Amalgamation of Companies – CA Inter Advanced Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Amalgamation of Companies – CA Inter Advanced Accounting Study Material

Computation of Purchase Consideration

Question 1.
N Ltd. and G Ltd. amalgamated to form a new company on 1.04.20X1 Following is the Draft Balance Sheet of N Ltd. and G Ltd. as at 31.3.20X1:

Following are the additional information:

1. The authorised capital of the new company will be ₹ 25,00,000 divided into 1,00,000 equity shares of ₹ 25 each.
2. Liabilities of N Ltd. includes ₹ 50,000 due to G Ltd. for the purchases made. G Ltd. made a profit of 20% on sale to N Ltd.
3. N Ltd. had purchased goods costing ₹ 10,000 from G Ltd. All these goods are included in the current asset of N Ltd. as at 31st March, 20X1.
4. The assets of N Ltd. and G Ltd. are to be revalued as under:
   
5. The purchase consideration is to be discharged as under:
   (a) Issue 24,000 equity shares of ₹ 25 each fully paid up in the pro-portion of their profitability in the preceding 2 years.
   (b) Profits for the preceding 2 years are given below:
   
   (c) Issue 12% preference shares of ₹ 10 each fully paid up at par to provide income equivalent to 8% return on net assets in the business as on 31.3.20X1 after revaluation of assets of N Ltd. and G Ltd. respectively.

You are required to compute the

1. 1. equity and preference shares issued to N Ltd. and G Ltd.
   2. Purchase consideration.

Answer:
(i) Computation of equity shares to he issued to NLtd. and G Ltd.

No. of shares to be issued = 24,000 equity shares in the proportion of the preceding 2 years’ profitability

Computation of 12% Preference shares to be issued to NLtd. and G Ltd.

(ii) Computation of Purchase Consideration

Working Note:
Calculation of Net assets as on 31.3.20X1

Question 2.
A Ltd. is absorbed by S Ltd.; the consideration being the takeover of liabilities, the payment of cost of absorption not exceeding ₹ 10,000 (actual cost ₹ 9,000); the payment of the 9% debentures of ₹ 50,000 at a premium of 20% in form of 8% debentures issued at a premium of 25% at face value and the payment of ₹ 15 per share in cash and allotment of three 11% preference share of ₹ 10 each at a discount of 10% and four equity share of ₹ 10 each at a premium of 20% fully paid for every five shares in A Ltd. The number of shares of the vendor company are 1,50,000 of ₹ 10 each fully paid.
Calculate purchase consideration as per Accounting Standard 14.
Answer:
Computation of Purchase Consideration

Question 3.
On 1st April, 2018, Tina Lid. takeover the business of Rina Ltd. and discharged purchase consideration as follows:

1. Issued 50,000 fully paid Equity shares of ₹ 10 each at a premium of ₹ 5 per share to the equity shareholders of Rina Ltd.
2. Cash payment of ₹ 50,000 was made to equity shareholders of Rina Ltd.
3. Issued 2,000 fully paid 12% Preference shares of ₹ 100 each at par to discharge the preference shareholders of Rina Ltd.
4. Debentures of Rina Ltd. 20,000 will he converted into equal number and amount of 10% debentures of Tina Ltd.

Calculate the amount of Purchase consideration as per AS-14 and pass Journal Entry relating to discharge of purchase consideration in the books of Tina Ltd. (November 2018 – New Course) (5 Marks)
Answer:
Computation of Purchase Consideration

Journal Etitry (in the books of Tina Ltd.)

Simple Problems – Merger

Question 4.
Super Express Ltd. and Fast Express Ltd. were in competing business. They decided to form a new company named Super Fast Express Ltd. The summarized balance sheets of both the companies were as under:
Super Express Ltd. Balance Sheet as at 31st December, 20X1

Fast Express Ltd.
Balance Sheet as at 31st December, 20X1

The assets and liabilities of both the companies were taken over by the new company at their book values. The companies were allotted equity shares of ₹ 100 each in lieu of purchase consideration amounting to ₹ 30,000 (20,000 for Super Fast Express Ltd. and 10,000 for Fast Express Ltd.).

Prepare opening balance sheet of Super Fast Express Ltd. considering pooling method.
Answer:
Balance Sheet of Super Fast Express Ltd.
as at 1st Jan., 20X2

Notes to accounts

Question 5.
The following were the summarized Balance Sheets of P Ltd. and V Ltd. as at 31-3-20X1:


All the bills receivable held by V Ltd. were P Ltd.’s acceptances.

On 1st April 20X1, P Ltd. took over V Ltd. in an amalgamation in the nature of merger. It was agreed that in discharge of consideration for the business P Ltd. would allot three fully paid equity shares of ₹ 10 each at par for every two shares held in V Ltd. It was also agreed that 12% debentures in V Ltd. would be converted into 13% debentures in P Ltd. of the same amount and denomination.

Details of trade receivables and trade payables as under:

Expenses of amalgamation amounting to ₹ 1 lakh were borne by P Ltd. You are required to:
(i) Pass journal entries in the books of P Ltd. and
(ii) Prepare P Ltd.’s Balance Sheet ini mediately after the merger considering that the cost of issue of dehentures shown in the balance sheet of the V Ltd. company is 1101 transferred to the P Ltd. company.
Answer:
Books of P Ltd. Journal Entries

Balance Sheet of P Ltd. as at 1st April, 20X1 (after merger)

Notes to accounts

Computation of purchase consideration :
The purchase consideration was discharged in the form of three equity shares of P Ltd. for every two equity shares held in V Ltd.
Purchase consideration = ₹ 6,000 lacs × \(\frac{3}{2}\) = ₹ 9,000 lacs.
* Cost of issue of debenture adjusted against P & L Account of V Ltd.

Advanced Problems – Merger

Question 6.
The following are the Balance Sheets of M Ltd. and N Ltd. as at 31st March, 2009:

A new Company MN Ltd. was incorporated with an authorised capital of ₹ 15,000 lakhs divided into shares of ₹ 10 each. For the purpose of amalgamation in the nature of merger, M Ltd. and N Ltd. were merged into MN Ltd. on the following terms:

1. Purchase consideration for M Ltd.’s business is to be discharged by issue of 120 lakhs fully paid 11% preference shares and 720 lakhs fully paid equity shares of MN Ltd. to the preference and equity shareholders of M Ltd. in full satisfaction of their claims.
2. To discharge purchase consideration for N Ltd.’s business, MN Ltd. to allot 90 lakhs fully paid up equity shares to shareholders of N Ltd. in full satisfaction of their claims.
3. Expenses on the liquidation of M Ltd. and N Ltd. amounting to ₹ 6 lakhs are to be borne by MN Ltd.
4. 8% redeemable debentures of N Ltd. to be converted into 8.5% redeemable debentures of MN Ltd.
5. Expenses on incorporation of MN Ltd. were ₹ 15 lakhs. You are requested to:

Pass necessary Journal Entries in the books of MN Ltd. to record above transactions, and (Adapted Nov 2009) (16 Marks)
Answer:
Journal Entries

Question 7.
The following was the Balance Sheet of V Ltd. as on 31 st March, 2012:

Notes:

On 1st April, 2012, P Ltd. took over the entire business of V Ltd. on the following terms:

V Ltd.’s equity shareholders would receive 4 fully paid equity shares of P Ltd. of ₹ 10 each issued at a premium of ₹ 2.50 each for every five shares held by them in V Ltd.

Preference shareholders of V Ltd. would get 35 lakh 13% Cumulative Preference Shares of ₹ 10 each fully paid up in P Ltd., in lieu of their present holding.

All the debentures of V Ltd. would be converted into equal number of 10.5% Secured Cumulative Debentures of ₹ 100 each, fully paid up after the takeover by P Ltd., which would also pay outstanding debenture interest in cash.

Expenses of amalgamation would be borne by P Ltd. Expenses came to be ₹ 2 lakhs. P Ltd. discovered that its creditors included ₹ 7 lakhs due to V Ltd. for goods purchased.

Also P Ltd.’s stock included goods of the invoice price of ₹ 5 lakhs earlier purchased from V Ltd., which had charged profit @ 20% of the invoice price.
You are required to:
(i) Prepare Realisation A/c in the books of V Ltd.
(ii) Pass journal entries in the books of P Ltd. assuming it to be an amal-gamation in the nature of merger. (Nov 2012) – (16 Marks)
Answer:
(i) In the books of V Ltd.
Realisation Account

(ii)
In the books of P Ltd.
Journal Entries

Working Note:
Calculation of Purchase Consideration payable by P Ltd.

Simple Problems – Purchase

Question 8.
The financial position of two companies Hari Ltd. and Vayu Ltd. as on 31st March, 20X1 was as under:

H Ltd. absorbs V Ltd. on the following terms:
(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of H Ltd.
(b) Goodwill of V Ltd. is valued at ₹ 50,000, Buildings are valued at ₹ 1,50,000 and the Machinery at ₹ 1,60,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be created @ 7.5%.
(d) Equity Shareholders of V Ltd. will be issued Equity Shares @ 5% premium.
Prepare necessary Ledger Accounts to close the books of V Ltd. and show the acquisition entries in the books of H Ltd. Also draft the Balance Sheet after absorption as at 31st March, 20X1.
Answer:
In the Books of VLtd. Realisation Account

Equity Shareholders Account

Prefetettce Shareholders Account

Hari Ltd. Account

In the Books of H Ltd.
Journal Entries

Balance Sheet of H Ltd. (after absorption) as at 31st March, 20X1

Notes to accounts

Working Notes:
Computation of Purchase Consideration:

Question 9.
A Limited was wound up on 31.3.2014 and its draft Balance Sheet as on that date was given below:
Balance Sheet of A Limited as on 31.3.2014

Details of Trade receivables and Trade payables:

B Limied took over the following assets at values shown as under:
Fixed assets ₹ 6,40,000, Inventory ₹ 3,85,000 and Bills Receivable ₹ 15,000.
Purchase consideration was settled by B Limited: ₹ 2,55,000 of the consideration was satisfied by the allotment of fully paid 10% Preference shares of ₹ 100 each. The balance was settled by issuing equity shares of ₹ 10 each at ₹ 8 per share paid up.

Sundry debtors realised ₹ 75,000. Bills payable was settled for ₹ 19,000. Income tax authorities fixed the taxation liability at ₹ 1,11,000.

Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting to ₹ 4,000.
You are required to:

1. Calculate the number of equity shares and preference shares to be allotted by B Limited in discharge of purchase consideration.
2. Prepare the Realisation account, Cash/Bank account, Equity share-holders account and B Limited account in the books of A Limited.
3. Pass journal entries in the books of B Limited.

Answer:
(i) Computation of purchase consideration

Discharge of purchase consideration
Amount discharged by issue of preference shares = ₹ 2,55,000 = 2,550 shares
No. of preference shares to be allotted = \(\frac{2,55,000}{100}\)
Amount discharged by allotment of equity shares = ₹ 10,40,000 – ₹ 2,o5,000
= ₹ 7,85,000
Paid up value of equity share = ₹ 8
Hence, number of equity shares to be issued = \(\frac{7,85,000}{8}\)
= 98,125 shares

(ii) In the books of Alia Ltd.
Realisation Account

Cash/Bank Account

Equity Shareholders Account

B Limited Account

(iii) Journal Entries in the books of B Ltd.

Question 10.
The Balance Sheet of Reckless Ltd. as on 31st March, 2008 is as follows:

Careful Ltd. decided to takeover Reckless Ltd. from 31st March, 2008 with the following assets at value noted against them:

1/4 of the consideration was satisfied by the allotment of fully paid preference shares of ₹ 100 each at par which carried 13% dividend on cumulative basis. The balance was paid in the form of Careful Ltd.’s equity shares of ₹ 10 each, ₹ 8 paid up.

Sundry Debtors realised ₹ 79,500. Acceptances were settled for ₹ 19,000. Income-tax authorities fixed the taxation liability at ₹ 1,11,600. Creditors were finally settled with the cash remaining after meeting liquidation expenses amounting to ? 4,000.
You are required to:

1. Calculate the number of equity shares and preference shares to be allotted by Careful Ltd. in discharge of consideration.
2. Prepare the important ledger accounts in the books of Reckless Ltd.; and
3. Pass journal entries in the books of Careful Ltd. with narration. (May 2010)

Answer:

Discharge of purchase consideration:
1. Amount paid by allotment of 13% preference shares
= ₹ 10,00,000 × \(\frac{1}{4}\)
= ₹ 2,50,000
Number of 13% preference shares of ₹ 100 each
= ₹ \(\frac{2,50,000}{100}\)
= 2,500 preference shares

2. Amount paid by allotment of equity shares
= ₹ 10,00,000 – ₹ 2,50,000 = ₹ 7,50,000
Paid up value of one equity share = ₹ 8 each
Hence, the number of equity shares allotted
= ₹ \(\frac{7,50,000}{100}\)
= 93,750 equity shares

(ii) Ledger accounts in the books of Reckless Ltd.
Realisation Account

Cash and Bank Account

Equity Shareholders Account

Careful Ltd. Account

(iii) Journal Entries in the books of Careful Ltd.

Question 11.
The Balance Sheet of Mars Limited as on 31st March, 2011 was as follow:

On 1st April, 2011, Jupiter Limited agreed to absorb Mars Limited on the following terms and conditions:

1. Jupiter Limited will takeover the assets at the following values:
   
2. Purchase consideration will be settled by Jupiter Ltd. as under:
   4,100 fully paid 10% preference shares of ₹ 100 will be issued and the balance will be settled by issuing equity shares of ₹ 10 each at ₹ 8 paid up.
3. Liquidation expenses are to be reimbursed by Jupiter Ltd. to the extent of ₹ 5,000.
4. Sundry debtors realized ₹ 1,50,000. Bills payable were settled for ₹ 38,000. Income tax authorities fixed the taxation liability at ₹ 2,22,000 and the same was paid.
5. Creditors were finally settled with cash remaining after meeting liquidation expenses amounting to ₹ 8,000

You are required to:

1. Calculate the number of equity shares and preference shares to be allotted by Jupiter Limited in discharge of purchase consideration.
2. Prepare the Realisation account, Bank account. Equity shareholders account and Jupiter Limited’s account in the books of Mars Ltd. (May 2011) (16 Marks)

Answer:
(i) Computation of purchase consideration

(ii) Ledger Accounts in the books of Mars Limited
Realization Account

Bank Account

Equity Shareholders Account

Jupiter Limited Account

Question 12.
The summarized Balance Sheet of Srishti Ltd. as on 31st March, 2014 was as follows:

ANU Ltd. agreed to absorb the business of SRISHTI Ltd. with effect from 1st April, 2014.
(a) The purchase consideration settled by ANU Ltd. as agreed:
(i) 4,50,000 equity Shares of ₹ 10 each issued by ANU Ltd. by valuing its share @ ₹ 15 per share.
(ii) Cash payment equivalent to ₹ 2.50 for every share in SRISHTI Ltd.

(b) The issue of such an amount of fully paid 8% Debentures in ANU Ltd. at 96% as is sufficient to discharge 9% Debentures in SRISHTI Ltd, at a premium of 20%.

(c) ANU Ltd. will takeover the Tangible Fixed Assets at 100% more than the book value, Stock at ₹ 7,10,000 and Debtors at their face value subject to a provision of 5% for doubtful Debts.

(d) The actual cost of liquidation of SRISHTI Ltd. was ₹ 75,000. Liquidation cost of SRISHTI Ltd. is to be reimbursed by ANU Ltd. to the extent of ₹ 50,000.

(e) Statutory Reserves are to be maintained for 1 more year. You are required to:
(i) Close the books of SRISHTI Ltd. by preparing Realisation Account, ANU Ltd. Account, Shareholders Account and Debenture Account, and
(ii) Pass Journal Entries in the books of ANU Ltd. regarding acquisition of business. (May 2014) – (16 Marks)
Answer:

In the books of Srishti Ltd. REALISATION ACCOUNT

Equity Shareholders A/c

(ii) Journal Entries in the books of Anu Ltd.

Question 13.
L Ltd. and S Ltd. were amalgamated on and from 1st April, 2014. A new company M Ltd. was formed to takeover the businesses of the existing companies. The summarized balance sheets of L Ltd. and S Ltd. as on 31st March, 2014 are given below: (₹ in lakhs)

Other information

1. 13% Debenture holders of L Ltd. and S Ltd. are discharged by M Ltd. by issuing such number of its 15% Debentures of ₹ 100 each so as to maintain the same amount of interest.
2. Preference Shareholders of the two companies are issued equivalent number of 15% preference shares of M Ltd. at a price of ₹ 125 per share (face value ? 100)
3. M Ltd. will issue 4 equity shares for each equity share of L Ltd. and 3 equity shares for each equity share of S Ltd. The shares are to be issued @ ₹ 35 each, having a face value of ₹ 10 per share.
4. Investment allowance reserve is to be maintained for two more years.

Prepare the balance sheet of M Ltd. as on 1 st April, 2014 after the amalgamation has been carried out if amalgamation is in the nature of purchase.
Answer:
Computation of Purchase consideration (Payment Net Method)

Amalgamation in the nature of Purchase:
Balance Sheet of M Ltd. As on 1st April, 2014

Notes to Accounts

Working Note 1:

Question 14.
P Ltd. and Q Ltd. agreed to amalgamate their business. The scheme envisaged a share capital, equal to the combined capital of P Ltd. and Q Ltd. for the purpose of acquiring the assets, liabilities and undertakings of the two companies in exchange for share in PQ Ltd.
The Summarized Balance Sheets of P Ltd. and 0 Ltd. as on 31st March, 2017 (the date of amalgamation) are given below:
Summarized balance sheets as at 31-3-2017

The consideration was to be based on the net assets of the companies as shown in the above Balance Sheets, but subject to an additional payment to P Ltd. for its goodwill to be calculated as its weighted average of net profits for the three years ended 31st March, 2017. The weights for this purpose for the years 2014-15, 2015-16 and 2016-17 were agreed as 1, 2 and 3 respectively.

The profit had been:
2014-15 ₹ 3,00,000; 2015-16 ₹ 5,25,000 and 2016-17 ₹ 6,30,000.

The shares of PQ Ltd. were to be issued to P Ltd. and 0 Ltd. at a premium and in proportion to the agreed net assets value of these companies.

In order to raise working capital, PQ Ltd. proceeded to issue 72,000 shares of ₹ 10 each at the same rate of premium as issued for discharging purchase consideration to P Ltd. and Q. Ltd.

You are required to:

1. Calculate the number of shares issued to P Ltd. and 0 Ltd; and
2. Give required journal entries in the books of PQ Ltd.; and
3. Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording the necessary journal entries.

Answer:
(i) Calculation of number of shares issued to P Ltd. and Q Ltd.:

(iii) Balance Sheet of PQ Ltd. on 31st March, 2017 after amalgamation

Notes to accounts

Working Notes:
1. Calculation of goodwill of P Ltd.

Question 15.
The financial position of two companies A Ltd. and B Ltd. as on 31st March, 2017 was as under:

B Ltd. is absorbed by A Ltd. on the following terms:
(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 8% Preference Shares of A Ltd.
(b) Goodwill of B Ltd. is valued at ₹ 1,40,000, Buildings are valued at ₹ 4,20,000 and the Machinery at ₹ 4,48,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be created @ 7.5%.
(d) Equity Shareholders of B Ltd. will be issued Equity Shares of A Ltd. @ 5% premium.
You are required to:
(a) Prepare necessary Ledger Accounts to close the books of B Ltd.
(b) Show the acquisition entries in the books of A Ltd.
(c) Also draft the Balance Sheet after absorption as at 31st March, 2017.
Answer:
(a) In the Books of B Ltd.
Realisation Account

Preference Shareholders Account

(b) In the Books of A Ltd.
Journal Entries

(c) Balance Sheet of A Ltd. (after absorption) as at 31st March, 2017

Notes to accounts

Working Notes:

Question 16.
Following is the Balance Sheet of Y Ltd., as at 31st March, 2010:

X Ltd. decided to absorb the business of Y Ltd., at the respective book value of assets and trade liabilities except building which was valued at ₹ 12,00,000 and plant & machinery at ₹ 1,00,000.
Working Notes:
The purchase consideration was payable as follows:
(i) Payment of liquidation expenses ₹ 5,000 and workmen’s profit sharing fund at 10% premium;
(ii) Issue of equity share of ₹ 10 each fully paid at ₹ 11 per share for every preference share and every equity share of Y Ltd., and a payment of ₹ 4 per equity share in cash.
Calculate the purchase consideration, show the necessary ledger accounts in the books of Y Ltd., and opening journal entries in the books of X Ltd. (Nov 2010) (16 Marks)
Answer:
(i) Computation of purchase consideration

* Question has stated explicitly to consider it as a part of P.C. otherwise it is not a part of P.C.

(ii) In the books of YLtd. Realisation A/c

Bank A/c

Equity shares in X Ltd. A/c

Question 17.
Given below balance sheet of Vasudha Ltd. Vaishali Ltd. as at 31st March, 2012.

Goodwill of the Companies Vasudha Ltd. and Vaishali Ltd. is to be valued at ₹ 75,000 and ₹ 50,000 respectively. Factory Building of Vasudha Ltd. is worth ₹ 1,95,000 and of Vaishali Ltd. ₹ 1,75,000. Stock of Vaishali Ltd. has been shown at 10% above of its cost.

It is decided that Vasudha Ltd. will absorb Vaishali Ltd. without liquidating later, by taking over its entire business by issue of shares at the Intrinsic Value

You are required to draft the balance sheet of the two companies after putting through the scheme. (May 2012) (16 Marks)
Answer:
Balance Sheet of Vasudha Ltd. as on 31st March, 2012

Working Note:
1. Computation of shares issued on the basis of intrinsic values

Hence, Vasudha Ltd. will give its 40,330 shares of ₹ 10 each @ ₹ 13 each to Vaishali Ltd.

Discharge of Purchase consideration

Question 18.
The summarized Balance Sheet of M/s. A Ltd. and M/s. B Ltd. as on 31.03.2014 were is as under:

M/s. A Ltd. and M/s. B Ltd. carry on business of similar nature and they agreed to amalgamate. A new Company, M/s. AB Ltd. is formed to take over the Assets and Liabilities of M/s. A Ltd. and M/s. B Ltd. on the following basis:

Assets and Liabilities are to be taken at Book Value, with the following exceptions:
(a) Goodwill of M/s. A Ltd. and M/s. B Ltd. is to be valued at ₹ 1,40,000 and ₹ 40,000 respectively.
(b) Plant & Machinery of M/s. A Ltd. are to be valued at ₹ 1,00,000.
(c) The Debentures of M/s. B Ltd. are to be discharged, by the issue of 6% Debentures of M/s. AB Ltd., at a premium of 5%.

You are required to:
(i) Compute the basis on which shares in M/s. AB Ltd. will be issued to Shareholders of the existing Companies assuming nominal value of each share of M/s. AB Ltd. is ₹ 10.
(ii) Draw up a Balance Sheet of M/s. AB Ltd. as on 1st April, 2014, when Amalgamation is completed.
(iii) Pass Journal entries in the Books of M/s. AB Ltd. for acquisition of M/s. A Ltd. and M/s. B Ltd. (May 2015) (16 Marks)
Answer:
Computation of Purchase consideration

Balance Sheet AB Ltd. as at 1st April, 2014

Notes to accounts

Journal Entries In the books of AB Ltd.

Assumptions:

1. Nominal value of debentures of B Ltd. is ₹ 100 each.
2. 6% Debentures of M/s B Ltd. are discharged at premium of 5% by issue of 6% Debentures of M/s AB Ltd. At par.

Question 19.
Sun and Neptune had been carrying on business independently. They agreed to amalgamate and form a new company Jupiter Ltd. with an authorised share capital of ₹ 4,00,000 divided into 80,000 equity shares of ₹ 5 each. On 31st March, 2018 the respective Summarised Balance Sheets of Sun and Neptune were as follow:

Additional Information:
(a) Revalued figures of Fixed and Current assets were as follows:

(b) The debtors and creditors include ₹ 43,350 owed by Sun to Neptune. The purchase consideration is satisfied by issue of the following shares and debentures.
(i) 60,000 equity shares of Jupiter Ltd. to Sun and Neptune in the proportion to the profitability of their respective business based on the average net profit during the last three years which were as follows:

(ii) 15% debenture in Jupiter Ltd. at par to provide an income equivalent to 8% return business as on capital employed in their respective business as on 31st March, 2018 after revaluation of assets.

You are required to:
(1) Compute the amount of debentures and shares to be issued to Sun and Neptune.
(2) A Balance sheet of Jupiter Ltd. showing the position immediately after amalgamation. (May 2018) (16 Marks)
Answer:
(1) Computation of Amount of Debentures and Shares to be issued:

Sun: 33,000 × \(\frac{100}{15}\) = 2,20,000
Neptune: 29,400 × \(\frac{100}{15}\) = 1,96,000

(2) Balance Sheet of Jupiter Ltd. As at 31st March 2018 (after amalgamation)

Notes to Accounts

* 1,57,750 – 43,350 = 1,14,400
** 5,97,000 – 43,350 = 5,53,650

Question 20.
The financial position of two companies A Ltd. and B Ltd. as on 31st March, 2017 was as under:

B Ltd. is absorbed by A Ltd. on the following terms:
(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 8% Preference Shares of A Ltd.
(b) Goodwill of B Ltd. is valued at ₹ 1,40,000, Buildings are valued at ₹ 4,20,000 and the Machinery at ₹ 4,48,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be created @ 7.5%.
(d) Equity Shareholders of B Ltd. will be issued Equity Shares of A Ltd. @ 5% premium.

You are required to:
(a) Prepare necessary Ledger Accounts to close the books of B Ltd.
(b) Prepare the acquisition entries in the books of A Ltd.
(c) Also prepare the Balance Sheet after absorption as at 31 st March, 2017. Internal Reconstruction of a Company
Answer:
(a) In the Books of B Ltd.
Realisation Account

A Ltd. Account

(c) Balance Sheet of A Ltd. (after absorption) as at 31st March, 2017

Notes to accounts:

Computation of: Purchase Consideration:

Question 21.
P Ltd. and 0 Ltd. decided to amalgamate as on 01.04.2016. Their summarized Balance Sheets as on 31.03.2016 were as follows:

From the following information, you are required to prepare the Balance Sheet as on 01.04.2016 of a new company, R Ltd., which was formed to takeover the business of both the companies and took over all the assets and liabilities:

1. 50% Debenture are to be converted into Equity Shares of the New Company.
2. Investments are non-current in nature.
3. Fixed Assets of P Ltd. were valued at 10% above cost and that of 0 Ltd. at 5% above cost.
4. 10% of trade receivables were doubtful for both the companies. Inventories to be carried at cost.
5. Preference shareholders were discharged by issuing equal number of 9% preference shares at par.
6. Equity shareholders of both the transferor companies are to be dis-charged by issuing Equity shares of ₹ 10 each of the new company at a premium of ₹ 5 per share.

Give your answer on the basis that amalgamation is in the nature of purchase.
Answer:
M/s R Ltd.
Balance Sheet as at 1.4.2016

Notes to accounts

Working Notes:
1. Computation of purchase consideration

Advanced Problems – Purchase

Question 22.
K Ltd. and L Ltd. amalgamate to form a new company LK Ltd. The financial position of these two companies on the date of amalgamation was as under:

The terms of amalgamation are as under:
(A) (1) The assumption of liabilities of both the Companies.
(2) Issue of 5 Preference shares of ₹ 20 each in LK Ltd. @ ₹ 18 paid up at premium of ₹ 4 per share for each preference share held in both the Companies.

(3) Issue of 6 Equity shares of ₹ 20 each in LK Ltd. @ ₹ 18 paid up at a premium of ₹ 4 per share for each equity share held in both the Companies. In addition, necessary cash should be paid to the Equity Shareholders of both the Companies as is required to adjust the rights of shareholders of both the Companies in accordance with the intrinsic value of the shares of both the Companies.

(4) Issue of such amount of fully paid 6% debentures in LK Ltd. as is sufficient to discharge the 5% debentures in K Ltd. at a discount of 5% after takeover.

(B) (1) The assets and liabilities are to be taken at book values inventory and
trade receivables for which provisions at 2% and 2 1/2% respectively to be raised.
(2) The trade receivables of K Ltd. include ₹ 20,000 due from L Ltd.

(C) The LK Ltd. is to issue 15,000 new equity shares of ₹ 20 each, ₹ 18 paid up at premium of ₹ 4 per share so as to have sufficient working capital. Prepare ledger accounts in the books of K Ltd. and L Ltd. to close their books.
Answer:
Books of K Ltd. Realisation Account

7% Preference Shareholders Account

LK Ltd. Account

Equity Shareholders Account

Computation and discharge of purchase consideration

Question 23.
The financial position of two companies M/s. Abhay Ltd. and M/s. Asha Ltd. as on 31-3-2015 is as follows:
Balance Sheet as on 31-3-2015

They decided to merge and form a new company M/s. Abhilasha Ltd. as on 1-4-2015 on the following terms:
(1) Goodwill to be valued at 2 years purchase of the super profits. The normal rate of return is 10% of the combined share capital and general reserve. All other reserves are to be ignored for the purpose of goodwill. Average profits of M/s. Abhay Ltd. is ₹ 2,75,000 and M/s. Asha Ltd. is ₹ 1,75,000.

(2) Land and Buildings, Plant and machinery and Inventory of both companies to be valued at 10% above book value and a provision of 10% to be provided on Sundry Debtors.

(3) 12% debentures to be redeemed by the issue of 12% preference shares of M/s. Abhilasha Ltd. (face value of ₹ 100) at a premium of 10%.

(4) Sundry creditor to be taken over at book value. There is an unrecorded liability of ₹ 15,500 of M/s. Asha Ltd. as on 1-4-2015.

(5) The bank balance of both companies to be taken over by M/s. Abhilasha Ltd. after deducting liquidation expenses of ₹ 60,000 to be borne by M/s. Abhay Ltd. and M/s. Asha Ltd. in the ratio of 2:1.

You are required to:
(i) Compute the basis on which shares of M/s. Abhilasha Ltd. are to be issued to the shareholders of the existing company assuming that the nominal value of per share of M/s. Abhilasha Ltd. is ₹ 100.
(n) Draw Balance Sheet of M/s. Abhilasha Ltd. as on 1 4-2015 after the amalgamation. (May 2015) (16 Marks)
Answer:
(i) Computation of Purchase consideration

(ii) Balance Sheet of Abhilasha Ltd. (After Amalgamation) as on 1-4-2015

Notes to accounts

Question 24.
Given below are the Balance Sheet of two companies as on 31st December, 2015.
A Limited

It has been agreed that both these companies should be wound up and a new company AB Ltd. should be formed to acquire the assets of both the companies on the following terms and conditions:

(i) AB Ltd. is to have an authorized capital of ₹ 36,00,000 divided into 60,000, 8% cumulative preference shares of ₹ 10 each and 3,00,000 equity shares of ₹ 10 each.

(ii) AB Ltd. to purchase the whole of the assets of A Ltd. (except cash and Bank balances) for ₹ 28,25,000 to be settled as to ₹ 5,75,000 in cash and as to the balance by issue of 1,80,000 equity shares, credited as fully paid, to be treated as valued at ₹ 12.50 each.

(iii) AB Ltd. is to purchase the whole of the assets of B Ltd. (except cash and bank balances) for ₹ 4,91,000 to be settled as to ₹ 16,000 in cash and as to the balance by issue of 38,000 equity shares, credited as fully paid, to be treated as valued at ₹ 12.50 each.

(iv) A Ltd. and B Ltd. both are to be wound up, the two liquidators distributing the shares in AB Ltd. in kind among the equity shareholders of the respective companies.

(v) The liquidator of A Ltd. is to pay the preference shareholders 12 in cash for every share held in full satisfaction of their claims.

(vi) AB Ltd. is to make a public issue of 60,000, 8% cumulative preference shares at a premium of 10% and 30,000 equity shares at the issue price of ₹ 12.50 per share, all amount payable in full on application.

It is estimated that the cost of liquidation (including the liquidators’ remuneration) will be ₹ 10,000 in case of A Ltd. and ₹ 5,000 in case of B Ltd. and that the preliminary expenses of AB Ltd. will amount to ₹ 24,000- exclusive of the underwriting commission of ₹ 38,900 payable on the public issue.

You are required to prepare the initial Balance Sheet of AB Ltd. on the basis that all assets other than goodwill are taken over at the book value. (May 2016) (16 Marks)
Answer:
Balance Sheet of AB Ltd.

Notes of accounts

Working Notes:
1. Computation of Purchase consideration of A Ltd.

4. Calculation of goodwill/capital reserve of A Ltd. & B Ltd.

Notes:

1. As per the information given in the question, only the assets of A Ltd. and B Ltd. are taken over by AB Ltd. Thus the creditors are considered to be paid by the liquidators of the respective companies and hence being not taken over by AB Ltd.
2. As per the information given in the second last para of the question, it is stated that the preliminary expenses of AB Ltd. will amount to ₹ 24,000 exclusive of the underwriting commission of ₹ 38,900 payable on the public issue. It has been assumed that ₹ 24,000 has been paid and underwriting commission is still payable in the balance sheet of the amalgamated company.
3. Preliminary expenses and underwriting commission have been written off as per the provisions of Accounting standards.

Question 25.
P Ltd. and 0 Ltd. agreed to amalgamate and form a new company called PQ Ltd. The summarized balance sheets of both the companies on the date of amalgamation stood as below:

PQ Ltd. took over the assets and liabilities of both the companies at book value after creating provision @ 5% on Stock and Debtors respectively and depreciating Furniture & Fittings by @ 10%, Plant and Machinery by @ 10%. The debtors of P Ltd. include ₹ 25,000 due from 0 Ltd.

PQ Ltd. will issue:

1. 5 Pref. shares of ₹ 20 each @ ₹ 18 paid up at a premium of ₹ 4 per share for each pref. share held in both the companies.
2. 6 Equity shares of ₹ 20 each @ ₹ 18 paid up a premium of ₹ 4 per share for each equity share held in both the companies.
3. 6% Debentures to discharge the 8% debentures of both the companies,
4. 20,000 new equity shares of ₹ 20 each for cash @ ₹ 18 paid up at a premium of ₹ 4 per share.

PQ Ltd. will pay cash to equity shareholders of both the companies in order to adjust their rights as per the intrinsic value of the shares of both the companies.

Prepare ledger accounts in the books of P Ltd. and Q Ltd. to close their books. (May 2017) (16 Marks)
Answer:
Books of P Ltd. Realization Account

9% Preference Shareholders Account

PQ Ltd. Account

Books of Q Ltd.
Realization Account

9% Preference Shareholders Account

PQ Ltd. Account

W. Note : Value of Net Assets

Note: This cash is paid to equity shareholders of both the companies for adjustment of their rights as per intrinsic value of both companies.

Question 26.
Following are the Balance Sheet of companies as at 31.12.2003:

D Ltd. took over V Ltd. on the basis of the respective shares value, adjusting wherever necessary, the book values of assets and liabilities on the basis of the following information:
(i) Investment Allowance Reserve was in respect of addition made to fixed assets by V Ltd. in the year 1997-2002 on which income tax relief has been obtained. In terms of the Income Tax Act, 1961, the company has to carry forward till 2006 reserve of ₹ 2,00,000 for utilization.
(ii) Investments of V Ltd. included 1,000 shares in D Ltd. acquired at cost of ₹ 150 per share. The other investments of V Ltd. have a market value of ₹ 1,92,500.
(iii) The market value of investments of D Ltd. are to be taken at ₹ 1,00,000.
(iv) Goodwill of DLtd. and V Ltd. are to be taken at ₹ 5,00,000and ₹ 1,00,000 respectively.
(v) Fixed assets of D Ltd. and V Ltd. are valued at ₹ 6,00,000 and ₹ 8,50,000 respectively.
(vi) Current assets of D Ltd. included ₹ 80,000 of stock in trade received from V Ltd. at cost plus 25%.

The above scheme has been duty adopted. Pass necessary Journal Entries in the books of D Ltd. and prepare Balance Sheet of D Ltd. after taking over the business of V Ltd. Fractional share to be settled in cash, rest in shares of D Ltd. Calculation shall be made to the nearest multiple of a rupee. (May 2004) (16 Marks)
Answer:
Journal Entries in the Books of D Ltd.

Balance Sheet of D Ltd. as on 31st December, 2003

Notes to accounts

Working Notes:
1. Calculation of net asset value of shares

Discharge of Purchase Consideration

Question 27.
The following is the summarized Balance Sheet of A Ltd. as at 31st March, 2006:

B Ltd. agreed to absorb A Ltd. on the following terms and conditions:

1. B Ltd. would takeover alt assets, except bank balance at their book values less 10%. Goodwill is to be valued at 4 year’s purchase of super profits, assuming that the normal rate of return be 8% on the combined amount of share capital and general reserve.
2. B Ltd. is to takeover creditors at book value.
3. The purchase consideration is to be paid in cash to the extent of ₹ 6,00,000 and the balance in fully paid equity shares of ₹ 100 each at ₹ 125 per share.
4. The average profit is ₹ 1,24,400. The liquidation expenses amounted to ₹ 16,000. B Ltd. sold prior to 31st March, 2006 goods costing ₹ 1,20,000 to A Ltd. for ₹ 1,60,000. ₹ 1,00,000 worth of goods are still in stock of A Ltd. on 31st March, 2006. Creditors of A Ltd. include ₹ 40,000 stilt due to B Ltd.
5. Show the necessary Ledger Accounts to close the books of A Ltd. and prepare the Balance Sheet of B Ltd. as at 1st April, 2006 after the takeover. (November 2006) (20 Marks)

Answer:
Books of A Limited Realisation Account

Loan from A Account

Equity Shares in B Ltd. Account

B Ltd.
Balance Sheet as on 1st April, 2006 (extract) ‘

Notes to accounts

Working Notes:

Out of this ₹ 6,00,000 is to be paid in cash and remaining i.e., (12,10,000 – 6,00,000) ₹ 6,10,000 in shares of ₹ 125. Thus, the number of shares to be allotted 6,10,000/125 = 4,880 shares.

3. Unrealised Profit on Stock

Question 28.
P Ltd. and 0 Ltd. decided to amalgamate as on 01.04.2018 Their summarized Balance Sheets as on 31.03.2018 were as follows:

From the following information, you are required to prepare the Balance Sheet as on 01.04.2018 of a new company, R Ltd., which was formed to takeover the business of both the companies and took over all the assets and liabilities:

1. 50% Debenture are to be converted into Equity Shares of the New Company.
2. Investments are non- current in nature.
3. Fixed Assets of P Ltd. were valued at 10% above cost and that of 0 Ltd. at 5% above cost.
4. 10 % of trade receivables were doubtful for both the companies. Inventories to be carried at cost.
5. Preference shareholders were discharged by issuing equal number of 9% preference shares at par.
6. Equity shareholders of both the transferor companies are to be discharged by issuing Equity shares of ₹ 10 each of the new company at a premium of ₹ 5 per share.

Give your answer on the basis that amalgamation is in the nature of purchase.
Answer:
M/s. R Ltd.
Balance Sheet as at 1.4.2018

Notes to accounts

Working Notes:
1. Calculation of value of equity shares issued to transferor companies

2. Number of shares issued to equity shareholders, debenture holders and preference shareholders

* Cash paid for fraction of shares = ₹ 3,97,000 less ₹ 3,96,990 = ₹ 10
** Cash paid for fraction of shares = ₹ 50,000 less ₹ 49,980 = ₹ 20

Question 29.
Sun Ltd. and Moon Ltd. were amalgamated on and from 1st April, 2009. A new company Star Ltd. was formed to takeover the business of the existing companies. The Balance Sheets of Sun Ltd. and Moon Ltd. as at 31st March, 2009 are given below:

Additional information:
(a) Star Ltd. will issue 5 equity shares for each equity share of Sun Ltd. and 4 equity shares for each equity share of Moon Ltd. The shares are to be issued @ ₹ 30 each, having a face value of ₹ 10 per share.
(b) Preference shareholders of the two companies are issued equivalent number of 15% preference shares of Star Ltd. at a price of ₹ 150 per share (face value ₹ 100).
(c) 10% Debenture holders of Sun Ltd. and Moon Ltd. are discharged by Star Ltd., issuing such number of its 15% Debentures of ₹ 100 each so as to maintain the same amount of interest.
(d) Investment allowance reserve is to be maintained for 4 more years.
(e) Liquidation expenses are:
Sun Ltd. ₹ 2,00,000
Moon Ltd. ₹ 1,00,000
It was decided that these expenses would be borne by Star Ltd.
(f) All the assets and liabilities of Sun Ltd. and Moon Ltd. are taken over at book value.
(g) Authorised equity share capital of Star Ltd. is ₹ 5,00,00,000, divided into equity shares of ₹ 10 each. After issuing required number of shares to the Liquidators of Sun Ltd. and Moon Ltd., Star Ltd. issued balance shares to Public. The issue was fully subscribed.

Required:
Prepare the Balance Sheet of Star Ltd. as at 1 st April, 2009 after amalgamation has been carried out on the basis of Amalgamation in the nature of purchase (Nov. 2009) (16 Marks)
Answer:
Balance Sheet of Star Ltd. as at 1st April, 2009

Working Notes:

4. Liquidation expenses of Sun Ltd. and Moon Ltd., ₹ 2 lakhs and ₹ 1 lakhs respectively will be debited to Goodwill account in the books of Star Ltd.

Question 30.
P Ltd. and 0 Ltd. were carrying on the business of manufacturing of auto components. Both the companies decided to amalgamate and a new company PQ Ltd. is to be formed with an Authorized Capital of ₹ 10,00,000 divided into 1,00,000 equity shares of ₹ 10 each. The Balance Sheet of the companies as on 31.03.2014 were as under:
P Limited Balance Sheet as at 31.03.2014

Q Limited
Balance Sheet as at 31.03.2014

The assets and liabilities of the existing companies are to be transferred at book value with the exception of some items detailed below:

1. Goodwill of P Ltd. was worth ₹ 50,000 and of 0 Ltd. was worth ₹ 1,50,000.
2. Furniture & Fixture of Q Ltd. was valued at ₹ 35,000.
3. The debtors of P Ltd. are realized fully and bank balance of P Ltd. are to be retained by the liquidator and the sundry creditors are to be paid out of the proceeds thereof.
4. The debentures of P Ltd. are to be discharged by issue of 8% debentures of PQ Ltd. at a premium of 10%.

You are required to:
(/) Compute the basis on which shares in PQ Ltd. will be issued at par to the shareholders of the existing companies.
(ii) Draw up a Balance Sheet of PQ Ltd. as at 1st April, 2014, the date of completion of amalgamation,
(iii) Write up journal entries including bank entries for closing the books of P Ltd. (May 2014) (16 Marks)
Answer:
Computation of Purchase Consideration

PQ Limited Balance Sheet as at 1st April, 2014

Notes to Accounts:

Working Note:
Computation of Securities Premium
Debentures issued by PQ Ltd. to the existing debenture holders of P Ltd. at 1 CPo premium.
Securities Premium = ₹ 1,10,000 × 10% = ₹ 11,000.

In the books of P Ltd. (Journal Entries)

Question 31.
P Ltd. and 0 Ltd. agreed to amalgamate their business. The scheme envisaged a share capital equal to the combined capital of P Ltd. and 0 Ltd. for the purpose of acquiring the assets, liabilities and undertakings of the two companies in exchange for share in PQ Ltd.

The Balance Sheets of P Ltd. and 0 Ltd. as on 31st March, 2017 (the date of amalgamation) are given below:
Summarised balance sheet as at 31-03-2017

The consideration was to be based on the net assets of the companies as shown in the above Balance Sheets, but subject to an additional payment to P Ltd. for its goodwill to be calculated as its weighted average of net profits for the three years ended 31st March, 2017. The weights for this purpose for the years 2014-15, 2015-16 and 2016-17 were agreed as 1, 2 and 3 respectively.

The profit had been:
2014-15 ₹ 3,00,000; 2015-16 ₹ 5,25,000 and 2016-17 ₹ 6,30,000.

The shares of PQ Ltd. were to be issued to P Ltd. and Q Ltd. at a premium and in proportion to the agreed net assets value of these companies.

In order to raise working capital, PQ Ltd. increased its authorized capital by ₹ 12,00,000 and proceeded to issue 72,000 shares of ? 10 each at the same rate of premium as issued for discharging purchase consideration to P Ltd. and Q Ltd.

You are required to:
(i) Calculate the number of shares issued to P Ltd. and Q Ltd.; and
(ii) Prepare the Balance Sheet of PQ Ltd. as per Schedule III after recording its journal entries. (May 2017) (16 Marks)
Answer:
(i) Computation of number of shares issued to P Ltd. and Q Ltd.:
Amoutn of Share Capital as per balance sheet
P Ltd. = ₹ 6,00,000
Q Ltd. = ₹ 8.40.000
= 14.40.000
Share of P Ltd. = ₹ 14,40,000 × [21,60,000/(21,60,000 + 14,40,000)]
= ₹ 8,64,000 or 86,400 shares
Securities premium = ₹ 21,60,000 – ₹ 8,64,000 = ₹ 12,96,000
Premium per share = ₹ 12,96,000/₹ 86,400 = ₹ 15
Issued 86,400 shares @ ₹ 10 each at a premium of ₹ 15 per share
Share of Q Ltd. = ₹ 14,40,000 × [14,40,000/(21,60,000 + 14,40,000)]
= ₹ 5,76,000 or 57,600 shares
Securities premium = ₹ 14,40,000 – ₹ 5,76,000 = ₹ 8,64,000
Premium per share = ₹ 8,64,000/₹ 57,600 = ₹ 15
Issued 57,600 shares @ ₹ 10 each at a premium of ₹ 15 per share

(ii) Journal Entries in the books of PQ Ltd.

Balance Sheet of PQ Ltd. on 31st March, 2017 after amalgamation

Notes to accounts

Working Notes:
1. Calculation of goodwill

Question 32.
The financial position of X Ltd. and Y Ltd. as on 31st March, 2018 was as under:

X Ltd. absorbs Y Ltd. on the following terms:
(i) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference Shares of X Ltd.
(ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of average profits of preceding three financial years (2016-17: ₹ 90,000; 2015-16: ₹ 78,000 and 2014-15: ₹ 72,000). The profits of 2014 -15 included credit of an insurance claim of ₹ 25,000 (fire occurred in 201314 and loss by fire ₹ 30,000 was booked in Profit and Loss Account of that year). In the year 2015-16, there was an embezzlement of cash by an employee amounting to ₹ 10,000.
(iii) Land & Buildings are valued at ₹ 5,00,000 and the Plant & Machinery at ₹ 4,00,000.
(iv) Inventories are to be taken over at 10% less value and Provision for Doubtful Debts is to be created @ 2.5%.
(v) There was an unrecorded current asset in the books of Y Ltd. whose fair value amounted to ₹ 15,000 and such asset was also taken over by X Ltd.
(vi) The trade payables of Y Ltd. included ₹ 20,000 payable to X Ltd.
(vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.

You are required to :
(i) Prepare Realisation A/c in the books of Y Ltd.
(ii) Show journal entries in the books of X Ltd.
(iii) Prepare the Balance Sheet of X Ltd. after absorption as at 31st March, 2018. (May 2018 – New Course) (20 Marks)
Answer:
In the Books of Y Ltd. Realisation Account

In the Books of X Ltd. Journal Entries

Balance Sheet of X Ltd. (after absorption) as at 31st March, 2018

Notes to accounts

Working Notes:
1. Computation of goodwill

Goodwill to be valued at 2 times of average profits = ₹ 75,000 × 2 = ₹ 1,50,000

2.

Mix Problems – Merger And Purchase

Question 33.
H Ltd. and N Ltd. are to be amalgamated into H N Ltd. The new company is to takeover all the assets and liabilities of the amalgamating companies.

Assets and Liabilities of H Ltd. are to be taken over at book values in exchange of shares in H N Ltd. Three shares in the new company are to be issued at a premium of 20% for every two shares of H Ltd.
The approved scheme for N Ltd. is as follows:

1. 10% Preference shareholders are to be allowed two 15% Preference shares of ₹ 100 each in H N Ltd. for three Preference shares held in N Ltd.
2. The Debentures of N Ltd. are to be paid off at 5% discount by the issue of debentures of H N Ltd. at par.
3. The Equity shareholders of NT Ltd. are to be allowed as many shares at par in H N Ltd. as will cover the balance on their account and for this purpose, plant and machinery is to be valued less by 15% and obsolete stock forming 10% of the overall stock value is to be treated as worthless.

The summarised Balance Sheets of the two companies prior to amalgamation are as follows:

You are required to show the Journal Entries and the Balance Sheet of the amalgamated company immediately after amalgamation.
Answer:
In the books of H N Ltd. (Amalgamated Company)
Journal Entries

Balance Sheet of H NLtd. after amalgamation

Notes to Accounts

Computation of Purchase Consideration
1. For HLtd.
Number of shares to be issued by H N Ltd. for H Ltd.’s shareholders
= 64.0 × 3/2 = 96,000 shares.
Since, the issue price is ₹ 12 per share, the Purchase Consideration is
= 96,000 × 12 = ₹ 11,52,000.

2. For N Ltd.

Inter Company Holdings

Question 34.
The following are the summarised Balance Sheets of Y Ltd. and N Ltd. as on 31st October, 20X1:

On that day Y Ltd. absorbed N Ltd. The members of N Ltd. are to get one equity share of Y Ltd. issued at a premium of ₹ 2 per share for every five equity shares held by them in N Ltd. The necessary approvals are obtained.
You are asked to pass journal entries in the books of the two companies to give effect to the above.
Answer:
Journal Entries in the books of N Ltd.

Working Note:

Question 35.
X Ltd. and Y Ltd. were carrying on same business independently. The companies agreed to amalgamate on and from 1-4-2011 and formed a new company Z Ltd. to takeover the assets and liabilities of the existing companies. The Balance Sheets of two companies as on 31-3-2011 are as follows:

Following are the additional information:

1. For the purpose of amalgamation, the shares of the existing companies are to be valued as under:
   X Ltd. = ₹ 18 per share Y Ltd. = ₹ 20 per share.
2. A contingent liability of X Ltd. of ₹ 1,80,000 is to be treated as actual existing liability.
3. The shareholders of X Ltd. and Y Ltd. are to be paid by issuing sufficient number of shares of Z Ltd. at a premium of ₹ 6 per share.
4. The face value of shares of Z Ltd. is to be of ₹ 10 each.

You are required to:
(i) Calculate the purchase consideration (i.e. the number of shares to be issued to X Ltd. and Y Ltd.)
(ii) Prepare Realisation Account and Shareholders Account in the books of X Ltd. & Y Ltd.
(iii) Prepare the Balance Sheet of Z Ltd. after amalgamation. (Nov 2011) (16 Marks)
Answer:
(i) Computation of Purchase Consideration

(ii) (a) In the books of X Ltd.
Realization Account

(b) In the books of YLtd.
Realization Account

(iii) Balance Sheet of Z Ltd. (After Amalgamation) as on 1st April, 2011

Working Note:
Calculation of Goodwill/(Capital Reserve)

Audit Strategy, Audit Planning and Audit Programme – CA Inter Audit Notes is designed strictly as per the latest syllabus and exam pattern.

Audit Strategy, Audit Planning and Audit Programme – CA Inter Auditing Notes

Question 1.
“The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business” Discuss stating clearly the broad points you would be covering in framing plan to conduct audit in an efficient and effective manner. [MTP-March 18, March 19]
Or
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement. Discuss stating clearly the broad points you would be covering in framing plan to conduct audit in an efficient and effective manner. [MTP-Oct. 18]
Or
The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business. Explain. [RTP-Nov. 18]
Or
Plans should be made to cover acquiring knowledge of the client’s accounting systems, policies and internal control procedures. Explain. [RTP-Nov. 19]
Answer:
Points to be covered in framing audit plan:

• Planning in auditing encompasses developing an overall plan for the expected scope and conduct of the audit and developing an audit programme showing the nature, timing and extent (NTE) of audit procedures.
• The audit planning is necessary to conduct an effective audit in an efficient and timely manner.
• SA 300 “Planning an Audit of Financial Statements” deals with the auditor’s responsibility to plan an audit of financial statements.
• Plans should be made to cover, among other things:
  (a) acquiring knowledge of the client’s accounting systems, policies and internal control procedures;
  (b) establishing the expected degree of reliance to be placed on internal control;
  (c) determining and programming the nature, timing, and extent of the audit procedures to be performed;
  (d) coordinating the work to be performed.

Question 2.
Write short note on: Usefulness of careful and adequate audit planning.
Or
Surya and Chand Ltd is a manufacturing company engaged in the production of miscellaneous electrical goods. Trilochan and Co. has been appointed as the auditors to carry out its audit. Au¬ditor thinks that Planning an audit would involve establishing the overall audit strategy for the engagement and developing an audit plan. Also, Adequate planning benefits the audit of financial statements in several ways. Analyse and Advise explaining the benefits of adequate planning. [RTP-May 18]
Or
“An adequate planning benefits the audit of financial statements.” Discuss. [Nov. 18 (5 Marks)]
Or
Explain the benefits of planning in the audit of financial statements. [RTP-May 19]
Or
Engagement partner of Audit Firm MKC AND COMPANY thinks that Planning an audit would involve establishing the overall audit strategy for the engagement and developing an audit plan. Also, Ade¬quate planning would benefit the audit of financial statements in several ways. Analyse explaining the benefits of adequate planning. [RTP-Nov. 19]
Answer:
Usefulness of Careful and Adequate Audit Planning:

• To ensure that appropriate attention is devoted to important areas of the audit: This is done through formal written audit plan, laying down the objectives and the procedures to be followed in order to meet those objectives.
• To facilitate review: Work should be delegated to staff with the appropriate level of experience. All work should be properly supervised and reviewed by a senior member of staff.
• To ensure that potential problems are identified: The auditor must ensure that resources are directed towards material/high risk areas.
• To assist in the proper assignment of work: This may be to members of the audit team or to experts or other auditors. It helps the audit to proceed in a timely and efficient manner.
• Coordination of work done by auditors of components and experts.

Question 3.
In performing an audit of financial statements, the auditor shall have or obtain knowledge of the business. Explain in the light of SA 315. [May 04 (8 Marks), MTP-Oct. 19]
Or
State the matters to be considered for acquiring knowledge of the business of the client by the auditor. [May 05 (6 Marks)]
Or
Write short note on: Knowledge of Client’s Business. [May 09 (5 Marks)]
Or
‘Knowledge of Client business’ is one of the important principles in developing an overall audit plan. Explain. [Nov. 17 {6 Marks)]
Answer:
Knowledge of Client’s Business:
Knowledge of client’s business is one of the important principles in developing an overall audit plan. In fact, without adequate knowledge of client’s business, a proper audit is not possible.
As per SA 315 “Identifying and Assessing the Risk of Material Misstatements through understanding the entity and its environment” auditor is required to obtain an understating of following as a part of risk assessment procedures:
(a) Industry, regulatory, and other external factors including applicable financial reporting framework,

(b) The nature of the entity, including:

• its operations;
• its ownership and governance structures;
• the types of investments that the entity is making and plan to make; &
• the way that the entity is structured and how it is financed;

(c) The entity’s selection and application of accounting policies, including the reasons for changes thereto.

(d) The entity’s objectives and strategies, and those related business risks that may result in risks of material misstatement.

(e) The measurement and review of the entity’s financial performance.

Question 4.
Knowledge of the Client’s business is one of the important principles in developing an overall audit plan. In fact without adequate knowledge of client’s business, a proper audit is not possible. As per SA-315, “Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and Its Environment”, the auditor shall obtain an understanding of the relevant industry, regulatory and other external factors including the applicable financial reporting framework. Substantiate with the help of examples. [RTP-May 20]
Answer:
Examples of industry, regulatory and other external factors including the applicable FRF:

• The competitive environment, including demand, capacity, product and price competition as well as cyclical or seasonal activity.
• Supplier and customer relationships, such as types of suppliers and customers (e.g., related parties, unified buying groups) and the related contracts with those entities.
• Technological developments, such as those related to the entity’s products, energy supply and cost.
• The effect of regulation on entity operations.

Question 5.
“The Nature, timing and extent of the direction and supervision of engagement team members and review of their work vary depending on many factors.” Explain.
The auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work. Explain the factors due to which above varies. [MTP-May 20, RTP-Nov. 20]
Answer:
Planning the Direction and Supervision of Engagement Team:
As per SA 300 “Planning an Audit of Financial Statements” the auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work.

The nature, timing and extent of the direction and supervision of engagement team members and review of their work vary depending on many factors, including:
(a) The size and complexity of the entity.
(b) The area of the audit.
(c) The assessed risks of material misstatement (for example, an increase in the assessed risk of material misstatement for a given area of the audit ordinarily requires a corresponding increase in the extent and timeliness of direction and supervision of engagement team members, and a more detailed review of their work],
(d) The capabilities and competence of the individual team members performing the audit work.

Question 6.
“Planning is not a discrete phase of an audit, butrather a continual and iterative process”. Discuss.
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after the completion of the previous audit and continues until the completion of the current audit engagement. Analyse and Explain. [RTP-Nov. 19]
Answer:
Planning – a continuous process:
Planning is not a discrete phase of an audit but rather a continuous process. It often begins shortly after (or in connection with] the completion of the previous audit and continues until the completion of the current audit engagement.

Planning, however, includes consideration of the timing of certain activities and audit procedures that need to be completed prior to the performance of further audit procedures. For example, planning includes the need to consider, prior to the auditor’s identification and assessment of the risks of material misstatement, such matters as:

• The analytical procedures to be applied as risk assessment procedures.
• Obtaining a general understanding of the legal and regulatory framework applicable to the entity and how the entity is complying with that framework.
• The determination of materiality.
• The involvement of experts.
• The performance of other risk assessment procedures.

Question 7.
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit. Explain. [RTP-Nov. 18]
Or
As a result of unexpected events, changes in conditions, or the audit evidence obtained from the results of audit procedures, the auditor may need to modify the overall audit strategy and audit plan. Explain. [RTP-Nov. 19]
Or
Plans should be further developed and revised as necessary during the course edit. Explain. [RTP-May 20]
Answer:
Changes to Planning decisions:
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit. The auditor may need to modify the overall audit strategy and audit plan as a result of:

• unexpected events,
• changes in conditions, or
• the audit evidence obtained from the results of audit procedures.

Based on the revised consideration of assessed risks, auditor need to modify the nature, timing and extent of further audit procedures. This may be the case when information comes to the auditor’s attention that differs significantly from the information available when the auditor planned the audit procedures. For example, audit evidence obtained through the performance of substantive procedures may contradict the audit evidence obtained through tests of controls.

Question 8.
The auditor shall document the overall audit strategy, the audit plan, and any significant changes i made during the audit engagement to the overall audit strategy or the audit plan, and the reasons [ for such changes. Explain, [MTP-Aug. 18, RTP-Nov. 18, Nov. 20]
Answer:
Documentation of Audit Plan:
The auditor shall document:
[a] The overall audit strategy;
[b] The audit plan; and
[c] Any significant changes made during the audit engagement to the overall audit strategy or the audit plan, and the reasons for such changes.

Documentation of the overall audit strategy is a record ofthe key decisions considered necessary to properly plan the audit and to communicate significant matters to the engagement team.

Documentation ofthe audit plan is a record oftheplanned NTRofRAPsand FAPs at the assertion level in response to the assessed risks. It also serves as a record of the proper planning ofthe audit procedures that can be reviewed and approved prior to their performance.

Record of the significant changes to the overall audit strategy and the audit plan, and resulting changes to the planned NTE of audit procedures, explains why the significant changes were made, and the overall strategy and audit plan finally adopted for the audit.
Examples of Audit Documentation:
(a) Summary of discussions with the entity’s key decision makers.
(b) Documentation of audit committee pre-approval of services, where required.
(c) Audit documentation access letters.
(d) Other communications or agreements with management or TCWG regarding the scope, or changes in scope, of services.
(e) Auditor’s report on the entity’s financial statements.
(f) Other reports as specified in the engagement agreement.

Question 9.
Write short note on: Factors to be considered in the development of overall audit plan.
Or
A & Co. was appointed as auditor of Great Airways Ltd. As the audit partner what factors shall be considered in the development of overall audit plan?
Or
M & Co. was appointed as auditor of IGI Ltd. As an auditor what are the factors that would be con¬sidered in the development of overall audit plan? [May 18 (5 Marks), MTP-April 19]
Or
Your firm has been appointed as an auditor to audit the accounts of an auto parts manufacturer, ABC Ltd. Elucidate the matters to be considered by an auditor in developing his overall plan for the expected scope and conduct of audit. [MTP-Oct. 20]
Answer:
Factors to be considered in development of overall Plan:

• Terms of his engagement and any statutory responsibilities.
• Nature and timing of reports or other communications.
• Applicable Legal or Statutory requirements,
• Accounting policies adopted by the clients and changes, if any, in those policies.
• The effects of new accounting and auditing pronouncement on the audit.
• Identification of significant audit areas.
• Setting of materiality levels for the audit purpose.
• Conditions requiring special attention such as the possibility of material error or fraud or involvement of parties in whom directors or persons who are substantial owners of the entity are interested and with whom transactions are likely.
• Degree of reliance to be placed on the accounting system and internal control.
• Possible rotation of emphasis on specific audit areas.
• Nature and extent of audit evidence to be obtained.
• Work of the internal auditors and the extent of reliance on their work, if any in the audit.
• Involvement of other auditors in the audit of subsidiaries or branches of the client and involvement of experts.
• Allocation of works to be undertaken between joint auditors and the procedures for its control and review.
• Establishing and coordinating staffing requirements.

Question 10.
The process of establishing the overall audit strategy assists the auditor to determine certain mat¬ters with respect of team resource. Explain those matters.
Or
Auditor of ABC Ltd. is worried as to management of key resources to be employed to conduct audit. How the audit strategy would be helpful to the auditor?
Or
The engagement partner of AST AND ASSOCIATES, firm of Chartered Accountants appointed as auditor of Fabric India Ltd is considering as to management of key resources to be employed to conduct audit. Discuss how overall audit strategy would assist the auditor. [MTP-March 18]
Or
Describe how the process of establishing the overall audit strategy assists the auditor in marshalling his human resources. [May 19 [4 Marks)]
Or
Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan. The process of establishing the overall audit strategy assists the auditor to determine such matters as for example – the resources to deploy for specific audit areas, such as the use of appropriately experienced team members for high risk areas or the involvement of experts on complex matters. Explain the other three such matters. [RTP-May 20J
Answer:
Benefits of Audit Strategy:

• Employment of Qualitative Resources:
  Audit strategy helps in deploying the appropriate resources for specific audit areas, such as the use of experienced team members for high risk areas or the involvement of experts on complex matters.
• Allocation of Quantity of Resources:
  Audit strategy helps in allocating the appropriate number of resources to specific audit areas, such as the number of team members assigned to observe the inventory count at material locations, the extent of review of other auditors’ work in the case of group audits, or the audit budget in hours to allocate to high risk areas.
• Timing of Deployment of Resources:
  Audit strategy helps in determining the timing of deploying the resources, such as whether at an interim audit stage or at key cut-off dates.
• Management of Resources:
  Audit strategy helps in managing, directing, supervising the resources, such as when team briefing and debriefing meetings are expected to be held, how engagement partner and manager reviews are expected to take place [for example, on-site or off-site), and whether to complete engagement quality control reviews.

Question 11.
The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan.
Discuss stating the process of establishing the overall audit strategy that would assist the auditor to determine key matters. [RTP-Nov. 18]
Answer:
Process of establishing the overall audit strategy:
The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan.

The process of establishing the overall audit strategy assists the auditor to determine, subject to the completion of the auditor’s risk assessment procedures, such matters as:

• The resources to deploy for specific audit areas, such as the use of appropriately experienced team members for high risk areas or the involvement of experts on complex matters;
• The amount of resources to allocate to specific audit areas, such as the number of team members assigned to observe the inventory count at material locations, the extent of review of other auditors’ work in the case of group audits, or the audit budget in hours to allocate to high risk areas;
• When these resources are to be deployed, such as whether at an interim audit stage or at key cut-off dates; and
• How such resources are managed, directed and supervised, such as when team briefing and debriefing meetings are expected to be held, how engagement partner and manager reviews are expected to take place (for example, on-site or off-site), and whether to complete engagement quality control reviews.

Question 12.
Comment on the following in relation to SAs: Auditor shall establish an overall strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan. [May 11 (5 Marks)]
Or
Discuss the factors the auditor will consider while establishing the overall strategy.
Answer:
Establishment of Audit Strategy:
(a) SA 300 “Planning an Audit of Financial Statements” requires that the auditor shall establish an
overall audit strategy that sets the scope, timing and direction of the audit, and that guides the
development of the audit plan.

(b) In establishing the overall audit strategy, the auditor shall;

• Identify the characteristics of the engagement that define its scope;
• Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required;
• Consider the factors that are significant in directing the engagement team’s efforts;
• Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant; and
• Ascertain the NTE of procedures necessary to perform.

Question 13.
Discuss the relationship between overall audit strategy and audit plan.
Or
“Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy”. Discuss.
Or
The establishment of the overall audit strategy and the detailed audit plan are closely inter-related. Explain. [MTP-March 19]
Answer:
Relationship between the Overall Audit Strategy and the Audit Plan:

• Audit strategy and audit plan are interrelated to each other because change in one would result into change in the other.
• The audit strategy is prepared before the audit plan. The audit plan contains more details than the overall audit strategy.
• The audit strategy provides the guidelines for developing the audit plan. Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy.
• Audit strategy establishes the scope, timing and direction of the audit and thereby works as basis for developing a detailed audit plan.
• Detailed audit plan would include the nature, timing and extent of the audit procedures so as to obtain sufficient appropriate audit evidence.

Question 14.
In establishing overall audit strategy, the auditor shall ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required. Elucidate those cases by which auditor can ascertain the reporting objectives of the engagement. [Nov. 19 (4 Marks)]
Answer:
Cases by which by which auditor can ascertain the reporting objectives of the engagement:
As per SA 300 “Planning an Audit of Financial Statements” the auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan. In establishing the overall audit strategy, the auditor shall, among other ascertain the reporting objectives of the engagement to plan the timing of the audit. Various cases through which auditor can ascertain the reporting objectives of the engagement are:

• The entity’s timetable for reporting, such as at interim and final stages.
• The organization of meetings with management and those charged with
• Governance to discuss the nature, timing and extent of the audit work.
• The discussion with management and those charged with governance regarding the expected type and timing of reports to be issued and other communications, both written and oral, including the auditor’s report, management letters and communications to those charged with governance.
• The discussion with management regarding the expected communications on the status of audit work throughout the engagement.

Question 15.
Write short note on: Audit Programme. [Nov. 06 (4 Marks)]
Or
“An audit programme is a detailed plan of applying the audit procedure in the given circumstance for accomplishing the audit objectives”. Discuss.
Answer:
Audit Programme:

• An Audit programme is a detailed plan of work, prepared by the auditor for carrying out an audit.
• It is comprised of a set of techniques and procedures, which the auditor plans to apply in the given audit for forming an opinion about the client’s statement of account.
• It not only constitutes the plan of the work but also provides a basis for the supervision and control of the audit work.
• The programme may also contain the audit objectives for each audit step.
• It should be sufficient in detail to serve as a set of instructions to the audit staff involved in the audit and also as a means to control the proper execution of the work.

Advantages of Audit Programme:

• It provides guidance and instructions on the work to be carried out e.g. manner of picking up transactions for sample test.
• It provides a clear record of the work to be carried out by the individual staff assigned on the audit.
• The progress of audit work can be reviewed by the audit managers or the partners.
• Chances of duplication of work are eliminated.
• Chances of overlooking the important areas of audit are also eliminated.
• Evidence of work done is available when the auditor is to defend his performance against charge of negligence.
• It serves as a guide for audits to be carried out in the succeeding year.

Question 16.
Explain the significant points auditor would consider while developing an audit programme. [RTP-May 19]
Or
List out the points that should be kept in mind by the auditor for the purpose of constructing an audit programme. [May 19 (3 Marks)]
Or
Discuss the points to be considered by auditor for the purpose of constructing an audit programme. [Nov. 19 (4 Marks)]
Answer:
Points to be considered in constructing Audit Programme:
For the purpose of programme construction, the following points should be kept in mind:

• Be within the scope and limitation of the assignment.
• Determine the evidence reasonably available and identify the best evidence for deriving the necessary assurance.
• Only those techniques and procedures which are useful in accomplishing the verification purpose should be applied.
• Consideration of all possibilities of errors and fraud.
• Co-ordinate the procedures to be applied to related items.

Question 17.
Evidence is the very basis for formulation of opinion and an audit programme is designed to provide for that by prescribing procedures and techniques.
Analyse and explain with the help of example of evidence in respect of Sales. [RTP-May 20]
Answer:
Audit Programme-Designed to provide Audit Evidence:

• Evidence is the very basis for formulation of opinion and an audit programme is designed to provide for that by prescribing procedures and techniques.
• Whatisbestevidencefortestingtheaccuracyofanyassertionisamatterofexpertknowledgeand experience. This is the primary task before the auditor when he draws up the audit programme.
• Transactions are varied in nature and impact; procedures to be prescribed depend on prior knowledge of what evidence is reasonably available in respect of each transaction.
• Example, sales are evidenced by:
  • invoices raised by the client;
  • price list;
  • forwarding notes to client;
  • inventory-issue records;
  • sales managers’ advice to the inventory section;
  • acknowledgements of the receipt of goods by the customers; and collection of money against sales by the client.

Question 18.
Discuss the following: Despite of several disadvantages, audit programme is required to start an audit. [Nov. 13 (5 Marks)]
Or
How does an audit programme help to plan and perform the audit?
Answer:
Requirement of Audit Programme:
The audit programme is required to start an audit due to the following considerations:

• The audit programme lists down areas of audit before commencement.
• Audit programme covers the audit timings and hence it becomes a schedule of audit plan.
• Audit programme allocates the work among the staff members and thereby fixes a responsibility over them.
• It specifies the procedures to be performed during the audit.
• Audit programme acts as a check list during the performance of audit.
• The working papers of the audit staff can be reviewed against the audit programme to evaluate the performance before reporting on the financial statements.
• It also works as a basis for billing the clients for the time and manpower involved in the audit.

Question 19.
Arpana Hospitals Ltd having Gross Professional Charges of ? 50 crores is engaged in providing healthcare services. STP & Co., a firm of auditors is appointed as its auditors.
Advise what special points to be kept in mind for the purpose of construction of an Audit programme. Explain. [RTP-May 18]
Answer:
Points to be considered in constructing Audit Programme:
For the purpose of programme construction, the following points should be kept in mind:

• Be within the scope and limitation of the assignment.
• Determine the evidence reasonably available and identify the best evidence for deriving the necessary assurance.
• Only those techniques and procedures which are useful in accomplishing the verification purpose should be applied.
• Consideration of all possibilities of errors and fraud.
• Co-ordinate the procedures to be applied to related items.

Question 20.
“The utility of the audit programme can be retained and enhanced only by keeping the programme sand also the Client’s operations and internal control under periodic review so that inadequacies or redundancies of the programme may be removed”. Explain. [RTP-May 19]
Answer:
Periodic Review of The Audit Programme
Periodic review of the audit programme is required to assess whether the same continues to be adequate for obtaining requisite knowledge and evidence about the transactions. If periodic review is not done, any change in the business policy of the client may not be adequately known, and consequently, audit work may be carried on, on the basis of an obsolete programme and, for this negligence, the whole audit may be held as negligently conducted and the auditor may have to face legal consequences.

It was held in the case of Pacific Acceptance Corporation Ltd. v. Forsyth and Others, that if the audit programme for the audit of a branch of a financing house, drawn up a number of years ago, fails to take into consideration that the previous policy of financing of a vehicle has been changed to financing of real estate acquisition, the whole audit conducted thereunder would be entirely misdirected and may even result into nothing more than a farce.

The utility of the audit programme can be retained and enhanced only by keeping the programme as also the client’s operations and internal control under periodic review so that inadequacies or redundancies of the programme maybe removed. However, as a basic feature, audit programme not only lists the tasks to be carried out but also contains a few relevant instructions, like the extent of checking, the sampling plan, etc.

Question 21.
What are the disadvantages of the use of an Audit Programme. [May 07 (4 Marks)]
Or
Write short note on: Disadvantages of the use of an Audit Programme. [May 12 (4 Marks)]
Answer:
Disadvantages of Audit Programme:
(a) The audit work tends to become mechanical and monotonous, unless the audit objectives for each step are clear to the person/staff deployed.
(b) The audit work may be partially accomplished but may give an impression that the audit has been fully done if the programme does not record evidence of performing the work.
(c) If the client’s system of business line has changed but the programme has not been tailored to the changes, it may fail to serve the intended purpose and an audit failure may result.
(d) The initiative of the audit staff is dampened if the programme is to be rigidly followed.
(e) The clients staff may become aware of the scope of audit as per programme and this may provide them an opportunity for manipulation of records or for committing fraud since they become aware about the auditor’s approach.

Question 22.
Evolving one audit programme applicable to all audit engagements under all circumstances is not practicable. Explain [RTP-May 18, May 19, Nov. 20]
Answer:
Uniform Audit Programme applicable to all audit assignments:
Evolving one audit programme applicable to all audit engagements under all circumstances is not practicable due to following reasons:

• Businesses vary in nature, size and composition;
• Work which is suitable to one business may not be suitable to others;
• Efficiency and operation of internal controls and the exact nature of the service to be rendered by the auditor differs from assignment to assignment.

However, it is an essential requirement that audit programme, specify in detail, the nature of work to be done so that no time will be wasted on matters not pertinent to the engagement and any special matter or any specific situation can be taken care of.

Question 23.
Explain concept of materiality and factors which act as guiding factors to this concept. [Nov. 09 (6 Marks)]
Or
State the factors which are to be considered in determining materiality. [Nov. 15 (4 Marks)]
Answer:
Concept of Materiality:

• SA 320 on “Materiality in Planning and Performing an Audit” lays down the standard on the concept of materiality and its relationship with audit risk. As per SA 320 information is material if its misstatement (i.e. omission or erroneous statement) could influence the economic decisions of users taken on the basis of the financial information.
• The concept of materiality recognises that some matters, either individually or in the aggregate, are relatively important for true and fair presentation of financial information in conformity with recognised accounting policies and practices.
• The auditor considers materiality at both the overall financial information level and in relation to individual account balances and classes of transactions. The concept of materiality recognises that some matters, either individually or in the aggregate, are relatively important for true and fair presentation of financial information in conformity with recognised accounting policies and practices.

Factors influencing materiality: Materiality may be influenced by

• Legal and regulatory requirements, non-compliance of which may have a significant bearing on the financial information, and
• Considerations which may have a significant bearing on the financial information, and
• Considerations relating to individual account balances and relationships. These factors may result in different levels of materiality depending on the matter being audited.

Question 24.
State the factors which are to be considered in determining materiality. [Nov. 15 (4 Marks)]
Answer:
Factors influencing materiality:

• Legal and regulatory requirements, non-compliance of which may have a significant bearing on the financial information, and
• Considerations which may have a significant bearing on the financial information, and
• Considerations relating to individual account balances and relationships.
  These factors may result in different levels of materiality depending on the matter being audited.

Question 25.
Write short note on: Materiality and Audit Risk. [Nov. 14 (4 Marks)]
Answer:
Materiality and Audit Risk:
SA 320 on “Materiality in Planning and Performing an Audit” lays down the standard on the concept of materiality and its relationship with audit risk. Accordingly,

• In conducting an audit of financial statements, the overall objectives of the auditor are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and to report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s findings.
• The auditor obtains reasonable assurance by obtaining sufficient appropriate audit evidence to reduce audit risk to an acceptably low level.
• Audit riskis the riskthatthe auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Audit risk is a function of the risks of material misstatement and detection risk. Materiality and audit risk are considered throughout the audit, in particular, when:
(a) Identifying and assessing the risks of material misstatement;
(b) Determining the nature, timing and extent of further audit procedures; and
(c) Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in forming the opinion in the auditor’s report

Question 26.
Write short note on: Factors affecting the identification of an appropriate benchmark in determining materiality.
Or
Mr. X was appointed as the auditor of M/s Easy Go Ltd. and intends to apply the concept of materi¬ality for the financial statements as a whole. Please guide him as to the factors that may affect the identification of an appropriate benchmark for this purpose.
“Determining materiality involves the exercise of professional judgment”. Discuss stating the factors that may affect the identification of an appropriate benchmark. Also give examples. [RTP-May 18]
Or
With reference to SA 320 indicate the factors which may affect the identification of an appropriate benchmark in determining materiality for the financial statements as a whole. [Nov. 15 (5 Marks)]
Or
With reference to SA 320 “Materiality in planning and performing an audit” Indicate the factors
which may effect the identification of an appropriate benchmark while determining materiality for the financial statements as a whole. [Nov. 20 (4 Marks)]
Answer:
Factors affecting identification of appropriate benchmark as per SA 320:
Determining materiality involves the exercise of professional judgment. Apercentage is often applied
to a chosen benchmark as a starting point in determining materiality for the financial statements as a
whole. Factors that may affect the identification of an appropriate benchmark include the following:

• The elements of the financial statements [for example, assets, liabilities, equity, revenue, expenses);
• Whether there are items on which the attention of the users of the particular entity’s financial statements tends to be focused [for example, for the purpose of evaluating financial performance users may tend to focus on profit, revenue or net assets);
• The nature of the entity, where the entity is at in its life cycle, and the industry and economic environment in which the entity operates;
• The entity’s ownership structure and the way it is financed [for example, if an entity is financed solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the entity’s earnings); and
• The relative volatility of the benchmark.

Question 27.
As an auditor of RST Ltd. Mr. P applied the concept of materiality for the financial statements as a whole. On the basis of obtaining additional information of significant contractual arrangements that draw attention to a particular aspect of a company’s business, he wants to re-evaluate the materiality concept. Please guide him.
Or
Materiality for the financial statements as a whole may need to be revised as a result of a change in circumstances that occurred during the audit. Explain with the help of example. [MTP-Olt. 19]
Answer:
Revision as the Audit Progresses

• SA 320 on “Materiality in Planning and Performing an Audit” lays down the standard on the concept of materiality.
• As per SA 320, auditor shall revise materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures) in the event of becoming aware of information during the audit that would have caused the auditor to have determined a different amount (or amounts) initially.
• If the auditor concludes that a lower materiality for the financial statements as a whole (and, if applicable, materiality level or levels for particular classes of transactions, account balances or disclosures) than that initially determined is appropriate, the auditor shall determine whether it is necessary to revise performance materiality, and whether the nature, timing and extent of the further audit procedures remain appropriate.

Example: If during the audit it appears as though actual financial results are likely to be substantially different from the anticipated period end financial results that were used initially to determine materiality for the financial statements as a whole, the auditor revises that materiality.

• Materiality is an important consideration for an auditor to evaluate whether the financial statements reflect a true or fair view or not. SA 320 on “Materiality in Planning and Performing an Audit” requires that an auditor should consider materiality and its relationship with audit risk while conducting an audit.
• When planning the audit, the auditor considers what would make the financial information materially misstated. The auditor’s preliminary assessment of materiality related to specific account balances and classes of transactions helps the auditor decide such questions as what items to examine and whether to use sampling and analytical procedures.
• This enables the auditor to select audit procedures that, in combination, can be expected to support the audit opinion at an acceptably low degree of audit risk.
• It may be noted that the auditor’s assessment of materiality and audit risk may be different at the time of initially planning of the audit than at the time of evaluating the results of audit procedures.

Objective Type Questions (Correct/Incorrect)

Question 1.
SA 315 has a purpose to establish standards to form procedures to be followed to have an understanding of the entity and its environment.
Answer:
Statement is correct.
SA 315 “Identifying and Assessing the Risk of Material Misstatements through Understanding the Entity and its Environment” deals with the auditor’s responsibility to identify and assess the risks of material misstatement in the financial statements, through understanding the entity and its environment, including the entity’s internal control.

Question 2.
The establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential processes, but are closely inter-related since changes in one may result in consequential changes to the other.
Answer:
Statement is correct.

• Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy, taking into account the need to achieve the audit objectives through the efficient use of the auditor’s resources.
• The establishment of the overall audit strategy and the detailed audit plan are not necessarily discrete or sequential processes, but are closely inter-related since changes in one may result in consequential changes to the other.

Question 3.
Establishing an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan is prerogative of the management.
Answer:
Statement is incorrect.
As per SA 3 0 0 “Planning an Audit of Financial Statements” to establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan is the part of audit planning activities.

Question 4.
Planning is a discrete phase of an audit.
Answer:
Statement is incorrect.
As per SA 300 “Planning an Audit of Financial Statements” planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement.

Question 5.
Materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures)does not need any revision.
Answer:
Statement is incorrect.
As per SA 320 “Materiality in Planning and Performing an Audit” materiality for the financial statements as a whole (and, if applicable, the materiality level or levels for particular classes of transactions, account balances or disclosures] may need to be revised as a result of

• a change in circumstances that occurred during the audit (for example, a decision to dispose of a major part of the entity’s business],
• new information, or
• a change in the auditor’s understanding of the entity and its operations as a result of performing further audit procedures.

Question 6.
There is direct relationship between materiality and the degree of audit risk. [RTP-May 18]
Answer:
Statement is incorrect.

• As per SA 3 2 0 “Materiality in Planning and Performing an Audit” there is an inverse relationship between materiality and the degree of audit risk.
• The higher the materiality level, the lower the audit risk and vice versa. For example, the risk that a particular account balance or class of transactions could be misstated by an extremely large amount might be very low but the risk that it could be misstated by an extremely small amount might be very high.

Question 7.
There is no relation between Audit Plans and knowledge of the client’s business. [RTP-May 19]
Answer:
Statement is incorrect.

• The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner.
• Plans should be based on knowledge of the client’s business

Question 8.
Planning is not a discrete phase of an audit, but rather a continual and iterative process. [RTP-May 19]
Answer:
Statement is correct.

• As per SA-300, “Planning an Audit of Financial Statements”, planning is not a discrete phase of an audit, but rather a continual and iterative process.
• Planning often begins shortly after (or in connection with] the completion of the previous audit and continues until the completion of the current audit engagement.

Question 9.
A well designed and drafted audit plan and audit strategy which takes care of all the uncertainties and conditions, need not be changed during the course of audit. [Nov. 18 (2 Marks)]
Answer:
Statement is incorrect.
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit.

The auditor may need to modify the overall audit strategy and audit plan as a result of:

• unexpected events,
• changes in conditions, or
• the audit evidence obtained from the results of audit procedures.
• Planning, however, includes consideration of the timing of certain activities and audit procedures that need to be completed prior to the performance of further audit procedures.

Question 10.
The auditor need not discuss elements of planning with the entity’s management in any case. [RTP-Nov. 19]
Answer:
Statements is incorrect.
The auditor may decide to discuss elements of planning with the entity’s management to facilitate the conduct and management of the audit engagement.

Question 11.
Planning is a discrete phase of an audit. [RTP-Nov. 19]
Answer:
Statement is incorrect.

• As per SA-300, “Planning an Audit of Financial Statements”, planning is not a discrete phase of an audit, but rather a continual and iterative process.
• Planning often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement.

Question 12.
Under a properly framed audit programme by the auditor, the danger is significantly less and audit can proceed systematically. [Nov. 19 (2 Marks)]
Answer:
Statement is correct.

• Without a written and pre-determined programme, work is necessarily to be carried out on the basis of some ‘mental’ plan. In such a situation there is always a danger of ignoring or overlooking certain books and records.
• Under a properly framed programme, the danger is significantly less and the audit can proceed systematically.

Question 13.
In the planning stage, analytical procedures would not in any way assist the auditor. [RTP-May 20]
Answer:
Statement is incorrect.

• In the planning stage, analytical procedures assist the auditor in understanding the client’s business and in identifying areas of potential risk by indicating aspects of and developments in the entity’s business of which he was previously unaware.
• This information will assist the auditor in determining the nature, timing and extent of his other audit procedures.
• Analytical procedures in planning the audit use both financial data and non-financial information, such as number of employees, square feet of selling space, volume of goods produced and similar information.

Question 14.
A detailed Audit Programme once prepared for a business can be used for all business under all circumstances. [MTP-Oct. 20]
Answer:
Statement is incorrect.

• Evolving one audit programme applicable to all business under all circumstances is not practicable as businesses vary in nature, size and composition, work which is suitable to one business may not be suitable to others.
• Efficiency and operation of internal controls and the exact nature of the service to be rendered by the auditor are the other factors that vary from engagement to engagement.

Question 15.
Overall audit plan sets the scope, timing and direction of the audit, and guides the development of the more detailed audit strategy. [RTP-Nov. 20]
Answer:
Statement is incorrect.
Overall audit strategy sets the scope, timing and direction of the audit, and guides the development of the more detailed audit plan.

Question 16.
It is not necessary for the auditor to periodically review the audit programme. [Nov. 20 (2 Marks)]
Answer:
Statement is incorrect.

• There should be periodic review of the audit programme to assess whether the same continues to be adequate for obtaining requisite knowledge and evidence about the transactions.
• Unless this is done, any change in the business policy of the client may not be adequately known, and consequently, audit work may be carried on, on the basis of an obsolete programme and, for this negligence, the whole audit may be held as negligently conducted and the auditor may have to face legal consequences.

Question 17.
The audit plan is more detailed than the overall audit strategy. [Nov. 20 (2 Marks)]
Answer:
Statement is correct.

• Audit strategy and audit plan are inter-related to each other because change in one would result into change in the other.
• The audit strategy is prepared before the audit plan. The audit plan contains more details than the overall audit strategy.
• The audit strategy provides the guidelines for developing the audit plan. Once the overall audit strategy has been established, an audit plan can be developed to address the various matters identified in the overall audit strategy.

Students should practice these Audit Report – CA Inter Audit MCQ based on the latest syllabus.

Audit Report – CA Inter Audit MCQ

Question 1.
A statement as to auditor’s believing that the audit evidence, we have obtained is sufficient and appropriate to provide a basis for their opinion is mentioned in which section of the auditor’s report?
(a) Opinion
(b) Basis for Opinion
(c) Management’s responsibility
(d) Auditor’s responsibility
Answer:
(b) Basis for Opinion

Question 2.
As per Standards on Auditing, the auditor shall date the report no earlier than the date:
(a) the audit opinion is submitted for issue among stakeholders
(b) the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements
(c) the opinion is presented to management
(d) that management takes responsibility for the financial statements
Answer:
(b) the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements

Question 3.
In an auditor’s report on financial statements an unmodified opinion is issued when the auditor is satisfied in all material respects that:
(a) the view presented by the financial information as a whole is consistent with the auditor’s knowledge of the business of the entity
(b) there are no disagreements with management
(c) the audit has been conducted in accordance with Standards on Auditing
(d) internal controls are consistent in design and op-eration
Answer:
(b) there are no disagreements with management

Question 4.
Which of the following topics are not covered in the ‘Auditor Responsibilities’ paragraphs?
(a) a statement that the standards require that the auditor plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement
(b) wording indicating that the audit evidence is sufficient to provide the basis for the audit opinion
(c) reference to the financial accounting standards followed in conducting the audit
(d) a statement that the standards require that the auditor comply with ethical requirements
Answer:
(c) reference to the financial accounting standards followed in conducting the audit

Question 5.
Based on SA 700, there are at least two circumstances where the auditor may not be able to express an unmodified opinion:
(a) limitation of scope and fraud
(b) disagreement with management or inconsistent application of accounting standards
(c) disagreement with management and limitation of scope
(d) disagreement with management and fraud
Answer:
(c) disagreement with management and limitation of scope

Question 6.
Which of the following is not a section of the SA 700 auditor’s unmodified (unqualified) opinion?
(a) Management’s responsibility for the financial statements
(b) Opinion
(c) Report on other audit activities
(d) Auditor’s responsibility
Answer:
(c) Report on other audit activities

Question 7.
In audit report, a description that audit was per-formed in accordance with Standards on Auditing is given in which section?
(a) Management’s responsibility
(b) Opinion
(c) Basis for Opinion Section
(d) Auditor’s responsibility
Answer:
(c) Basis for Opinion Section

Question 8.
As per SA 700 “Forming an Opinion and Reporting on Financial Statements” when expressing an unmodified opinion on financial statements prepared in accordance with a fair presentation framework, the auditor’s opinion shall, unless otherwise required by law or regulation, use which of the following phrase:
(a) In our opinion, the accompanying financial statements present fairly, in all material respects, […] in accordance with [the applicable financial reporting framework].
(b) In our opinion, the accompanying financial statements give a true and fair view of […] in accordance with [the applicable financial reporting framework].
(c) In our opinion, the accompanying financial statements are prepared, in all material respects, in accordance with [the applicable financial reporting framework].
(d) Either (a) or (b).
Answer:
(d) Either (a) or (b).

Question 9.
As per SA 700 “Forming an Opinion and Reporting on Financial Statements” when expressing an unmodified opinion on financial statements prepared in accordance with a Compliance framework, the auditor’s opinion shall, unless otherwise required by law or regulation, use which of the followingphrase:
(a) In our opinion, the accompanying financial statements present fairly, in all material respects, […] in accordance with [the applicable financial reporting framework].
(b) In our opinion, the accompanying financial statements give a true and fair view of […] in accordance with [the applicable financial reporting framework].
(c) In our opinion, the accompanying financial statements are prepared, in all material respects, in accordance with [the applicable financial reporting framework],
(d) Either (a) or (b).
Answer:
(c) In our opinion, the accompanying financial statements are prepared, in all material respects, in accordance with [the applicable financial reporting framework],

Question 10.
As per SA 700 “Formingan Opinion and Reporting on Financial Statements”, the description of the auditor’s responsibilities for the audit of the financial statements shall be included:
(a) Within the body of the auditor’s report.
(b) Within an appendix to the auditor’s report, in which case the auditor’s report shall include a reference to the location of the appendix.
(c) By a specific reference within the auditor’s report to the location of such a description on a website of an appropriate authority, where law, regulation or the national auditing standards expressly permit the auditor to do so.
(d) Any of the above.
Answer:
(d) Any of the above.

Question 11.
Communicating key audit matters in the auditor’s report is
(a) not a substitute for disclosures in the financial statements that the applicable FRF requires man-agement to make, or that are otherwise necessary to achieve fair presentation.
(b) a substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705.
(c) a substitute for reporting in accordance with SA 570 when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern.
(d) a separate opinion on individual matters.
Answer:
(a) not a substitute for disclosures in the financial statements that the applicable FRF requires man-agement to make, or that are otherwise necessary to achieve fair presentation.

Question 12.
Key Audit Matters are to be communicated in Auditor’s Report
(a) as a substitute for disclosure’s in the Financial Statement
(b) as substitute for Auditor Expressing a modified opinion in the Financial Statement
(c) as a separate opinion on Individual Matters
(d) when auditor is required by law or regulation to communicate key audit matters in the auditor’s Report
Answer:
(d) when auditor is required by law or regulation to communicate key audit matters in the auditor’s Report

Question 13.
When auditor is unable to obtain sufficient and appropriate audit evidence that financial statement on which to base the opinion and the auditor concludes that possible effects of the financial statement can be both Material and Pervasive. Then the Key Matters to be included in the Auditor’s Report should
(a) disclose that no sufficient & appropriate evidence is obtained
(b) auditor is prohibited in communicating key audit matters in the auditor’s report i.e., no disclosure is required
(c) disclose that financial statement doesn’t present a true and fair view
(d) both (a) & (c)
Answer:
(b) auditor is prohibited in communicating key audit matters in the auditor’s report i.e., no disclosure is required

Question 14.
As per SA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report” communicating key audit matters in the auditor’s report is in the context of the auditor having formed an opinion on the financial statements as a whole Communicating key audit matters in the auditor’s report can be considered as a substitute for
(a) disclosures in the financial statements that the applicable financial reporting framework requires management to make, or that are otherwise necessary to achieve fair presentation
(b) the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705 (Revised]
(c) reporting in accordance with SA 570 (Revised) when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern
(d) none of the above
Answer:
(d) none of the above

Question 15.
A matter giving rise to a modified opinion in accordance with SA 705 (Revised), or a material uncertainty related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern in accordance with SA 570 (Revised), are by their nature key audit matters.
In relation to this statement, select the appropriate answer:
(a) Such matters shall not be described in the Key Audit Matters section of the auditor’s report and the requirements as stated in SA 701 do not apply
(b) Such matters shall only be described in the Key Audit Matters section of the auditor’s report and the requirements as stated in SA 701 shall apply
(c) Such matters shall be described in the Key Audit Matters section of the auditor’s report and the requirements as stated in SA 701 shall apply in addition to the requirements of SA 570 or SA 705, as the case may be
(d) Such Matters shall be described in Emphasis of matter Para
Answer:
(a) Such matters shall not be described in the Key Audit Matters section of the auditor’s report and the requirements as stated in SA 701 do not apply

Question 16.
As per SA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report’’ Key audit matters are
(a) Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the prior period. Key audit matters are selected from matters communicated with those charged with governance
(b) Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with Central Government
(c) Those matters that, in the management judgment, were of most significance in the audit of the financial statements ofthe current period. Key audit matters are selected from matters communicated with those charged with governance
(d) Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with those charged with governance
Answer:
(d) Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period.
Key audit matters are selected from matters communicated with those charged with governance

Question 17.
As per SA 701 “Communicating Key AuditMatters in the Independent Auditor’s Report”, the auditor shall describe each key audit matter in the auditor’s report. However, in some situations, such matters need not be communicated. Identify the situation:
(a) Law or regulation precludes public disclosure about the matter.
(b) TCWG has not given their consent for public disclosure.
(c) Management is not willing for public disclosure of the matters.
(d) Both (a) and (b).
Answer:
(a) Law or regulation precludes public disclosure about the matter.

Question 18.
As per SA 701 “Communicating Key AuditMatters in the Independent Auditor’s Report”, the auditor shall determine, from the matters communicated with those charged with governance, those matters that required significant auditor attention in performing the audit. In making this determination, the auditor shall take into account:
(a) Areas of lower assessed risk of material misstatement
(b) significant risks identified during the audit of previous year
(c) Significant auditor judgments relating to areas in the business operations that involved significant management judgment
(d) effect on the audit of significant events or transactions that occurred during the period
Answer:
(d) effect on the audit of significant events or transactions that occurred during the period

Question 19.
If the auditor determines, depending on the facts and circumstances of the entity and the audit, that there are no key audit matters to communicate or that the only key audit matters communicated are those matters that give rise to modified opinion, the auditor shall include a statement to this effect in a separate section of the auditor’s report under the heading “Key Audit Matters”. In which of the circumstance, the requirement so mentioned above will apply:
(a) the auditor determines that there are no key audit matters
(b) the auditor determines in accordance with SA 701 that a key audit matter will not be communicated in the auditor’s report and no other matters have been determined to be key audit matters
(c) the only matters determined to be key audit matters are those communicated in accordance SA 570 or SA 705
(d) all of the above
Answer:
(d) all of the above

Question 20.
Which of the following is not a type of audit opinion?
(a) Disclaimer
(b) Adverse
(c) Reserved
(d) Qualified
Answer:
(c) Reserved

Question 21.
What type of opinion is issued when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements?
(a) Qualified
(b) Reserved
(c) Disclaimer
(d) Adverse
Answer:
(d) Adverse

Question 22.
When an auditor expresses an adverse opinion, the opinion paragraph should include
(a) A direct reference to a separate paragraph disclosing the basis for the opinion
(b) The substantive reasons for the financial statements being misleading
(c) The principal effects of the departure from generally accepted accounting principles
(d) A description of the uncertainty or scope limitation that prevents an unmodified opinion
Answer:
(a) A direct reference to a separate paragraph disclosing the basis for the opinion

Question 23.
The auditor shall disclaim an opinion when the following conditions occur except:
(a) it is not possible to form an opinion on the financial statements due to the potential interaction of the uncertainties and their possible cumulative effect on the financial statements
(b) the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive
(c) the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be both material and pervasive
(d) the auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion
Answer:
(b) the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could be material but not pervasive

Question 24.
When the auditor modifies the opinion on the financial statements, the auditor shall include a paragraph in the auditor’s report. All of the following are true of this paragraph except:
(a) it should draw the financial statement users’ attention to matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements
(b) the auditor shall place this paragraph immediately after the opinion paragraph in the auditor’s report
(c) the paragraph should provide a description of the matter giving rise to the modification
(d) the auditor shall use the heading ‘basis for qualified opinion,’ ‘basis for adverse opinion’ or ‘basis for disclaimer of Opinion,’ as appropriate
Answer:
(a) it should draw the financial statement users’ attention to matters presented or disclosed in the financial statements that are of such importance that they are fundamental to users’ understanding of the financial statements

Question 25.
XYZ Limited received a grant of ₹ 25 lakhs under the Government’s Subsidy Scheme, for acquiring an imported machinery for setting up new plant. The entire grant received is credited to Profit and Loss Account. While preparing the audit report, the auditor needs to:
(a) qualify the report stating the fact that the income has been overstated to the extent of the amount of grant net of proportionate credit that would have been worked out
(b) qualify the report stating the fact that the income has been understated to the extent of the amount of grant net of proportionate debit that would have been worked out
(c) express unmodified opinion as Accounting Standard-12 allow the recognition of grant received as income
(d) None of the above
Answer:
(a) qualify the report stating the fact that the income has been overstated to the extent of the amount of grant net of proportionate credit that would have been worked out

Question 26.
An auditor concludes that a client’s illegal act, which has a material effect on the financial state-ments, has not been properly accounted for or dis-closed. Depending on the materiality of the effect on the financial statements, the auditor should express either
(a) Unqualified opinion with a separate explanatory paragraph or a qualified opinion
(b) Adverse opinion or a disclaimer of opinion
(c) Disclaimer of opinion or an unqualified opinion with a separate explanatory paragraph
(d) Qualified opinion or an adverse opinion
Answer:
(d) Qualified opinion or an adverse opinion

Question 27.
When an auditor qualifies an opinion because of inadequate disclosure, the auditor should describe the nature of the omission in a basis for qualification paragraph and modify the

Introductory paragraph	Auditor re­sponsibility paragraphs	Opinion paragraph
(a) No	No	Yes
(b) Yes	No	No
(c) Yes	Yes	No
(d) No	Yes	Yes

Answer:
(a)

Question 28.
Wipro Ltd. has branches all over the India. Suddenly due to floods in Kerala, all the Records of Wipro Ltd. at its Kerala branch were destroyed due to Floods. No documents were made available. The turnover of Wipro Ltd. (all over India) was ₹ 100 Crore. If turnover from Kerala Branch alone was ? 2 5 Lakhs and the Company does not disclose the same in Financial Statements. There are no alternative checks that could be applied except External Party Confirmations. As an auditor of Wipro what would be your opinion on the Financial Statements
(a) Unmodified Opinion with Emphasis on Matter that the books of the Kerala Branch have been destroyed
(b) Modified Opinion – Adverse Opinion
(c) Modified Opinion – Disclaimer of Opinion
(d) Modified Opinion – Qualified Opinion
Answer:
(d) Modified Opinion – Qualified Opinion

Question 29.
Wipro Ltd. has branches all over the India. Suddenly due to floods in Kerala, all the Records of Wipro Ltd. at its Kerala branch were destroyed due to Floods. No documents were made available. The turnover of Wipro Ltd. (all over India) was ? 100 Crore. If turnover from Kerala Branch alone was ? 60 Crores and the Company has disclosed the same in Financial Statements as notes to accounts. There are no alternative checks that could be applied except External Party Confirmations. As an auditor of Wipro what would be your opinion on the Financial Statements
(a) Unmodified Opinion with EOM that the books of the Kerala Branch have been destroyed
(b) Adverse Opinion
(c) Disclaimer of Opinion
(d) Qualified Opinion
Answer:
(c) Disclaimer of Opinion

Question 30.
Ordinarily, an auditor may include an emphasis of a matter paragraph:
(a) when limitation in scope is not so material as to re-quire an adverse opinion or a disclaimer of opinion
(b) to highlight an immaterial matter regarding a going concern problem
(c) when the effect of a disagreement with management is material and pervasive to the financial statements
(d) if there is a significant uncertainty, the resolution of which is dependent upon future events
Answer:
(d) if there is a significant uncertainty, the resolution of which is dependent upon future events

Question 31.
Wipro Ltd. has branches all over the India. : Suddenly due to floods in Kerala, all the Records of Wipro Ltd. at its Kerala branch were destroyed due to Floods. No documents were made available. The turnover of Wipro Ltd. (all over India) was ₹ 100 Crore. If turnover from Kerala Branch alone was ₹ 2 5 Lakhs and the Company has disclosed the same in Financial Statements as notes to accounts. There are no alternative checks that could be applied except External Party Confirmations. As an auditor of Wipro what would be your opinion on the Financial Statements
(a) Unmodified Opinion with Emphasis on Matter that the books of the Kerala Branch have been destroyed
(b) Modified Opinion – Adverse Opinion
(c) Modified Opinion – Disclaimer of Opinion
(d) Modified Opinion – Qualified Opinion
Answer:
(a) Unmodified Opinion with Emphasis on Matter that the books of the Kerala Branch have been destroyed

Question 32.
As per SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report” Emphasis of Matter paragraph may be defined as:
(a) A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the director’s report that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements
(b) A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ under-standing of the audit, the auditor’s responsibilities or the auditor’s report
(c) A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the auditor’s report
(d) A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements
Answer:
(d) A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements

Question 33.
Which of the following is not an example of uncertainties that might be emphasised in an emphasis of a matter paragraph?
(a) Matters affecting the comparability of financial statements with those of previous years
(b) The existence of related party transactions
(c) Important accounting matters occurring subsequent to the balance sheet date
(d) Internal control deficiencies
Answer:
(d) Internal control deficiencies

Question 34.
An auditor would express an unmodified opinion and add an emphasis-of-matter paragraph for and Other Matter Paragraphs in the Independen t Auditor’s Report” Other Matter Para may be defined as:

	an unjustified ac­counting change	a material weakness in the internal control
(a)	No	Yes
(b)	Yes	No
(c)	Yes	Yes
(d)	No	No

Answer:
(a)

Question 35.
As per SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independen t Auditor’s Report” Other Matter Para may be defined as:
(a) A paragraph included in the auditor’s report that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements
(b) A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report
(c) A paragraph included in the auditor’s report that refers to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report
(d) A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the financial statements
Answer:
(b) A paragraph included in the auditor’s report that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report

Question 36.
As per SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report” an Emphasis of Matter paragraph is a substitute for:
(a) A modified opinion in accordance with SA 705 (Revised) when required by the circumstances of a specific audit engagement;
(b) Disclosures in the financial statements that the applicable financial reporting framework requires management to make, or that are otherwise necessary to achieve fair presentation; or
(c) Reporting in accordance with SA 570 (Revised) when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern
(d) None of the above
Answer:
(d) None of the above

Question 37.
If the prior period financial statements were not audited, the auditor shall state in the auditor’s report thatthe corresponding figures are unaudited. Such statement is incorporated in:
(a) Basis for Opinion Section
(b) Key Audit Matter
(c) Other Matter Paragraph
(d) Emphasis of Matter Paragraph
Answer:
(c) Other Matter Paragraph

Question 38.
Comparative information where amounts and other disclosures for the prior period are included as an integral part of the current period financial statements, and are intended to be read only in revelation to the amounts and other disclosures relating to the current period is known as:
(a) Comparative financial information
(b) Corresponding Figures
(c) Comparative financial statements
(d) Common Size financial statements
Answer:
(b) Corresponding Figures

Question 39.
If the auditor obtains audit evidence that a material misstatement exists in the prior period financial statements on which an unmodified opinion has been previously issued, the auditor shall verify whether the misstatement has been dealt with as required under the applicable financial reporting framework and, if that is not the case, the auditor shall
(a) express an unmodified opinion in the auditor’s report on the current period financial statements
(b) express a qualified opinion in the auditor’s report on the currentperiod financial statements, modified with respect to the corresponding figures included therein
(c) express an adverse opinion in the auditor’s report on the currentperiod financial statements, modified with respect to the corresponding figures included therein
(d) express a qualified opinion or an adverse opinion in the auditor’s report on the current period financial statements, modified with respect to the corresponding figures included therein
Answer:
(d) express a qualified opinion or an adverse opinion in the auditor’s report on the current period financial statements, modified with respect to the corresponding figures included therein

Question 40.
If the prior period financial statements were not audited; the auditor shall state in _____ in the auditor’s report that the corresponding figures are unaudited
(a) Key Audit Matter
(b) Emphasis of Matter paragraph
(c) Other Matter Paragraph
(d) Basis for Opinion Section
Answer:
(c) Other Matter Paragraph

Question 41.
A company did not disclose accounting policies required to be disclosed under Schedule III or any other provisions of the Companies Act, 2013, the auditor should issue-
(a) a qualified opinion
(b) an adverse opinion
(c) a disclaimer of opinion
(d) emphasis of matter paragraph.
Answer:
(a) a qualified opinion

Question 42.
An Audit report is:
(a) an opinion drawn on the entity’s financial statements to make sure that the records are true and correct representation of the transactions they claim to represent.
(b) an opinion drawn on the entity’s books of account to make sure that the records are true and fair representation of the transactions they claim to represent.
(c) an opinion drawn on the entity’s financial statements to make sure that the records are true and fair representation of the transactions they claim to represent.
(d) an opinion drawn on the entity’s books of account to make sure that the records are true and correct representation of the transactions they claim to represent.
Answer:
(c) an opinion drawn on the entity’s financial statements to make sure that the records are true and fair representation of the transactions they claim to represent.

Question 43.
Which of the following is not a Specific Evaluations by the Auditor?
(a) The financial statements adequately disclose the significant accounting policies selected and applied.
(b) The accounting policies selected and applied are consistent with the applicable financial reporting framework and are appropriate.
(c) The accounting estimates made by management are reasonable.
(d) The sufficient appropriate audit evidence has been obtained.
Answer:
(d) The sufficient appropriate audit evidence has been obtained.

Question 44.
Which of the following is correct?
(a) The auditor shall express a qualified opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
(b) The auditor shall express a disclaimer opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
(c) The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.
(d) The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are material, but not pervasive, to the financial statements.
Answer:
(c) The auditor shall express an adverse opinion when the auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both material and pervasive to the financial statements.

Question 45.
Which of the following is correct?
(a) When reporting on prior period financial statements in connection with the current period’s audit, if the auditor’s opinion on such prior period financial statements differs from the opinion the auditor previously expressed, the auditor need not disclose the substantive reasons for the different opinion.
(b) When reporting on prior period financial statements in connection with the current period’s audit, if the auditor’s opinion on such prior period financial statements differs from the opinion the auditor previously expressed, the auditor shall disclose the substantive reasons for the different opinion in an Other Matter paragraph in accordance with
(c) When reporting on prior period financial statements in connection with the current period’s audit, if the auditor’s opinion on such prior period financial statements differs from the opinion the auditor previously expressed, the auditor shall disclose the substantive reasons for the different opinion in an emphasis of Matter paragraph in accordance with SA 706.
(d) When reporting on prior period financial statements in connection with the current period’s audit, if the auditor’s opinion on such prior period financial statements differs from the opinion the auditor previously expressed, the auditor shall disclose the substantive reasons for the different opinion in an Other Matter paragraph or emphasis of matter paragraph in accordance with SA 706.
Answer:
(b) When reporting on prior period financial statements in connection with the current period’s audit, if the auditor’s opinion on such prior period financial statements differs from the opinion the auditor previously expressed, the auditor shall disclose the substantive reasons for the different opinion in an Other Matter paragraph in accordance with

Question 46.
Which of the following is incorrect?
(a) Communicating key audit matters in the auditor’s report is not a substitute for disclosures in the financial statements that the applicable financial reporting framework requires management to make, or that are otherwise necessary to achieve fair presentation.
(b) Communicating key audit matters in the auditor’s report is not a substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705 (Revised],
(c) Communicating key audit matters in the auditor’s report is not a substitute for reporting in accordance with SA 570 when a material uncertainty exists relating to events or conditions that may cast significant doubt on an entity’s ability to continue as a going concern.
(d) Communicating key audit matters in the auditor’s report is a substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705 (Revised],
Answer:
(d) Communicating key audit matters in the auditor’s report is a substitute for the auditor expressing a modified opinion when required by the circumstances of a specific audit engagement in accordance with SA 705 (Revised],

Question 47.
CA. Goofy has been appointed as an auditor for audit of a complete set of financial statements of Dippy Ltd., a listed company. The financial statements of the company are prepared by the management in accordance with the Accounting Standards prescribed under section 133 of the Companies Act, 2013. However, the inventories are misstated which is deemed to be materia! but not pervasive to the financial statements, Based on the audit evidences obtained, CA. Goofy has concluded that a material uncertainty does not exist related to events or conditions that may cast significant doubt on the entity’s ability to continue as a going concern in accordance with SA 570. Further, CA. Goofy is also aware of the fact that a qualified opinion would be appropriate due to a material misstatement of the Financial Statements. State what phrases should the auditor use while drafting such opinion paragraph?
(a) In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, the aforesaid financial statements present fairly, in all material respects, or give a true and fair view in conformity with the applicable financial reporting framework.
(b) In our opinion and to the best of our information and according to the explanations given to us, with the foregoing explanation, the aforesaid financial statements present fairly, in all material respects, or give a true and fair view in conformity with the applicable financial reporting framework.
(c) In our opinion and to the best of our information and according to the explanations given to us, subject to the misstatement regarding inventories, the aforesaid financial statements present fairly, in all material respects, or give a true and fair view in conformity with the applicable financial reporting framework.
(d) In our opinion and to the best of our information and according to the explanations given to us, with the explanation described in the Basis for Qualified Opinion section of our report, the aforesaid financial statements present fairly, in all material respects, or give a true and fair view in conformity with the applicable financial reporting framework.
Answer:
(a) In our opinion and to the best of our information and according to the explanations given to us, except for the effects of the matter described in the Basis for Qualified Opinion section of our report, the aforesaid financial statements present fairly, in all material respects, or give a true and fair view in conformity with the applicable financial reporting framework.

Question 48.
Which of the following is not correct:
(a) SA 700- Forming an Opinion and Reporting on Financial Statements
(b) SA 705- Modified Opinion
(c) SA 701- Communicating Key Audit Matters
(d) SA 706-ComparatiVe Information
Answer:
(d) SA 706-ComparatiVe Information

Buyback of Securities and Equity Shares with Differential Rights – CA Inter Advanced Accounting Study Material is designed strictly as per the latest syllabus and exam pattern.

Buyback of Securities and Equity Shares with Differential Rights – CA Inter Advanced Accounting Study Material

Theory Questions

Question 1.
State the conditions of issuance of Sweat Equity Shares by Joint Stock Companies. (Nov. 2012) (4 Marks)
Answer:
A company may issue sweat equity shares of a class of shares already issued, if the following conditions are fulfilled:
(i) the issue of sweat equity shares is authorised by a special resolution passed by the company in the general meeting.

(ii) the resolution specifies the number of shares, current market price, the consideration if any, and the class or classes of directors or employees to whom such equity shares are to be issued.

(iii) not less than one year has, at the time of the issue, elapsed since the date on which the company was entitled to commence business.

(iv) the sweat equity shares of company, whose equity shares are listed on a recognised stock exchange, are issued in accordance with the regulations made by the Securities and Exchange Board of India (SEBI) in this behalf. But in the case of company whose equity shares are not listed on any recognised stock exchange, the sweat equity shares are issued in accordance with the guidelines as may be prescribed.

Question 2.
Give four conditions to be fulfilled by a Joint Stock Company to buy back its equity Shares. (May 2014) (4 Marks)
Answer:
As per section 77A of the Companies Act, 1956, a joint stock company has to fulfil the following conditions to buy back its own equity shares:

1. Buy back is authorized by its articles.
2. A special resolution has been passed in general meeting of the shareholders of the company, authorizing the buy back.
3. The buy back does not exceed 25% of the total paid up capital and free reserves of the company.
4. All the shares proposed for buy back are fully paid up.
5. The ratio of the debts owed by the Company is not more than twice the capital and its free reserves after such buy back.
6. The buy back of listed shares is in accordance with the regulation of SEBI.
7. The buy back is made out of free reserves (which includes securities premium) or out of the proceeds of a fresh issue of any shares or other specified securities.
8. The buy back is completed within 12 months of the passing of the special resolution or resolution passed by the Board.
9. Before making such buy back, a listed company has to the with the Registrar of the Companies and SEBI a declaration of solvency in the prescribed form.

Questions Without 3 Test

Question 3.
U Ltd. (a listed company) resolves to buy back 4 lakhs of its fully paid equity shares of ₹ 10 each at ₹ 22 per share from the open market. For the purpose, it issues 1 lakh 11% preference shares of ₹ 10 each at par, the entire amount being payable with applications. The company uses ₹ 16 lakhs of its balance in Securities Premium Account apart from its adequate balance in General Reserve to fulfil the legal requirements regarding buy-back. Give necessary journal entries to record the above transactions.
Answer:
Journal Entries (In the Books of U Ltd.)

Working Note:
Amount to be transferred to Capital Redemption Reserve account (CRR)

	₹
Face value of shares bought back (4,00,000 shares × ₹ 10)	40,00,000
Less: Nominal value of Preference Shares issued for such buy-back (1,00,000 shares × ₹ 10)	(10,00,000)
Amount transferred to Capital Redemption Reserve Account	30,00,000

Question 4.
A Limited furnishes the following summarized Balance Sheet as at 31st March, 2017:

On 1st April, 2017, the company announced the buy back of 25% of its equity shares @ ₹ 15 per share. For this purpose, it sold all of its investments for ₹ 150 lakhs.

On 5th April, 2017, the company achieved the target of buy back.
You are required to:
(1) Pass necessary journal entries for the buy-back.
(2) Prepare Balance Sheet of A Limited after buy-back of the shares.
Answer:
Journal Entries
(In the books of A Limited)

Balance Sheet (After buy back)

Notes to Accounts

4. Cash at bank after buy-back

Question 5.
Dee Limited furnishes the following Balance Sheet as at 31st March,

The company passed a resolution to buy back 20% of its equity capital @ ₹ 50 per share. For this purpose, it sold all of its investment for ₹ 22,00,000.
You are required to pass necessary journal entries and prepare the Balance Sheet. (Nov. 2009) (8 Marks)
Answer:
Journal Entries
(In the books of A Limited)

Balance Sheet of Dee Limited as on 1st April, 2008
(After buy back of shares)

Question 6.
Following is the summarized Balance Sheet of C Ltd. as on 31st March, 2016:

The Company wants to buy back 25,000 equity shares of ₹ 10 each, on 1st April, 2016 at ₹ 20 per share. Buy back of shares is duly authorized by its Articles and necessary resolution has been passed by the Company towards this. The buy-back of shares by the Company is also within the provisions of the Companies Act, 2013. The payment for buy back of shares will be made by the Company out of sufficient bank balance available shown as part of Current Assets.

You are required to prepare the necessary journal entries towards buy back of shares and prepare the Balance Sheet after buy back of shares.
Answer:
Journal Entries for buy-back of shares (In the books of C Ltd.)

Balance Sheet of C Ltd. as on 1st April, 2016

Notes to Accounts

Question 7.
The following summarized Balance Sheet P Limited (a non-listed company) furnishes as at 31st March, 2017:


On 1st April, 2017, the company passed a resolution to buy back 20% of its equity capital @ ₹ 60 per share. For this purpose, it sold all of its investment for ₹ 25,00,000.
The company achieved its target of buy-back. You are required to:
(a) Give necessary journal entries and
(b) Give the Balance Sheet of the company after buy back of shares. (RTP)
Answer:
Journal Entries
(In the books of P Limited)

Balance Sheet of P Limited as on 1st April, 2017(After buy back of shares)

Notes to Accounts

Question 8.
Following is the summarized Balance Sheet of C Ltd. as on 31st March, 2016 :

The Company wants to buy back 25,000 equity shares of ₹ 10 each, on 1st April, 2016 at ₹ 20 per share. Buy back of shares is duly authorized by its Articles and necessary resolution has been passed by the Company towards this. The buy-back of shares by the Company is also within the provisions of the Companies Act, 2013. The payment for buy back of shares will be made by the Company out of sufficient bank balance available shown as part of Current Assets.

You are required to prepare the necessary journal entries towards buy back of shares and prepare the Balance Sheet after buy back of shares.
Answer:
Journal Entries for buy-back of shares
(In the books of C Ltd.)

Balance Sheet of C Ltd. as on 1st April, 2016

Notes to Accounts

Questions With 3 Test

Question 9.
Following Is the summarized Balance Sheet of Complicated Ltd. as on 31st March, 2016:

The Company wants to buy back 25000 equity shares of ₹ 10 each, on 1st April, 2016 at ₹ 20 per share. Buy back of shares is duly authorised by Its Articles and necessary resolution has been passed by the Company towards this. The payment for buy back of shares will be made by the Company out of sufficient bank balance available shown as part of Curreni Assets.

Comment with your calculations, whether buy back of shares by the Company is within the provisions of the Companies Act, 2013. If yes, pass necessary journal entries towards buy back of shares and prepare the Balance Sheet after buy back of shares. (May 2016) (12 Marks)
Answer:
(a) Determination of Buy back of maximum No. of shares as per the Companies Act, 2013
TEST 1. Shares Outstanding Test

Particulars	(Shares)
Number of shares outstanding (₹ 12,50,000 + ₹ 1,00,000)/₹ 10	1,35,000
25% of the shares outstanding	33,750

TEST 2. Resources Test: (Maximum permitted limit 25% of Equity paid up capital + Free Reserves)

TEST 3. Debt Equity Ratio Test: (Loans cannot be in excess of twice the Equity Funds post Buy Back)

*Note: Section 68(2)(d) of the Companies Act, 2013

The ratio of debt owed by the company should not be more than twice the capital and its free reserves after such buy-back.

Section 69(1)
On buy-back of shares out of free reserves a sum equal to the nominal value of the share bought back shall be transferred to Capital Redemption Reserve (CRR).

Section 69(2)
Utilization of CRR is restricted to fully paying up unissued shares of the Company which are to be issued as fully paid-up bonus shares only. It means CRR is not available for distribution as dividend. Hence, CRR is not a free reserve. Therefore, for calculation of future equity i.e. share capital and free reserves, amount transferred to CRR on buy-back has to be excluded from the present equity.

Working Note:
Amount transferred to CRR and maximum equity to be bought back will be calculated by simultaneous equation method.

Suppose amount transferred to CRR account is ‘x’ and maximum permitted buy-back of equity is ‘y’.
Then
(₹ 32,25,000 – x) – ₹ 24,12,500 = y ………………… (1)
(\(\frac{y}{20}\) × 10) = x
Or 2x = y …………………. (2)
by solving the above equation we get x = ₹ 2,70,833 and y = ₹ 5,41,667

Statement showing maximum number of shares to be bought back

Particulars	Number of shares
Shares Outstanding Test	33,750
Resources Test	40,312
Debt Equity Ratio Test	27,083
Maximum number of shares that can be bought back [least of the above]	27,083

Company qualifies all tests for buy-back of shares and conclusion is that it can buy maximum 27,083 shares on 1st April, 2016.

However, company wants to buy-back only 25,000 equity shares @ ₹ 20. Therefore, buy-back of 25,000 shares, as desired by the company is within the provisions of the Companies Act, 2013.
Journal Entries for buy-back of shares

Balance Sheet of Complicated Ltd. as on 1st April, 2016

Particulars	Note No.	Amount ₹
EQUITY AND LIABILITIES
1. Shareholders’ funds
(a) Share capital	1	11,00,000
(b) Reserves and Surplus	2	22,25,000
2. Non-current liabilities
(a) Long-term borrowings	3	28,75,000
3. Current liabilities
(a) Other current liabilities	4	19,50,000
Total		81,50,000
ASSETS
1. Non-current assets
(a) Fixed assets		46,50,000
2. Current assets (40,00,000 – 5,00,000)		35,00,000
Total		81,50,000

Notes to Accounts

Question 10.
SMMLtd. has the following capital structure as on 31st March, 2017: ₹ in crore

The company has offered buy back price of ₹ 30 per equity share. You are required to calculate maximum permissible number of equity shares that can be bought back in both situations and also required to pass necessary Journal Entries. (May 2017) – (8 Marks)
Answer:
Statement showing maximum number of shares to be bought back

Journal Entries for the Buy Back
(applicable only when loan fund is ₹ 3,200 crores)

Working Notes:
TEST 1. Shares Outstanding Test

Particulars	(Shares in crores)
Number of shares outstanding	120
25% of the shares outstanding	30

TEST 2. Resources Test

TEST 3. Debt Equity Ratio Test: (Loans cannot be in excess of twice the Equity Funds post Buy Back)

Mix Questions (Buy Back; Redemption 0f Preference Shares; Redemption 0f Debentures; Esop’s; Bonus)

Question 11.
The following was the balance sheet of M Ltd. as on 31 st March, 2016

On 1st April, 2016 the Company redeemed all its Preference Shares at a Premium of 10% and bought back 25% of its Equity Shares at ₹ 20 per Share. In order to make Cash available, the Company sold all the Investments for ₹ 25,200 Lakhs and raised a Bank Loan amounting to ₹ 16,000 lakh on the Security of the Company’s Plant.

Give the necessary Journal Entries considering that the buy back is authorised by the articles of company and necessary resolution is passed by the company for this. The amount of Securities premium will be utilized to the maximum extents allowed by law.
Answer:
Journal entries
(In the books of M Ltd.)

Question 12.
The following is the Summarized Balance Sheet of M/s. Vriddhi Infra Ltd. as on 31st March, 2016:

On 21st April, 2016 the Company announced the buy back of 25,000 of its equity shares @ ₹ 15 per share. For this purpose, it sold all its investment for ₹ 2.50 lakhs.

On 25th April, 2016, the company achieved the target of buy back. On 1st May, 2016 the company issued one fully paid up share of ? 10 each by way of bonus for every five equity shares held by the equity shareholders.

You are requested to pass necessary Journal Entries for the above transactions. All necessary workings should form part of your answer. (Nov. 2016) (6 Marks)
Answer:
In the books of Vriddhi Infra Ltd.
Journal Entries

* It is assumed that, there is bank overdraft amounting ₹ 85,000 [(40,000 + 2,50,000) less ₹ 3,75,000]

Question 13.
Alpha Ltd. furnishes the following summarized Balance Sheet as at 31st March, 2017:

1. On 1st April, 2017, the company announced buy-back of 25% of its equity shares @ ₹ 5 per share. For this purpose, it sold all its investment for ₹ 150 lakhs.
2. On 10th April, 2017 the company achieved the target of buy-back.
3. On 30th April, 2017, the company issued one fully paid up equity share of ₹ 10 each by way of bonus for every four equity shares held by the equity shareholders by capitalization of Capital Redemption Reserve.

You are required to pass necessary journal entries and prepare the Balance Sheet of Alpha Ltd. after bonus issue. (May 2018 – New Course) (10 Marks)
Answer:
Journal Entries
(In the books of Alpha Limited)

Note : For transferring amount equal to nominal value of buy back shares from free reserves to capital redemption reserve account, the amount of ₹ 340 lakhs from P & L A/c and the balance from general reserve may also be utilized. The combination of different set of amounts (from General Reserve and Profit and Loss Account) aggregating ₹ 600 lakhs may also be considered for the purpose of transfer to CRR.

Balance Sheet (After buy back and issue of bonus shares)

Notes to Accounts

3. Cash at bank after issue of bonus shares

Equity Shares With Differential Rights

Theory Questions

Question 14.
Explain the meaning of equity shares with differential rights. Can preference shares be also issued with differential rights?
Answer:
Equity shares with Differential Rights means the share with dissimilar rights as to dividend, voting or otherwise. No; the preference shares cannot be issued with differential rights.

Question 15.
Explain the conditions under Companies (Share Capital and Debentures) Rules, 2014, to deal with equity shares with differential rights.
Answer:
In exercise of th e power conferred under Section 43 (a)(ii), the Central Government announced Rule 4 under Companies (Share Capital and Debentures) Rules, 2014, to deal with equity shares with differential rights.
The rules lay down the following conditions to be compulsorily complied with:
(a) The articles of association of the company authorizes the issue of shares with differential rights;

(b) The issue of shares is authorized by an ordinary resolution passed at a general meeting of the shareholders:
Provided that where the equity shares of a company are listed on a recognized stock exchange, the issue of such shares shall be approved by the shareholders through postal ballot;

(c) The shares with differential rights shall not exceed twenty-six per cent of the total post-issue paid up equity share capital including equity shares with differential rights issued at any point of time;

(d) The company having consistent track record of distributable profits for the last three years;

(e) The company has not defaulted in filing financial statements and annual returns for three financial years immediately preceding the financial year in which it is decided to issue such shares;

(f) The company has no subsisting default in the payment of a declared dividend to its shareholders or repayment of its matured deposits or redemption of its preference shares or debentures that have become due for redemption or payment of interest on such deposits or debentures or payment of dividend;

(g) The company has not defaulted in payment of the dividend on preference shares or repayment of any term loan from a public financial institution or State level financial institution or scheduled Bank that has become repayable or interest payable thereon or dues with respect to statutory payments relating to its employees to any authority or default in crediting the amount in Investor Education and Protection Fund to the Central Government;

(h) The company has not been penalized by Court or Tribunal during the last three years of any offence under the Reserve Bank of India Act, 1934, the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956, the Foreign Exchange Management Act, 1999 or any other special Act, under which such companies being regulated by sectoral regulators.

Practical Question

Question 16.
E, F, G and H hold Equity Capital in Alpha Co. in the proportion of 30:30:20:20. S, T, U and V hold preference share capital in the proportion of 40:30:10:20. If the paid up capital of the company is ₹ 120 Lakh and Preference share capital is ₹ 60 Lakh. You are required to calculate their voting rights in case of resolution of winding up of the company.
Answer:
E, F, G and H hold Equity capital is held by in the proportion of 30:30:20:20 and S, T, U and V hold preference share capital in the proportion of 40:30:10:20. As the paid up equity share capital of the company is ₹ 120 Lakhs and Preference share capital is ₹ 60 Lakhs & (2:1), then relative weights in the voting right of equity shareholders and preference shareholders will be 2/3 and 1/3. The respective voting right of various shareholders will be
E = = 2/3 × 30/100 = = 3/15
F = = 2/3 × 30/100 = = 3/15
G = = 2/3 × 20/100 = = 2/15
H = = 2/3 × 20/100 = = 2/15
S = = 1/3 × 40/100 = = 2/15
T = = 1/3 × 30/100 = = 1/10
U = = 1/3 × 10/100 = = 1/30
V = = 1/3 × 20/100 = = 1/15

Students should practice these The Company Audit – CA Inter Audit MCQ based on the latest syllabus.

The Company Audit – CA Inter Audit MCQ

Question 1.
Auditor appointed at AGM shall hold the office from the conclusion of that AGM till the conclusion of
(a) Sixth AGM
(b) Next AGM
(c) Fifth AGM
(d) Tenth AGM
Answer:
(a) Sixth AGM

Question 2.
An Individual auditor of a Listed company who has completed his term shall not be eligible for re-appointment as auditor in the same company for years from the conclusion of his term
(a) 2
(b) 3
(c) 5
(d) 10
Answer:
(c) 5

Question 3.
Which of the following company shall notappoint an audit firm as auditor for more than two terms of five consecutive years:
(a) Unlisted Public company having Turnover of ₹ 10 Cr. or more
(b) Unlisted Public company having Turnover of ₹ 2 0 Cr. or more
(c) Unlisted Public company having Paid up share capital of ₹ 10 Cr. or more
(d) Unlisted Public company having Paid up share Capital of ₹ 20 Cr. or more
Answer:
(c) Unlisted Public company having Paid up share capital of ₹ 10 Cr. or more

Question 4.
Subsequent auditor in case of Government Company shall be appointed within from the commencement of the financial year
(a) 30 days
(b) 90 days
(c) 120 days
(d) 180 days
Answer:
(d) 180 days

Question 5.
First auditor shall hold office till conclusion of
(a) First AGM
(b) Sixth AGM
(c) Next AGM
(d) Second AGM
Answer:
(a) First AGM

Question 6.
Casual vacancy in the office of an auditor, shall be filled by the Board of Directors within
(a) 30 days
(b) 60 days
(c) 90 days
(d) 120 days
Answer:
(a) 30 days

Question 7.
Which of the following statement is correct?
(a) Casual Vacancy in case of resignation of auditor shall be filled by Board of Directors within 90 days
(b) Casual Vacancy in case of Government company shall be filled by Central Govt, within 90 days
(c) Casual Vacancy means a vacancy arises after com-pletion of the tenure
(d) None of the Above
Answer:
(d) None of the Above

Question 8.
Which of the following statement is correct?
(a) Where at any AGM, no auditor is appointed or re-appointed, it amounts to casual vacancy and will be filled by Board of Directors
(b) Where at any AGM, no auditor is appointed or re-appointed, it amounts to casual vacancy and will be filled by Central Government
(c) Where at any AGM, no auditor is appointed or re-appointed, it amounts to casual vacancy and will be filled by members in EGM
(d) None of the above
Answer:
(d) None of the above

Question 9.
The Auditor appointed under section 139 of Companies Act, 2013 may be removed from his office before the expiry of his term by
(a) Ordinary Resolution
(b) Special Resolution
(c) Board Resolution
(d) None of the Above
Answer:
(b) Special Resolution

Question 10.
The application for removal of auditor before expiry of his term shall be made to Central Govt, within 30 days of
(a) Ordinary Resolution
(b) Special Resolution
(c) Board Resolution
(d) None of the Above
Answer:
(c) Board Resolution

Question 11.
In case of removal of auditor before expiry of his term, the company shall hold the within 60 days of receipt of approval of the Central Government for passing the
(a) General Meeting, Ordinary Resolution
(b) Board Meeting, Special Resolution
(c) General Meeting, Special Resolution
(d) Board Meeting, Board Resolution
Answer:
(c) General Meeting, Special Resolution

Question 12.
The auditor who has resigned from the company shall file within a period of from the date of resignation, a statement in the Form
(a) 30 days, ADT-1
(b) 30 Days, ADT-3
(c) 60 days, ADT-1
(d) 60 days, ADT-3
Answer:
(b) 30 Days, ADT-3

Question 13.
To appoint as auditor, a person other than a retiring auditor, who is eligible for reappointment, ______ is required
(a) Approval of Central Government
(b) Special Notice
(c) Approval of CAG
(d) Ordinary Resolution
Answer:
(b) Special Notice

Question 14.
Which of the following is qualified to be appointed as auditor of the company?
(a) A person whose relative is holding security of the company of face value exceeding ₹ 1 Lac
(b) A person whose relative is holding security of the company of market value exceeding ₹ 1 Lac
(c) A person whose relative is holding security of the company of face value not exceeding ₹ 1 Lac
(d) A person whose relative is holding security of the company of market value not exceeding ₹ 1 Lac
Answer:
(c) A person whose relative is holding security of the company of face value not exceeding ₹ 1 Lac

Question 15.
A person is disqualified to be appointed as auditor of the company if he himself or his relative or partner is indebted to the company for an amount exceeding ?
(a) One Lac
(b) Two Lacs
(c) Five Lacs
(d) Ten Lacs
Answer:
(c) Five Lacs

Question 16.
A person is disqualified to be appointed as auditor of the company if he himself or his relative or partner has given any guarantee in connection with the indebtedness of any third person to the company for an amount exceeding ?
(a) One Lac
(b) Two Lacs
(c) Five Lacs
(d) Ten Lacs
Answer:
(a) One Lac

Question 17.
A person is disqualified to be appointed as auditor of a company if he has been convicted by a court of an offence involving fraud and a period of ______ years has not elapsed from the date of such conviction
(a) 2 Years
(b) 5 Years
(c) 7 Years
(d) 10 Years
Answer:
(d) 10 Years

Question 18.
A person is disqualified to be appointed as auditor of a company if such person as at date of such appointment holding appointment of more than ______ companies
(a) 10
(b) 15
(c) 20
(d) 30
Answer:
(c) 20

Question 19.
The remuneration of first auditor appointed by members of the company shall be fixed by
(a) Company
(b) Board of Directors
(c) Central Government
(d) CAG
Answer:
(a) Company

Question 20.
Which of the following is correct?
(a) Remuneration of auditor shall in addition to the fees payable include expenses, if any incurred by the auditor in connection with the audit of the company
(b) Remuneration does not include any remuneration paid to auditor for any other service rendered by him at the request of the company
(c) Both of the Above
(d) None of the Above
Answer:
(c) Both of the Above

Question 21.
In addition to listed companies, which of the following companies are required to constitute audit committee:
(a) Public Companies with a paid-up capital of ₹ 10 Cr. or more
(b) Private Companies with a paid-up capital of ₹ 20 Cr. or more
(c) Both of the Above
(d) None of the Above
Answer:
(a) Public Companies with a paid-up capital of ₹ 10 Cr. or more

Question 22.
In which of the following cases, appointment of auditor shall be made after taking into account the recommendations of audit committee:
(a) Appointment of Subsequent Auditor
(b) Filling of Casual vacancies
(c) Re-Appointment of Retiring Auditor
(d) All of the above
Answer:
(d) All of the above

Question 23.
Every auditor of a company shall have a right of access at all times to of the company whether kept at the registered office of the company or at any other place
(a) Books and Account
(b) Books and Papers
(c) Books of Account and Vouchers
(d) Statutory registers
Answer:
(c) Books of Account and Vouchers

Question 24.
Auditor is required to inquire which of the following matters under Section 143(1):
(a) Sale of Shares and debentures at a price less than purchase amount by a banking company
(b) Sale of Shares and debentures at a price less than purchase amount by an investment company
(c) Sale of Fixed Assets and Inventory at a price less than purchase amount by a non-banking company
(d) Sale of Shares and debentures at a price less than purchase amount by a non-banking company
Answer:
(d) Sale of Shares and debentures at a price less than purchase amount by a non-banking company

Question 25.
Auditor is required to inquire which of the following matters under Section 143(1):
(a) Charging of personal expenses to revenue account
(b) Charging of capital expenses to revenue account
(c) Charging of Provisions to revenue account
(d) Charging of Depreciation to revenue account
Answer:
(a) Charging of personal expenses to revenue account

Question 26.
Which of the following statements is correct?
(a) Reporting on propriety matters u/s 143(1) is required if the auditor finds answer to any of the matters in positive
(b) Reporting on propriety matters u/s 143(1) is required if the auditor finds answer to any of the matters in negative
(c) Reporting on propriety matters u/s 143(1) is required in every case irrespective of auditor’s observations
(d) Reporting on propriety matters u/s 143(1) is not the duty of auditor, it is the duty of management
Answer:
(b) Reporting on propriety matters u/s 143(1) is required if the auditor finds answer to any of the matters in negative

Question 27.
Under Section 143(2) auditor is required to make a report to the members of the company on the following:
(a) Accounts Examined by him
(b) Financial statement laid before the company in general Meeting
(c) Both of the above
(d) None of the Above
Answer:
(c) Both of the above

Question 28.
Under Section 143(3), auditor is required to report on following
1. Whether loans and advances made by the company have been shown as deposits
2. Whether transactions represented by book entries are prejudicial
3. Whether any director is disqualified from being appointed as director u/s 164(2)
4. Whether financial statements comply with the accounting Standards Correct answer is:
(a) 1 & 2
(b) 3 & 4
(c) 1 & 3
(d) 1,2, 3 & 4
Answer:
(d) 1,2, 3 & 4

Question 29.
CAG shall within from the date of receipt of the audit report have a right to conduct a supplementary audit
(a) 30 days
(b) 45 days
(c) 60 days
(d) 90 days
Answer:
(c) 60 days

Question 30.
As per Sec. 143(9) of Companies Act, 2013, every auditor shall comply with
(a) Accounting Standards
(b) Auditing Standards
(c) Engagement Standards
(d) Accounting and Auditing Standards
Answer:
(b) Auditing Standards

Question 31.
Under Section 143(12) of Companies Act, 2013, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence involving fraud is being or has been committed against the ______ he shall immediately report the matter to the
(a) company by officers or employees of the company; Registrar of Companies
(b) officers or employees of the company by directors; Central Government
(c) company by officers or employees of the company; Central Government
(d) officers or employees of the company by directors; Registrar of Companies
Answer:
(c) company by officers or employees of the company; Central Government

Question 32.
If the auditor does not report u/s 143(2) with respect to fraud, he shall be punishable with fine ranging from:
(a) ₹ 1 Lac to ₹ 10 Lacs
(b) ₹ 1 Lac to ₹ 25 Lacs
(c) ₹ 5 Lacs to ₹ 10 Lacs
(d) ₹ 5 Lacs to ₹ 25 Lacs
Answer:
(b) ₹ 1 Lac to ₹ 25 Lacs

Question 33.
Report u/s 143(12) with respect to fraud shall be sent to
(a) Registrar of Companies
(b) National Company Law Tribunal
(c) Secretary, Ministry of Home affairs
(d) None of the above
Answer:
(d) None of the above

Question 34.
The Audit Committee or the Board of Directors, are required to give their reply over the report of auditor in relation to fraud noticed by the auditor, within
(a) 15 days
(b) 30 days
(c) 45 days
(d) 60 days
Answer:
(c) 45 days

Question 35.
Report u/s 143(12) shall be in the form of a statement as specified in
(a) ADT-1
(b) ADT-2
(c) ADT-3
(d) ADT-4
Answer:
(d) ADT-4

Question 36.
An auditor appointed under Companies Act, 2013, shall provide only such other services as are approved by
(a) Board of Directors
(b) Central Government
(c) Board of Directors or the Audit Committee
(d) Registrar of Companies
Answer:
(c) Board of Directors or the Audit Committee

Question 37.
Auditor appointed under Companies Act, 2013 cannot render which of the following services:
(a) Actuarial Services
(b) Tax Audit
(c) Review of Interim Financial Statements
(d) Examination of Prospective Financial Statements
Answer:
(a) Actuarial Services

Question 38.
Which of the following statement is correct?
(a) Communication relating to General meeting need not be forwarded to the auditor of the company
(b) Auditor has discretion to attend the general meeting
(c) Auditor shall have a right to be heard at general meeting
(d) None of the above
Answer:
(c) Auditor shall have a right to be heard at general meeting

Question 39.
The auditor shall attend ______ any general meeting
(a) himself
(b) through his authorised representative
(c) either by himself or through his authorised representative
(d) at his discretion
Answer:
(c) either by himself or through his authorised representative

Question 40.
Right of Lien refers to
(a) Right for lawful possession of somebody’s else property
(b) Right of access to records of the company
(c) Right to obtain necessary information and explanation
(d) Right of access to records of subsidiary companies
Answer:
(a) Right for lawful possession of somebody’s else property

Question 41.
RightofIiencanbeexercisedfor
(a) Non-payment of statutory dues
(b) Non-payment of fees by the client
(c) Both of the above
(d) None of the above
Answer:
(b) Non-payment of fees by the client

Question 42.
CA. X is a partner in M/s AB & Associates and M/s MN & Associates simultaneously. M/s AB & Associates has completed its tenure of 10 years as an auditor in XYZ Ltd. immediately preceding the current financial year, it may be noted that the provisions for applicability of rotation of auditors are applicable to XYZ Ltd. Now, the company wants to appoint M/s MN & Associates as auditor for 5 years.
(a) M/S MN & Associates cannot be appointed as auditor being not eligible u/s 141(3) of Companies Act, 2013
(b) M/S MN & Associates cannot be appointed as auditor being not eligible as per Rule 6 of Companies (Audit & Auditor’s) Rules, 2014
(c) M/S MN & Associates cannot be appointed as auditor being not eligible as per proviso to Sec. 139(2) of Companies Act, 2013
(d) M/S MN & Associates cannot be appointed as auditor being not eligible u/s 141(1) of Companies Act, 2013
Answer:
(c) M/S MN & Associates cannot be appointed as auditor being not eligible as per proviso to Sec. 139(2) of Companies Act, 2013

Question 43.
ABC Pvt. Ltd., a new company, incorporated on 01.07.2018 is engaged in the manufacturing business. On 30.07.2018, the Managing Director of ABC Pvt. Ltd. himself appointed CA Mohan, as the first auditor of the company.
(a) Appointment of Mr. Mohan is invalid as first auditor of a company can be appointed by members of the company as per Sec. 139(6) ofCompanies Act, 2013
(b) Appointment of Mr. Mohan is invalid as first auditor of a company canbe appointed by Board of Directors as per Sec. 139(6) of Companies Act, 2013
(c) Appointment of Mr. Mohan is invalid as first auditor of a company can be appointed by members of the company asperSec. 139(1) of Companies Act, 2013
(d) Appointment of Mr. Mohan is invalid as first auditor of a company can be appointed by Board of Directors as per Sec. 139(1) ofCompanies Act, 2013
Answer:
(b) Appointment of Mr. Mohan is invalid as first auditor of a company canbe appointed by Board of Directors as per Sec. 139(6) of Companies Act, 2013

Question 44.
KM Pvt. Ltd., engaged in the manufacturing business of Silk Shirts, is a newly incorporated company dated 01.09.2018. On 28.09.2018, the members of KM Pvt. Ltd. themselves appointed CA Raj, a renowned practitioner, as the first auditor of the company opposing that Board is not authorised to appoint the auditor.
(a) Appointment of CA. Raj is valid as first auditor of a company can be appointed by members of the company as per Sec. 139(6) ofCompanies Act, 2013
(b) Appointment of CA. Raj is invalid as first auditor of a company within 30 days of incorporation of company can be appointed by CAG as per Sec. 139(6) of Companies Act, 201.3
(c) Appointment of CA. Raj is valid as first auditor of a company can be appointed by members of the company as per Sec. 139(1) of Companies Act, 2013
(d) Appointment of CA. Raj is invalid as first auditor of a company within 30 days of incorporation of company can be appointed by Board of Directors as per Sec.-139(6) of Companies Act, 2013
Answer:
(d) Appointment of CA. Raj is invalid as first auditor of a company within 30 days of incorporation of company can be appointed by Board of Directors as per Sec.-139(6) of Companies Act, 2013

Question 45.
KM Ltd., a Government company is incorporated on 01.09.2018.0n 28.09.2018, the Board of Directors themselves appointed CA Raj, a renowned practitioner, as the first auditor of the company.
(a) Appointment of CA. Raj is invalid as first auditor of a government company within 30 days of incorporation of company can be appointed by Central Government as per Sec. 139(7) of Companies Act, 2013.
(b) Appointment of CA. Raj is invalid as first auditor of a government company within 60 days of incorporation of company can be appointed by Central Government as per Sec. 139(7) ofCompanies Act, 2013.
(c) Appointment of CA. Raj is invalid as first auditor of a government company within 3 0 days of incorporation of company can be appointed by CAG as per Sec. 139(7) ofCompanies Act, 2013.
(d) Appointment of CA. Raj is invalid as first auditor of a government company within 60 days of incorporation of company can be appointed by CAG as per Sec. 139(7) of Companies Act, 2013.
Answer:
(d) Appointment of CA. Raj is invalid as first auditor of a government company within 60 days of incorporation of company can be appointed by CAG as per Sec. 139(7) of Companies Act, 2013.

Question 46.
PQR Company Ltd. removed their first auditor by passing a resolution in the meeting of the Board of Directors for his removal without obtaining prior approval from the Central Government.
(a) Removal is valid as approval of Central Government is not required in case of first auditor.
(b) Removal is not valid as approval of Central Government is not obtained.
(c) Removal is not valid as first auditor of a company cannot be removed.
(d) Removal is not valid as first auditor can be removed by Audit Committee.
Answer:
(b) Removal is not valid as approval of Central Government is not obtained.

Question 47.
“Mr. A”, a practicing Chartered Accountant, is holding securities of “XYZ Ltd.” having face value of ₹ 90000. XYZ Ltd. wants to appoint Mr. B, partner of Mr. Aas itsauditor. Mr. B does not hold any securities in the company.
(a) Mr. B is not eligible for appointment as an Auditor of “XYZ Ltd” as his partner holds securities of the company.
(b) Mr. B is eligible for appointment as an Auditor of “XYZ Ltd” as the value of securities hold by his partner is less than ₹ 1 Lac.
(c) Mr. B is eligible for appointment as an Auditor of “XYZ Ltd” as he do not hold any securities of the company.
(d) Mr. B not eligible for appointment as an Auditor of “XYZ Ltd.” as his partner holds securities of the company exceeding ₹ 1,000.
Answer:
(a) Mr. B is not eligible for appointment as an Auditor of “XYZ Ltd” as his partner holds securities of the company.

Question 48.
Mr. B, a partner of Mr. A held shares of face value of ₹ 1,05,000 in DEF Ltd., the holding company of ABC Ltd. Mr. B has sold the securities after a period of 45 days from the date of appointment of Mr. A as an auditor of ABC Ltd.
(a) Appointment of Mr. Ain ABC Ltd. as auditor is valid as his partner Mr. B sold the securities within 60 days of appointment of Mr. A.
(b) Appointment of Mr. A in ABC Ltd. as auditor is valid as shareholding of Mr. B in the holding company of ABC Ltd. is of no relevance.
(c) Appointment of Mr. A in ABC Ltd. as auditor is invalid as his partner Mr. B hold shares in the holding company of ABC Ltd. at the time of appointment.
(d) Appointment of Mr. A in ABC Ltd. as auditor is invalid as his partner Mr. B hold shares in the holding company of ABC Ltd. in excess of ₹ 1 Lac.
Answer:
(c) Appointment of Mr. A in ABC Ltd. as auditor is invalid as his partner Mr. B hold shares in the holding company of ABC Ltd. at the time of appointment.

Question 49.
Mrs. A, wife of Mr. A had given a financial guarantee for the principal amount of a debt owed by Mr. X to ABC Ltd. for ₹ 6 lakhs. Mr. X has repaid ₹ 5 lakhs to ABC Ltd. 2 days before the date of appointment of Mr. A as an auditor of the company.
(a) Appointment of Mr. A in ABC Ltd. is not valid as his wife has given guarantee to ABC Ltd. for an amount in excess of ₹ 1 Lac.
(b) Appointment of Mr. A in ABC Ltd. is not valid as his wife has given guarantee to ABC Ltd. for an amount in excess of ₹ 5 Lac.
(c) Appointment of Mr. A in ABC Ltd. is valid as the outstanding amount of guarantee given by his wife at the time of appointment does not exceed ₹ 1 Lac.
(d) Appointment of Mr. A in ABC Ltd. is valid as guarantee given by the relative of the auditor is of no relevance.
Answer:
(c) Appointment of Mr. A in ABC Ltd. is valid as the outstanding amount of guarantee given by his wife at the time of appointment does not exceed ₹ 1 Lac.

Question 50.
As per Sec. 141 (3) (g) of the Companies Act, 2013, a person shall not be eligible for appointment as an auditor if he is in full time employment elsewhere or a person or a partner of a firm holding appointment as its auditor, if such persons or partner is at the date of such appointment or reappointment holding appointment as auditor of more than twenty (20) Companies, other than one-person company, dormant companies, small companies and private companies having paid up capital
(a) ₹ 100 Crores, which has not committed default in filing its financial statements under section 137 or annual return under section 92 of the Companies Act with the Registrar.
(b) less than ₹ 100 Crores, which has not committed default in filing its financial statements under section 137 or annual return under section 92 of the Companies Act with the Registrar.
(c) less than ₹ 100 Crores, which has not committed default in filing its financial statements under section 92 or annual return under section 137 of the Companies Act with the Registrar.
(d) ₹ 100 Crores, which has not committed default in filing its financial statements under section 92 or annual return under section 13 7 of the Companies Act with the Registrar.
Answer:
(b) less than ₹ 100 Crores, which has not committed default in filing its financial statements under section 137 or annual return under section 92 of the Companies Act with the Registrar.

Question 51.
Which of the following is true?
(a) Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue be the auditor of the company.
(b) If the auditor appointed at the AGM refuses to accept the same, the Company can appoint another person by holding General Meeting.
(c) If appointment of a person as an auditor is void-ab-initio, it should be treated as a casual vacancy.
(d) An auditor can be appointed as first auditor of a newly formed company simply because his name has been stated in the Articles of Association.
Answer:
(a) Where at any AGM, no auditor is appointed or re-appointed, the existing auditor shall continue be the auditor of the company

Question 52.
As per proviso to Sec. 140(5) of Companies Act, 2013, if the application is made by the Central Government and the Tribunal is satisfied that any change of the auditor is required, it shall within ______ of receipt of such application, make an order that he shall not function as an auditor and the ______ may appoint another auditor in his place.
(a) 15 days, Tribunal
(b) 15 days, Central Government
(c) 30 days, Tribunal
(d) 30 days, Central Government
Answer:
(b) 15 days, Central Government

Question 53.
As per proviso to Sec. 140(5) of Companies Act, 2013, an auditor, whether individual or firm, against whom final order has been passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of ______ for a period
of from the date of passing of the order.
(a) any company, 5 years
(b) same company, 5 years
(c) any company, 10 years
(d) same company, 10 years
Answer:
(a) any company, 5 years

Question 54.
Sec. 143(3)(i) of Companies Act, 2013 requires the auditor to report, whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls. This reporting is not required in case of private companies:
(a) which is a one person company or a small company
(b) which has turnover less than ₹ 50 crores as perlatest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr.
(c) which has turnover less than ₹ 25 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 50 Cr.
(d) which has turnover less than ₹ 100 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 50 Cr.
Answer:
(a) which is a one person company or a small company

Question 55.
Sec. 143(3)(i) of Companies Act, 2013 requires the auditor to report, whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls. This reporting is not required in case of private companies:
(a) which has turnover less than ₹ 50 crores as per latest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr.
(.b) which has turnover less than ₹ 25 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 50 Cr.
(c) which has turnover less than ₹ 100 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 50 Cr,
(d) which has turnover less than ₹ 50 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr.
Answer:
(d) which has turnover less than ₹ 50 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr.

Question 56.
As per Sec. 143(6) of Companies Act, 2013, the Comptroller and Auditor General of India shall within ______ days from the date of receipt of the audit report have a right to, conduct a ______ of the ______ of the company by such person or persons as he may authorise in this behalf.
(a) 60 days, Supplementary Audit, books of account
(b) 60 days, Supplementary Audit, financial statements
(c) 60 days, Test Audit, books of accounts
(d) 90 days, Test Audit, financial statements
Answer:
(b) 60 days, Supplementary Audit, financial statements

Question 57.
As per Sec. 143(8) of Companies Act, 2013, where the branch office of a company is situated in a country outside India, the accounts of the branch office shall be audited
(a) only by the company’s auditor
(b) only by a person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country
(c) either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country
(d) either by the company’s auditor or by a cost accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country
Answer:
(c) either by the company’s auditor or by an accountant or by any other person duly qualified to act as an auditor of the accounts of the branch office in accordance with the laws of that country

Question 58.
As per Sec. 143(12) of Companies Act, 2013, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matter to the Central Government within such time and in such manner as may be prescribed. The amount prescribed for purpose is
(a) Individually ₹ 1 Cr. or above
(b) Individually above ₹ 1 Cr.
(c) ₹ 1 Cr. or above in aggregate
(d) above ₹ 1 Cr. in aggregate
Answer:
(a) Individually ₹ 1 Cr. or above

Question 59.
Reporting of fraud to Central Government required under Section 143(12) of Companies Act, 2013 read with Rule 13 ofCompanies (Audit & Audi-tor’s) Rules, 2014 shall be in the form of a statement as specified in and sent to
(a) Form ADT-3; Secretary, Institute of Chartered Accountants of India
(b) FormADT-4; Secretary, Ministry of Corporate Affairs
(c) Form ADT-4; Secretary, Ministry of Law and Justice
(d) Form ADT-3; Secretary, Indian Institute of Corporate Affairs
Answer:
(b) FormADT-4; Secretary, Ministry of Corporate Affairs

Question 60.
As per Sec. 143(15) of Companies Act, 2013, if any auditor, cost accountant or company secretary in practice do not comply with the provisions of Sec. 143 (12), he shall be punishable with fine which shall not be less than ______ but which may extend to ______
(a) ₹ 1 lac; ₹ 25 Lacs
(b) ₹ 5 lac; ₹ 25 Lacs
(c) ₹ 1 lac; ₹ 5 Lacs
(d) ₹ 1 lac; ₹ 10 Lacs
Answer:
(a) ₹ 1 lac; ₹ 25 Lacs

Question 61.
As per Section 144 of the Companies Act, 2013, auditor appointed under this Act cannot render certain services to the company. Which of the following service is not covered in the services prescribed u/s 144?
(a) Investment Banking Services
(b) Investment Advisory Services
(c) Design and implementation of any Operational information system
(d) rendering of outsourced financial services
Answer:
(c) Design and implementation of any Operational information system

Question 62.
As per Section 144 of the Companies Act, 2013, auditor appointed under this Act cannot render certain services to the company, whether such services are rendered directly or indirectly. For the purposes of this section, the term “directly or indirectly” shall include rendering of services by the auditor, in case of auditor being an individual, either himself or through
(a) his partner or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual
(b) his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual
(c) his relative or any other person connected or associated with such individual or through any other entity whatsoever, in which such individual may or may not have significant influence or control, or whose name or trade mark or brand is used by such individual
(d) his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand may or may not use by such individual
Answer:
(b) his relative or any other person connected or associated with such individual or through any other entity, whatsoever, in which such individual has significant influence or control, or whose name or trade mark or brand is used by such individual

Question 63.
AsperSection 144 of the Companies Act, 2013, auditor appointed under this Act cannot render certain services to the company or its
(a) holding company or subsidiary company
(b) holding company, subsidiary company or associate company
(c) holding company, subsidiary company, associate company or another subsidiary of holding company
(d) holding company, subsidiary company, associate company, another subsidiary of holding company or subsidiary of associate company
Answer:
(a) holding company or subsidiary company

Question 64.
As per Sec. 147 of the Companies Act, 2013, if any of the provisions of sections 139 to 146 (both inclusive) is contravened, the company shall be punishable with fine which shall not be less than ______ but which may extend to ______
(a) ₹ 25,000; ₹ 5 Lacs
(b) ₹ 10,000; ₹ 1 Lac
(c) ₹ 50,000; ₹ 25 Lacs
(d) ₹25,000; ₹ 1 Lac
Answer:
(a) ₹ 25,000; ₹ 5 Lacs

Question 65.
As per Sec. 147 of the Companies Act, 2013, if any of the provisions of sections 139 to 146 (both inclusive) is contravened, every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to ______ or with fine which shall not be less than ______ but which may extend to ______ or with both
(a) 1 year; ₹ 25,000; ₹ 5 Lacs
(b) 1 year; ₹ 10,000; ₹ 1 Lac
(c) 3 years; ₹ 25,000; ₹ 5 Lacs
(d) 3 years; ₹ 10,000; ₹ 1 Lac
Answer:
(b) 1 year; ₹ 10,000; ₹ 1 Lac

Question 66.
As per Sec. 147 of the Companies Act, 2013, if an auditor of a company contravenes any of the provisions of Sec. 139, Sec. 143, Sec. 144 or Sec. 145, the auditor shall be punishable with fine which shall not be less than but which may extend to
(a) ₹ 25,000; ₹ 5 Lacs or five times the remuneration of auditor whichever is less
(b) ₹ 25,000; ₹ 5 Lacs or five times the remuneration of auditor whichever is more
(c) ₹ 25,000; ₹ 5 Lacs or four times the remuneration of auditor whichever is less
(d) ₹ 25,000; ₹ 5 Lacs or four times the remuneration of auditor whichever is more
Answer:
(c) ₹ 25,000; ₹ 5 Lacs or four times the remuneration of auditor whichever is less

Question 67.
For the purposes of Section 148(1) of the Companies Act, 2013, the specified class of companies, including foreign companies, engaged in the production of the goods or providing services, having an overall turnover from all its products and services of ______ , shall include cost records for such products or services in their books of account
(a) ₹ 35 Cr. or more during the immediately preceding financial year
(b) ₹ 35 Cr. or more during the financial year
(c) More than ₹ 3 5 Cr. during the immediately preceding financial year
(d) More than ₹ 35 Cr. during the financial year
Answer:
(a) ₹ 35 Cr. or more during the immediately preceding financial year

Question 68.
Sec. 143 (1) of Companies Act, 2013 requires the auditor to inquire into certain matters of propriety matters. Which ofthe following matter is not covered in Sec. 143(1)?
(a) Whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests of the company or its members.
(b) Whether loans and advances made by the company have been shown as deposits.
(c) Whether the company has granted any loans, secured or unsecured to companies, firms, LLPs or other parties covered in the register maintained under section 189 of the Act. If so, whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular.
(d) Where it is stated in the books and documents of the company that any shares have been allotted for cash, whether cash has actually been received in respect of such allotment.
Answer:
(c) Whether the company has granted any loans, secured or unsecured to companies, firms, LLPs or other parties covered in the register maintained under section 189 of the Act. If so, whether the schedule of repayment of principal and payment of interest has been stipulated and whether the repayments or receipts are regular.

Question 69.
As per Sec. 143(3) of Companies Act, 2013, the auditor report shall also state certain matters. Which of the following is not covered in reporting u/s 143(3)?
(a) whether any director is disqualified from being appointed as a director under sub-section (2) of section 164.
(b) whether maintenance of cost records has been specified by the Central Government u/s 148(1) of the Companies Act, 2013 and whether such accounts and records have been so made and maintained.
(c) whether the company’s balance sheet and profit and loss account dealt with in the report are in agreement with the books of account and returns.
(d) whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls.
Answer:
(b) whether maintenance of cost records has been specified by the Central Government u/s 148(1) of the Companies Act, 2013 and whether such accounts and records have been so made and maintained.

Question 70.
As per Rule 11 of Companies (Audit & Auditor’s) Rules, 2014, the auditor’s report shall also include auditor’s views and comments on certain matters. Which of the following is covered in Rule 11?
(a) Whether moneys raised by way of initial public offer or further public offer (including debt instruments) and term loans were applied for the purposes for which those are raised
(b) Whether any fraud by the company or any fraud on the Company by its officers/employees has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated
(c) Whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether provisions of Section 192 of Companies Act, 2013 have been complied with
(d) Whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company
Answer:
(d) Whether there has been any delay in transferring amounts, required to be transferred, to the Investor Education and Protection Fund by the company

Question 71.
ABC & Co. is a firm of Chartered Accountants has three partners, A, B & C. The firm is holding audit of 55 companies which include 10 small companies, 5 government public companies, 5 listed companies, 5 OPC, 15 public companies and 15 private companies having paid up capital more than ₹ 100 crores. Firm has been offered the appointment as auditors of 30 companies. Of the 30 companies, 5 are private companies having paid up capital of each company is below ₹ 100 crores and the remaining 25 companies are public companies.
(a) Firm can accept audit of all 30 companies.
(b) Firm can accept audit of 25 companies including 5 private companies.
(c) Firm can accept audit of 20 companies including 5 private companies.
(d) Firm can accept audit of 15 companies including 5 private companies.
Answer:
(b) Firm can accept audit of 25 companies including 5 private companies.

Question 72.
As per Sec. 143(3)(i) of Companies Act, 2013, auditor’s report shall also state “the observations or comments of the auditors on financial transactions or matters which have any adverse effect on the functioning of the company”. The word “observations or comments” as used in the clause (i) refers to:
(a) EOM Paragraphs and the situations leading to modification in the auditor’s report.
(b) Key Audit matters communicated in the audit report.
(c) Matters covered under Sec. 143(1) relating to propriety aspects.
(d) Material uncertainty as to going concern which requires a separate section in the audit report titled “Material uncertainty relating to Going concern”.
Answer:
(a) EOM Paragraphs and the situations leading to modification in the auditor’s report.

Question 73.
If the auditor has contravenes provisions of Sec. 139,143,144 or 145, knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, the auditor shall be punishable with imprisonment which may extend to and with fine ranging from
(a) one years; ₹ 25,000 – ₹ 5,00,000
(b) five years; ₹ 1,00,000 to lower of ₹ 25,00,000 or 8 times of remuneration
(c) one years; ₹ 50,000 to lower of ₹ 25,00,000 or 8 times of remuneration
(d) five years; ₹ 50,000 – ₹ 25,00,000
Answer:
(a) five years; ₹ 1,00,000 to lower of ₹ 25,00,000 or 8 times of remuneration

Question 74.
The auditor who has resigned from the company shall file within a period of 30 days from the date of resignation, a statement in the Form ADT-3 with the company and the Registrar. If the auditor does not comply with requirement of Sec. 140(2), he or it shall be punishable with fine of
(a) ₹ 50,000 or the remuneration ofthe auditor, whichever is less, but it may extend to ₹ 5 Lacs
(b) ₹ 50,000 or the remuneration ofthe auditor, whichever is higher, but it may extend to ₹ 5 Lacs
(c) ₹ 50,000 or two times of the remuneration of the auditor, whichever is less, but it may extend to ₹ 5 Lacs
(d) ₹ 50,000 or two times of the remuneration of the auditor, whichever is higher, but it may extend to ₹ 5 Lacs
Answer:
(a) ₹ 50,000 or the remuneration ofthe auditor, whichever is less, but it may extend to ₹ 5 Lacs

Question 75.
As per Sec. 143(12) of Companies Act, 2013, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such amount or amounts as may be prescribed, is being or has been committed in the company by its officers or employees, the auditor shall report the matterto the Central Government within such time and in such manner as may be prescribed. The amount so prescribed is
(a) ₹ 1 Cr. or above, individually as per Rule 13 of Companies (Audit and Auditor’s) Rules, 2014
(b) ₹ 1 Cr. or above, in aggregate as per Rule 13 of Companies (Audit and Auditor’s) Rules, 2014
(c) ₹ 1 Cr. or above, individually as per Rule 13 of Companies (Accounts) Rules, 2014
(d) ₹ 1 Cr. or above, in aggregate as per Rule 13 of Companies (Accounts) Rules, 2014
Answer:
(a) ₹ 1 Cr. or above, individually as per Rule 13 of Companies (Audit and Auditor’s) Rules, 2014

Question 76.
As per Sec. 146 of Companies Act, 2013, ______ mentioned in the auditor’s report shall be read before the company in general meeting and shall be open to inspection by any member of the company
(a) the qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company
(b) any qualification, reservation or adverse remark relating to the maintenance of accounts and other matters connected therewith
(c) any operating effectiveness of internal financial controls with reference to financial statements
(d) director’s disqualifications u/s 164(2) ofCompanies Act, 2013
Answer:
(a) the qualifications, observations or comments on financial transactions or matters, which have any adverse effect on the functioning of the company

Question 77.
The turnover criteria for applicability of Companies (Cost Records and Audit) Rules, 2014 is
(a) at the end of immediately preceding financial year
(b) at the end of the financial year
(c) average of 3 preceding financial year
(d) when the company achieves the turnover during the current financial year
Answer:
(a) at the end of immediately preceding financial year

Question 78.
A cost auditor submits his report to
(a) Government
(b) Shareholders
(c) Statutory Auditor
(d) Board of Directors
Answer:
(d) Board of Directors

Question 79.
CA Mr. X was indebted to ABC Ltd. for a sum of ₹ 5,.10,000 as on 01.04.2018. However, Mr. X having come to knowr that he might be appointed as auditor of the company, he squared up the amount on 10.7.2018. Later on, he was appointed as an auditor of the company for the year ended 31.3.2019 at the Annual General Meeting held on 16.07.2018. Subsequently, one of the shareholders complains that the appointment of Mr. X as an auditor is invalid because he incurred disqualification under section 141 of the Companies Act, 2013
(a) Appointment of Mr. X is not valid as he is disqualified u/s 141(3) as at the beginning of the year for which he was appointed as auditor
(b) Appointment ofMr.X is not valid as he is disqualified u/s 143(3) of Companies Act, 2013
(c) Appointment of Mr. X is valid as he settles his in-debtedness before the appointment
(d) Appointment of Mr. X will be treated as valid only when special resolution was passed in this regard
Answer:
(c) Appointment of Mr. X is valid as he settles his in-debtedness before the appointment

Question 80.
Clause (i) of Sec. 143(3) shall not apply to a private company:
(a) which has turnover less than ₹ 50 crores as per latest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr
(b) which has turnover less than ₹ 25 crores as per latest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 50 Cr
(c) which has turnover less than ₹ 50 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial 1 institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr
(d) which has turnover less than ₹ 25 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than ₹ 50 Cr
Answer:
(c) which has turnover less than ₹ 50 crores as per latest audited financial statement and which has aggregate borrowings from banks or financial 1 institutions or any body corporate at any point of time during the financial year less than ₹ 25 Cr

Question 81.
In which of the following companies, auditor is not required to report on matters specified under CARO, 2020:
(a) private limited company, which is a subsidiary company of a public company having a paid-up capital and reserves and surplus not more than rupees one crore as on the balance sheet date
(b) private limited company, which is a holding company of a public company, which does not have total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year
(c) Both (a) and (b)
(d) None of the above
Answer:
(d) None of the above

Question 82.
In which of the following companies, auditor is required to report on matters specified under CARO, 2020:
(a) Foreign company
(b) Small Company
(c) One Person company
(d) None of the above
Answer:
(a) Foreign company

Question 83.
A private limited company, in order to be covered under CARO, 2020, must satisfy which of the following conditions:
(a) total borrowings exceeding rupees ten crores from any bank or financial institution at any point of time during the financial year.
(b) total borrowings exceeding rupees one crore from any bank or financial institution as on the balance sheet date.
(c) total borrowings exceeding rupees ten crores from any bank or financial institution as on balance sheet date.
(d) total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year.
Answer:
(d) total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year.

Question 84.
Astha Pvt. Ltd. which is a subsidiary company of Kiran Pvt. Ltd., has fully paid capital of ₹ 40 lakh. During the year, the company had borrowed ₹ 55 lakh each from a bank and a financial institution independently. It has the turnover of ₹ 175 lakhs.
(a) CARO is not applicable as Astha Pvt. Ltd. is a Small Company.
(b) CARO is applicable as total borrowings exceeds ₹ 1 Cr.
(c) CARO is not applicable as Astha Pvt. Ltd. is a sub-sidiary company of another Pvt. Ltd
(d) CARO is applicable as turnover exceeds ₹ 1 Cr.
Answer:
(b) CARO is applicable as total borrowings exceeds ₹ 1 Cr.

Question 85.
CARO, 2020 is applicable over a private limited company, having paid up capital and reserves and surplus is ₹ 1 crore or more as on the balance sheet date. For this purpose,
(a) Paid-up share capital would include equity share capital only
(b) Amount of calls unpaid should be added to the figure of paid-up capital
(c) Amount originally paid-up on forfeited shares should be added to the figure of paid-up capital
(d) Share application money received should be considered as part of the paid-up capital
Answer:
(c) Amount originally paid-up on forfeited shares should be added to the figure of paid-up capital

Question 86.
Para 3 (vi) of CARO, 2020 requires the auditor to report whether maintenance of cost records has been specified by the C.G. u/s 148(1) of the Companies Act, 2013 and whether such accounts and records have been so madeand maintained. For thispurpose, auditor should:
(a) a detailed examination of such records
(b) conduct a general review of the cost records
(c) rely only on written representation received from the management stating that cost records are being made and maintained
(d) any of the above
Answer:
(b) conduct a general review of the cost records

Question 87.
Para 3(xi) of CARO, 2020 requires the auditor to report on various fraud noticed or reported during the year. Which of the following frauds are covered in Para 3(xi)
(a) fraud on the company by its officers/employees (h) fraud on the company by its vendors/suppliers
(c) fraud on the company by its associate companies
(d) All of the above
Answer:
(d) All of the above

Question 88.
When reporting under CARO, 2020, auditor is required to state in case of Nidhi Companies, whether the Nidhi company has complied with:
(a) Net Owned funds to total debts in the ratio of 1:20
(b) Net Owned funds to deposits in the ratio of 1:20
(c) Net Owned funds to total debts in the ratio of 1:10
(d) Net Owned funds to deposits in the ratio of 1:10
Answer:
(b) Net Owned funds to deposits in the ratio of 1:20

Question 89.
Auditor’s report under CARO, 2020 in terms of Para 3(xvi) shall incorporate:
(a) Registration number of company under Companies Act, 2013
(b) Registration number of company allotted by RBI
(c) Both of the above
(d) None of the above
Answer:
(d) None of the above

Question 90.
As per Clause (0(a) of Paragraph 3 of the CARO, 2020, the auditor is required to report on:
(a) whether the title deeds of immovable properties are held in the name of the company. If not, provide the details thereof.
(b) whether physical verification of inventory has been conducted at reasonable intervals by the manage-ment; and whether any material discrepancies were noticed on physical verification and if so, whether the same have been properly dealt with in the books of account.
(c) whether any fraud by the company or any fraud on the Company by its officers or employees has been noticed or reported during the year; If yes, the nature and the amount involved is to be indicated.
(d) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of property, plant and equipment.
Answer:
(d) whether the company is maintaining proper records showing full particulars, including quantitative details and situation of property, plant and equipment.

Question 91.
Which of the following dues are required to be reported under Clause (vii) of Paragraph 3 of CARO, 2016:
(a) amount payable to creditors for purchase of goods
(b) annual performance bonus payable to employees
(c) state government taxes
(d) none of the above
Answer:
(c) state government taxes

Question 92.
If a company is not regular in deposit of statutory dues to the appropriate authorities, auditor need to report on arrears of outstanding dues as at the last day of the financial year concerned for a period of:
(a) more than 90 days from the date they became payable
(b) more than 6 months from the date they became payable
(c) more than 90 days from the reporting date
(d) more than 6 months from the reporting date
Answer:
(b) more than 6 months from the date they became payable

Question 93.
A company has not deposited the employees provident fund with the authorities due to existence of some dispute. Dispute is pending in Court of Law. Non-payment of employees provident fund due to dispute is required to be reported by the auditor:
(a) under Clause (vii)(a) of Para 3 of CARO, 2020
(b) under Clause (vii)(b) of Para 3 of CARO, 2020
(c) under Clause (viii) of Para 3 of CARO, 2020
(d) None of the above
Answer:
(b) under Clause (vii)(b) of Para 3 of CARO, 2020

Question 94.
Acompany has defaulted in repayment of loansor borrowings to a NBFC. Auditor is required to report the period and amount of the default:
(a) under Clause (vii)(a) of Para 3 of CARO, 2020
(b) under Clause (vii)(b) of Para 3 of CARO, 2020
(c) under Clause (ix) of Para 3 of CARO, 2020
(d) no reporting required, as default of dues of NBFC are not covered in CARO, 2020
Answer:
(c) under Clause (ix) of Para 3 of CARO, 2020

Question 95.
Under Clause (x) of Paragraph 3 of CARO, 2020, auditor is required to report the application of money raised through for the purposes for which those are raised
(a) Initial Public Offer or Further Public Offer (excluding debt instruments) only
(b) Initial Public Offer or Further Public Offer (including debt instruments) and term loans
(c) Initial Public Offer or Further Public Offer (excluding debt instruments) and term loans
(d) Initial Public Offer or Further Public Offer (including debt instruments) and working capital loans
Answer:
(b) Initial Public Offer or Further Public Offer (including debt instruments) and term loans

Question 96.
While reporting under Clause (xi) of Para 3 of CARO, 2016, with respect to fraud, auditor is required to report on:
(a) fraud noticed and reported u/s 143(12) of Companies Act, 2013
(b) fraud suspected and reported u/s 143(12) of Companies Act, 2013
(c) fraud committed on the company by the vendors | of the company
(d) Both (a) and (c)
Answer:
(a) fraud noticed and reported u/s 143(12) of Companies Act, 2013

Question 97.
As per Clause (xiii) of Paragraph 3 of the CARO, 2020, the auditor is required to report on:
(a) Whether all transactions with the related parties are in compliance with Sections 177 and 188 of Companies Act, 2013 where applicable
(b) Whether the company has made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review
(c) Whether the company has entered in to any non-cash ( transactions with directors or persons connected with him and if so, whether provisions of Section 192 of Companies Act, 2013 have been complied with
(d) None of the above
Answer:
(a) Whether all transactions with the related parties are in compliance with Sections 177 and 188 of Companies Act, 2013 where applicable

Question 98.
As per Clause (x) of Paragraph 3 of the CARO, 2020, the auditor is required to report on:
(a) Whether all transactions with the related parties are in compliance with Sections 177 and 188 of g Companies Act, 2013 where applicable.
(b) Whether the company has made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review and if so, as to whether the requirement of Sec. 42 of the Companies Act, 2013 have been complied.
(c) Whether the company has entered into any non-cash transactions with directors or persons connected with him and if so, whether provisions of Section 192 of Companies Act, 2013 have been complied with.
(d) None of the above.
Answer:
(b) Whether the company has made any preferential allotment or private placement of shares or fully or partly convertible debentures during the year under review and if so, as to whether the requirement of Sec. 42 of the Companies Act, 2013 have been complied.

Question 99.
Which clause of CARO, 2020 requires the auditor to report whether the company is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934. If so, whether the registration has been obtained
(a) Under Clause (xi) of paragraph 3 of the CARO, 2020.
(b) Under Clause (xvi) of paragraph 3 of the CARO, 2020.
(c) Under Clause (xv) of paragraph 3 of the CARO, 2020.
(d) Under Clause (xiv) of paragraph 3 of the CARO, 2020.
Answer:
(b) Under Clause (xvi) of paragraph 3 of the CARO, 2020.

Question 100.
While carrying out audit of ABC ltd, auditor observed that a term loan was obtained by the company from a bank for ? 75 lakhs for acquiring R&D equipment, out of which ? 12 lakhs were used to buy a car for use of the concerned director, who was overlooking the R&D activities. Auditor is required to report the matter:
(a) Under Clause(vii)of paragraph 3 of the CARO,2020.
(b) Under Clause (viii) of paragraph 3 of the CARO, 2020.
(c) Under Clause(ix)ofparagraph3 of the CARO,2020.
(d) No reporting required under the requirements of CARO, 2020.
Answer:
(c) Under Clause(ix)ofparagraph3 of the CARO,2020.

Question 101.
While carrying out audit of ABC Ltd, auditor observed that the company has taken a term loan from a nationalized bank in 2016 for ? 200 lakhs repayable in five equal instalments off 40 lakhs from 31st March, 2017 onwards. It had repaid the loans ® due in 2017 & 2018, but defaulted in 2019, 2020 & 2021. Auditor is required to report the matter:
(a) UnderClause(vii)of paragraph 3 of the CARO,2020.
(b) Under Clause (viii) of paragraph 3 of the CARO, 2020.
(c) Under Clause (ix) of paragraph 3 of the CARO, 2020.
(d) Both (b) and (c).
Answer:
(c) Under Clause (ix) of paragraph 3 of the CARO, 2020.

Question 102.
Big and Small Ltd. received a show cause notice from central excise department intending to levy a demand of f 25 lakhs in December, 2020. The company replied to the above notice in January, 2021 contending that it is not liable for the levy. No further action was initiated by the central excise department upto the finalization of the audit for the ! year ended on 31st March, 2 021. Auditor is required to report the matter:
(a) Under Clause (vi) of paragraph 3 ofthe CARO, 2020.
(b) Under Clause(vii)of paragraph3 of the CARO,2020.
(c) Under Clause (viii) of paragraph 3 of the CARO, 2020.
(d) No reporting required under the requirements of CARO, 2020.
Answer:
(b) Under Clause(vii)of paragraph3 of the CARO,2020.

Question 103.
Reporting under CARO, 2020 will be required in case of which companies:
(a) X Pvt. Ltd. which is a subsidiary of ABC Ltd. a listed company
(b) X Pvt. Ltd. which is a One-person company, having paid up capital off 105 Lacs
(c) X Pvt. Ltd. which is a Small Company, having out-standing borrowings from banks in excess of ₹ 1 Cr
(d) All of the above
Answer:
(a) X Pvt. Ltd. which is a subsidiary of ABC Ltd. a listed company

Question 104.
In which of the following companies, auditor is required to report on matters specified under CARO, 2020:
(a) private limited company, which is a holding company of a public company having a paid-up capital and reserves and surplus not more than rupees one crore as on the balance sheet date
(b) private limited company, which is a subsidiary company of a public company, which does not have total borrowings exceeding rupees one crore from any bank or financial institution at any point of time during the financial year
(c) Both (a) and (b)
(d) None of the above
Answer:
(c) Both (a) and (b)

Question 105.
Which clause of CARO, 2020 requires the auditor to report whether managerial remuneration has been paid or provided in accordance with the requisite approvals mandated by the provisions of Sec. 197 read with schedule V to the Companies Act?
(a) Clause (xi) of Para 3
(b) Clause (xii) of Para 3
(c) Clause (xv) of Para 3
(d) NO Reporting required under CARO
Answer:
(d) NO Reporting required under CARO

Question 106.
UnderClause (x) of Paragraph 3 of CARO, 2020, auditor is required to report the application of money raised through Initial Public Offer or Further Public Offer (including debt instruments) and term loans for the purposes for which those are raised. Term loans for this purpose includes:
(a) Term loans obtained from banks and financial institutions
(b) Term loans obtained from entities/person other than banks and financial institutions
(c) Term loans obtained from Scheduled banks only
(d) Term loans obtained from banks and financial institutions as well as from entities/person other than banks and financial institutions
Answer:
(d) Term loans obtained from banks and financial institutions as well as from entities/person other than banks and financial institutions

Question 107.
Para 3 (xi) of CARO, 2020, required the auditor to report the nature and amount of fraud in relation to:
(a) any fraud by the company and any fraud on the Company by its officers/employees suspected and reported during the year
(b) any fraud by the company and any fraud on the Company by its officers/employees noticed or reported during the year
(c) any fraud on the company and any fraud by the Company suspected and reported during the year
(d) any fraud on the company and any fraud by the Company noticed or reported during the year
Answer:
(d) any fraud on the company and any fraud by the Company noticed or reported during the year

Question 108.
While carrying out audit of ABC Ltd, auditor observed that the company had obtained a term loan of? 300 lakhs from a bank for the construction of a factory. Since there was a delay in the construction activities, the said funds were temporarily invested in short term deposits. Auditor is required to report the matter:
(a) Under clause (vii) of paragraph 3 of the CARO, 2020
(b) Under clause (viii) of paragraph 3 of the CARO, 2020
(c) Under clause (ix) of paragraph 3 of the CARO, 2020
(d) No reporting required under the requirements of CARO, 2020
Answer:
(c) Under clause (ix) of paragraph 3 of the CARO, 2020

Question 109.
Company auditor is required to report “Whether the Nidhi Company has complied with the Net Owned Fund to Deposits in the ratio of 1:20 to meet out the liability and whether the Nidhi Company is maintaining 10% unencumbered term deposits as specified in the Nidhi Rules, 2014 to meet out the liability”. This reporting requirement is prescribed by:
(a) Sec. 143(1) of Companies Act, 2013
(b) Para 3 of NBFC Auditor’s Report (Reserve Bank) Directions, 2016
(c) Para 3 (xii) of Companies (Auditor’s Report) Order, 2020
(d) Para 3 (xvii) of Companies (Auditor’s Report) Order, 2020
Answer:
(c) Para 3 (xii) of Companies (Auditor’s Report) Order, 2020

Question 110.
H Ltd, granted unsecured loan of ₹ 1 crore @ 15% p.a. to two of its subsidiaries during the Financial Year 2020-21. Before the year end both the companies repaid the loan. The management of H Ltd. is of the opinion that since no balance is outstanding as on 31st March 2021, these loans are not required to be reported in CARO 2020. Auditor is required to report the matter:
(a) Under clause (iii) of paragraph 3 of the CARO, 2020
(b) Under clause (iv) of paragraph 3 of the CARO, 2020
(c) Under clause (vi) of paragraph 3 of the CARO, 2020
(d) No reporting required under the requirements of CARO, 2020
Answer:
(a) Under clause (iii) of paragraph 3 of the CARO, 2020

Question 111.
Which of the following is not an objective of SA 299?
(a) To lay down broad principles for the joint auditors in conducting the joint audit
(b) To mandate the requirement of joint audit in case of listed entities
(c) To identify the distinct areas of work and coverage thereof by each joint auditor
(d) To identify individual responsibility and joint responsibility of the joint auditors in relation to audit
Answer:
(b) To mandate the requirement of joint audit in case of listed entities

Question 112.
KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint auditors to conduct auditing for the financial year 2017-18. For the valuation of gratuity scheme of the company, Mr. X, Mr. Y and Mr. Z wanted to refer their own known Actuaries. Due to difference of opinion, all the joint auditors consulted their respective Actuaries. Subsequently, major difference was found in the actuary reports. However, Mr. X agreed to Mr, Y’s actuary report, though, Mr. Z did not. Mr. X contends that Mr. Y’sactuary reportshali be considered in auditreport due to majority of votes. Now, Mr. Z is in dilemma
(a) Contention of Mr. X is correct as SA 299 requires a single report based on majority
(b) Contention of Mr. X may be considered as SA 299 does not provide any provision in relation to such situations
(c) Contention of Mr. X is not acceptable as SA 299 requires separate reports in a situation where opinion of joint auditors differs
(d) None of the above
Answer:
(c) Contention of Mr. X is not acceptable as SA 299 requires separate reports in a situation where opinion of joint auditors differs

Question 113.
Which ofthe following is correct?
(a) All the joint auditors are responsible in respect of the appropriateness of the decisions concerning the nature, timing and extent of the audit procedures agreed upon among them and their proper execution
(b) Appropriateness of the decisions concerning the nature, timing and extent of the audit procedures agreed among joint auditors and proper execution of these audit procedures is the individual responsibility of the concerned joint auditor
(c) All the joint auditors are responsible only in respect of the appropriateness of the decisions concerning the nature, timing and extent of the audit procedures agreed upon among them, proper execution of these audit procedures is the individual responsibility of the joint auditor concerned
(d) Appropriateness of the decisions concerning the nature, timing and extent of the audit procedures agreed among joint auditors is the individual responsibility of the concerned joint auditor whereas, proper execution of these audit procedures is the joint responsibility of all the joint auditors
Answer:
(c) All the joint auditors are responsible only in respect of the appropriateness of the decisions concerning the nature, timing and extent of the audit procedures agreed upon among them, proper execution of these audit procedures is the individual responsibility of the joint auditor concerned

Question 114.
ABC & Co. and DEF & Co. Chartered Accountant firms were appointed as joint auditors of Good Health Care Ltd. for 2017-18. An investigation was conducted under Companies Act, 2013 during March 2019 and observed gross understatement of Revenue. The revenue aspects were looked after by DEF & Co, but there was no documentation for the division of work between the joint auditors
(a) Liability for negligence will arise only on DEF & Co
(b) Liability for negligence will arise only ABC & Co
(c) Both Joint auditors are jointly and severally responsible
(d) No liability arises on joint auditors as company was liable to maintain documentation for the division of the work between the joint auditors
Answer:
(c) Both Joint auditors are jointly and severally responsible

Question 115.
The jointauditorsare required to issuecommon audit report, however, where the joint auditors are in disagreement with regard to the opinion or any matters to be covered by the audit report, they shall express their opinion in a separate audit report. In such cases, separate audit report issued by the joint auditor shall make reference to the audit report issued by other joint auditors under the heading
(a) “Other Matter Paragraph” as per SA 706
(b) “Key Audit Matters” as per SA 701
(c) “Other Information” as per SA 720
(d) “Emphasis of Matter Paragraph” as per SA 706
Answer:
(a) “Other Matter Paragraph” as per SA 706

Question 116.
SA 600 deals with:
(a) Situations where an auditor reporting on the financial information of an entity, uses the work of another auditor with respect to the financial information of one or more components included in the financial information of the entity.
(b) Situations where two or more auditors are appointed as joint auditors.
(c) The auditor’s relationship with a predecessor auditor.
(d) All of the above.
Answer:
(a) Situations where an auditor reporting on the financial information of an entity, uses the work of another auditor with respect to the financial information of one or more components included in the financial information of the entity.

Question 117.
The principal auditor, if decides to use the work of auditor of component in relation to audit of consolidated financial statements, he should comply with requirements of:
(a) SA 600 “Using the work of Another Auditor”
(b) SA 299 “joint Audit of Financial Statements”
(c) SA 720 “The Auditor’s Responsibilities Relating to Other Information”
(d) SRS 4410 “Compilation Engagements”
Answer:
(a) SA 600 “Using the work of Another Auditor”

Question 118.
If auditor of parent company is also the auditor of all of the components, this association requires the auditor:
(a) to apply the procedures of SA 600 while auditing the consolidated financial statements.
(b) to report whether principles and procedures for preparation and presentation of consolidated F.S. as laid down in the relevant AS(s) have been followed.
(c) to incorporate emphasis of matter paragraph in the audit report to state his association with the component.
(d) both (a) and (b) above.
Answer:
(b) to report whether principles and procedures for preparation and presentation of consolidated F.S. as laid down in the relevant AS(s) have been followed.

Question 119.
If auditor of parent company is not the auditor of the components, the auditor of parent company while auditing the consolidated financial statements is required to:
(a) apply the procedures of SA 600 while auditing the consolidated financial statements.
(b) to incorporate Emphasis of Matter Paragraph in the audit report as per requirement of SA 706.
(c) to incorporate Other Matter Paragraph in the audit report as per requirement of SA 706.
(d) both (a) and (c) above.
Answer:
(d) both (a) and (c) above.

Question 120.
When planning to use the work of another auditor, the principal auditor need not to consider the professional competence of the other auditor in the context of specific assignment if the other auditor is:
(a) a member of the Institute of Chartered Accountants of India.
(b) not a member of the Institute of Chartered Accountants of India.
(c) a member of foreign professional accounting body.
(d) a state certified auditor.
Answer:
(a) a member of the Institute of Chartered Accountants of India.

Question 121.
In case of a company that is required to constitute an Audit Committee under section 177, the committee, and, in cases where such a committee is not required to be constituted, ______ , shall take into consideration the qualifications and experience of the individual or the firm proposed to be considered for appointment as auditor and whether such qualifications and experience are commensurate with the size and requirements of the company.
(a) the Board
(b) any Director
(c) Managing Director
(d) Whole time director
Answer:
(a) the Board

Question 122.
Under sub-section (3) of section 141 along with Rule 10 ofthe Companies (Auditand Auditors) Rules, 2014 (hereinafter referred as CAAR), the following persons shall not be eligible for appointment as an auditor of a company, namely
(i) a limited liability partnership registered under the Limited Liability Partnership Act, 2008;
(ii) an officer or employee of the company;
(iii) a person who is a partner, or who is in the employment, of an officer or employee of the company;
(iv) a person who, or his relative or partner is holding any security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company. It may be noted that the relative may hold security or interest in the company of face value not exceeding ₹ 1,00,000.
Which of the above is incorrect?
(a) All statements are incorrect.
(b) (i)and(ii)
(c) (i) only
(d) (iv) only
Answer:
(c) (i) only

Question 123.
Which ofthe following is notan advantage of Joint Audit?
(a) Sharing of expertise.
(b) General superiority complexes of some auditors.
(c) Lower workload.
(d) Displacement of the auditor of the company taken over in a take over often obviated.
Answer:
(b) General superiority complexes of some auditors.

Question 124.
Which of the following is correct as per section 143(10) of the Companies Act, 2013?
(a) IFAC may prescribe the standards of auditing as recommended by the Institute of Chartered Ac-countants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.
(b) the International Auditing Standards Board may prescribe the standards of auditing as recommended by the Institute of Chartered Accountants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.
(c) the MCA may prescribe the standards of auditing as recommended by the Institute of Chartered Accountants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.
(d) the Central Government may prescribe the standards of auditing as recommended by the Institute of Chartered Accountants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.
Answer:
(d) the Central Government may prescribe the standards of auditing as recommended by the Institute of Chartered Accountants of India, in consultation with and after examination of the recommendations made by the National Financial Reporting Authority.

Question 125.
Which of the following is not a duty of auditor to report under section 143(1)?
(a) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are prejudicial to the interests ofthe company or its members;
(d) whether transactions of the company which are represented merely by book entries are prejudicial to the interests ofthe company;
(c) where the company not being an investment com-pany or a banking company, whether so much of the assets of the company as consist of shares, debentures and other securities have been sold at a price less than that at which they were purchased by the company;
(d) whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditors has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;
Answer:
(d) whether the report on the accounts of any branch office of the company audited under sub-section (8) by a person other than the company’s auditors has been sent to him under the proviso to that sub-section and the manner in which he has dealt with it in preparing his report;

Question 126.
Which of the following is correct?
(a) Under section 128 of the Act, books of account of a company must be kept at the registered office.
(b) Under section 128 of the Act, books of account of a company must be kept at the corporate office.
(c) Under section 128 of the Act, books of account of a company must be kept at the Head office of the company.
(d) Under section 128 of the Act, books of account of a company must be kept at the usual place of business.
Answer:
(a) Under section 128 of the Act, books of account of a company must be kept at the registered office.

Question 127.
Section 139(7) provides that in the case of a ® Government company or any other company owned or controlled, directly or indirectly, by the Central Government, or by any State Government, or Governments, or partly by the Central Government and | partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-General of India ______ from the date of registration of the company.
(a) within 60 days
(b) within 30 days
(c) within 90 days
(d) within 45 days
Answer:
(a) within 60 days

Question 128.
As per Section 139(8), any casual vacancy in the ) office of an auditor shall 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,
(a) be filled by the Audit committee within 60 days.
(b) be filled by the Audit committee within 30 days.
(c) be filled by the Board of Directors within 60 days,
(d) be filled by the Board of Directors within 30 days.
Answer:
(d) be filled by the Board of Directors within 30 days.

Question 129.
As per section 140(2) the auditor who has resigned from the company shall
(a) file within a period of 60 days from the date of resignation, a statement in the prescribed Form ADT-3 (as per Rule 8 of CAAR) with the company and the Registrar
(b) file within a period of 30 days from the date of resignation, a statement in the prescribed Form ADT-3 (as per Rule 8 of CAAR) with the company and the Registrar
(c) file within a period of 30 days from the date of resignation, a statement in the prescribed Form ADT-3 (as per Rule 8 of CAAR) with the company.
(d) file within a period of 60 days from the date of resignation, a statement in the prescribed Form ADT-3 (as per Rule 8 of CAAR) with the company.
Answer:
(b) file within a period of 30 days from the date of resignation, a statement in the prescribed Form ADT-3 (as per Rule 8 of CAAR) with the company and the Registrar

Question 130.
Which of the following is correct?
(a) As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein.
(b) As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in its general meeting.
(c) As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in its extra-ordinary general meeting.
(d) As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in its Board meeting or in such manner as may be determined therein.
Answer:
(a) As per section 142 of the Act, the remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as may be determined therein.

Question 131.
In case of a fraud involving less than ₹ 1 crore, the auditor shall
(a) report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as prescribed.
(b) report the matter to the audit committee constituted under section 177 within such time and in such manner as prescribed.
(c) report the matter to the Board within such time and in such manner as prescribed.
(d) report the matter to the audit committee constituted under section 177 and also to the Board within such time and in such manner as prescribed.
Answer:
(a) report the matter to the audit committee constituted under section 177 or to the Board in other cases within such time and in such manner as prescribed.

Question 132.
Which of the following is incorrect?
(a) According to Section 140(1),theauditorappointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company, after obtaining the previous approval of the Central Government in that behalf as per Rule 7 of CAAR, 2014.
(b) The application to the Central Government for removal of auditor shall be made in Form ADT-2 and shall be accompanied with fees as provided for this purpose under the Companies (Registration Offices and Fees) Rules, 2014.
(c) The application shall be made to the Central Government within 30 days of the resolution passed by the Board.
(d) The company shall hold the general meeting within 30 days of receipt of approval of the Central Government for passing the special resolution.
Answer:
(d) The company shall hold the general meeting within 30 days of receipt of approval of the Central Government for passing the special resolution.

Question 133.
Which of the following is correct?
(a) A firm whereof all the partners practising anywhere are qualified for appointment may be appointed by its firm name to be auditor of a company.
(b) A firm whereof majority of partners practising anywhere are qualified for appointment may be appointed by its firm name to be auditor of a company.
(c) A firm whereof all the partners practising in India are qualified for appointment may be appointed by its firm name to be auditor of a company.
(d) A firm whereof majority of partners practising in India are qualified for appointment may be appointed by its firm name to be auditor of a company.
Answer:
(d) A firm whereof majority of partners practising in India are qualified for appointment may be appointed by its firm name to be auditor of a company.

Question 134.
As per Section 139(6), the first auditor of a company, other than a Government company, shall be appointed
(a) by the Board of Directors within 30 days from the date of registration of the company.
(b) by the audit committee within 30 days from the date of registration of the company.
(c) by the Managing Director within 30 days from the date of registration of the company.
(d) by the shareholders within 30 days from the date of registration of the company.
Answer:
(a) by the Board of Directors within 30 days from the date of registration of the company.

Question 135.
Where a company is required to constitute an Audit Committee under section 177,
(a) all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee.
(b) all appointments, excluding the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee.
(c) appointment of first auditors shall be made after taking into account the recommendations of such committee.
(d) appointment of subsequent auditors shall be made after taking into account the recommendations of j such committee.
Answer:
(a) all appointments, including the filling of a casual vacancy of an auditor under this section shall be made after taking into account the recommendations of such committee.

Question 136.
Which of the following is incorrect?
(a) 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
(b) Under section 128 of the Act, 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.
(c) The company provides reasonable facility to auditor for inspection of the books of account by directors and others authorised to inspect under the Act.
(d) Working papers not being his own property auditor can exercise lien on working papers.
Answer:
(d) Working papers not being his own property auditor can exercise lien on working papers.

Question 137.
Springfield Hospital located in the rural area of Lonawala region is a government hospital run by the local doctors who are appointed by the government. The hospital was registered on 1st October 2018. Which of the following is correct in respect of the appointment of the first auditor for Springfield Hospital?
(a) The Board of Directors of the hospital have appointed the first auditor on 5th November 2018.
(b) The Comptroller Auditor-General of India appointed the first auditor on 15th December 2018.
(c) Since the Comptroller Auditor-General of India did not appoint the first auditor, the Board of Director appointed the first auditor on 15th December 2018.
(d) Since the Comptroller Auditor-General of India did not appoint the first auditor, the Board of Director appointed the first auditor on 10th November 2018.
Answer:
(c) Since the Comptroller Auditor-General of India did not appoint the first auditor, the Board of Director appointed the first auditor on 15th December 2018.

Question 138.
Eeyore Pvt. Ltd. is incorporated on 1st July, 2017. During the Financial Year ending on 31st March, 2018, the company did not opt for any borrowing at any point of time and have a total revenue of ₹ 60 Lakh. At the year end, it provides the following information regarding its paid-up capital and reserve & surplus

Particulars	Amount (in ₹)
Paid-up Capital
– Consideration received in cash for equity shares (including unpaid calls of ₹ 5,00,000)	40,00,000
– Consideration received in cash for preference shares	25,00,000
– Bonus shares allotted	7,00,000
– Share application money re­ceived pending allotment	10,00,000
Sub-Total	82,00,000
Reserve & Surplus
– Balance in Statement of Profit and Loss	15,00,000
– Capital Reserves	10,00,000
Sub-Total	25,00,000
GRAND TOTAL	1,07,00,000

You are provided with the provisions regarding applicability of Companies (Auditor’s Report) Order, @ 2020, (CARO, 2020) issued under section 143(11) of the Companies Act, 2013 to a private limited company that it specifically exempts a private limited company having a paid up capital and reserves and surplus not more than ₹ 1 crore as on the Balance Sheet date and which does not have total borrowings exceeding ₹ 1 crore from any bank at any point of time during the financial year and which does not have a total revenue as disclosed in Scheduled III to the Companies Act, 2013 exceeding ₹ 10 crore during the financial year.
Considering the information given above, which of the following shall be considered as a reason regard- ingapplicability or non-applicability ofCARO, 2020?
(a) Reporting under CARO, 2020 shall be applicable as the company is having a paid-up capital and reserves and surplus of ₹ 1.07 crore i.e. more than ₹ 1 crore as on the Balance Sheet date.
(d) Reporting under CARO, 2020 shall be applicable as the company is having a paid-up capital and reserves and surplus of ₹ 1.02 crore i.e. more than ₹ 1 crore as on the Balance Sheet date.
(c) Reporting under CARO, 2020 shall not be applicable as the company is having a paid-up capital and reserves and surplus of ₹ 0.92 crore i.e. not more than ₹ 1 crore as on the Balance Sheet date.
(d) Reporting under CARO, 2020 shall not be applicable as the company is having a paid-up capital and reserves and surplus of ₹ 0.82 crore i.e. not more than ₹ 1 crore as on the Balance Sheet date.
Answer:
(c) Reporting under CARO, 2020 shall not be applicable as the company is having a paid-up capital and reserves and surplus of ₹ 0.92 crore i.e. not more than ₹ 1 crore as on the Balance Sheet date.

Question 139.
CA. Daffy is the auditor of x Bose Ltd. for the previous 2 years. However, due to certain unavoidable circumstances, no Annual General Meeting (AGM) was held for the current Financial Year ending on 31st March, 2018 within every possible time limit and thus, the ratification procedure for her appointment in the AGM could not be performed. Whether she may continue to hold the office of the auditor?
(a) CA. Daffy may continue to hold the office of the auditor for the current Financial Year only and thereafter shall resign herself as the ratification procedure could not be completed.
(b) CA. Daffy shall continue to hold the office of the auditor and ask the Board to re-appoint her in a private meeting.
(c) CA. Daffy shall continue to hold the office of the auditor as no such ratification provisions for ap-pointment by members at every AGM exist.
(d) CA. Daffy shall not continue to hold office of the auditor as the ratification procedure could not be completed as per proviso to section 139(1) of the Companies Act, 2013.
Answer:
(c) CA. Daffy shall continue to hold the office of the auditor as no such ratification provisions for ap-pointment by members at every AGM exist.

Question 140.
With respect to the forms specified by Companies (Cost Records & Audit) Rule 2014, which of the following is incorrect combination:
(a) Form CRA 1 – Maintenance of cost records by the Company.
(b) Form CRA 2 – Intimation of appointment of another cost auditor to Central Government.
(c) Form CRA 3 – Submission of Cost Audit Report to the Board of Directors of the company.
(d) Form CRA 4 – Submission of Cost Audit Report by the company to the Registrar.
Answer:
(d) Form CRA 4 – Submission of Cost Audit Report by the company to the Registrar.

Question 141.
Statement I: A firm whereof majority of partners practising in India are qualified for appointment may be appointed by its firm name to be auditor of a company.
Statement II: Where a firm including a limited liability partnership is appointed as an auditor of a company, all the partners shall be authorised to act and sign on behalf of the firm.
(a) Only Statement I is correct (,b) Only Statement II is correct
(c) Both statements are correct
(d) Both Statements are incorrect
Answer:
(a) Only Statement I is correct (,b) Only Statement II is correct

CA Inter Advanced Accounts Paper Nov 2020 – Advanced Accounts CA Inter Study Material is designed strictly as per the latest syllabus and exam pattern.

CA Inter Advanced Accounting Question Paper Nov 2020

Question 1.
(a) Rajendra undertook a contract for ₹ 20,00,000 on an arrangement that 80% of the value of work done as certified by the architech of the contractee, should be paid immediately and that the remaining 20% be retained until the contract was completed.

In year 1, the amounts expended were ₹ 8,60,000, the work was certified for ₹ 8,00,000 and 80% of this was paid as agreed. It was estimated that future expenditure to complete the contract would be ₹ 10,00,000.

In year 2, the amounts expended were ₹ 4,75,000. Three-fourths of the Contract was certified as done by December 31 st and 80% of this was received accordingly. It was estimated that future expenditure to complete the Contract would be ₹ 4,00,000.

In year 3, the amounts expended were ₹ 3,10,000 and on June 30th, the whole contract was completed.
Show how Contract revenue would be recognized in the P&L A/c of Mr. Rajendra each year.
Answer:
Computation of Expected Profit/Loss:

Particulars	Year 1	Year 2	Year 3
Contract Revenue (A)	20,00,000	20,00,000	20,00,000
Contract Cost:
Incurred	8,60,000	13,35,000(8,60,000 + 4,75,000)	16,45,000 (13,35,000 + 3,10,000)
Estimated further cost	10,00,000	4,00,000	Nil
Total Cost (B)	18,60,000	17,35,000	16,65,000
Contract Profit (A – B)	1,40,000	2,65,000	3,35,000

Particulars	Year 1	Year 2	Year 3
Degree of completion Cost incurred as a % of total cost	46.24%	76.95%	100%
Contract Revenue to be re-cognized for the given year	9,24,800 (20 lacs × 46.24%)	6,14,200 (20 lacs × 76.95%	4,61,000 (20 lacs – 15,39,000)

(b) Swift Limited acquired patent rights to manufactured Solar Roof Top Panels at a cost of ₹ 600 lacs. The Product life cycle has been estimated to be 5 years and the amortization was decided in the ratio of future cash flows which are estimated as under:

Year	1	2	3	4	5
Cash Flows (₹ in lacs)	300	300	300	150	150

After 3rd year, it was estimated that the patents would have an estimated balance future life of 3 year and Swift Ltd. expected the estimated cash flow after 5th year to be ₹ 75 Lacs. Determine the amortization cost of the patent for each of the above years as per Accounting Standard 26.
Answer:
Same as May 2018 Examination question (Figures X W) – Page 9.111 [Que. 15]

(c) The accountant of Parag Limited has furnished you with the following data related to its Business Divisions :

You are requested to indentify the reportable segment in accordance with the criteria laid down in AS 17.
Answer:
Quantitative thresholds Test:

Segments	A	B	C	D
% segment revenue to total revenue % segment profit to total profits (See Working Note below)	10%	30%	20%	40%
% segment assets to total assets	26%	34%	32%	8%

Based on:
(A) Revenue Test – All segments are reportable.
(B) Asset Test – A, B and C are reportable.

Working Note – Profit/Loss Test:

In compliance with AS 17, the segment profit/loss of respective segment will be compared with the greater of the following:

1. All segments in profit, Le., A and C – Total profit ₹ 125 lacs.
2. All segments in loss, Le., B and D – Total loss ₹ 80 lacs.
   Greater of the above – ₹ 125 lacs.

Based on the above, reportable segments will be determined as follows:

Segment	Profit/ (Loss)	Absolute Profit/Loss as a % of 125	Reportable Segment
A	45	36%	Yes
B	(70)	56%	Yes
C	80	64%	Yes
D	(10)	8%	No
Total	45

Final Conclusion:
All segments are reportable.

(d) From the following details of Aditya Limited for accounting year ended on 31st March, 2020 :

Particulars	₹
Accounting profit	15,00,000
Book profit as per MAT	7,50,000
Profit as per Income tax Act	2,50,000
Tax Rate	20%
MAT Rate	7.5%

Calculated has deferred tax asset/liability as per AS 22 and amount of tax to be debited to the profit and loss account for the year.

Question 2.
(a) H Limited acquired 64000 Equity Shares of ₹ 10 each in S Ltd. as on 1 st October, 2019. The Balance Sheets of the two companies as on 31 st March, 2020 were as under :

Additional Information

(1) The Profit & Loss Account of S Ltd. showed a balance of ₹ 1,20,000 on 1st April, 2019. S Ltd. paid a dividend of 10% out of the same on 1st November, 2019 for the year 2018-19. The dividend was correctly accounted for by H Ltd.

(2) The Plant & Machinery of S Ltd. which stood at ₹ 6,00,000 on 1st April, 2019 was considered worth ₹ 5,20,000 on the date of acquisition by H Ltd. S Ltd. charges depreciation @ 10% per annum on Plant & Machinery.
Prepare consolidated Balance Sheet of H Ltd. and its subsidiary S Ltd. as on 31st March, 2020 as per Schedule III of the Companies Act, 2013.
Answer:

Step 1: Date of Acquisition:

1st October, 2019

Step 2: % of Holding:

Step 3: Analysis of Profit (AOP):

Particulars	Pre-acquisition profits Pre 1st October, 2019	Post-Acquisition profits 1st October, 2019 to 31st March, 2020
General Reserve	4,20,000 Balance on 1st April, 2019
Surplus in P&L	40,000 Balance on 1st April, 2019 Still available (1,20,000 – 10% of 8 lacs)
Increase in Surplus in P&L Le. Profit for the year = 1,44,000 (3,28,000-40,000) In time ratio – 6 months : 6 months	1,44,000	1,44,000
Preliminary Expenses	(20,000) Balance on 1st April, 2019
Revaluation of P&M – Loss (See Working note below) [5,20,000 – 5,70,000]	(50,000)
Excess Depreciation [5,20,000 × 10% × 6/12 vs 6,00,000 × 1096 × 6/12]		4,000
Total	5,34,000	1,48,000
Holding company’s share (80%)	4,27,200	1,18,400
Minority’s share (20%)	1,06,800	29,600

Working Note:

Let us calculate the Book Value on date of acquisition ie. 1st October, 2019: For this purpose, we need depreciation rate;
Book Value on 1st April, 2019 = 6,00,000.
Depreciation rate is 10%.
Thus, Book Value on 1 st October, 2019 = 6,00,000 -10% of 6,00,000 for 6 months = 5,70,000.

Step 4: Minority Interest:

Particulars	Amount
Paid up share capital (8,00,000 X 20%)	1,60,000
Pre-acquisition profits (Step 3)	1,06,800
Post-acquisition profits (Step 3)	29,600
Total	2,96,400

Step 5: Cost of Control:

Particulars	Amount	Amount
Cost of shares		12,27,200
Paid up share capital (8,00,000 × 80%)	6,40,000
Pre-acquisition profits (Step 3)	4.27.200	10,67,200
Goodwill		1,60,000

Step 6: Special Issues:

1. Revaluation of P&M already taken care in AOR

Consolidated Balance Sheet Of H Ltd. And Its Subsidiary S Ltd.
As at 31st March, 2020

Notes to Accounts

(b) PGL Finance Ltd. is a non-banking financial company. The following information is provided by the company regarding its outstanding amounts, ₹ 600 Lakhs, of which instalments are overdue on 300 accounts for last two months (amount overdue ₹ 150 Lakhs), on 48 accounts for three months (amount overdue ₹ 64 Lakhs), on 20 accounts for more than 30 months (amount overdue ₹ 120 Lakhs) and in 4 accounts for more than three years (amount overdue ₹ 60 Lakhs – already identified as sub-standard asset) and one account of ₹ 40 Lakhs which has been indentified as non-recoverablc by the management. Out of 20 accounts overdue for more than 30 months, 16 accounts are already indentified as sub-standard (amount ₹ 28 Lakhs) for more than fourteen months and others are identified as sub-standard asset for a period of less than fourteen months.
Classify the assets of the company in line with Non-Banking Financial Company – Systematically Important Non-Deposit Taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.

Question 3.
(a) High Ltd. and Low Ltd. were amalgamated on and from 1st April, 2020. A new company little Ltd. was formed to take over the business of the existing Companies. The Balance sheets of High Ltd. and Low Ltd. as on 31st March, 2020 are as under :

Other information :

1. 13% Debenture holders of High Ltd. & Low Ltd. are discharged by Little Ltd. by issuing such number of its 15% Debentures of ₹ 100 each so as to maintain the same amount of interest.
2. Preference shareholders of the two companies are issued equivalent number of 15% Preference share of Little Ltd. at a price of ₹ 125 per share (Face Value ₹ 100)
3. Little Ltd. will issue 4 Equity shares for each Equity share of High Ltd. & 3 equity shares for each Equity Share of Low Ltd. The share are to be issued ₹ 35 each having a face value of ₹ 10 per share.
4. Investment Allowance Reserve is to be maintained for two more years. Prepare the Balance Sheet of Little Ltd. as on 1st April, 2020 after the amalgamation has been carried out in basis of in the nature of purchase.

(b) In a winding up of a company creditors remain unpaid. The following persons has transferred their holdings before winding up.

The shares were of Rs. 100 each, Rs. 80 being called up and paid up on the date of transfers.

1. A member G, who holds 200 shares died on 28th Feb., 2019 when the amount due to creditors was Rs. 16000. His shares were transmitted to his Son X.
2. R was the transferee of shares held by J.R paid Rs. 20 per shares as calls in advance immediately on becoming a member.
3. The liquidation of the company commenced on 1st February, 2020. When the liquidator made a call on the present and past contributories to pay the amount.

You are required to quantify the maximum liability of the transferors of shares mentioned in the above the table.
Answer:
Who is not part of List B contributories:
D will not be liable since he transferred his shares prior to one year preceding the date of winding up.
R since he paid calls in advance on becoming a member.
Computation of Liability of List B contributories:

Question 4.
(a) Mohan and Sohan were carrying business in partnership, sharing profit and losses equally. The Balance Sheet of the firm as on 31st March, 2019 stood as under:

The business was carried on till 30th September, 2019. The partners withdrew the amounts equal to half the amount of profit made during the period of six months ended on 30th September, 2019 equally. The profit was calculated after charging depreciation @ 5% per annum on Leasehold premises and 10% per annum on Plant & Machinery.

In the half year, the amounts of Bank Overdraft and Trade Payables stood reduced by Rs. 18,000 and Rs. 12,000 respectively. On 30th September, 2019, the inventories were valued at Rs. 90,000 and Trade Receivables at Rs. 72,000. The Joint Life Policy had been surrendered for Rs. 10,800 before 30th September, 2019 and all other terms remained the same as at 31st March, 2019.

On 30th September, 2019, the firm sold off its business to PKR Limited. The value of Goodwill was fixed at Rs. 1,20,000 and the rest of the assets and liabilities were valued on the basis of their book values as at 30th September, 2019. PKR Ltd. paid the purchase consideration in equity shares of Rs. 10 each.

You are requested to prepare the following:

1. Balance Sheet of the Firm as at 30th September, 2019;
2. Realisation Account;
3. Partners’ Capital Account showing the final settlement between them.

(b) Vikas Finance Ltd. is a Non-Banking Finance Company. The extract of its Balance Sheet are as under:

You are requested to compute the “Net Owned Funds” of Vikas Finance Ltd. as per Non-Banking Finance Company – Systematically Important Non-Deposit taking company and Deposit taking company (Reserve Bank) Direction, 2016.

Question 5.
(a) Sun Ltd. grants 100 stock options to each of its 1200 employees on 01-04-2016 for Rs. 30, depending upon the employees at the time of vesting of options. Options would be exercisable within a year it is vested. The market price of the share is Rs. 60 each. These options will vest at the end of the year 1 if the earning of Sun Ltd. is 16% or it will vest at end of year 2 if the average earning of two years in 13%, or lastly it will vest at the end of the third year, if the average earning of 3 years is 10%. 6000 unvested options lapsed on 31-3-2017, 5000 unvested options lapsed on 31-03-2018 and finally 4000 unvested options lapsed on 31-03-2019.

The earnings of Sun Ltd. for the three financial years ended on 31 st March, 2017,2018 and 2019 are 15%, 10% and 6%, respectively. 1000 employees exercised their vested options within a year and remaining options were unexercised at the end of the contractual life.
You are requested to give the necessary journal entries for the above and prepare the statement showing compensation expenses to be recognized at the end of the year.

(b) Vasu Commercial Bank has the following capital funds an assets. Segregate the capital funds into Tier I and Tire II capitals. Find out the risk adjusted asset and risk weighted assets ratio.

Question 6.
Answer any four of the following:
(a) Under what circumstances an LLP can be wound up by the tribunal?

(b) Beekey Limited is being wound up by the tribunal. All the assets of the company have been charged to the company’ bankers to whom the company owes Rs. 2.50 crores. The company owes following amounts to other:

Dues to workers	– Rs. 62,50,000
Taxes payable to Government	-Rs. 15,00,000
Unsecured creditors	– Rs. 30,00,000

You are required to compute with reference to the provision of the Companies Act, 2013, the amount each kind of creditors is likely to get if the amount realized by the official liquidator from the secured assets and available for distribution among creditors is only Rs. 2,00,00,000.

(c) M/s. Pasa Ltd. is developing a new production process. During the financial year ended 31st March, 2019, the total expenditure incurred on the process was Rs. 80 lakhs. The production process met the criteria for recognition as an intangible asset on 1st November, 2018. Expenditure incurred till this date was Rs. 42 lakhs.

Further expenditure incurred on the process for the financial year ending 31 st March, 2020 was Rs. 90 lakhs. As on 31 -03-2020, the recoverable amount of know how embodied in the process is estimated to be Rs. 82 lakhs. This included estimates of future cash outflows and inflows.

You are required to work out:

1. What is the expenditure to be charged to Profit and Loss Account for the year ended 31st March, 2019?
2. What is the carrying amount of the intangible asset as on 31st March, 2019?
3. What is the expenditure to be charged to Profit and Loss Account for the year ended 31st March, 2020?
   What is the carrying amount of the intangible asset as on 31st March, 2020?

(d) A, B, C and D hold Equity Share Capital in the proportion of 40:30:20:10 and P, Q, R and S hold Preference Share Capital in the proportion of 30:40:20:10 in Alpha Ltd. If the paid up Equity Share Capital of Alpha Ltd. is Rs. 75 lacs and the Preference Share Capital is Rs. 25 lacs, find their voting rights in the case of resolution of winding up of the company.

(e) With reference to AS 29, how would you deal with the following in the Annual Accounts of the company at the Balance Sheet date:

(i) The company operates an offshore oilfield where its licensing agreement requires it to remove the oil rig at the end of production and restore the seabed. Eighty five per cent of the eventual costs relate to the removal of the oil rig and restoration of damage caused by building it, and fifteen per cent arise through the extraction of oil. At the balance sheet date, rig has been constructed but no oil has been extracted.

(ii) The Government introduces a number of changes to the taxation laws. As a result of these changes, the company will need to train a large proportion of its accounting and legal workforce in order to ensure continued compliances with tax law regulations. At the balance sheet date, no retraining of staff has taken place.
Answer:
Part (i)

Present obligation as a result of a past obligating event – The construction of the oil rig creates an obligation under the terms of the licence to remove the rig and restore the seabed and is thus an obligating event. At the balance sheet date, however, there is no obligation to rectify the damage that will be caused by extraction of the oil.

An outflow of resources embodying economic benefits in settlement – Probable.

Conclusion – A provision is recognised for the best estimate of 85% of the eventual costs that relate to the removal of the oil rig and restoration of damage caused by building it (see paragraph 14). These costs are included as part of the cost of the oil rig. The 15% of costs that arise through the extraction of oil are recognised as a liability when the oil is extracted.

Part (ii)
Present obligation as a result of a past obligating event – There is no obligation because no obligating event (retraining) has taken place.
Conclusion – No provision is recognised (see paragraphs 14 and 16-18)

Students should practice these Audit of Items of Financial Statements – CA Inter Audit MCQ based on the latest syllabus.

Audit of Items of Financial Statements – CA Inter Audit MCQ

Question 1.
Which assertion is common among income statement and balance sheet captions:
(a) Existence
(b) Valuation
(c) Completeness
(d) Measurement
Answer:
(c) Completeness

Question 2.
Direct confirmation procedures are performed during audit of trade receivable balances to address the following balance sheet assertion:
(a) Measurement
(b) Existence
(c) Rights and Obligations
(d) Completeness
Answer:
(b) Existence

Question 3.
Where no reply is received during the performance of direct confirmation procedures as part of audit of trade receivable balances, the auditor should perform:
(a) Additional testing including agreeing the balance to cash received; agreeing the detail of the respective balance to the customer’s remittance advice
(b) Additional testing including preparing a detailed analysis of the balance, ensuring it consists of identifiable transactions and confirming that these revenue transactions actually occurred
(c) No additional testing
(d) Both (a) and (b)
Answer:
(d) Both (a) and (b)

Question 4.
Obtaining trade receivables ageing report and analysis and identification of doubtful debts is performed during audit of trade receivable balances to address which of the following balance sheet assertion:
(a) Valuation
(b) Rights and obligations
(c) Measurement
(d) Completeness
Answer:
(a) Valuation

Question 5.
Observing inventory being counted and personally performing test counts to verify counts is performed during audit of inventory balances to address which of the following balance sheet assertion:
(a) Existence
(b) Rights and obligations
(c) Measurement
(d) Cut-off
Answer:
(a) Existence

Question 6.
Wages paid to workers will be classified as:
(a) Revenue expenditure
(b) Capital expenditure
(c) Deferred revenue Expenditure
(d) Revenue or capital expenditure depending upon facts and circumstances
Answer:
(d) Revenue or capital expenditure depending upon facts and circumstances

Question 7.
During the course of audit of intangible assets, expenditure incurred during which of the following phase is generally not capitalised:
(a) Research phase
(b) Development phase
(c) Both (a) and (b)
(d) None of the above
Answer:
(a) Research phase

Question 8.
Search for unrecorded liability is performed during audit of current liabilities to address which of the following balance sheet assertion:
(a) Rights and obligations
(b) Existence
(c) Completeness
(d) Occurrence
Answer:
(c) Completeness

Question 9.
Cut-off testing is performed during audit of sales to address which of the following assertion:
(a) Occurrence
(b) Measurement
(c) Completeness
(d) Existence
Answer:
(c) Completeness

Question 10.
ABC’s investee company- XYZ declares Final dividend for financial year 2018-19 in the meeting of board of directors held on April 15, 2019. In which financial year should ABC account for the dividend income:
(a) Proportionately i.e. considering 15 days of financial year 2019-20 and 350 days of financial year 201819
(b) Financial year 2018-19
(c) Financial year 2019-20
(d) Equally between financial year 2018-19 and financial year 2019-20
Answer:
(c) Financial year 2019-20

Question 11.
All inventory units held by the audit entity and that should have been recorded, has been recognized in the financial statements. The assertion involved is:
(a) Rights and Obligations
(b) Existence
(c) Completeness
(d) Valuation
Answer:
(c) Completeness

Question 12.
Which of the following is not an example of revenue expenditure?
(a) Salaries and wages of employees engaged directly or indirectly in production
(b) Repairs, maintenance and renewals of non-current assets
(c) Development expenditure on land
(d) Legal and professional expenses
Answer:
(c) Development expenditure on land

Question 13.
ABC Ltd. is a renowned food chain supplier in a posh area providing restaurant facility along with food delivering. CA. Ram was appointed as an auditor of the company for the Financial Year 2018-19. While examining the books of account of the company, auditor came to knowabout one ofthe major expenses of the company i.e. rent expense of ₹ 1,20,000 per month, for which he applied substantive analytical procedure for verification purpose. Explain, how would auditor perform substantive analytical procedure in the given scenario?
(a) Auditor would inspect every single rent invoice per month of ₹ 1,20,000 and verify other elements appropriately
(b) Auditor would compare the rental expense of the company with that of another nearby company having corresponding dimensions, for high degree of accuracy
(c) Auditor would select the first month rent invoice of ₹ 1,20,000 and appropriately verifying other elements would predict that the rent for the whole year would be ₹ 14,40,000 (i.e. ₹ 1,20,000 × 12). Thereafter, he would compare the actual with his prediction and follow-up for any fluctuation
(d) Both (a) and (b)
Answer:
(c) Auditor would select the first month rent invoice of ₹ 1,20,000 and appropriately verifying other elements would predict that the rent for the whole year would be ₹ 14,40,000 (i.e. ₹ 1,20,000 × 12). Thereafter, he would compare the actual with his prediction and follow-up for any fluctuation

Question 14.
In July, 2018, M/s ABC & Co. entered into an agreement with M/s X & Co. under which a machinery would be let on hire and M/s X & Co. would have the option to purchase the machinery in accordance with the terms of the agreement. Thus, M/s X & Co. agreed to pay M/s ABC & Co. a settled amount in periodical instalments. The property in the goods shall be passed to M/s X & Co. on the payment of last of such instalments. While checking such hire-purchase transaction, what would the auditor examine?
(a) That the periodical instalments paid are charged as an expenditure by M/s X & Co.
(b) That M/s ABC & Co. charges depreciation through-out the life of the machinery
(c) That the hire purchase agreement specifies clearly the hire purchase price of the machinery to which the agreement relates
(d) All of the above
Answer:
(c) That the hire purchase agreement specifies clearly the hire purchase price of the machinery to which the agreement relates

Question 15.
The management of M Ltd. has developed a strong internal control in its accounting system in such a way that the work of one person is reviewed by another. Since no individual employee is allowed to handle a task alone from the beginning to the end, the chances of early detection of frauds and errors are high. CA. Amar has been appointed as an auditor of the company for current Financial Year 2018-19. Before starting the audit, he wants to evaluate the internal control system of M Ltd. To facilitate the accumulation of the information necessary for the proper review and evaluation of internal controls, CA. Amar decided to use internal control questionnaire to knowand assimilate the system and evaluate the same. Which of the following questions need notbe framed under internal control questionnaire relating to purchases?
(a) Are authorized signatories for purchases limited to elected officials?
(b) Are payments approved only on original invoices?
(c) Are monthly bank reconciliations implemented for each and every bank accounts of the company?
(d) Does authorized officials thoroughly review the documents before signing cheques?
Answer:
(c) Are monthly bank reconciliations implemented for each and every bank accounts of the company?

Question 16.
While auditing the books of account of ABC Ltd., CA. Sanyam, the statutory auditor of the company, came to know that the management of the company has recognized internally generated goodwill as a fixed asset. CA. Sanyam discussed with the management that according to AS 26, internally generated goodwill is not recognized as an asset because it is not an identifiable resource controlled by the enterprise that can be measured reliably at cost. However, the management is quite rigid to the accounting treatment followed for internally generated goodwill and not paying attention to the auditor. Thus, through an example, CA. Sanyam explained which type of goodwill may be recognized as a fixed asset for which the management got justified. State which of the following examples he must have given to the management?
(a) If an item meeting the definition of an intangible asset is acquired in abusiness combination, it forms part of the goodwill to be recognized at the date of the amalgamation
(b) Goodwill is recognised only when there is a contractual or other legal rights for a physical asset which shall not be amortized over the period
(c) Only those goodwill needs to be recognized as a fixed asset which can be touched like physical assets, for example, land and buildings
(d) Any of the above
Answer:
(a) If an item meeting the definition of an intangible asset is acquired in abusiness combination, it forms part of the goodwill to be recognized at the date of the amalgamation

Question 17.
The notes to the account statement of A Ltd. shows the break-up of accounts payable for the Financial Year 2018-19 as follows:

Accounts Payable	Amount (in ₹ )
Mr. A	2,20,000
Mr. B	1,40,000
Mr. C	16,56,000
Total	21,16,000

CA. Sanyam, the auditor of A Ltd., wants to investigate the valuation of accounts payable of Mr. C amounting to ₹ 16,56,000. Which of the following procedures is best fitted & more reliable to be followed by the auditor to get more reliable evidence for the existence of such balance as on 31st March, 2019?
(a) Inspect the invoices issued by Mr. C and the payments made
(b) Inspect each and every journal entry passed in the books of A Ltd.
(c) Ask A Ltd. to provide the details of payment made during the year 2018-19
(d) Any of the above
Answer:
(a) Inspect the invoices issued by Mr. C and the payments made

Question 18.
An entity in addition to undertaking purchases and incurring employee benefit expenses also j spends on other expenditure that are essential and incidental to running of business operations. One of such expenses is the legal and professional expenses. These are the fees paid for professional advices regardingspecificdealsTitanicLtd. is having a retainer ship agreement with a lawyer, Mr. Bhan- war, to whom the company is paying a huge sum as legal and professional expenses on monthly basis. While vouching such expenses, what should be kept in mind by the auditor?
(a) In case of monthly retainer ship agreements, only j verify if the expenditure for all 12 months has been recorded correctly
(b) The auditor should verify that the payments have been only through bank vouchers
(c) The auditor should be cautious while vouching for legal expenses as the same may highlight a dispute for which the entity may not have made g any provision and the matter may also not have been discussed/highlighted to the auditor for his S specific consideration
(d) In case of monthly retainer ship agreements, only verify that all the payments have been made and there is no outstanding balance to be shown as liability in the Balance Sheet
Answer:
(c) The auditor should be cautious while vouching for legal expenses as the same may highlight a dispute for which the entity may not have made g any provision and the matter may also not have been discussed/highlighted to the auditor for his S specific consideration

Question 19.
The management of XYZ Ltd. could not differentiate between any obligation for which either provisions need to be made or the contingent liability to be shown. The auditor of the company clarifies the management that the provisions are the amounts charged against revenue to provide for a known liability, the amount whereof cannot be determined with substantial accuracy. On the other hand, a contingent liability is a possible obligation that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity; or a present obligation that arises from past events j but is not recognized because it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability. The auditor further explains the concept with the help of examples. State which of the following examples the auditor must have provided in respect of contingent liability?
(a) Depreciation
(b) Clean-up costs for unlawful environmental damage
(c) Product warranties
(d) Lawsuit against the company where iris more likely that no present obligation exists
Answer:
(d) Lawsuit against the company where iris more likely that no present obligation exists

Question 20.
One of your junior audit team members is con-fused with the term ‘material misstatement’. You explain him that a material misstatement is untrue information in a financial statement that could affect the financial decisions of one who relies on the statement. Which of the following would constitute material misstatement?
(1) An error of ₹ 5,000 in relation to assets of ₹ 20 lakhs
(2) A payroll fraud of ₹ 100 in a company where profit before tax is ₹ 11,000
(3) Non-disclosure of a material uncertainty
(4) Financial statements have been prepared on a . going concern basis when the company is in the process of being liquidated
(a) 1 and 2
(b) 3 and 4
(c) 2 and 3
(d) 1 and 4
Answer:
(b) 3 and 4

Question 21.
One of your junior audit team members is con-fused with the term ‘material misstatement’. You explain him that a material misstatement is untrue information in a financial statement that could affect the financial decisions of one who relies on the statement.
(1) An error of ₹ 5,000 in relation to assets of ₹ 20 lakhs.
(2) A payroll fraud of ₹ 100 in a company where profit before tax is ₹ 11,000.
(3) Non-disclosure of a material uncertainty.
(4) Financial statements have been prepared on a going concern basis when the company is in the process of being liquidated.
Which of the above mentioned would constitute material misstatement?
(a) 1 and 2
(b) 3 and 4
(c) 2 and 3
(d) 1 and 4
Answer:
(b) 3 and 4

Question 22.
While auditing the accounts of Thought Co. Ltd., CA. Biiss, the auditor of the company came across certain accounts payable balances for which direct confirmation procedure needs to be applied. Thus, for the year endingS IstMarch, 2018, he sent positive confirmation requests wherein the trade payables are requested to respond whether or not they are in agreement with the balance shown. The auditor received all the confirmation replies from the trade payables on time as correct except from five of them. What other option the auditor is left with regard to trade payables from which no reply for confirmation requests received?
(a) Perform additional testing which may include agreeing the balance to subsequent cash paid.
(b) Accept the balances as it is assuming other replies against received confirmation requests being correct.
(c) Accept the balances as it is assuming that the trade payables must have replied in case of any discrepancies.
(d) None of the above.
Answer:
(a) Perform additional testing which may include agreeing the balance to subsequent cash paid.

Question 23.
__________ is a possible obligation that arises from the past events and whose existence will be confirmed only by the occurrence/non-occurrence of one or more uncertain future events not wholly within the control of the entity:
(a) Provisions
(b) Reserves
(c) Contingent Liabilities
(d) Liability
Answer:
(c) Contingent Liabilities

Question 24.
While conducting the audit of Saraswati Ltd., a packaged water making company, it was found that a purchase of motor car was made in the name of the company. Your Article Assistant has performed the following audit procedures. Identify which of the following procedure is incorrect.
(a) Ascertain whether the purchase of car has been properly authenticated.
(b) Check invoice of the car dealer to confirm the purchase price
(c) Examine registration with Transport Authorities to verify the ownership
(d) Ensure that the motor car has been included in the Closing inventory of goods
Answer:
(d) Ensure that the motor car has been included in the Closing inventory of goods

CA Inter Advanced Accounts Paper Nov 2019 – Advanced Accounts CA Inter Study Material is designed strictly as per the latest syllabus and exam pattern.

CA Inter Advanced Accounting Question Paper Nov 2019

Question 1.
(a) A Ltd. provides after sales warranty for two years to its customers.
Based on past experience, the company has the following policy for making provision for warranties on the invoice amount, on the remaining balance warranty period.
Less than 1 year: 2% provision
More than 1 year: 3% provision The company has raised invoices as under:

Calculate the provision to be made for warranty under AS-29 as at 31st March, 2018 and 31st March, 2019. Also compute amount to be debited to P & L account for the year ended 31st March, 2019. [5 Marks]
Answer:
31st March, 2018 = 1,00,000 × 2% = 2,000
31st March, 2019 = 40,000 × 2% + 1,35,000 × 3% = 4,850

(b) As per provision of AS-26, how would you deal to the following situations:

(1) ₹ 23,00,000 paid by a manufacturing company to the legal advisor de-fending the patent of a product is treated as a capital expenditure.

(2) During the year 2018-19, a company spent ₹ 7,00,000 for publicity and research expenses on one of its new consumer product which was marketed in the same accounting year but proved to be a failure.

(3) A company spent ₹ 25,00,000 in the past three years to develop a product, these expenses were charged to profit and loss account since they did not meet AS-26 criteria for capitalization. In the current year approval of the concerned authority has been received. The company wishes to capitalize ₹ 25,00,000 by disclosing it as a prior period item.

(4) A company with a turnover of ₹ 200 crores and an annual advertising budget of ₹ 50,00,000 had taken up for the marketing of a new product by a company. It was estimated that the company would have a turnover of ₹ 20 crore from the new product. The company had debited to its Profit & Loss Account the total expenditure of ₹ 50,00,000 incurred on extensive special initial advertisement campaign for the new product. [5 Marks]
Answer:
(1) Revenue
(2) Revenue
(3) Incorrect
(4) Correct

(c) Indicate in each case whether revenue can be recognized and when it will be recognized as per AS-9.
(1) Trade discount and volume rebate received.
(2) Where goods are sold to distributor or others for resale.
(3) Where seller concurrently agrees to repurchase the same goods at a later date.
(4) Insurance agency commission for rendering services.
(5) On 11-3-2019 cloths worth ₹ 50,000 were sold to X mart, but due to re-furbishing of their showroom being underway, on their request cloths were delivered on 12-4-2019. [5 Marks]
Answer:
(1) Deducted from sales
(2) When ultimate sale is made (However depends upon terms of agreement)
(3) Not a sale (Financing arrangement)
(4) Policy is reversed
(5) Revenue for FY 2018-19

(d) Following information is supplied by K Ltd.
Number of shares outstanding prior to right issue – 2,50,000 shares.
Right issue – two new share for each 5 outstanding shares (i.e. 1,00,000 new shares)
Right issue price – ₹ 98
Last date of exercising rights – 30-6-2018.
Fair value of one equity share immediately prior to exercise of right on 30-6-2018 is ₹ 102.
Net Profit to equity shareholders:
2017- 18 – ₹ 50,00,000
2018- 19 – ₹ 75,00,000
You are required to calculate the basic earnings per share as per AS-20 Earning per Share. [5 Marks]
Answer:
Step 1: Theoretical Ex Right FV per share
= \(\frac{250000 \times 102+100000 \times 98}{350000}\)
= 100.86
Step 2: Adjustment Factor
= \(\frac{102}{100.86}\) = 1.011 100.86
Step 3: EPS Computation

Question 2.
(a) X Ltd. furnishes the following summarized Balance Sheet as at 31-3-2018:

The shareholders adopted the resolution on the date of the abovementioned Balance Sheet to:

(1) Buy back 25% of the paid up capital and it was decided to offer a price of 20% over market price. The prevailing market value of the company’s share is ₹ 30 per share.

(2) To finance the buy back of share company:
(a) Issue 3000, 14% debenture of ₹ 100 each at a premium of 20%.
(b) Issue 2500, 10% preference share of ₹ 100 each

(3) Sell investment worth ₹ 1,00,000 for ₹ 1,50,000.
(4) Maintain a balance of ₹ 2,00,000 in Revenue Reserve.

(5) Later the company issue three fully paid up equity share of ₹ 20 each by way of bonus share for every 15 equity share held by the equity shareholder.
You are required to pass the necessary journal entries to record the above transactions and prepare Balance Sheet after buy back. [15 Marks]
Answer:

2 VIEW POINTS

Accordingly amount of journal entries will charge.

(b) On 1st April, 2018, XYZ Ltd., offered 150 shares to each of its 750 employees at ₹ 60 per share. The employees are given a year to accept the offer. The shares issued under the plan shall be subject to lock-in period on transfer for three years from the grant date. The market price of shares of the company on the grant date is ₹ 72 per share. Due to post-vesting restrictions on transfer, the fair value of shares issued under the plan is estimated at ₹ 67 per share.

On 31st March, 2019, 600 employees accepted the offer and paid ₹ 60 per share purchased. Nominal value of each share is ₹ 10.
You are required to record the issue of shares in the books of the XYZ Ltd., under the aforesaid plan. [5 Marks]
Answer:

Question 3.
(a) Following is the summarized Balance Sheet of Fortunate Ltd. as on 31st March, 2019.

(Note: Preference shares dividend is in arrear for last five years).

The Company is running with the shortage of working capital and not earn-ings profits. A scheme of reconstruction has been approved by both the classes of shareholders. The summarized scheme of reconstruction is as follows:

(i) The equity shareholders have agreed that their ₹ 50 shares should be reduced to ₹ 5 by cancellation of ₹ 45.00 per share. They have also agreed to subscribe for three new equity shares of ₹ 5.00 each for each equity share held.

(ii) The preference shareholders have agreed to forego the arrears of dividends and to accept for each ₹ 50 preference share, 4 new 6% preference shares of ₹ 10 each, plus 3 new equity shares of ₹ 5.00 each, all credited as fully paid.

(iii) Lenders to the company for ₹ 1,87,500 have agreed to convert their loan into shares and for this purpose they will be allotted 15,000 new preference shares of ₹ 10 each and 7,500 new equity shares of ₹ 5.00 each.

(iv) The directors have agreed to subscribe in cash for 25,000 new equity shares of ₹ 5.00 each in addition to any shares to be subscribed by them under (i) above.

(v) Of the cash received by the issue of new shares, ₹ 2,50,000 is to be used to reduce the loan due by the company.

(vi) The equity share capital cancelled is to be applied :
(a) To write off the debit balance in the Profit and Loss A/c, and
(b) To write off ₹ 43,750 from the value of plant.

Any balance remaining is to be used to write down the value of trade-marks and goodwill. The nominal capital as reduced is to be increased to ₹ 8,12,500 for preference share capital and t 9,37,500 for equity share capital.

You are required to pass journal entries to show the effect of above scheme and prepare the Balance Sheet of the Company after recon-struction. [15 Marks]
Answer:
Journal Entries

(b) A liquidator is entitled to receive remuneration at 5%, of the assets realised and 8% of the amount distributed among the unsecured creditors. The assets realised ₹ 13,75,000. Payment was made from realised amount as follows:

Liquidation expenses ₹ 13,000
Preferential creditors (treated as unsecured creditors) ₹ 88,500
Secured creditors ₹ 1,00,000
You are required to calculate remuneration payable to the liquidator. [5 Marks]
Answer:
5% of 1375000 + 8% of (1375000 – 13000 – 88500 – 100000) = 162630

Question 4.
(a) From the following information, you are required to prepare Profit and Loss Account of Simple Bank for the year ended as on 31st March, 2019:

2017-18 (₹ in ‘000)	Item	2018-19 (₹ in ‘000)
71,35	Interest and Discount	1,02,25
5,70	Income from investment	5,60
7,75	Interest on Balances with RBI	8,85
36,10	Commission, Exchange and Brokerage	35,60
60	Profit on sale of investments	6,10
30,60	Interest on Deposits	41,10
6,35	Interest to RBI	7,35
36,35	Payment to and provision for employees	42,75
7,90	Rent, taxes and lighting	8,95
7,35	Printing and Stationery	10,60
5,60	Advertising and publicity	4,90
4,90	Depreciation	4,90
7,40	Director’s fees	10,60
5,50	Auditor’s fees	5,50
2,50	Law Charges	7,60
2,40	Postage, telegrams and telephones	3,10
2,10	Insurance	2,60
2,85	Repair and maintenance	3,30

Other Information:

(i) The following items are alreadv adjusted with Interest and Discount (Cr.)
Tax Provision (₹ ‘000) 7,40
Provision for Doubtful Debts (₹ ‘000) 4,60
Loss on sale of investments (₹ ‘000) 60
Rebate on Bills discounted (₹ ‘000) 2,75

(ii) Appropriations:
25% of profit is transferred to Statutory Reserves.
5% of profit is transferred to Revenue Reserve
You are required to give necessary Schedules also.

(b) The investment portfolio of a mutual fund scheme includes 4,000 shares of P Ltd. and 3,200 shares of Q Ltd. acquired on 31-12-2017. The cost of P Ltd.’s share is ₹ 50 and Q Ltd.’s share is ₹ 75. The market value of these shares at the end of 2017-18 were ₹ 47 and ₹ 80 respectively. On 30th June, 2018 shares of both companies were disposed of realising:
P Ltd.’s share at ₹ 40 and
Q Ltd.’s share at ₹ 82
Show important accounting entries in the books of the fund for the accounting years 2017-18 and 2018-19. [5 Marks]
Answer:
Chapter deleted from course

(c) The following information is furnished by ALFA Bank Ltd.

Margins held against letter of credit	₹ in Lakhs 200
Recurring accounts deposits	100
Current accounts deposits	375
Demand deposit	125
Unclaimed deposit	75
Gold deposit	235
Demand liabilities portion of saving bank deposit	1325
Time liabilities portion of saving bank deposit	722

Explain CRR and you are required to calculate the amount of Cash Reserve Ratio (CRR) as per the direction of Reserve Bank of India. [5 Marks]

Question 5.
(a) Consider the following summarized Balance Sheets of subsidiary MNT Ltd.:

Liabilities	2017-18 Amount in ₹	2018-19 Amount in ₹
Share Capital
Issued and subscribed 7500 Equity Shares of ₹ 100 each	7,50,000	7,50,000
Reserve and Surplus
Revenue Reserve	2,14,000	5,05,000
Securities Premium	72,000	2,07,000
Current Liabilities and Provisions
Trade Payables	2,90,000	2,46,000
Bank Overdraft	—	1,70,000
Provision for Taxation	2,62,000	4,30,000
	15,88,000	23,08,000

Liabilities	2017-18 Amount in ₹	2018-19 Amount in ₹
Assets
Fixed Assets (Cost)	9,20,000	9,20,000
Less: Accumulated Depreciation	(1,70,000)	(2,82,500)
	7,50,000	6,37,500
Investment at Cost	—	5,30,000
Current Assets
Inventory	4,12,300	6,90,000
Trade Receivable	2,95,000	3,43,000
Prepaid expenses	78,000	65,000
Cash at Bank	52,700	42,500
	15,88,000	23,08,000

Other Information :

1. MNT Ltd. is a subsidiary of LTC Ltd.
2. LTC Ltd. values inventory on FIFO basis, while MNT Ltd. used LIFO basis. To bring MNT Ltd.’s inventories values in line with those of LTC Ltd., its value of inventory is required to be reduced by ₹ 5,000 at the end of 2017-2018 and increased by ₹ 12,000 at the end of 2018-2019. (Inventory of 2017-18 has been sold out during the year 2018-19)
3. MNT Ltd. deducts 2% from Trade Receivables as a general provision against doubtful debts.
4. Prepaid expenses in MNT Ltd. include Sales Promotion expenditure carried forward of ₹ 25,000 in 2017-18 and ₹ 12,500 in 2018-19 being part of initial Sales Promotion expenditure of ₹ 37,500 in 2017-18, which is being written off over three years. Similar nature of Sales Promotion expenditure of LTC Ltd. has been fully written off in 2017-18.

Restate the balance sheet of MNT Ltd. as on 31st March, 2019 after consider-ing the above information for the purpose of consolidation. Such restatement is necessary to make the accounting policies adopted by LTC Ltd. and MNT Ltd. uniform. [10 Marks]

Answer:

Balance Sheet (Extract)
[only changes have been reflected]

(b) On the basis of the following information, calculate the value of goodwill of Star Ltd. at, 5 years’ purchase of super profits, if any, earned by the com-pany in the previous three completed accounting years.
Summarised Balance Sheet of Star Ltd. as at 31st March, 2019

	₹ in Lakhs
Liabilities
Share Capital
Issued and subscribed
3 Crore Equity Shares of ₹ 10 each, fully paid up	3,000
Capital Reserve	200
General Reserve	5,293
Profit & Loss Account	517
Trade Payables	522
Provision for Taxation (net)	68
	9,600
Assets
Goodwill	510
Land & Building	1,650
Plant & Machinery	2,715
Furniture & Fixtures	2,062
Patent and Trade Marks	30
Investments	800
Inventory	673
Trade Receivables	546
Cash and Cash equivalents	614
	9,600

The profits before tax of three years are as follows:

Year ended 31st March	Profit before tax in lakhs of (₹)	Weights
2015-16	1,910	1
2016-17	2,050	3
2017-18	2,950	5

Other information:

1. Assume that the rate of income tax for all the year is 35%,
2. In the accounting year 2015-16 the company sold its land at a profit of ₹ 75.2 Lakhs, which is included in the profits of the same year.
3. In December, 2016 there was a fire occurred in factory due to which the company lost property worth of ₹ 25 lakhs and the loss was not covered under the insurance policy.
4. In November, 2017 the company earned an extraordinary income of ₹ 48.88 Lakhs due to a special contract.
5. 40% of total investments were, 8% Non-trading investments (Purchased at par on 1st April, 2014).
6. Company values inventory on FIFO basis. On 31 st March, 2018 inventory was undervalued by ₹ 6 Lakhs inventory of 2017-18 sold during the year 2018-19)
7. Future maintainable profits to be ascertained considering weighted average.
8. The normal rate of return for the industry in which company is engaged is 15%.
9. Capital employed as on 31st March, 2018 was ₹ 5,820 Lakhs.
10. In Shareholders’ general meeting a resolution was passed to sanction the directors additional remuneration of ₹ 15 lakhs every year beginning from the accounting year 2018-19. [10 Marks]

Answer:
Step 1: Average Capital Employed

Step 2:

Note:
Current year profits are missing. Thus, FMP has been computed on the basis of past 3 years profits.

Future Maintainable Profits

Step 3

NRR= 15%

Goodwill
= 1583.075 – 7000 × 15% × 5 = 2665.375

Question 6.
Answer any four of the following:
(a) X Ltd. is a group engaged in manufacture and sale of industrial and FMCG products. One of their division also deals in Leasing of proper-ties – Mobile Towers. The accountant showed the rent arising from the leasing of such properties as other income in the Statement of Profit and Loss.
Comment whether the classification of the rent income made by the accountant is correct or not in the light of Schedule III to the Companies Act, 2013. [5 Marks]
Answer:
Incorrect

(b) Darshan Ltd. incorporated on 1st January, 2018 issued a prospectus in-viting application for 40,000 Equity Shares of ₹ 10 each. The whole issue was fully underwritten by Arun, Babu and Chandran as follows:
Arun 20,000 shares
Babu 12,000 shares
Chandran 8,000 shares
Applications were received for 32,000 shares, of which marked applications were as follows:
Arun 16,000 shares
Babu 5,700 shares
Chandran 8,300 shares
You are required to find out the liabilities of individual underwriters viz. Arun, Babu & Chandran. [5 Marks]
Answer:
Statement Showing Net Liability of Underwriters

	A	B	C
Gross Liability	20000	12000	8000
Marked Application	16000	5700	8300
Unmarked Application [2000]	1000	600	400
	3000	5700	(700)
Surplus Transferred (2012)	(438)	(262)	700
Net Liability	2562	5438	Nil

(c) From the following data determine in each case:

[5 Marks]
Answer:
Minority Interest

Case	Subsidiary Company	% of Share Owned	Cost	Date of Acquisition 01-01-2018		Consolidation date 31-12-2018
				Share Capital	Profit and Loss a/c	Share Capital	Profit and Loss a/c
				7	7	7	7
Case-A	X	90%	2,00,000	1,50,000	75,000	1,50,000	85,000
Case-B	Y	75%	1,75,000	1,40,000	60,000	1,40,000	20,000
Case-C	Z	70%	98,000	40,000	20,000	40,000	20,000
Case-D	M	95%	75,000	60,000	35,000	60,000	55,000
Case-E	N	100%	1,00,000	40,000	40,000	40,000	65,000

(d) Explain the criterion of income recognition in the case of Non Banking Financial Companies [5 Marks]

(e) Classify the following into either operating lease or finance lease with rea-son:
(1) Economic life of asset is 10 years, lease term is 9 years, but asset is not acquired at the end of lease term.
(2) Lessee has option to purchase the asset at lower than fair value at the end of lease term.
(3) Lease payments should be recognized as an expense in the statement of Profit & Loss of a lessee.
(4) Present Value (PV) of Minimum Lease Payment (MLP) = “X”. Fair value of the asset is “Y”. And X = Y.
(5) Economic life of the asset is 5 years, lease term is 2 years, but the asset is of special nature and has been procured only for use of the lessee. [5 Marks]
Answer:
(1) Finance lease
(2) Finance lease
(3) Operating lease
(4) Finance lease
(5) Finance lease

Students should practice these Analytical Procedures – CA Inter Audit MCQ based on the latest syllabus.

Analytical Procedures – CA Inter Audit MCQ

Question 1.
What are analytical procedures?
(a) Substantive tests designed to assess control risk
(b) Substantive tests designed to evaluate the validity of management’s representation letter
(c) Substantive tests designed to study relationships between financial and non-financial information
(d) All of the above
Answer:
(c) Substantive tests designed to study relationships between financial and non-financial information

Question 2.
Which of the following is not an analytical procedure?
(a) Tracing of purchases recorded in the purchase book to purchase invoices
(b) Comparing aggregate wages paid to number of employees
(c) Comparing the actual costs with standard costs
(d) All of them are analytical procedures
Answer:
(a) Tracing of purchases recorded in the purchase book to purchase invoices

Question 3.
Analytical procedures issued in the planning stage of an audit, generally:
(a) helps to determine the nature, timing and extent of other audit procedures
(b) directs attention to potential risk areas
(c) indicates important aspects of business
(d) all of the above
Answer:
(d) all of the above

Question 4.
The basic assumption underlying the use of analytical procedures is:
(a) It helps the auditor to study relationship among elements of financial information
(b) Relationship among data exist and continue in the absence of known condition to the contrary
(c) Analytical procedures will not be able to detect unusual relationships
(d) None of the above
Answer:
(b) Relationship among data exist and continue in the absence of known condition to the contrary

Question 5.
What is the primary objective of analytical procedures used in the overall review stage of an audit?
(a) To help to corroborate the conclusions drawn from individual components of financial statements
(b) To reduce specific detection risk
(c) To direct attention to potential risk areas
(d) To satisfy doubts when questions arise about a client’s ability to continue
Answer:
(a) To help to corroborate the conclusions drawn from individual components of financial statements

Question 6.
Which of the following is true?
(a) Substantive Analytical Procedures are generally more applicable to large volume of transactions that tend to be more predictable over time.
(b) Different types of analytical procedures provide same levels of assurance.
(c) Determination of suitability of Substantive Analytical procedures is not influenced by the nature of assertion
(d) All of the above
Answer:
(a) Substantive Analytical Procedures are generally more applicable to large volume of transactions that tend to be more predictable over time.

Question 7.
Analytical procedures compare one result to another. These comparisons may be with all the following except:
(a) Similar information about top-performing subsidiaries
(b) Anticipated results (such as budgets and forecasts, or auditor expectations)
(c) Comparable information for prior periods
(d) Non-financial information
Answer:
(a) Similar information about top-performing subsidiaries

Question 8.
Performing analytical procedures may be thought of as a four-phase process. The first phase is:
(a) compare the expected value to the recorded amount
(b) formulate expectations
(c) evaluate the impact of the differences between expectation and recorded amounts on the audit | and the financial statements
(d) investigate possible explanations for a difference between expected and recorded values
Answer:
(b) formulate expectations

Question 9.
Which of the following is correct:
(a) As per the Standard on Auditing (SA) 520 “Analytical Procedure” the term “analytical procedures” means evaluations of financial information through analysis of financial data.
(b) As per the Standard on Auditing (SA) 520 “Analytical Procedure” the term “analytical procedures” means evaluations of financial information through analysis of non-financial data.
(c) As per the Standard on Auditing (SA) 520 “Analytical Procedure” the term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.
(d) As per the Standard on Auditing (SA) 520 “Analytical Procedure” the term “analytical procedures” means evaluations of financial information through ratio analysis
Answer:
(c) As per the Standard on Auditing (SA) 520 “Analytical Procedure” the term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among both financial and non-financial data.

Question 10.
Which of the following statement is correct:
(a) Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time
(b) Substantive analytical procedures are generally less applicable to large volumes of transactions that tend to be predictable over time
(c) Substantive analytical procedures are generally more applicable to small volumes of transactions that tend to be predictable over time
(d) All statements are correct
Answer:
(a) Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time

Question 11.
A basic premise of using analytical procedures is that:
(a) there exist plausible relationships among data that is highly accurate
(b) there exist plausible relationships among data that can reasonably be expected to continue
(c) they are a good indicator of fraud and error
(d) they are essential in the planning process
Answer:
(b) there exist plausible relationships among data that can reasonably be expected to continue

Question 12.
Trend analysis is:
(a) the analysis of account balances or changes in account balances within an accounting period in terms of their reasonableness
(b) the analysis of changes in an account balance over time
(c) use of sophisticated statistical analysis, including artificial intelligence techniques, to examine large volumes of data with the objective of indicating hidden or unexpected information or patterns
(d) the comparison of relationships between firms in an industry
Answer:
(b) the analysis of changes in an account balance over time

Question 13.
Expectations are developed by identifying plausible relationships that are reasonably expected to exist based on the auditor’s understanding of the client and of the industry. These relationships may be determined by comparisons with the following sources:
(a) Data from various company divisions
(b) Non-financial information
(c) Data from national cross-industry surveys
(d) Comparable information for future periods
Answer:
(b) Non-financial information

Question 14.
Which of the following statements is not true of analytical procedures as substantive tests?
(a) are used as a confirmation of an account
(b) include tests of details (either of balances or of transactions) and analytical procedures
(c) identify situations that require increased use of other procedures (i.e. tests of control, substantive audit procedures),but seldom to reduce audit effort
(d) are designed to reduce detection risk relating to specific financial statement assertions
Answer:
(a) are used as a confirmation of an account

Question 15.
Substantive analytical procedures have certain advantages. Which of the following is an advantage of substantive analytical procedures?
(a) analytical procedures are effective when applied to the financial statements of the entity as a whole rather than when applied to financial statements of components of a diversified entity
(b) obtaining data used to develop an expectation and ensuring the reliability of that data at an appropriate level of disaggregation can account for a substantial amount of the time
(c) substantive analytical procedures deliver the desired results every year
(d) substantive analytical procedures often enable auditors to focus on a few key factors that affect the account balance
Answer:
(d) substantive analytical procedures often enable auditors to focus on a few key factors that affect the account balance

Question 16.
Which of the following would NOT be considered an analytical procedure?
(a) Computing accounts receivable turnover by dividing credit sales by the average net receivables
(b) Estimating payroll expense by multiplying the number of employees by the average hourly wage rate and the total hours worked
(c) Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics
(d) Developing the expected current year sales based on the sales trend of the prior 5 years
Answer:
(c) Projecting an error rate by comparing the results of a statistical sample with the actual population characteristics

Question 17.
For all audits of financial statements made in accordance with generally accepted auditing standards, the use of analytical procedures is required to some extent:

	In the plan­ning stage	As a substan­tive test	In the review stage
(a)	No	Yes	Yes
(b)	No	Yes	No
(c)	Yes	No	Yes
(d)	Yes	No	No

Answer:
(c)

Question 18.
Which of the following procedures do general analytical procedures not include?
(a) Sequence tests
(b) Trend analysis
(c) Statistical analysis
(d) Reasonableness tests
Answer:
(a) Sequence tests

Question 19.
Of the following types of analytical procedure, which one uses the most variables?
(a) Reasonableness test
(b) Trend analysis
(c) Ratio analysis
(d) Data mining
Answer:
(d) Data mining

Question 20.
Which of the following statement is correct?
(a) Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time.
(b) Substantive analytical procedures are generally less applicable to large volumes of transactions that tend to be predictable over time.
(c) Substantive analytical procedures are generally more applicable to small volumes of transactions that tend to be predictable over time.
(d) None of the above.
Answer:
(a) Substantive analytical procedures are generally more applicable to large volumes of transactions that tend to be predictable over time.

Question 21.
Which of the following is not an analytical procedure?
(a) Tracing of purchases recurred in the purchase book to purchase invoices.
(b) Comparing aggregate wages paid to number of employees
(c) Comparing the actual costs with standard costs
(d) All of them are analytical procedures
Answer:
(a) Tracing of purchases recurred in the purchase book to purchase invoices.

Question 22.
Which of the following is correct?
(a) Different types of analytical procedures provide different levels of assurance.
(b) Different types of analytical procedures provide similar levels of assurance.
(c) Similar type of analytical procedures provides different levels of assurance.
(d) All are correct
Answer:
(a) Different types of analytical procedures provide different levels of assurance.

Question 23.
Statement I: As per the Standard on Auditing (SA) 520 “Analytical Procedures”, the term “analytical procedures” means evaluations of financial information through analysis of plausible relationships among financial data.
Statement II: Analytical procedures also encompass such investigation as is necessary of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.
(a) Only Statement I is correct
(b) Only Statement II is correct
(c) Both statements are correct
(d) Both Statements are incorrect
Answer:
(b) Only Statement II is correct

Question 24.
Which of the following is not an example of Analytical Procedures having consideration of comparisons of the entity’s financial information:
(a) Comparable information for prior periods.
(b) Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor, such as an estimation of depreciation.
(c) Similar industry information, such as a comparison of the entity’s ratio of sales to accounts receivable with industry averages or with other entities of comparable size in the same industry.
(d) Among elements of financial information that would be expected to conform to a predictable pattern based on the entity’s experience, such as gross margin percentages.
Answer:
(d) Among elements of financial information that would be expected to conform to a predictable pattern based on the entity’s experience, such as gross margin percentages.

Question 25.
Auditor Compares Gross Profit Ratio with that of Previous year and it is discovered that there has been a fall in the ratio. This is an example of:
(a) Analytical Procedure
(b) Test of Controls
(c) Walk-Through Test
(d) Audit Sampling
Answer:
(a) Analytical Procedure

Students should practice these Audit Sampling – CA Inter Audit MCQ based on the latest syllabus.

Audit Sampling – CA Inter Audit MCQ

Question 1.
Which of the following is more scientific?
(a) Statistical
(b) Non-statistical
(c) Both (a) and (b)
(d) None of the above
Answer:
(a) Statistical

Question 2.
Which of the following is source of Non-Sampling risk?
(a) Human Mistakes
(b) Applying audit procedures not appropriate to the objectives of audit
(c) Misinterpreting the sample results
(d) All of the above
Answer:
(d) All of the above

Question 3.
The main advantage of using statistical sampling techniques is that such techniques:
(a) Mathematically measure risk
(b) Eliminate the need for judgmental sampling
(c) Defines the values of tolerable error
(d) all of the them
Answer:
(a) Mathematically measure risk

Question 4.
A monetary amount set by the auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded by the actual misstatement in the population is known as:
(a) Tolerable Misstatement
(b) Tolerable Rate of Deviation
(c) Performance Materiality
(d) Value Weighted Selection
Answer:
(a) Tolerable Misstatement

Question 5.
As per the requirement of SA 530, if the audit procedure is not applicable to the selected item, the auditor
(a) shall perform the procedure on a replacement item
(b) shall treat that item as a deviation from the prescribed control, in the case of tests of controls
(c) shall treat that item as a misstatement, in the case of tests of details
(d) none of the above
Answer:
(a) shall perform the procedure on a replacement item

Question 6.
As per the requirement of SA 530, if the auditor is unable to apply the designed audit procedures, or suitable alternative procedures, to a selected item, the auditor
(a) shall treat that item as a deviation from the prescribed control, in the case of tests of details, or a misstatement, in the case of tests of controls.
(fa) shall treat that item as a deviation from the prescribed control/in the case of tests of controls and tests of details.
(c) shall treat that item as a misstatement in the case of tests of controls and tests of details.
(d) shall treat that item as a deviation from the pre¬scribed control, in the case of tests of controls, or a misstatement, in the case of tests of details
Answer:
(d) shall treat that item as a deviation from the pre¬scribed control, in the case of tests of controls, or a misstatement, in the case of tests of details

Question 7.
Which of the following factors is (are) considered in determining the sample size for tests of control?
(a) Projected error
(b) Tolerable error
(c) Expected error
(d) Both (b) and (c)
Answer:
(d) Both (b) and (c)

Question 8.
In the case of tests of details
(a) the projected misstatement plus anomalous mis¬statement, if any, is the auditor’s best estimate of misstatement in the population.
(b) the projected misstatement is the auditor’s best estimate of misstatement in the population.
(c) the anomalous misstatement is the auditor’s best estimate of misstatement in the population.
(d) the projected misstatement plus anomalous misstatement, if any, cannot be the auditor’s best estimate of misstatement in the population.
Answer:
(a) the projected misstatement plus anomalous mis¬statement, if any, is the auditor’s best estimate of misstatement in the population.

Question 9.
Which of the following is correct:
(a) When the projected misstatement exceeds tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has been tested.
(b) When the projected misstatement plus anomalous misstatement, if any, exceeds tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has been tested.
(c) When the anomalous misstatement exceeds tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has been tested.
(d) When the projected misstatement plus anomalous misstatement, if any, exceeds tolerable misstatement, the sample provides a reasonable basis for conclusions about the population that has been tested.
Answer:
(b) When the projected misstatement plus anomalous misstatement, if any, exceeds tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has been tested.

Question 10.
Value-weighted selection in which sample size, selection and evaluation results in a conclusion in monetary amounts, is known as:
(a) Haphazard sampling
(b) Monetary Unit Sampling
(c) Stratified Sampling
(d) Interval sampling
Answer:
(b) Monetary Unit Sampling

Question 11.
Tolerable error, is the maximum monetary error that the auditor is prepared to accept in the population and still conclude that audit objective has been achieved, is directly related to
(a) Sample size
(b) Audit risk
(c) Materiality
(d) Expected error
Answer:
(c) Materiality

Question 12.
While determining the sample size for tests of controls, an increase in the auditor’s desired level of assurance that the tolerable rate of deviation is not exceeded by the actual rate of deviation in the population will:
(a) require the auditor to increase the sample size
(b) allow the auditor to decrease the sample size
(c) have negligible effect
(d) none of the above
Answer:
(a) require the auditor to increase the sample size

Question 13.
Which of the following is false?
(a) Audit sampling can be applied using either non-statistical or statistical sampling approaches.
(b) The level of sampling risk that the auditor is willing to accept affects the sample size required
(c) Example of sampling risk include use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognise a misstatement.
(d) All of the above
Answer:
(c) Example of sampling risk include use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognise a misstatement.

Question 14.
While auditing TEN Ltd., CA. Porky divided the whole population of trade receivables balances to be tested in a few separate groups called ‘strata’ and started taking a sample from each of them. He treated each stratum as if it was a separate population. He divided the trade receivables balances of TEN Ltd. for the Financial Year 2017-18 into groups on the basis of personal judgment as follows:

S. No.	Particulars
1	Balances in excess of ₹ 10,00,000
2	Balances in the range of ₹ 7,75,001 to ₹ 10,00,000
3	Balances in the range of ₹ 5,50,001 to ₹ 7,75,000
4	Balances in the range of ₹ 2,25,001 to ₹ 5,50,000
5	Balances ₹ 2,25,000 and below

From the above mentioned groups, CA. Porky picked up different percentage of items for examination from each of the groups, for example, from the top group i.e. balances in excess of ₹ 10,00,000, he selected all the items to be examined; from the second group, he opted for 25% of the items to be examined; from the lowest group, he selected 2% of the items for examination; and so on from rest of the groups. Which one of the following methods of sample selection is he following?
(a) Systematic sampling.
(b) Stratified sampling.
(c) Section sampling.
(d) Selection sampling
Answer:
(b) Stratified sampling.

Question 15.
While determining the sample size for tests of details, an increase in the auditor’s assessment of the risk of material misstatement will:
(a) require the auditor to increase the sample size
(b) allow the auditor to decrease the sample size
(c) have negligible effect
(d) none of the above
Answer:
(a) require the auditor to increase the sample size

Question 16.
Which among the following will have negligible effect on determination of sample size in case of tests of details?
(a) The number of sampling units in the population
(b) Stratification of the population when appropriate
(c) An increase in the auditor’s desired level of assurance that tolerable misstatement is not exceeded by actual misstatement in the population
(d) An increase in the use of other substantive procedures directed at the same assertion
Answer:
(a) The number of sampling units in the population

Question 17.
Which among the following will have effect of decrease in sample size in case of tests of details?
(a) The number of sampling units in the population
(b) Stratification of the population when appropriate
(c) An increase in the auditor’s desired level of assurance that tolerable misstatement is not exceeded by actual misstatement in the population
(d) An increase in the use of other substantive procedures directed at the same assertion
Answer:
(b) Stratification of the population when appropriate

Students should practice these Audit in an Automated Environment – CA Inter Audit MCQ based on the latest syllabus.

Audit in an Automated Environment – CA Inter Audit MCQ

Question 1.
Type of automated environment in which business operations and transactions are initiated, processed and recorded immediately on their occurrence
(a) Real Time processing
(b) Batch processing
(c) Time Sharing processing
(d) Service Bureau processing
Answer:
(a) Real Time processing

Question 2.
As required by SA 315, auditor is required to obtain an understanding of the entity and its environment as a part of Risk Assessment procedure to identify and assess Risk of Material Misstatements. Given below is list of certain areas for which auditor generally required understanding:
(i) Applications being used by the entity.
(ii) IT infrastructure components for each of the application.
(iii) Organisation structure and governance.
(iv) Policies, procedures and processes followed,
(v) IT risks and controls.
In an automated environment, auditor is required to obtain an understating of:
(a) (i), (ii) and (v)
(b) (iii) and (iv)
(c) (i) (ii) (iii) and (v)
(d) (i) (ii) (iii) (iv) and (v)
Answer:
(d) (i) (ii) (iii) (iv) and (v)

Question 3.
Which of the following are not general IT controls?
(a) Controls over data centre and network operations
(b) Back-up and recovery
(c) Edit checks of input data
(d) System software acquisition
Answer:
(c) Edit checks of input data

Question 4.
Which of the following are not application controls?
(a) Access security
(b) Numerical sequence checks
(c) Edit Checks of Input Data
(d) Reasonable Checks
Answer:
(a) Access security

Question 5.
Policies and procedures that relate to many applications and support the effective functioning of application controls are known as
(a) General IT Controls
(b) Application Controls
(c) IT Dependent Controls
(d) None of the above
Answer:
(a) General IT Controls

Question 6.
Which of the following is a General IT control?
(a) IT Environment
(b) Application Control
(c) Access Security
(d) IT Dependent Control
Answer:
(c) Access Security

Question 7.
Which of the following is an automated control?
(a) Program change
(b) System-generated report
(c) Application control
(d) Configurations
Answer:
(d) Configurations

Question 8.
Application controls are that typically operate at a business process level and apply to the processing of individual applications
(a) Manual procedures
(b) Automated procedures
(c) Manual or Automated procedures
(d) None of the above
Answer:
(c) Manual or Automated procedures

Question 9.
Manual controls that make use of some form of data or information or report produced from IT systems and applications are known as:
(a) General IT Controls
(b) Automated Application Controls
(c) IT Dependent Controls
(d) None of the above
Answer:
(c) IT Dependent Controls

Question 10.
Identify the automated controls from below mentioned cases:
(a) All changes to the credit limit are approved manually by sales manager
(b) Price master configured in the sales master can only be edited by authorised personnel in the system
(c) Inventory ageing report is pulled out from the system based on which provisioning is calculated after analysing the future demand by the inventory personnel and approved by the controller
(d) All invoices are signed by warehouse personnel before the goods are dispatched to the customer
Answer:
(b) Price master configured in the sales master can only be edited by authorised personnel in the system

Question 11.
Identify the IT Dependent controls:
1. Price master configured in the sales master can only be edited by authorised personnel in the system
2. Invoice can not be booked in SAP in case Purchase orders are not approved
3. All invoices are signed by warehouse personnel before the goods are dispatched to the customer
4. Inventory ageing report is pulled out from the system based on which provisioning is calculated after analysing the future demand by the inventory personnel and approved by the controller
5. Credit limit is assigned to the customer and goods cannot be sold in excess of credit limit configured in the system
6. Ageing report is pulled out from SAP based on which provisioning is calculated by accounting personnel and approved by financial controller
Correct Answer is:
(a) 1, 2, 3 and 4
(b) 2, 3 and 4
(c) 4 and 6
(d) 4, 5 and 6
Answer:
(c) 4 and 6

Question 12.
Identify the Automated controls:
1. Price master configured in the sales master can only be edited by authorised personnel in the system
2. Invoice cannotbe booked in SAP in case Purchase orders are not approved
3. Inventory ageing report is pulled out from the system based on which provisioning is calcu-lated after analysing the future demand by
the inventory personnel and approved by the controller
4. All invoices are signed by warehouse personnel before the goods are dispatched to the customer
5. Credit limit is assigned to the customer and goods cannot be sold in excess of credit limit configured in the system
6. All changes to the credit limit are approved manually by sales manager
Correct Answer is:
(a) 1, 2 and 3
(b) 1, 2 and 4
(c) 1, 2 and 5
(d) 1, 2 and 6
Answer:
(c) 1, 2 and 5

Question 13.
Which controls help ensure that transactions occurred are authorised and are completely and accurately recorded and processed?
(a) General IT Controls
(b) Application Controls
(c) IT Dependent Controls
(d) None of the above
Answer:
(b) Application Controls

Question 14.
IT dependent controls are:
(a) Manual Controls
(b) Automated Controls
(c) Manual or Automated Controls
(d) None of the above
Answer:
(a) Manual Controls

Question 15.
Examples of Application controls include the following:
1. Edit checks and Validation of input data
2. Sequence Number checks
3. Limit Checks
4. Access security
5. Application system acquisition, development, and maintenance
Correct Answer is:
(a) 1, 2 and 3
(b) 1, 2, 3 and 4
(c) 4 and 5
(d) 1,2, 3 and 5
Answer:
(a) 1, 2 and 3

Question 16.
Examples of General IT controls include the following:
1. Edit checks and Validation of input data
2. Sequence Number checks
3. Limit Checks
4. Access security
5. Application system acquisition, development, and maintenance
Correct Answer is:
(a) 1,2 and 3
(b) 1, 2, 3 and 4
(c) 4 and 5
(d) 1, 2, 3 and 5
Answer:
(c) 4 and 5

Question 17.
Who is mainly responsible for implementation of internal financial controls in a company?
(a) Auditors
(b) Directors
(c) Employees
(d) Regulators
Answer:
(b) Directors

Question 18.
Analytical process by which meaning information is generated and prepared from raw system data using processes, tools and techniques is known as:
(a) Substantive Analytical Procedures
(b) Data Analytics
(c) Data Monitoring
(d) Modelling tool
Answer:
(b) Data Analytics

Question 19.
The data analytics methods used in an audit are known as
(o) Test Data
(b) Integrated Test Facility
(c) Computer Assisted Auditing Techniques or CAATs
(d) Data Base Management System
Answer:
(c) Computer Assisted Auditing Techniques or CAATs

Question 20.
Arrange the steps involved in using Data Analytics:

Arrange the steps involved in using Data Analytics:
A	Document the results &Report the conclu­sions.	E	Understand Business Environment includ­ing IT.
B	Apply Criteria on data extracted.	F	Extract Data
C	Validate and Confirm results	G	Identify Source and Format of Data
D	Verily, Completeness, accuracy and Validity of extracted Data	H	Defines the Objectives and Criteria against which subject matter will be evaluated.

(a) E, H, F, G, B, D, A and C
(b) E, H,G, F, D, B.C and A
(c) H, G, F, B, E, D, A and C
(d) H, G, F, B, E, D, C and A
Answer:
(b) E, H,G, F, D, B.C and A