following scheme of internal reconstruction was framed and implemented, as approved by the court and concerned parties:

1) Uncalled capital is to be called up in full and then all the shares to be converted into Equity Shares of ` 40 each.

2) The existing shareholders agree to subscribe in cash, fully paid up equity shares of 40 each for ` 12,50,000.

3) Trade payables are given option of either to accept fully paid equity shares of ` 40 each for the amount due to them or to accept 70% of the amount due to them in cash in full settlement of their claim. Trade payables for ` 7,50,000 accept equity shares and rest of them opted for cash towards full and final settlement of their claim.

4) Mr. Shiv agrees to cancel debentures amounting to ` 2,00,000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due. He also agree to subscribe further 15% Debentures in cash amounting to ` 1,00,000.

5) Mr. Ganesh agrees to cancel debentures amounting to ` 50,000 out of total debentures due to him and agree to accept 15% Debentures for the balance amount due.

6) Land & Building to be revalued at ` 51,84,000, Machinery at ` 7,20,000, Computers at ` 4,00,000, Inventories at ` 3,50,000 and Trade receivables at 10% less to as they are appearing in Balance Sheet as above.

7) Outstanding Expenses are fully paid in cash. 8) Goodwill and Profit & Loss A/c will be written off and balance, if any, of Capital Reduction A/c will

be adjusted against Capital Reserve. You are required to pass necessary Journal Entries for all the above transactions (16 Marks)

5. a) From the following balances extracted from the books of Gemini Insurance Company Limited as on

31.3.2014 you are required to prepare Revenue Accounts in respect of Fire and Marine Insurance business for the year ended 31.3.2014 to and a Profit and Loss Account for the same period:

` ` Directors’ Fees 1,84,000 Interest received 44,000

Dividend received 2,30,000 Fixed Assets (1.4.2013) 20,00,000

Provision for Taxation (as on 1.4. 2013) 1,95,000 Income-tax paid during the year

1,40,000

Fire ` Marine `

Outstanding Claims on 1.4. 2013 63,000 15,000

Claims paid 2,30,000 1,84,000

Reserve for Unexpired Risk on 1.4.2013 4,60,000 3,20,000

Premiums Received 10,00,000 7,50,000

Agent’s Commission 92,000 46,000

Expenses of Management 1,40,000 1,00,000

Re-insurance Premium (Dr.) 60,000 35,000

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The following additional points are also to be taken into account:

(i) Depreciation on Fixed Assets to be provided at 5% p.a. (ii) Interest accrued on investments ` 23,000. (iii) Closing provision for taxation on 31.3. 2014 to be maintained at ` 2,05,000. (iv) Claims outstanding on 31.3. 2014 were Fire Insurance ` 23,000; Marine Insurance ` 34,000. (v) Premium outstanding on 31.3.2014 were Fire Insurance ` 70,000; Marine Insurance ` 45,000. (vi) Reserve for unexpired risk to be maintained at 50% and 100% of net premiums in respect of Fire

and Marine Insurance respectively. (vii) Expenses of management due on 31.3.2014 were ` 20,000 for Fire Insurance and ` 10,000 in

respect of marine Insurance. (8 Marks)

b) Give the necessary journal entries both at the time of Issue and Redemption of Debentures in each of the following alternative cases: (i) P Ltd. issued 1,000, 10% Debentures of ` 100 each at par and redeemable at par at the end of 4

years. The board of directors decided to transfer the minimum required amount to DRR at the time of Redeem.

(ii) S Ltd. issued ` 1,00,000, 12% Debentures at a discount of 5% repayable at par at the end of 4 years. The board of directors decided to transfer the minimum required amount to DRR at the time of Redeem.

(iii) Z Ltd. issued 10% Debentures of the total face value of ` 1,00,000 at a premium of 5% to be redeemed at par at the end of 4 years. The board of directors decided to transfer the minimum required amount to DRR at the time of Redeem.

(iv) K Ltd. issued 1,000, 14% Debentures of ` 100 each at par but redeemable at 5% premium at the end of 4 years. The board of directors decided to transfer the minimum required amount to DRR at the time of Redeem. (4 Marks)

6.

a) Sterling Ltd. purchased a plant for US $ 20,000 on 31st December, 2014 payable after 4 months. The company entered into a forward contract for 4 months @ ` 48.85 per dollar. On 31st December, 2014, the exchange rate was ` 47.50 per dollar. How will you recognize the profit or loss on forward contract in the books of Sterling Limited for the year ended 31st March, 2015. (4 Marks)

b)

Exchange Rate per $

Goods purchased on 1.1.2014 of US $ 10,000 ` 45

Exchange rate on 31.3.2014 ` 44

Date of actual payment 7.7.2014 ` 43

Ascertain the loss/gain for financial years 2013-14 and 2014-15, also give their treatment as per AS 11. (4 Marks)

c) Show adjustment Journal entry in the books of Head Office at the end of April, 2014 for incorporation

of inter-branch transactions assuming that only Head Office maintains different branch accounts in its books.

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A. A.P. Branch: (1) Received goods from M.P. – ` 30,000 and ` 25,000 from U.P. (2) Sent goods to W.B. – ` 20,000, U.P. – ` 30,000. (3) Bill Receivable received – ` 10,000 from W.B. (4) Acceptances sent to M.P. – ` 10,000, U.P. – ` 20,000. B. M.P. Branch (apart from the above) : (5) Received goods from U.P. – ` 20,000, A.P – ` 10,000. (6) Cash sent to A.P – ` 20,000, U.P. – ` 10,000. C. W.B. Branch (apart from the above) : (7) Received goods from U.P. – ` 40,000. (8) Acceptances and Cash sent to U.P. – ` 10,000 and ` 15,000 respectively. D. U.P. Branch (apart

from the above) : (9) Paid cash to W.B. – ` 20,000 and M.P. – ` 10,000 (8 Marks)

7. Answer any four of the following:

(a) A company capitalizes interest cost of holding investments and adds to cost of investment every year,

thereby understating interest cost in profit and loss account. Comment on the accounting treatment done by the company in context of the relevant AS.

(b) Autumn Ltd. issued 1,20,000 Equity shares of ` 10 each . It wanted to buy back 20,000 equity shares at par. It issued 6% 2,000 Preference Shares of ` 100 each, the proceeds being utilized for the purpose of buy-back. Expenses relating to the buy-back amounted to ` 18,000. Show entries.

(c) Write short note on classification of investments by Banking companies (d) Differentiate on ordinary partnership firm with an LLP. Under what circumstances, an LLP may be

wound up by the Tribunal? (e) AB Ltd. launched a project for producing product X in October, 2013. The Company incurred ` 20

lakhs towards Research and Development expenses up to 31st March, 2015. Due to prevailing market

conditions, the Management came to conclusion that the product cannot be manufactured and sold

in the market for the next 10 years. The Management hence wants to defer the expenditure write off

to future years. Advise the Company as per the applicable Accounting Standard.

(4 x 4 = 16 Marks)

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CADEMY

PRIME/41st ME/IPC 1

PRIME ACADEMY 41st SESSION MODEL EXAM - IPC – ADVANCED ACCOUNTING

SUGGESTED ANSWERS 1.

a) WDV of asset at the end of year 2013-14= ` 5,00,000 – ` 45,000 x 3 = ` 3,65,000 WDV of asset at the end of year 2013-14 (by reducing balance method) = ` 5,00,000 (1 – 0.15)3 = ` 3,07,062.50 Depreciation to be charged in year 2014-15 = (` 3,65,000 – ` 3,07,062.50) + 15% of ` 3,07,062.50 ` 57,937.50 + ` 46,059.38 = ` 1,03,997 (approx.) As per AS 5 ‘Net profit or loss for the period, Prior Period Items and Changes in Accounting Policies’ the revision of remaining useful life is change in accounting estimate, and adoption of reducing balance method of depreciation instead of the straight-line method is change in accounting policy. Since it is difficult to segregate impact of these two changes, the entire amount of difference between depreciation at old rate and depreciation charged in 2014-15 (` 1,03,997- ` 45,000 = ` 58,997) is regarded as an effect of change in accounting estimate as per provisions of the standard. The effect of this change in accounting estimate should be properly disclosed in the financial statements of the company for the year ended 31st March, 2015.

b) As per para 21 of AS-12, ‘Accounting for Government Grants’, “the amount refundable in respect of a grant related to specific fixed asset should be recorded by reducing the deferred income balance. To the extent the amount refundable exceeds any such deferred credit, the amount should be charged to profit and loss statement. (i) In this case the grant refunded is ` 30 lakhs and balance in deferred income is ` 21 lakhs, ` 9 lakhs

shall be charged to the profit and loss account for the year 2010-11. There will be no effect on the cost of the fixed asset and depreciation charged will be on the same basis as charged in the earlier years.

(ii) If the grant was deducted from the cost of the plant in the year 2007-08 then, para 21 of AS-12 states that the amount refundable in respect of grant which relates to specific fixed assets should be recorded by increasing the book value of the assets, by the amount refundable. Where the book value of the asset is increased, depreciation on the revised book value should be provided prospectively over the residual useful life of the asset.

Therefore, in this case, the book value of the plant shall be increased by ` 30 lakhs. The increased cost of ` 30 lakhs of the plant should be amortized over 7 years (residual life). Depreciation charged during the year 2010-11 shall be (84 + 30)/7 years = ` 16.286 lakhs presuming the depreciation is charged on SLM.

c) Even if the cheques bear the date 31st March or before, the cheques received after 31st March do not represent any condition existing on the balance sheet date i.e. 31st March. Thus, the collection of cheques after balance sheet date is not an adjusting event. Cheques that are received after the balance sheet date should be accounted for in the period in which they are received even though the same may be dated 31st March or before as per AS 4 “Contingencies and Events Occurring after the Balance Sheet Date”. Moreover, the collection of cheques after balance sheet date does not represent any material change affecting financial position of the enterprise on the balance sheet date, so no disclosure is necessary.

d) According to AS 19, following will be the treatment in the given situations: (i) When sales price of ` 60 lakhs is equal to fair value, X Ltd. should immediately recognize the profit

of `10 lakhs (i.e. 60 – 50) in its books. (ii) When fair value of leased JCB machine is ` 50 lakhs & sales price is ` 45 lakhs, then loss of ` 5 lakhs

(50 – 45) to be immediately recognized by X Ltd. in its books provided loss is not compensated by future lease payments.

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(iii) When fair value is ` 55 lakhs & sales price is ` 62 lakhs, profit of ` 5 lakhs (55 - 50) to be immediately recognized by X Ltd. in its books and balance profit of ` 7 lakhs (62-55) is to be amortised/deferred over lease period.

(iv) When fair value is ` 45 lakhs & sales price is ` 48 lakhs, then the loss of ` 5 lakhs (50- 45) to be immediately recognized by X Ltd. in its books and profit of ` 3 lakhs (48-45) should be amortised/deferred over lease period.

2. In the book of the Firm

a) Profit and Loss Adjustment Account for the year ended 31st March, 2013

Particulars ` Particulars `

To interest on capital By Net profit b/d 129800

A 7000 By profit on sale of plant 10000

R 5000 [80000-(105000-35000)]

M 3000

To Partner's capital a/c

(profit transferred)

A 52000

R 41600

M 31200

139800

139800

b) Partners capital account

A ` R ` M `

A ` R ` M `

To Drawings

(as per Trial Balance) 30000 25000 20000 By Balance b/d 70000 50000 30000

To Drawings

(after Trial Balance)* 20000 10600 14200

By P&L Adjustment

A/c 52000 41600 31200

By Balance c/d 79000 61000 30000

By Interest on

Capital 7000 5000 3000

129000 96600 64200

129000 96600 64200

To Equity Shares 50000 40000 30000 By Balance c/d 79000 61000 30000

To 7.5% Preference

Shares 29000 21000

79000 61000 30000

79000 61000 30000

c) Statement Showing the Number and Classes of Shares Issued to the Partners

A ` R ` M `

Capital balance after adjustment 79000 61000 30000

Taking Madwesh's Capital as base for ensuring same rights of

sharing profits and losses —Equity Shares allotted 50000 40000 30000

29000 21000 0

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3.

a)

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Note: C had sold in excess of the underwriting obligation and hence he will not be required to purchase any shares but will get commission for underwriting. b)

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4.

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5.

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4. Reserve for unexpired risks is 50% of net premium for fire insurance and 100% of net premium for marine insurance. Reserve for unexpired risks for fire insurance = ` 10,10,000 X 50% = ` 5,05,000. Opening Balance in reserves for unexpired risk for fire insurance was ` 4,60,000. Hence, additional transfer to reserve for fire insurance in the year will be ` 45,000. On similar basis of calculation, the additional transfer to reserve for marine insurance will be ` 4,40,000.

6.

b) As per AS 11 on ‘The Effects of Changes in Foreign Exchange Rates’, all foreign currency transactions should be recorded by applying the exchange rate on the date of transactions. Thus, goods purchased on 1.1.2013 and corresponding creditor would be recorded at ` 4,50,000 (i.e. $10,000 × ` 45)

According to the standard, at the balance sheet date all monetary transactions should be reported using the closing rate. Thus, creditor of US $10,000 on 31.3.2013 will be reported at ` 4,40,000 (i.e. $10,000 × ` 44) and exchange profit of ` 10,000 (i.e. 4,50,000 – 4,40,000) should be credited to Profit and Loss account in the year 2012-13. On 7.7.2013, creditor of $10,000 is paid at the rate of ` 43. As per AS 11, exchange difference on settlement of the account should also be transferred to Profit and Loss account. Therefore, ` 10,000 (i.e. 4,40,000 – 4,30,000) will be credited to Profit and Loss account in the year 2013-14.

c)

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7.

a) The Accounting Standard Board (ASB) has opinioned that investments other than investment in properties are not qualifying assets as per AS-16 Borrowing Costs. Therefore, interest cost of holding such investments cannot be capitalized. Further, even interest in respect of investment properties can only be capitalized if such properties meet the definition of qualifying asset, namely, that it necessarily takes a substantial period of time to get ready for its intended use or sale. Also, where the investment properties meet the definition of ‘qualifying asset’, for the capitalization of borrowing costs, the other requirements of the standard such as that borrowing costs should be directly attributable to the acquisition or construction of the investment property and suspension of capitalization as per paragraphs 17 and 18 of AS-16 have to be complied with.

b)

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c) The investment portfolio of a bank would normally consist of both approved securities (predominantly

government securities) and other securities (shares, debentures, bonds etc.). Banks are required to classify their entire investment portfolio into three categories: (i) Held-to-maturity: Securities acquired by banks with the intention to hold them up to maturity

should be classified as ‗held-to-maturity‘ (ii) Held-for-maturity: Securities acquired by banks with the intention to trade by taking advantage of

short–term price interest rate movements should be classified as held-for trading/maturity. (iii) Available-for-sale: Securities which do not fall within the above two categories should be classified

as available-for-sale‘. d)

Key Elements Partnerships LLPs

1 Applicable Law Indian Partnership Act 1932 The Limited Liability Partnerships Act, 2008

2 Registration Optional Compulsory with ROC

3 Creation Created by an Agreement Created by Law

4 Body Corporate No Yes

5 Separate Legal Entity

No Yes

6 Perpetual Succession

Partnerships do not have perpetual succession

It has perpetual succession and individual partners may come and go

7 Number of Partners

Minimum 2 and Maximum 20 (subject to 10 for banks)

Minimum 2 but no maximum limit

8 Ownership of Assets

Firm cannot own any assets. The partners own the assets of the firm

The LLP as n independent entity can own assets

9 Liability of Partners / Members Unlimited:

Partners are severally and jointly liable for actions of other partners and the firm and their liability extends to personal assets

Limited to the extent of their contribution towards LLP except in case of intentional fraud or wrongful act of omission or commission

e) As per para 41 of AS 26 “Intangible Assets”, expenditure on research should be recognized as an

expense when it is incurred. An intangible asset arising from development (or from the development phase of an internal project) should be recognized if, and only if, an enterprise can demonstrate all of the conditions specified in para 44 of the standard. An intangible asset (arising from development) should be derecognised when no future economic benefits are expected from its use according to para 87 of the standard. Therefore, the manager cannot defer the expenditure write off to future years. Hence, the expenses amounting ` 20 lakhs incurred on the research and development project has to be written off in the current year ending 31st March, 2011.

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DTTA No. of Pages: 2 Total Marks: 100 No of Questions: 7 Times Allowed: 3 Hrs

Question 1 is Compulsory Answer any five from the rest.

1. a) What are Audit working papers and why should they be carefully preserved by the Auditor? (5 Marks) b) Comment on Vouching of payment of taxes. (5 Marks)

c) As per SA 530, state the requirements relating to audit sampling, sample design, sample size and

selection of items for testing. (5 Marks) d) With reference of SA 250 give some examples or matters indicating to the auditor about non

compliance of laws & regulations by management. (5 Marks)

2. a) GR & Co., a firm of Chartered Accountants has been called upon to audit the accounts of Dee

Vee Philips Ltd. The auditors are told that Company is not performing well due to weak accounting and administration system in place. Mr. Preet handling the assignment noticed that there are gaps in internal check system of the company. You are required to explain the special steps involved in framing a system of Internal Check. (8 Marks)

b) State briefly, how you will audit the following in a joint stock company:

(i) Issue of shares for consideration other than cash. (ii) Splitting of one share of the face value of ` 10 into 10 shares of ` 1 each. (8 Marks)

3.

a) Explain the objectives of internal audit. (8 Marks) b) Mention any ten special points to be examined by you in the audit of Income and Expenditure of

a Charitable Institution running a hospital. (8 Marks) 4.

a) Distinguish between Internal evidence and External evidence. b) What procedure an auditor should adopt to test the authenticity of cash at bank? c) Give your comments and observations on no entry is passed for cheques received by the auditee

on the last day of the year, but not yet deposited with the bank. d) Explain clearly the meaning of vouching. Also discuss the points that should be considered while

examining a voucher. (4 x 4 = 16 Marks)

5. a) How does an audit programme help to plan and perform the audit? (8 Marks) b) What precautions should be taken by an auditor while applying test check techniques?

(8 Marks)

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6. As an auditor, comment on the following situations/statements: a) A Ltd. has its Registered Office at New Delhi. During the current accounting year, it has shifted

its Corporate Head Office to Indore though it has retained the Registered Office at New Delhi. The Managing Director of the Company wants to shift its books of account to Indore from New Delhi, as he feels that there is no legal bar in doing so.

b) The Board of Directors of a company have filed a complaint with the Institute of Chartered Accountants of India against their statutory auditors for their failing to attend the Annual General Meeting of the Shareholders in which audited accounts were considered.

c) Due to the resignation of the existing auditor(s), the Board of directors of X Ltd appointed Mr.

Hari as the auditor. Is the appointment of Hari as auditor valid? d) At the Annual General Meeting of the Company, a resolution was passed by the entire body of

shareholders restricting some of the powers of the Statutory Auditors. Whether powers of the Statutory Auditors can be restricted? (4 x 4 = 16 Marks)

7. Write short notes on any four of the following: a) Examination in Depth. b) Audit Trail. c) Intangible Assets. d) Auditor’s Lien e) Disclaimer of opinion. (4 x 4 = 16 marks)

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PRIME/41st ME/IPC 1

PRIME ACADEMY 41st SESSION MODEL EXAM - IPC - AUDITING & ASSURANCE

SUGGESTED ANSWERS 1.

a) Audit Working Papers: As per SA 230(Revised) “Audit Documentation”, audit Working Papers are the record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached.

Working papers are the (i) Evidence of the auditor’s basis for a conclusion about the achievement of the overall objective

of the auditor; and (ii) Evidence that the audit was planned and performed in accordance with SAs and applicable

legal and regulatory requirements. Besides they serve a number of additional purposes, including the following: 1 Assisting the engagement team to plan and perform the audit. 1 Assisting members of the engagement team responsible for supervision to direct and supervise the audit work, and to discharge their review responsibilities in accordance with SA 220. 1 Enabling the engagement team to be accountable for its work. 1 Retaining a record of matters of continuing significance to future audits. 1 Enabling the conduct of quality control reviews and inspections in accordance with SQC 1. 1 Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other requirements. Standard on Quality Control (SQC) 1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services Engagements”, issued by the Institute, provides that, unless otherwise specified by law or regulation, working papers are the property of the auditor. He may at his discretion, make portions of, or extracts from, working papers available to clients, provided such disclosure does not undermine the validity of the work performed, or, in the case of assurance engagements, the independence of the auditor or of his personnel Retention of working papers: Working papers should be retained, long enough, for a period of time sufficient to meet the needs of his practice and satisfy any legal or professional requirement of record retention. SQC 1 requires firms to establish policies and procedures for the retention of engagement documentation. The retention period for audit engagements ordinarily is no shorter than seven years from the date of the auditor's report, or, if later, the date of the group auditor's report.

b) Vouching of Payment of Taxes:

(i) Obtain the computation of income prepared by the auditee and verify whether it is as per the Income-tax Act, 1961 and Rules made there under.

(ii) Review adjustments, expenses disallowed, special rebates etc. with particular reference to the last available completed assessment.

(iii) Examine relevant records and documents pertaining to payment of advance tax, self assessment tax and other demands.

(iv) Payment on account of income-tax and other taxes consequent upon a regular assessment should be verified by reference to the copy of the assessment order, assessment form, notice of demand and the receipted challan.

(v) Payments or advance payments of income-tax should also be verified with the notice of demand and the receipted challan acknowledging the amount paid.

(vi) The interest allowed on advance payments of income-tax should be included as income and penal interest charged for non-payment should be debited to the interest account.

(vii) Ensure that the requirements of AS 22 on ‘Accounting for Taxes on Income’ have been appropriately followed for the period under audit.

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c) As per SA 530 on “Audit Sampling”, the meaning of the term Audit Sampling is – the application of audit procedures to less than 100% of items within a population of audit relevance such that all sampling units have a chance of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about the entire population. The requirements relating to sample design, sample size and selection of items for testing are explained below- Sample design - When designing an audit sample, the auditor shall consider the purpose of the audit procedure and the characteristics of the population from which the sample will be drawn. Sample Size- The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low level. Selection of Items for Testing- The auditor shall select items for the sample in such a way that each sampling unit in the population has a chance of selection.

d) Examples on Non Compliance of Laws & Regulations: As per SA 250 on “Consideration of Laws and

Regulation in an Audit of Financial Statements”, the following are examples or matters indicating to the auditor about non- compliance with laws and regulations by management- (i) Investigations by regulatory organizations and government departments or payment of fines

or penalties. (ii) Payments for unspecified services or loans to consultants, related parties, employees or

government employees. (iii) Sales commissions or agent’s fees that appear excessive in relation to those ordinarily paid

by the entity or in its industry or to the services actually received. (iv) Purchasing at prices significantly above or below market price. (v) Unusual payments in cash, purchases in the form of cashiers’ cheques payable to bearer or

transfers to numbered bank accounts. (vi) Unusual payments towards legal and retainer ship fees. (vii) Unusual transactions with companies registered in tax havens. (viii) Payments for goods or services made other than to the country from which the goods or

services originated. (ix) Payments without proper exchange control documentation. (x) Existence of an information system which fails, whether by design or by accident, to provide

an adequate audit trail or sufficient evidence. (xi) Unauthorized transactions or improperly recorded transactions. (xii) Adverse media comment.

2.

a) General Considerations in Framing a System of Internal Check: The term “internal check” is defined as the “checks on day to day transactions which operate continuously as part of the routine system whereby the work of one person is proved independently or is complementary to the work of another, the object being the prevention or early detection of errors or fraud”. The following aspects should be considered in framing a system of internal check: (i) No single person should have an independent control over any important aspect of the

business. The work done by one person should automatically be checked by another person in routine course.

(ii) The duties/work of members of the staff should be changed from time to time without any previous notice so that the same officer or subordinate does not, without a break, perform the same function for a considerable length of time.

(iii) Every member of the staff should be encouraged to go on leave at least once in a year so that frauds successfully concealed by such a person can be detected in his absence.

(iv) Persons having physical custody of assets must not be permitted to have access to the books of accounts.

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(v) There should be an accounting control in respect of each important class of assets, in addition, these should be periodically inspected so as to establish their physical condition.

(vi) The system of Budgetary Control should be introduced. (vii) For inventory-taking, at the close of the year, trading activities should, if possible, be

suspended. The task of inventory-taking, and evaluation should be done by staff belonging to other than inventory section.

(viii) The financial and administrative powers should be sub divided very judicially and the effect of such division should be reviewed periodically.

(ix) Finally, the system must be capable of being expanded or contracted to correspond to the size of the concern.

b) (a) Issue of shares for consideration other than cash (i) Study of the contract pursuant to which the issue is made to determine how many shares

are agreed to be issued and for what value and the nature and other details of the consideration.

(ii) Examination of the prospectus to see the substance of the contract and the relevant terms of the issue including the mode of payment of the purchase consideration in case of an issue to a vendor of the business or pay-ability of commission to the underwriters or pay-ability of the preliminary expenses.

(iii) Examination of the Board’s minutes to see the adoption of the relevant contract, the decision to issue shares for a consideration other than cash and the actual allotment of shares.

(iv) Ensuring that proper accounting entry has been passed to record the acquisition of the assets or the business or payment of the expenses (any of these may constitute the consideration) on the one hand and the issue of shares on the other. Incidentally, if any premium or discount is involved, ensure that appropriate adjustment entry has been passed therefore. Sometimes, in view of the nature of transaction, it may be difficult to know whether an allotment is for cash or for a consideration other than cash, for instance, allotment of shares in adjustment of a debt owed by the company. In such a case, if the allotment is made in adjustment of a bonafide debt payable in money at once, the allotment should be considered as against cash.

This position should be kept in view when inquiring into matters stated in section 143(1) of the Companies Act, 2013. Again if the shares are allotted on a cash basis, though the amount is actually paid later, it should constitute an allotment against cash.

(b) Splitting of shares of face value from ` 10 to ` 1 per share (i) Confirm that alteration was authorised by articles. (ii) Verify the minutes of the Board meeting and ordinary resolution passed in the general

meeting in which the approval of members is obtained. (iii) Verify also with reference to Form No.SH-7 filed with the ROC. (iv) Verify that alteration had been effected in copies of Memorandum Articles, etc. (v) Verify that proper accounting entries have been passed. Register of members may also be

checked to see that the necessary alteration have been effected therein.

3. a) Objectives of Internal Audit: Internal Audit is an independent management function, which

involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity’s risk management and internal control system.

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The objective of internal audit can be stated as follows: (i) To verify the accuracy and authenticity of the financial accounting and statistical records

presented by the management. (ii) To ascertain that the standard accounting practices, as have been decided to be followed by

the organisation, are being adhered to. (iii) To establish that there is a proper authority for every acquisition, retirement and disposal of

assets. (iv) To confirm that liabilities have been incurred only for the legitimate activities of the

organisation. (v) To analyse and improve the system of internal check in particular to see (1) that it is working

; (2) that it is sound ; and (3) that it is economical. (vi) To facilitate the prevention and detection of frauds. (vii) To examine the protection afforded to assets and the uses to which they are put. (viii) To make special investigations for management. (ix) To provide a channel whereby new ideas can be brought to the attention of management. (x) To review the operation of the overall internal control system and to bring material

departures and non-compliances to the notice of the appropriate level of management; the review also generally aims at locating unnecessary and weak controls for making the entire control system effective and economical.

b) Audit of Hospital: While auditing the Income and Expenditure Account of a charitable institution

running a hospital, following special points may be examined: (i) Verify the register of patients with duplicate copy of bills and patients admission record to

see that bills have been properly and correctly prepared for all the services, tests and treatments.

(ii) Check cash collections from patients by tracing the receipt issued into cash book. (iii) Check receipt of interest, rent, dividend etc., with receipt counterfoil into cash book and

bank book and ensure that all such income has been duly accounted for. (iv) Check collection of subscription, donations from the receipt issued, correspondence etc.,

into cash book. (v) Verify that all grants from government and other bodies have been duly accounted for and

have been applied in the manner as specified. (vi) Verify all recurring nature of revenue expenditure, with necessary evidence like bill,

authority, period etc. (vii) Examine the internal check as regards the receipt and issue of stores, medicines, linen etc.,

to ensure that these have been properly recorded and issued/consumed only on proper authorization.

(viii) See that depreciation has been written off in respect of all the assets at appropriate rate and method as in the earlier year.

(ix) Verify the receipts from supply of food and canteen receipts and compare the same with previous year as regards number of patients.

(x) Ensure that all outstanding liabilities have been adequately provided for and similarly all accrued incomes and receipts have been duly accounted for.

(xi) Obtain inventory of stock and stores as at the end of the year and physically check a percentage of items.

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4. a) Internal evidence and external evidence: Evidence which originates within the organization

being audited is internal evidence. Example – sales invoice, copies of sales challan and forwarding note, goods received notes, inspection report, copies of cash memo, debit and credit notes, etc. External evidence on the other hand is the evidence that originates outside the client’s organization; for example, purchase invoice, supplier’s challan and forward note, debit notes and credit notes coming from parties, quotations, confirmations, etc. In an audit situation, the bulk of evidence that an auditor gets is internal in nature. However, substantial external evidence is also available to the auditor. Since in the origination of internal evidence, the client and his staff have the control, the auditor should be careful in putting reliance on such evidence. It is not suggested that they are to be suspected; but an auditor has to be alive to the possibilities of manipulation and creation of false and misleading evidence to suit the client or his staff. The external evidence is generally considered to be more reliable as they come from third parties who are not normally interested in manipulation of the accounting information of others. However, if the auditor has any reason to doubt the independence of any third party who has provided any material evidence e.g., an invoice of an associated concern, he should exercise greater vigilance in that matter. As an ordinary rule the auditor should try to match internal and external evidence as far as practicable. Where external evidence is not readily available to match, the auditor should see to what extent the various internal evidence corroborate each other.

b) Verification of Cash at Bank: While testing the authenticity of cash at bank, the following areas

may be considered by the auditor: (i) Apart from comparing the entries in the cash book with those in the Pass Book the auditor

should obtain a certificate from the bank confirming the balance at the close of the year as shown in the Pass Book.

(ii) Examine the bank reconciliation statement prepared as on the last day of the year and see whether (a) cheques issued by the entity but not presented for payment, and (b) cheques deposited for collection by the entity but not credited in the bank account have been duly debited/credited in the subsequent period.

(iii) Pay special attention to those items in the reconciliation statements which are outstanding for an unduly long period. The auditor should ascertain the reasons for such outstanding items from the management. He should also examine whether any such items require an adjustment write-off.

(iv) Examine relevant certificates in respect of fixed deposits or any type of deposits with banks duly supported by bank advices.

(v) The auditor should examine the possibility, that even though the balance in an apparently inoperative account may have remained stagnant, transactions may have taken place in that account during the year.

(vi) In relation to balances/deposits with specific charge on them, or those held under the requirements of any law, the auditor should examine that suitable disclosures are made in the financial statements.

(vii) Remittances shown as being in transit should be examined with reference to their credit in the bank in the subsequent period. Where the auditor finds that such remittances have not been credited in the subsequent period, he should ascertain the reasons for the same. He should also examine whether the entity has reversed the relevant entries in appropriate cases.

(viii) The auditor should examine that suitable adjustments are made in respect of cheques which have become stale as at the close of the year.

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(ix) Where material amounts are held in bank accounts which are blocked, e.g. in foreign banks with exchange control restrictions or any banks which are under moratorium or liquidation, the auditor should examine whether the relevant facts have been suitably disclosed in the financial statements. He should also examine whether suitable adjustments on this account have been made in the financial statements in appropriate cases.

(x) Where the auditor finds that the number of bank accounts maintained by the entity is disproportionately large in relation to its size, the auditor should exercise greater care in satisfying himself about the genuineness of banking transactions and balances.

c) Cheques Received on the last day of Accounting Year: It is a quite normal that in any ongoing

business entity many a times cheques are received from the customers on the last day of the accounting year. It is also quite likely, that cheques received on the last day of the accounting year could not be deposited in the bank. Though normally speaking, it is expected that all cheques should be deposited in the bank daily. But there may be a possibility that such cheques which are received particularly during the late hours could not be deposited in the bank. Therefore, it is quite important to ensure that the system of internal control is effective and such cheques should be properly accounted for to avoid any frauds and that the financial statements reflect a true and fair view. As far as internal control system is concerned, it should be ensured that a list of such cheques is prepared in duplicate and a copy of the same has been sent to person controlling the trade receivables’ ledger and a second copy is handed over to cashier along with the cheques received. The person who is controlling the trade receivables’ ledger should ensure that proper accounting entries have been passed by crediting respective trade receivables’ accounts. The balance of cheques-in- hand should also be disclosed along with the cash and bank balances in the financial statements.

d) Vouching: The act of examining vouchers is referred to as vouching. It is the practice followed in

an audit, with the objective of establishing the authenticity of the transaction recorded in the primary books of account. It essentially consists of verifying a transaction recorded in the books of account with the relevant documentary evidence and the authority on the basis of which the entry has been made; also confirming that the amount mentioned in the voucher has been posted to an appropriate account which would disclose the nature of transaction on its inclusion in the final statements of account. After examination, each voucher is marked in a manner to ensure that it may not be presented again in support of another entry. The following points need careful consideration while examining a voucher: (i) that the date of the voucher falls within the accounting period; (ii) that the voucher is made out in the client’s name; (iii) that the voucher is duly authorised; (iv) that the voucher comprised all the relevant documents which could be expected to have

been received or brought into existence on the transactions having been entered into, i.e., the voucher is complete in all respects; and

(v) that the account in which the amount of the voucher is adjusted is the one that would clearly disclose the character of the receipts or payments posted thereto on its inclusion in the final accounts.

5. a) The role of audit programme in audit plan and performance: The audit programme is helpful both

in planning and performance stages of audit: (i) The audit programme lists down areas of audit before commencement. (ii) The audit timing is built therein; thereby it becomes a schedule of audit plan. (iii) The staff who are entrusted with the audit assignment is also specified. It is a plan of

resource allocation of the firm. (iv) It specifies the procedures to be checked during the audit.

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(v) As the audit work is split into various elements of procedures to be performed, the audit programme acts as a guiding chart or check list during the performance of audit.

(vi) Since the staff in charge of each work is specified and they sign the programme, it extracts the responsibility from the audit assistants.

(vii) The working papers of the audit staff can be reviewed against the audit programme which helps a base of reference for evaluation of the performance before reporting on the financial statements.

(viii) It also helps in preparing a diary of the performance and plan and also base for billing the clients for the time and manpower involved in the audit.

b) While adopting test check technique, an auditor should take following precautions:-

(i) The transactions of the concern should be classified under appropriate heads and may be stratified in case of wide variations between the transactions of the same kind.

(ii) Authorisations, documentations, recording of the transactions should be studied right from the beginning to end.

(iii) Evaluating the system of internal control for its efficiency, soundness and capability to produce reliable accounting and financial data.

(iv) Preparation of test check plan with clear audit objective understood by the audit staff. (v) Un-biased selection of the transactions with reference to the random number tables or

other statistical methods. (vi) Identification of the areas where test check may not be done. (vii) Based on degree of reliance and the confidence level required in the audit, the number of

transactions to be selected for each test plan should be pre-determined. (viii) Setting up criteria to judge what constitute material or immaterial errors. Further

investigation of only material errors be carried out and all immaterial errors may be avoided.

6. a) Shifting of Books of Account: As per section 128(1) of The Companies Act 2013, every company

shall keep at its registered office proper books of accounts. It is permissible, however, for all or any of the books of accounts to be kept at such place in India as the Board of Directors may decide but, when a decision in this regard is taken, the company must file within seven days of such decision with the Registrar of Companies a notice in writing giving full address of the other place. Conclusion: In view of the above provisions, A Ltd should maintain its books of account at its registered office at New Delhi. The Managing Director is not allowed to shift its books of account to Indore unless decision in this behalf is taken by the Board of Directors and a notice is also given to the Registrar of Companies within the specified time. The auditor may accordingly, inform the Managing Director that his contention is not in accordance with the legal provisions.

b) Auditor’s Attendance at Annual General Meeting: Section 143 of the Companies Act, 2013 confers

right on the auditor to attend the general meeting. The said section provides that all notices and other communications relating to any general meeting of a company also to be forwarded to the auditor. Further, it has been provided that the auditor shall be, unless otherwise exempted, entitled to attend any general meeting and to be heard at such general meeting which he attends on any part of the business which concerns him as an auditor. Therefore, the section does not cast any duty on the auditor to attend the annual general meeting. The law only confers right on the auditor to receive notices and also attend the meeting if he so desires. Therefore, the complaint filed by the Board of Directors is based on mis-conception of the law.

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c) Board's Powers to Appoint an Auditor: As per Section 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor shall- (i) In the case of a company other than a company whose accounts are subject to audit by an

auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of Directors within thirty days. If such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be approved by the company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting;

(ii) In the case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the Comptroller and Auditor-General of India within thirty days:

It may be noted that in case the Comptroller and Auditor-General of India does not fill the vacancy within he said period the Board of Directors shall fill the vacancy within next thirty days. Therefore, the vacany can be filled by the Board of Directors within thirty days but such appointment should be approved by the Company at a general meeting convened within three months of the recommendation of the Board and he shall hold the office till the conclusion of the next annual general meeting

d) Restrictions on Powers of Statutory Auditors: Section 143 of the Companies Act, 2013 provides that

an auditor of a company shall have right of access at all times to the books and accounts and vouchers of the company whether kept at the Head Office or other places and shall be entitled to require from the offices of the company such information and explanations as the auditor may think necessary for the purpose of his audit. These specific rights have been conferred by the statute on the auditor to enable him to carry out his duties and responsibilities prescribed under the Act, which cannot be restricted or abridged in any manner. Hence, any such resolution even if passed by entire body of shareholders is ultra vires and therefore void.

7. a) Examination in Depth: It implies examination of a few selected transactions from the beginning to

the end through the entire flow of the transaction, i.e., from initiation to the completion of the transaction by receipt or payment of cash and delivery or receipt of the goods. This examination consists of studying the recording of transactions at the various stages through which they have passed. At each stage, relevant records and authorities are examined; it is also judged whether the person who has exercised the authority in relation to the transactions is fit to do so in terms of the prescribed procedure. For example, a purchase of goods may commence when a predetermined re-order level has been reached. The ensuing stages may be summarised thus: (i) requisitions are pre-printed, pre-numbered and authorised; (ii) official company order, also sequentially pre-numbered, authorised and placed with

approved suppliers only; (iii) receipt of supplier’s invoice; (iv) receipt of supplier’s statement; (v) entries in purchases day book; (vi) postings to purchase ledger and purchase ledger control account; (vii) cheque in settlement; (viii) entry on bank statement and returned “paid” cheque (if requested); (ix) cash book entry; (x) posting from cash book to ledger and control account, taking into account any discounts. (xi) receipt of goods, together with delivery/advice note; (xii) admission of goods to stores; (xiii) indication, by initials or rubber stamp on internal goods inwards note, of compliance with

order regarding specification, quantity and quality; (xiv) entries in stores records.

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It should be noted that the above list is not necessarily comprehensive, nor does its constituent stages inevitably take place in the sequence suggested. The important point to note is that from the moment it was realised that once a re-order level had reached, a chain of events was put in motion, together leaving what may be termed as “audit trail”. Each item selected for testing must be traced meticulously, and although sample sizes need not be large, they must, of course, be representative. It is an acceptable practice to check a slightly smaller number of transactions at each successive stage within a depth test, on the statistical grounds (based on probability theory) that the optimum sample size decreases as the auditor’s “level of confidence” concerning the functioning of the system increases. Examination in depth has been found indispensable in modern auditing practice and, if intelligently conducted, its reconstruction of the audit trail reveals more about the functioning (or malfunctioning) of the client’s system in practice than the haphazard and mechanical approach to testing.

b) Audit Trail: An audit trail refers to a situation where it is possible to relate ‘one-to- one’ basis, the

original input along with the final output. The work of an auditor would be hardly affected if “Audit Trail” is maintained i.e. if it were still possible to relate, on a ‘one-to-one’ basis, the original input with the final output. A simplified representation of the documentation in a manually created audit trail. For example, the particular credit notes may be located by the auditor at any time he may wish to examine them, even months after the balance sheet date. He also has the means, should he so wish, of directly verifying the accuracy of the totals and sub-totals that feature in the control listing, by reference to individual credit notes. He can, of course, check all detailed calculations, casts and postings in the accounting records, at any time. In first and early second-generation computer systems, such a complete and trail was generally available, no doubt , to management’s own healthy skepticism of what the new machine could be relied upon to achieve – an attitude obviously shared by the auditor. It is once iterated that there is an abundance of documentation upon which the auditor can use his traditional symbols of scrutiny, in the form of colored ticks and rubber stamps. Specifically: (i) The output itself is as complete and as detailed as in any manual system. (ii) The trail, from beginning to end, is complete, so that all documents may be identified by

located for purposes of vouching, totalling and cross-referencing. Any form of audit checking is possible, including depth testing in either direction.

c) Intangible Assets: An intangible asset is that asset which does not have a physical identity but

which is used by the enterprise for production or supply of goods or for retails to other or for administrative purpose. Such asset does not have any physical existence but their presence in the business is indicated with a value placed thereon. These assets include rights and benefit to owners subject to their being useful. For example: goodwill, patents, copyright etc. AS 26, “Intangible Assets”, applies to, among other things, expenditure on advertising, training, start-up, research and development activities. Research and development activities are directed to the development of knowledge. Therefore, although these activities may result in an asset with physical substance (for example, a prototype), the physical element of the asset is secondary to its intangible component, that is the knowledge embodied in it. This standard also applies to rights under licensing agreements for items such as motion picture films, video recordings, plays, manuscripts, patents and copyrights. An intangible asset should measured at cost. After initial recognition an intangible asset should be carried at its cost less any accumulated amortization and any impairment losses.

d) Auditor’s Lien: In terms of the general principles of law, any person having the lawful possession of

somebody else’s property, on which he has worked, may retain the property for non-payment of his dues on account of the work done on the property.

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On this premise, auditor can exercise lien on books and documents placed at his possession by the client for nonpayment of fees, for work done on the books and documents. The Institute of Chartered Accountants in England and Wales has expressed a similar view on the following conditions: (i) Documents retained must belong to the client who owes the money. (ii) 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.

(iii) The auditor can retain the documents only if he has done work on the documents assigned to him.

(iv) Such of the documents can be retained which are connected with the work on which fees have not been paid.

Under section 128 of the Companies Act, 2013, books of account of a company must be kept at the registered office. These provisions ordinarily make it impracticable for the auditor to have possession of the books and documents. The company provides reasonable facility to auditor for inspection of the books of account by directors and others authorised to inspect under the Act. Taking an overall view of the matter, it seems that though legally, auditor may exercise right of lien in cases of companies, it is mostly impracticable for legal and practicable constraints. His working papers being his own property, the question of lien, on them does not arise. Further, as per SA 230 “Audit Documentation”, “working papers are the property of the auditor”. The auditor may at his discretion make portions of or extracts from his working papers available to his clients. Thus, documents prepared by the professional accountant solely for the purpose of carrying out his duties as auditor (whether under statutory provisions or otherwise) belong to the professional accountant. In the case of Chantrey Martin and Co. v. Martin, it was held that the following documents were the property of the auditor: working papers and schedules relating to the audit, draft accounts of the company, and the draft tax computation prepared by an employee of the auditor. It is also clear that the accountant’s correspondence with his client (letters written by the client to the accountant and copies of the letters written by the accountant to the client) belong to the accountant. In the case of Chantrey Martin and Co. v. Martin, it was also held that the correspondence between the accountant and the taxation authorities with regard to the client’s accounts and tax computations was the property of the client since the accountant merely acted as agent of the client. However, where the accountant communicates with third parties not as an agent, but as a professional man, e.g., as an auditor, the correspondence with third parties would seem to belong to the accountant. According to the statement, where an auditor obtains documents confirming the bank balance or confirming the custody of securities of the client or other similar documents, it is probable that the courts would hold that these documents belong to the auditor.

e) Disclaimer of Opinion: Where an auditor fails to obtain sufficient information to warrant an

expression of opinion, and, thus, is unable to form an opinion, he issues a disclaimer of opinion. Accordingly, the auditor may state that he is unable to express an opinion because he has not been able to obtain sufficient and appropriate audit evidence to form an opinion. The necessity of a disclaimer of opinion may arise due to many reasons such as the scope of examination is restricted or in certain circumstances the auditor may not have access to all the books of account for certain reasons, e.g., books are seized by excise authorities or destroyed in fire, etc. It is but natural that the auditor must make all efforts to verify and substantiate the events. In case he is unable to obtain audit evidence even from alternative sources, then the auditor can only state that he is unable to form an opinion.

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ITTA No. of Pages: 2 Total Marks: 100

No. of Questions: 14 Time Allowed: 3 Hrs PART - A

Question No.1 is compulsory. Answer any five questions from the rest.

1. Answer all the following questions in brief:

a) What are the four basic components of Decision support system? b) What are the three basic functions of Accounting Information System c) Explain Coaxial cable d) What are the disadvantages of Cloud computing? e) State one example of communication capabilities provided by IT (2 x 5 = 10 Marks)

2.

a) In reference to Network Virtualization, describe major applications of the concepts of the virtualization. (4 Marks)

b) XYZ Limited is planning to implement Business Process Management System (BPMS). The Management asked you to briefly explain some benefits of BPMS to help them to take a decision on BPMS. (4 Marks)

3. a) Differentiate between Circuit Switching and Packet Switching. (4 Marks) b) Server performs computational tasks on behalf of clients. Explain different types of servers

based on the service they provide (4 Marks) 4.

a) HTTPS is a communication protocol for secure communication. What are the popular network security protocols? (4 Marks)

b) Plastic cards have become payment mechanism in today’s growing economy. Comment (4 Marks)

5. a) State few examples of applications that are available to help enterprise in achieving business

process automation. (4 Marks) b) Discuss pre-requisites of ACID Test for any Transaction Processing System. (4 Marks)

6.

a) What are the types of management sub-system? Explain (4 Marks) b) Data flow diagram is a graphical representation of flow of data through information system.

Elucidate. (4 Marks)

7. Write short notes on any four of the following: a) Leased Application b) Repeater c) Operating system d) Smart cards e) Batch processing (2 x 4 = 8 Marks)

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PART - B Question 8 is compulsory.

Attempt any five questions from the rest 8.

a) “Firms can use benchmarking process to achieve improvement in diverse range of management functions.” Comment

b) Can a change in the elected government affect the business environment? Explain. c) Explain the meaning of enlightened marketing and Synchro marketing d) To which industries the following development offers opportunities and threats? ‘The number

of nuclear families, where husband and wife both are working, is fast increasing'. e) How would you argue that 'corporate strategy 'ensures the correct alignment of the firm with

its environment'? (5 x 3 = 15 Marks)

9. a) State with reasons which of the following statements are correct/incorrect:

(i) Focus strategies are most effective with consumers having similar preferences. (ii) De-marketing is used to eliminate the competitors’ market share. (2 x 2 = 4 Marks)

b) You are appointed as a Strategic Manager by XYZ Co. Ltd. Being a Strategic Manager what

should be your tasks to perform? (3 Marks)

10. Many organizations in order to achieve quick growth use strategies such as mergers and acquisitions. Explain. Discuss various types of mergers. (7 Marks)

11.

a) A business does not function in isolation, rather, it acts as a sub-system of its environment (4 Marks)

b) “Successful strategy formulation does not guarantee successful strategy implementation.” Discuss. (3 Marks)

12. Define corporate culture. Also elucidate the statement “Culture is a strength that can also be a weakness”. (7 Marks)

13. Distinguish between:

a) Operational Control and Management Control. (4 Marks) b) DMAIC and DMADV Methodology of Six Sigma (3 Marks)

14. Write short notes on the following:

a) Augmented marketing Or

Portfolio analysis (4 Marks)

b) What are the three basic goals environmental analyses? (3 Marks)

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PRIME ACADEMY 41st SESSION – IPC - MODEL EXAM

INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT SUGGESTED ANSWERS

PART A - INFORMATION TECHNOLOGY 1.

a) DSS has four basic components: (i) The user: The user is usually a manager with an unstructured or semi-structured problem to solve

and may be at management - level of an organization. (ii) One or more databases: Databases contain both routine and non-routine data from both internal

and external sources. (iii) Planning languages: Planning languages can either be general-purpose or special purpose allowing

users to perform routine tasks and specific tasks respectively. (iv) Model Base: Model base is the brain of the DSS as it performs data manipulations and

computations with the data provided to it by the user and the database. The planning language in DSS allows the user to maintain a dialogue with the model base.

b) There are three basic functions of AIS and these are explained here. (i) Collect and store data: Collect and store data about organization’s business activities and

transactions by capturing transaction data from source documents and posting data from journals to ledgers. Source documents are special forms used to capture transaction data such as sales order, sales invoice, order processing, purchase order, etc. Control over data collection is improved by pre-numbering each source document. Accuracy and efficiency in recording transaction data can be further improved if source documents are properly designed.

(ii) Record transaction: Record transactions data into journals. These journals present a chronological record of what occurred and provide management with information useful for decision making. These documents are in the form of reports like financial statements, managerial reports, etc.

(iii) Safeguard organizational assets: Provide adequate controls to ensure that data are recorded and processed accurately by safeguarding organizational assets (data and systems). The two important methods for accomplishing this objective are by providing adequate documentation of all business activities and an effective segregation of duties. Documentation allows management to verify that assigned responsibilities were completed correctly. Segregation of duties refers to dividing responsibility for different portions of a transaction among several people.

c) Coaxial Cable: This telecommunications media consists of copper or aluminum wire wrapped with spacers to insulate and protect it (as shown in the Fig. 3.5.2). Insulation minimizes interference and distortion of the signals the cable carries. Coaxial cables can carry a large volume of data and allows high-speed data transmission used in high-service metropolitan areas for cable TV systems, and for short-distance connection of computers and peripheral devices. These cables can be bundled together into a much larger cable for ease of installation and can be placed underground and laid on the floors of lakes and oceans. It is used extensively in office buildings and other work sites for local area networks. The only disadvantage of coaxial cable is that it is more expensive than twisted pair.

d) Disadvantages of Cloud Computing are as follows:

(i) Technical Issues: This technology is always prone to outages and other technical issues. Even the best cloud service providers run into this kind of trouble, in spite of keeping up high standards of Maintenance. We will invariably be stuck in case of network and connectivity problems.

(ii) Security in the Cloud: Surrendering all the company’s sensitive information to a third-party cloud service provider could potentially put the company to great risk.

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(iii) Prone to Attack: Storing information in the cloud could make the company vulnerable to external hack attacks and threats. Nothing on the Internet is completely secure and hence, there is always the lurking possibility of stealth of sensitive data.

e) IT provides resources to enterprises to communicate quickly and effectively. With these communication

capabilities, enterprises can now integrate their business functions and segments spread across different geographical areas. Whats App Messenger is a cross-platform mobile messaging application which allows us to exchange messages without having to pay for SMS. It is available for: iPhone, BlackBerry, Android, Windows phone, Nokia and these phones can message each other. Because Whats App Messenger uses the same internet data plan that we use for e-mail and web browsing, there is no cost to message and stay in touch with friends.

2. a) Some benefits of Business Process Management Systems (BPMS) are as follows:

(i) Automating repetitive business processes: Processes such as report creation and distribution or the monitoring of or reporting on company’s Key Performance Indicators (KPI) reduces the manual operational costs and helps employees to concentrate on activities that are important to the success of business.

(ii) BPMS works by 'loosely coupling' with a company's existing applications: This enables it to monitor, extract, format and distribute information to systems and people; in line with business events or rules.

(iii) Operational Savings: BPM focuses on optimization of processes. The processes that are repetitive are optimized and lead to reduced expenses which translate to immediate cost savings. By automating a task, ROI of BPM that requires six hours of manual intervention, one can expect to cut that time to half. Thus, three hours multiplied by the number of times the process is completed in a cycle will yield significant cost saving.

(iv) Reduction in the administration involved in Compliance and ISO Activities: Be it a quality assurance initiative such as the ISO standards, a financial audit law, or an IT systems best-practice implementation, companies worldwide are seeing the need to manage compliance as part of their everyday business activities. The BPM is ideally suited to help support companies in their quest for process improvement and compliance/governance certification. It gives full control over process and document change, clarity of inherent risks, and ease with which process knowledge is communicated across the company.

(v) Freeing-up of employee time: While the euphuism “time is money” is often over-used, it is very relevant to this topic, because in business, for each additional hour it takes to complete a manual business process, there is a hard cost associated with employee time as well as soft costs associated with losing business or lowered productivity. Another area where time comes into play is in opportunity costs.

b) In order to qualify as a Transaction Processing System (TPS), transactions made by the system must pass

the ACID Test. The ACID Test refers to the following four prerequisites as discussed below: (i) Atomicity: This means that a transaction is either completed in full or not at all. TPS systems ensure

that transactions take place in their entirety. For example, if funds are transferred from one account to another, this only counts as a bona-fide transaction if both the withdrawal and deposit take place. If one account is debited and the other is not credited, it does not qualify as a transaction.

(ii) Consistency: TPS systems exist within a set of operating rules (or integrity constraints). If an integrity constraint states that all transactions in a database must have a positive value, any transaction with a negative value would be refused.

(iii) Isolation: Transactions must appear to take place in seclusion. For example, when a fund transfer is made between two accounts the debiting of one and the crediting of another must appear to take place simultaneously. The funds cannot be credited to an account before they are debited from another.

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(iv) Durability: Once transactions are completed they cannot be undone. To ensure that this is the case even if the TPS suffers failure, a log will be created to document all completed transactions. These four conditions ensure that TPS systems carry out their transactions in a methodical, standardized and reliable manner. So Transactions must be ongoing.

3. a) Circuit Switching: A Circuit Switching network is one that establishes a fixed bandwidth circuit (or

channel) between nodes and terminals before the users may communicate, as if the nodes were physically connected with an electrical circuit. The route is dedicated and exclusive, and released only when the communication session terminates. Circuit switching is what most of us encounter on our home phones. A single circuit is used for the entire duration of the call. Applications which use circuit switching go through three phases: Establish a Circuit, Transfer of data and Disconnect the Circuit. Packet Switching: It is a sophisticated means of maximizing transmission capacity of networks. Packet switching refers to protocols in which messages are broken up into small transmission units called packets, before they are sent. Each packet is transmitted individually across the net. The packets may even follow different routes to the destination. Since there is no fixed path, different packets can follow different path and thus they may reach to destination out of order.

b) From a hardware perspective, a server is a computer (Hardware) or device on a network dedicated to run one or more services (as a host), to serve the needs of the users of other dedicated to run one or more services (as a host), to serve the needs of the users of other computers on a network. However in the context of client-server architecture, a server is a computer program running to serve the requests of other programs, the "clients". Thus, the server performs some computational task on behalf of "clients." The clients either run on the same computer, or they connect through the network. Servers are often dedicated, meaning that they perform no other tasks besides their server tasks. On multiprocessing operating systems, however, a single computer can execute several programs at once. A server in this case could refer to the program that is managing resources rather than the entire computer. Essentially it is not the size of a computer system that makes it a server. It is in-fact based on the function that it provides. Any computer system that provides some sort of service can be referred to as a server. There are different types of servers, based on the nature of service they provide. Some of them are given as follows: (i) File server: This is a computer and storage device dedicated to storing files. Any user on the

network can store files on the server. (ii) Print server: This is a computer that manages one or more printers. (iii) Network server: This is a computer that manages network traffic. (iv) Database server: This is a computer system that processes database queries.

Application Server: This is a program that handles all application operations between users and an enterprise's backend business applications or databases.

(v) Web Servers: Web servers are computers that deliver (serves up) web pages. Every web server has an IP address and possibly a domain name. For example, if we enter the URL http://www.icai.org in our browser, this sends a request to the Web server whose domain name is icai.org. The server then fetches the home page named and sends it to our browser. Any computer can be turned into a Web server by installing server software and connecting the machine to the Internet.

(vi) Mail Server: Mail servers move and store mail over corporate networks.

4. a) Some of the popular network security protocols include Secure Shell (SSH), Secure File Transfer Protocol

(SFTP), Secure Hypertext Transfer Protocol (HTTPS) and Secure Socket Layer (SSL) etc. (i) SSH - Secure Shell is a program to log into another computer over a network, to execute commands

in a remote machine, and to move files from one machine to another. It provides strong authentication and secure communications over insecure channels.

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SSH protects a network from attacks such as IP spoofing, IP source routing, and DNS spoofing. An attacker cannot play back the traffic or hijack the connection when encryption is enabled. During ssh login, the entire login session, including transmission of password, is encrypted; therefore it is almost impossible for an outsider to collect passwords.

(ii) SFTP – The SSH File Transfer Protocol (also known as Secure FTP and SFTP) is a computing network protocol for accessing and managing files on remote file systems. Unlike standard File Transfer Protocol (FTP), SFTP encrypts commands and data both, preventing passwords and sensitive information from being transmitted in the clear over a network.

(iii) HTTPS – Hyper Text Transfer Protocol Secure (HTTPS) is a communications protocol for secure communication over a computer network, with especially wide deployment on the Internet. The security of HTTPS uses long term public and secret keys to exchange a short term session key to encrypt the data flow between client and server.

(iv) SSL – Secure Socket Layer (SSL) is essentially a protocol that provides a secure channel between two machines operating over the Internet or an internal network. In today’s Internet focused world, the SSL protocol is typically used when a web browser needs to securely connect to a web server over the inherently insecure Internet. In practice, SSL is used to secure online credit card transactions, system logins and any sensitive information exchanged online, to secure webmail and applications like Outlook

b) e-Commerce will have a direct bearing on the validity of the information to individuals, corporations or the country’s economic interests and reputation. The validity of the transaction price, period, and the number of hours as part of the agreement is particularly vital. The use of a credit card as a payment mechanism augments the tendency to spend as compare to cash in otherwise identical purchase situations. Consumers nowadays have the prospect to pay for transactions with a progressively more growing array of payment mechanisms. In addition to conventional mode of payments like cash and cheques, the past few years have seen the speedy creation of plastic payment mechanisms - credit cards, charge cards and debit cards. In addition, consumers are also identifiable with payment mechanism, like traveler’s cheque, credit checkd and money order. Over the coming years, a total new generation of payment mechanisms like smart cards, memory cards and electronic payments is expected to cultivate and in due course symbolize a remarkable proportion of all consumer transactions.

5.

a) Many applications are available today that help enterprise to achieve business process automation. Few applications may be simpler; others may be more complex based on nature of process being considered. Some of them are mentioned below: (i) TALLY: It is an accounting application that helps entity to automate processes relating to

accounting of transactions. It also helps to achieve automation of few processes in inventory management. The latest version has been upgraded to help user achieve TAX compliances also. It has features such as Remote Access Capabilities, Tax Audit and Statutory Compliance, Payroll, Excise for Manufacturers, Multilingual Support, VAT Composition Returns, TDS, VAT (Value Added Tax), Rapid Implementation, Real Time Processing, Dynamic Interactive Reports and Unique Drill-Down Facility, Unlimited Companies and Periods of Accounting.

(ii) SAP R/3: It is ERP software, which allows an entity to integrate its business processes. ERP stands for Enterprise Resource Planning, which aims at better utilization of the resources and helps entity achieve better business performance. It has the features such as time management, reporting and analytics, budget monitoring, workflow approval, sales management, team management, leave management, travel management, recruitment management and demand planning. This is used by most of the large enterprises across the world and covers enterprise automation end-to-end.

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(iii) MS Office Applications: These are various office automation systems made available by Microsoft Corporation which include MS Word, MS Excel, MS PowerPoint, MS Access, etc. Each of these software help to achieve automation of various tasks in the office. It has features such as customized ribbon, backstage view, built-in graphics toolset, enhanced security, excel spark lines, pivot for Excel, PowerPoint broadcast, Power Point compression, paste, preview and outlook conversation view.

(iv) Attendance Systems: Many attendance automation systems are available in the market. The application helps entity to automate the process of attendance tracking and report generation. It has features such as supervisor login access, holiday pay settings, labour distribution, employee scheduling and rounding, employee view time card, overtime settings, battery-backed employee database and optional door/gate access control.

b) In order to qualify as a Transaction Processing System (TPS), transactions made by the system must pass the ACID Test. The ACID Test refers to the following four prerequisites as discussed below: (i) Atomicity: This means that a transaction is either completed in full or not at all. TPS systems ensure

that transactions take place in their entirety. For example, if funds are transferred from one account to another, this only counts as a bona-fide transaction if both the withdrawal and deposit take place. If one account is debited and the other is not credited, it does not qualify as a transaction.

(ii) Consistency: TPS systems exist within a set of operating rules (or integrity constraints). If an integrity constraint states that all transactions in a database must have a positive value, any transaction with a negative value would be refused.

(iii) Isolation: Transactions must appear to take place in seclusion. For example, when a fund transfer is made between two accounts the debiting of one and the crediting of another must appear to take place simultaneously. The funds cannot be credited to an account before they are debited from another.

(iv) Durability: Once transactions are completed they cannot be undone. To ensure that this is the case even if the TPS suffers failure, a log will be created to document all completed transactions.

(v) These four conditions ensure that TPS systems carry out their transactions in a methodical, standardized and reliable manner. So Transactions must be ongoing.

6. a)

Management Subsystem

Description of Subsystem

Top Management Top management must ensure that information systems function is well managed. It is responsible primarily for long – run policy decisions on how Information Systems will be used in the organization.

Information Systems Management

IS management has overall responsibility for the planning and control of all information system activities. It also provides advice to top management in relation to long-run policy decision making and translates long-run policies into short-run goals and objectives.

Systems Development Management

Systems Development Management is responsible for the design, implementation, and maintenance of application systems

Programming Management

It is responsible for programming new system; maintain old systems and providing general systems support software.

Data Administration Data administration is responsible for addressing planning and control issues in relation to use of an organization’s data.

Quality Assurance Management

It is responsible for ensuring information systems development; implementation, operation, and maintenance conform to established quality standards.

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Security Administration

It is responsible for access controls and physical security over the information systems function.

Operations Management

It is responsible for planning and control of the day-to-day operations of information systems.

b) Data Flow Diagram (DFD): It is a graphical representation of the flow of data through an information

system. A DFD illustrates technical or business processes with the help of the external data stored, the data flowing from a process to another, and the results. The four major DFD component’s symbols are as follows: DFDs may be partitioned into levels that represent increasing information flow and functional detail. Therefore, the DFD provides a mechanism for functional modeling as well as information flow modeling. Any system in general is too complex to be shown on a single DFD. Decomposition is an iterative process of exploding DFDs to create more detail. Data Flow Diagrams can be expressed as a series of levels. We begin by making a list of business activities to determine the DFD elements (external entities, data flows, processes, and data stores). Context Diagram shows the interaction between the system and external agents. (i) The Context Diagram is a high-level DFD that shows the entire system as a single process and shows

the interaction between the system and external agents which act as data sources and data sinks and gives no clues as to its internal organization.

(ii) The context-level DFD is next "exploded", to produce Level 1 DFDs for each process that shows how the system is divided into sub-systems (processes), each of which deals with one or more of the data flows to or from an external agent, and which together provide all of the functionality of the system as a whole.

7.

a) Leased Application: It is a new method for getting applications that are being used today, i.e. leased applications, where user pays fixed rent for using the application for agreed terms. Many specialized vendors provide users with option to get their job done by paying monthly rent; this is referred to as outsourcing.

b) Repeater: Repeater is a communication processor that boosts or amplifies the signal before passing it to the next section of cable in a network.

c) Operating System: An Operating System (OS) is a set of computer programs that manages computer hardware resources and acts as an interface with computer applications programs. The operating system is a vital component of the system software in a computer system. Application programs usually require an operating system to function that provides a convenient environment to users for executing their programs. Computer hardware with operating system can thus be viewed as an extended machine which is more powerful and easy to use. Some prominent Operating systems used nowadays are Windows 7, Windows 8, Linux, UNIX, etc.

d) Smart Cards: Smart cards are any pocket sized card with embedded integrated circuits. Smart cards can provide identification authentications, data storage and application processing. Smart cards may serve as a credit or ATM cards, Fuel cards, mobile phone SIMs, access-control cards, public transport or public phone payment cards etc. on the card. Contact cards, Contactless cards and Combi/Hybrid Cards are the three types of Smart Cards.

e) Batch Processing: It is defined as a processing of large set of data in a specific way, automatically, without needing any user intervention. The data is first collected, during a work day, for example, and then batch-processed, so all the collected data is processed in one go. This could happen at the end of the work day, for example, when computing capacities are not needed for other tasks. It is possible to perform repetitive tasks on a large number of pieces of data rapidly without needing the user to monitor it. Batched jobs can take a long time to process. Batch processing is used in producing bills, stock control, producing monthly credit card statements, etc.

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PART B = STRATEGIC MANAGEMENT 8.

a) Benchmarking is a process of finding the best practices within and outside the industry to which an organisation belongs. Knowledge of the best practices helps in setting standards and finding ways to match or even surpass own performances with the best performances. Benchmarking is a process of continuous improvement in search for competitive advantage. Firms can use benchmarking process to achieve improvement in diverse range of management function such as mentioned below: (i) Maintenance operations, (ii) Assessment of total manufacturing costs, (iii) Product development, (iv) Product distribution, (v) Customer services, (vi) Plant utilisation levels; and (vii) Human resource management.

b) The type of government running a country is a powerful influence on business. Businesses are highly

guided and influenced by government actions. Change in the elected government relates to the change in political environment. To an extent, even legal environment may change with the changes in the Government. It has a strong bearing on the conduct of business as it leads to significant changes in the economic policies and the regulatory framework. It generally reflects the political ideology of the political party or alliances. The government’s policy of promoting select sectors further impacts the functioning of business organizations. The type of government running a country is a powerful influence on business. Businesses are highly guided and influenced by government actions. Change in the elected government relates to the change in political environment. To an extent, even legal environment may change with the changes in the Government. It has a strong bearing on the conduct of business as it leads to significant changes in the economic policies and the regulatory framework. It generally reflects the political ideology of the political party or alliances. The government’s policy of promoting select sectors further impacts the functioning of business organizations.

c) Enlightened Marketing: A marketing philosophy holding that a company’s marketing should support the best long-run performance of the marketing system; its five principles include customer-oriented marketing, innovative marketing, value marketing, sense-of-mission marketing, and societal marketing. Synchro-marketing: When the demand for the product is irregular due to season, some parts of the day, or on hour basis, causing idle capacity or over-worked capacities, synchro-maketing can be used to find ways to alter the same pattern of demand through flexible pricing, promotion, and other incentives.

d) An opportunity is a favorable condition in the organisation’s environment which enables it to strengthen its position. On the other hand a threat is an unfavorable condition in the organisation’s environment which causes a risk for, or damage to, the organisation’s position. Different developments in the environment can offer different opportunities and threats to businesses. In the social environment, there is growth of nuclear families that is away from the joint family system. Often both husbands and wife are working. Having double income increases their spending capacity. Such developments bring direct opportunities to different businesses such as ready to eat food, eateries, fast to cook items, dish washers, washing machines, crèches for children and so on. Indirect opportunities exists for other lifestyle products. At the same time, such development also acts as threat to traditional raw food suppliers, kitty party organizers and so on.

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e) Corporate strategy helps an organisation to achieve and sustain success. It is basically concerned with the choice of businesses, products and markets. It is often correlated with the growth of the firm. Corporate strategy in the first place ensures the growth of the firm and its correct alignment with the environment. Corporate strategies are concerned with the broad and long-term questions of what businesses the organization is in or wants to be in, and what it wants to do with those businesses. They set the overall direction the organization will follow. It serves as the design for filling the strategic planning gap. It also helps to build the relevant competitive advantages. A right fit between the firm and its external environment is the primary contribution of corporate strategy. Basically the purpose of corporate strategy is to harness the opportunities available in the environment and countering the threats embedded therein. With the help of corporate strategy, organizations match their unique capabilities with the external environment so as to achieve its vision and mission.

9.

a) (i) Incorrect: Focus strategies are most effective when consumers have distinctive preferences or

requirements and when rival firms are not attempting to specialize in the same target segment. An organization using a focus strategy may concentrate on a particular group of customers, geographic markets, or on particular product line segments in order to serve a well-defined but narrow market better than competitors who serve a broader market.

(ii) Incorrect: Remarketing is a marketing strategy to reduce demand temporarily or permanently-the aim is not to destroy demand, but only to reduce or shift it. This happens when the demand is too much to handle. For example, buses are overloaded in the morning and evening, roads are busy for most of times, zoological parks are over-crowded on Saturdays, Sundays and holidays. Here remarketing can be applied to regulate demand.

b) The primary task of the strategic manager is conceptualizing, designing and executing company

strategies. For this purpose, his tasks will include:

(i) Defining the mission and goals of the organization. (ii) Determining what businesses it should be in. (iii) Allocating resources among the different businesses. (iv) Formulating and implementing strategies that span individual businesses. (v) Providing leadership for the organization.

10. a) Horizontal merger: Horizontal mergers are combinations of firms engaged in the same industry. It is

amerger with a direct competitor. The principal objective behind this type of mergers is to achieve economies of scale in the production process by shedding duplication of installations and functions, widening the line of products, decrease in working capital and fixed assets investment, getting rid of competition and so on. For example, formation of Brook Bond Lipton India Ltd. through the merger of Lipton India and Brook Bond.

b) Vertical merger: It is a merger of two organizations that are operating in the same industry but at different stages of production or distribution system. This often leads to increased synergies with the merging firms. If an organization takes over its supplier/producers of raw material, then it leads to backward integration. On the other hand, forward integration happens when an organization decides to take over its buyer organizations or distribution channels. Vertical merger results in many operating and financial economies. Vertical mergers help to create an advantageous position by restricting the supply of inputs to other players, or by providing the inputs at a higher cost.

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c) Co-generic merger: In Co-generic merger two or more merging organizations are associated in some way or the other related to the production processes, business markets, or basic required technologies. Such merger include the extension of the product line or acquiring components that are required in the daily operations. It offers great opportunities to businesses to diversify around a common set of resources and strategic requirements. For example, organization in the white goods categories such as refrigerators can diversify by merging with another organization having business in kitchen appliances.

d) Conglomerate merger: Conglomerate mergers are the combination of organizations that are unrelated to each other. There are no linkages with respect to customer groups, customer functions and technologies being used. There are no important common factors between the organizations in production, marketing, research and development and technology. In practice, however, there is some degree of overlap in one or more of these factors.

11. a) A business does not function in isolation, rather, it acts as a sub-system of its environment consisting of

society, economy, laws, competitors and so on. Business draws certain inputs from environment in form of resources and information and transforms them into outputs. The relationship between the organization and its environment may be discussed in terms of interactions between them that can be broadly outlined as below: Exchange of information: The organization scans the external environmental variables, their behaviour and changes, generates important information and uses it for its planning, decision-making and control purposes. On the other hand, the organization itself transmits information to several external agencies either voluntarily, inadvertently or legally. Exchange of resources: The organization receives inputs — finance, materials, manpower, equipment etc., from the external environment. It sustains itself by employing the above inputs for involving or producing output of products and services. The organization is also dependent on the external environment for disposal of its output of products and services to a wide range of clientele. Exchange of influence and power: The external environment holds considerable power over the organization both by virtue of its being more inclusive as also by virtue of its command over resources, information and other inputs. The external environment is also in a position to impose its will over the organization. Governmental control, competitors, customers, suppliers, investors etc., exercise considerable power and influence over the organization. In turn, the organization itself is sometimes in a position to wield power and influence over the external environment by virtue of its command over resources and information.

b) Successful strategy formulation does not guarantee successful strategy implementation. It is always

more difficult to do something (strategy implementation) than to say you are going to do it (strategy formulation)! Although inextricably linked, strategy implementation is fundamentally different from strategy formulation. Strategy implementation is different from strategy formulation. Strategy formulation is an intellectual process but strategy implementation is an operational process. Strategy formulation is positioning forces before the action which focuses on effectiveness whereas strategy implementation is managing forces during the action which focuses on efficiency. Strategy formulation requires good intuitive and analytical skills and coordination among a few individuals but strategy implementation requires special motivation and leadership skills and combination among many individuals. So the strategy implementation is more difficult than strategy formulation.

12. The phenomenon which often distinguishes good organizations from bad ones could be summed up as

‘corporate culture’. Corporate culture refers to a company’s values, beliefs, business principles, traditions, ways of operating and internal work environment. Every corporation has a culture that exerts powerful influences on the behaviour of managers. Culture affects not only the way managers behave

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within an organization but also the decisions they make about the organization’s relationships with its environment and its strategy. “Culture is a strength that can also be a weakness”. This statement can be explained by splitting it in to two parts. Culture as a strength: As a strength, culture can facilitate communication, decisionmaking & control and create cooperation & commitment. An organization’s culture could be strong and cohesive when it conducts its business according to a clear and explicit set of principles and values, which the management devotes considerable time to communicating to employees and which values are shared widely across the organization. Culture as a weakness: As a weakness, culture may obstruct the smooth implementation of strategy by creating resistance to change. An organization’s culture could be characterized as weak when many subcultures exist, few values and behavioral norms are shared and traditions are rare. In such organizations, employees do not have a sense of commitment, loyalty and sense of identity.

13.

a) Differences between Operational Control and Management Control are as under: (i) The thrust of operational control is on individual tasks or transactions as against total or more

aggregative management functions. When compared with operational, management control is more inclusive and more aggregative, in the sense of embracing the integrated activities of a complete department, division or even entire organisation, instead or mere narrowly circumscribed activities of sub-units. For example, procuring specific items for inventory is a matter of operational control, in contrast to inventory management as a whole.

(ii) Many of the control systems in organisations are operational and mechanistic in nature. A set of standards, plans and instructions are formulated. On the other hand the basic purpose of management control is the achievement of enterprise goals – short range and long range – in an effective and efficient manner.

b) For implementing six sigma, there are two separate key methodologies for existing and new processes.

They are known as DMAIC and DMADV. DMAIC is an acronym for five different steps used in six sigma - Define, Measure, Analyze Improve, and control. DMAIC methodology is directed towards improvement of existing product, process or service. (i) Define: To begin with six sigma experts define the process improvement goals that are consistent

with the strategy of the organization and customer demands. They discuss different issues with the senior managers so as to define what needs to done.

(ii) Measure: The existing processes are measured to facilitate future comparison. Six sigma experts collect process data by mapping and measuring relevant processes.

(iii) Analyze: Verify cause-and-effect relationship between the factors in the processes. Experts need to identify the relationship between the factors. They have to make a comprehensive analysis to identify hidden or not so obvious factor.

(iv) Improve: On the basis of the analysis experts make a detailed plan to improve. (v) Control: Initial trial or pilots are run to establish process capability and transition to production.

Afterwards continuously measure the process to ensure that variances are identified and corrected before they result in defects.

DMADV is an acronym for Define, Measure, Analyze, Design, and Verify. DMADV is a strategy for designing new products, processes and services.

(i) Define: As in case of DMAIC six sigma experts have to formally define goals of the design activity that are consistent with strategy of the organization and the demands of the customer.

(ii) Measure: Next identify the factors that are critical to quality (CTQs). Measure factors such as product capabilities and production process capability. Also assess the risks involved.

(iii) Analyze: Develop and design alternatives. Create high-level design and evaluate to select the best design.

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(iv) Design: Develop details of design and optimise it. Verify designs may require using techniques such as simulations.

(v) Verify: Verify designs through simulations or pilot runs. Verified and implemented processes are handed over to the process owners.

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a) Augmented marketing refers to deliberate and accelerated efforts to get better marketing returns through additional means. It includes provision of additional customer services and benefits built around the care and actual products that relate to introduction of hitech services like movies on demand, on-line computer repair services, secretarial services, etc. Such innovative offerings provide a set of benefits that promise to elevate customer service to unprecedented levels.

OR Portfolio analysis can be defined as a set of techniques that help strategists in taking strategic decisions with regard to individual products or businesses in a firm’s portfolio. It is primarily used for competitive analysis and corporate strategic splanning in multi product and multi business firms.

b) In general, environmental analysis has three basic goals as follows:

(i) The analysis should provide an understanding of current and potential changes taking place in the environment.

(ii) Environmental analysis should provide inputs for strategic decision making. (iii) Environment analysis should facilitate and foster strategic thinking in organizations typically a rich

source of ideas and understanding of the context within which a firm operates.

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