CS Foundation

Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting Notes

Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting Notes

Go through this Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting Notes

Goodwill:

  • Goodwill means the reputation of the firm.
  • In other words, Goodwill is the value of reputation earned by a firm which helps it to yield more than normal profits.

Features of Goodwill:

  • It is an intangible asset i.e. cannot be seen or touched, (it is not a fictitious asset).
  • The value of Goodwill fluctuates from time to time.
  • It is a valuable asset and placed on the asset side of Balance sheet.

Factors affecting Goodwill of a firm:

  • Location of business.
  • Quality of goods sold/services given.
  • Reputation of owners of the firm.
  • Risk involved in business.
  • Efficiency of management.
  • Trends of profits etc.
  • Monopolistic nature of the business.
  • Possibility of competition.
  • Government attitude.
  • Possession of special contract for availability of material.

Need for valuation of Goodwill:

  • On admission of new partner.
  • On retirement or death of a partner.
  • When there is a change in profit sharing ratio.
  • When the business is sold.
  • When a firm is amalgamated with another firm.

Goodwill is the present value of a firm’s anticipated super normal | earnings. Super normal earnings means earnings over and above the normal rate of return.

Calculation of Goodwill:
1. Average Profit Method
It is a very simple and widely followed method.
Formula:
Value of Goodwill = Average profit x Number of years of purchase
Here:
(i) Average profits are the past profits after adjustments.
The following adjustments are made from the past profits.

  • Abnormal income should be deducted
  • Abnormal losses should be added back
  • Income from investments should be deducted as it is not earned from the business.

Note: These adjustments are made because average profit is a figure which represents a profit of all past years. Hence, all abnormal items should be removed/adjusted.

(ii) Number of year of purchase – The number of year of purchase are the years for which the goodwill is expected to remain in the business i.e. the years for which the benefits of goodwill can be taken.

Weighted average profit method:

  • This method is a slight modification of average profit method.
  • Under this method, weights are allotted to each year’s profit.
  • Weights are multiplied by the product to get the product.
  • The total product is then divided by the total weight to get the weighted average profit
  • The method is used when the profits are increasing year after year.
    Goodwill = Weighted average profit x No. of years of purchase.

2. Super Profit Method
1. Under this method, goodwill is calculated on the basis of excess profit earned by a firm over and above normal profits.

2. There are three methods for calculating goodwill using super profit method –

  • Purchase of super profit.
  • Annuity method.
  • Capitalization of super profit.

(i) Purchase of super profit:
Goodwill is calculated as follows
Goodwill = Super profit x No. of years of purchase

(ii) Capitalization of super profit method:
Under this method, goodwill is calculated by capitalizing super profits as follows:
Goodwill = \(\frac { Super Profits × 100 }{ Normal Rate of Return }\)

(iii) Annuity method: Under this method, goodwill is calculated by taking the present value of a terminal annuity of a super profit for a reasonable period.
Goodwill = Super Profit x Annuity
Note: Annuity Rate is generally given in question

Example:
A firm earned net profits during the last seven years as follows:
1992 ₹ 20,000 Profit
1993 ₹ 70,000 Loss
1994 ₹ 40,000 Loss
1995 ₹ 2,50,000 Profit
1996 ₹ 2,70,000 Profit
1997 ₹ 3,00,00 Profit
1998 ₹ 3,20,000 Profit
The capital invested in the firm is ₹ 12,00,000. Normal rate of return in the similar type of business is 10%. Calculate the value of goodwill on the basis of 2\(\frac { 1 }{ 2 }\) years purchases of average super profits earned during the above mentioned seven year
Solution:
(i) Actual Average Profit:
Total Profits of last Seven Years – ₹ 20,000 – ₹ 70,000 – ₹ 40,000 + ₹ 2,50,000 + 2,70,000 : ₹ 3,00,000 + ₹ 3,20,000 = ₹ 10,50,000
Average Profit = \(\frac{10,50,000}{7}\) = 1,50,000

(ii) Normal Profit = Capital Invested x \(\frac { Normal Rate of Return }{ 100 }\)
= 12,00,000 x 10/100 = ₹ 1,20,000

(iii) Super Profit = Actual Average Profit – Normal Profit
= ₹ 1,50,000 – ₹ 1,20,000 = ₹ 30,000

(iv) Value of Goodwill = Super Profit x Number of years purchased
= ₹ 30,000 x 2.5 = ₹ 75,000

(3) Capitalization method:
Under this method, goodwill is ascertained by comparing value of whole business (applying normal rate of return) with the actual capital employed of the business. The difference of the above will be termed as goodwill. Goodwill = Value of whole business – capital employed where,

Example : Suppose capital employed by a partnership firm is ₹ 1,00,000. Average profits are ₹ 25,000 and normal rate of return is 10%. Calculate the value of goodwill using capitalization method.
Solution:
Goodwill = Whole value of firm – Capital employed = ₹ 2,50,000 – 1,00,000 = ₹ 1,50,000
Working Note:
Whole value of firm = \(\frac { Average Profits × 100 }{ Normal Rate of Return }\)
= \(\frac{25,000×100}{10}\) = ₹ 2,50,000

Partnership Accounts-Goodwill MCQ Questions

1. Under super profit basis goodwill is calculated by:
(a) Average profits x years of purchase.
(b) Super profits x Years of purchase.
(c) Total of the discounted value of expected future profits.
(d) Super profit divided with expected rate of return.
Answer:
(b) Super profits x Years of purchase.

2. Goodwill brought in by incoming partner in cash is taken away by tho old partners in:
(a) Old Profit Sharing Ratio.
(b) New Profit Sharing Ratio.
(c) Sacrificing Ratio.
(d) Capital Ratio.
Answer:
(c) Sacrificing Ratio.

3. Under capitalization basis goodwill is calculated by:
(a) Average profit x years of purchase.
(b) Super profits x years of purchase.
(c) Total of the discounted value of expected benefits.
(d) Super profit divided with expected rate of return
Answer:
(d) Super profit divided with expected rate of return

4. Partners are supposed to pay interest on drawing only when provide d by the __________.
(a) Partnership Act
(b) None of these
(c) Agreement
(d) (a) and (c) above
Answer:
(c) Agreement

5. Weighted average method of calculating goodwill is used when:
(a) Profits are not equal
(b) Profits show a trend
(c) Partners who gave the guarantee
(d) None of the above
Answer:
(b) Profits show a trend

6. X, Y and Z are partners sharing profits and losses in the ratio 5:3:2. They decide to share the future profits in the ratio 3:2:1. Workmen compensation fund appearing in the balance sheet on the date if no information is available for the same will be:
(a) Distributed to the partners in old profit sharing ratio.
(b) Distributed to the partners in new profit sharing ratio.
(c) Distributed to the partners in capital ratio.
(d) Carried forward to new balance sheet without any adjustment.
Answer:
(a) Distributed to the partners in old profit sharing ratio.

7. X, Y and Z are partners in a firm. At the time of division of profit for the year there was dispute among the partners. Profits before Interest on partners capital was ₹ 10,000 and X wanted interest on capital @20% as his capital contribution was ₹ 1,00,000 as compared to that of Y and Z which was ₹ 75,000 and ₹ 50,000 respectively. Find the solution.
(a) Profits of ₹ 10,000 will be distributed equally.
(b) X will get the interest of ₹ 20,000 and the loss of ₹ 10,000 will be shared equally.
(c) All the partners will get interest their capital and the loss will be shared equally.
(d) None of these.
Answer:
(a) Profits of ₹ 10,000 will be distributed equally.

8. A and B are partners sharing profits and losses in the ratio 5:3. On admission C brings ₹ 1,00,000 as Capital and ₹ 50,000 against goodwill. New profit sharing ratio between A, B and C are 7:5:4 Find the sacrificing ratio of A and B:
(a) 3:1
(b) 4:7
(c) 5:4
(d) 2:1
Answer:
(a) 3:1

9. The following trading results are available in respect of the business carried on by a firm:
2001 – Loss – ₹ 10,000
2002 – Loss – ₹ 5,000
2003 – Profit – ₹ 80,000
2004 – Profit – ₹ 55,000
The value of goodwill on the basis of 5 years purchase of average profit of the business will be:
(a) ₹ 1,25,000
(b) ₹ 1,50,000
(c) ₹ 1,00,000
(d) ₹ 1,20,000
Answer:
(b) ₹ 1,50,000

10. X and Y share profits and losses in the ratio of 2:1. They take Z as a partner and the new profit sharing ratio becomes 3:2:1 .Z brings ₹ 5,000 as premium for goodwill. The full value of goodwill be:
(a) ₹ 5,000
(b) ₹ 20,000
(c) ₹ 30,000
(d) ₹ 25,000
Answer:
(c) ₹ 30,000

11. Find the goodwill of the firm using capitalization method from the following information:
Total Capital Employed in the firm ₹ 8,00,000
Reasonable Rate of Return 15%
Profits for the year ₹ 6,00,000
(a) ₹ 80,00,000
(b) ₹ 40,00,000
(c) ₹ 32,00,000
(d) ₹ 42,00,000
Answer:
(c) ₹ 32,00,000

12. The capital of B and D is ₹ 60,000 and ₹ 30,000 respectively with the profit sharing ratio 3:1. The new ratio admissible after 01.4.2006 is 5:3. Goodwill valued as ₹ 80,000 will be credited to B and D’s capital by ₹:
(a) ₹ 60,000 and 20,000
(b) ₹ 50,000 and 30,000
(c) ₹ 50,000 and 30,000
(d) None of these.
Answer:
(a) ₹ 60,000 and 20,000

13. A and B are partners sharing profits and losses in the ratio of 3:2 having the capital of ₹ 80,000 and ₹ 50,000 respectively. They are entitled to 10% p.a. interest on capital before distributing the profits. During the year, the firm earned ₹ 17,800 before allowing any interest on capital. Profits apportioned among them excluding interest will be:
(a) ₹ 2,880 and 1,920
(b) ₹ 8,800 and 8,800
(c) ₹ 8,000 and 5,000
(d) None of the above.
Answer:
(a) ₹ 2,880 and 1,920

14. A and B are partners sharing profit and losses in the ratio 4:1. C was manager who received the salary of ₹ 2,000 p.m. in addition to a commission of 5% on net profits after charging such commission. Profit for the year is ₹ 3,39,000 before charging salary. Find the total remuneration of C:
(a) ₹ 39,000
(b) ₹ 44,000
(c) ₹ 43,500
(d) ₹ 38,000
Answer:
(a) ₹ 39,000

15. The capital of A and B sharing profits and losses equally are ₹ 90,000 and ₹ 30,000 respectively. They value the goodwill of the firm at ₹ 80,000 which was not recorded in the books. If goodwill is to be raised now, by what amount each partner’s capital account will be debited?
(a) ₹ 20,000 and ₹ 60,000
(b) ₹ 40,000 and ₹ 40,000
(c) ₹ 60,000 and ₹ 20,000
(d) None of these.
Answer:
(d) None of these.

16. A and B are partners with the capital ₹ 50,000 and ₹ 40,000 respectively. They share profits and losses equally. C is admitted on bringing ₹ 50,000 as capital only and nothing was brought against goodwill. Goodwill in Balance Sheet of ₹ 10,000 is revalued as 80,000. What will be value of goodwill in the books after the admission of C?
(a) ₹ 60,000
(b) ₹ 30,000
(c) ₹ 20,000
(d) ₹ 15,000
Answer:
(b) ₹ 30,000

17. Formula for calculation of manager’s commission after charging such commission is:
(a) (Diff of P/L app. A/c x r %) / (100+r %)
(b) (Diff of P/L app. A/c x r %) / (100-r %)
(c) Diff of P/L app. A/c x r %
(d) None
Answer:
(a) (Diff of P/L app. A/c x r %) / (100+r %)

18. The share of profit and loss of partner in absence of oral or written agreement will be:
(a) Equal ratio
(b) Capital ratio
(c) Agreed ratio
(d) No ratio
Answer:
(a) Equal ratio

19. A, B and C partners in the firm sharing profit ratio 5:3:2. They decided to share profits in the future in 3:2:1 ratio. For the aforesaid purpose, goodwill of the firm is valued as ₹ 60,000. Thus capital account of B will be:
(a) Debited with ₹ 2,000
(b) Credited with ₹ 2,000
(c) Will have no effect.
(d) Debited with ₹ 20,000
Answer:
(a) Debited with ₹ 2,000

20. When Goodwill is not purchased goodwill account can:
(a) Never be raised in the books
(b) Be raised in the books
(c) Be partially raised in the books
(d) Be raised as per the agreement of the partners.
Answer:
(a) Never be raised in the books

21. The profits of the last four years are as follows:

Year Amount (₹)
2000 40,000
2001 50,000
2002 60,000
2003 50,000

Calculate the goodwill on the basis of three purchase of average profits
(a) ₹ 1,00,000
(b) ₹ 1,50,000
(c) ₹ 2,00,000
(d) None of the above
Answer:
(b) ₹ 1,50,000

22. The profits of the last three years are as follows

Year Amount (₹)
2004 17,000
2005 20,000
2006 23,000

The capital employed is ₹ 80,000. The return on capital employed is 15%. Calculate the value of goodwill on the basis of two years purchase of average super profit earned.
(a) ₹ 16,000
(b) ₹ 20,000
(c) ₹ 30,000
(d) ₹ 40,000
Answer:
(a) ₹ 16,000

23. The capital employed in a business is ₹ 1,50,000. The profits are ₹ 50,000 and the normal rate of profits is 20%. Calculate the amount of goodwill as per capitalisation method:
(a) ₹ 2,00,000
(b) ₹ 3,50,000
(c) ₹ 1,50,000
(d) ₹ 1,00,000
Answer:
(d) ₹ 1,00,000

24. A and B are partners in a firm with capital of ₹ 18,000 and ₹ 20,000. Z is admitted for 1/3rd share in profits and brings ₹ 34,000 as capital, calculate the
amount of goodwill
(a) ₹ 24,000
(b) ₹ 30,000
(c) ₹ 15,000
(d) None of these
Answer:
(b) ₹ 30,000

25. Ramu and Shamu are partners sharing profits/losses in the ratio of 3:2. They admit Ramesh and the new profit sharing ratio will be 2:2:1 respectively. If Ramesh brings ₹ 50,000 as goodwill, calculate the share of goodwill which Ramu will get?
[Hint → Calculate the sacrificing ratio]
(a) ₹ 25,000
(b) ₹ 30.000
(c) ₹ 50,000
(d) ₹ 15,000
Answer:
(c) ₹ 50,000

26. The profits and loss for the last three years are:

Year Amount (₹)
2005 20,000
2006 (10,000)
20071 15,000

Calculate the goodwill on the basis of three years purchase of average profits
(a) ₹ 20,000
(b) ₹ 25,000
(c) ₹ 18,000
(d) ₹ 16,667
Answer:
(b) ₹ 25,000

27. The capital employed by a firm is ₹ 1,00,000 and the normal rate of return is 15%. The average profits of the firm are:

Year Profits (₹)
2002 18,000
2003 12,000
2004 15,000
2005 22,000
2006 18,000

Calculate the goodwill on the basis of three years purchase of the super profits
(a) ₹ 6,000
(b) ₹ 10,000
(c) ₹ 8,000
(d) ₹ 12,000
Answer:
(a) ₹ 6,000

28. Under the capitalisation method, the formula for calculating the goodwill is:
(a) Super profit multiplied by the rate of return
(b) Average profits multiplied by the rate of return
(c) Super profits divided by the rate of return
(d) Average profits divided by the rate of return
Answer:
(c) Super profits divided by the rate of return

29. When goodwill is to be raised in the books when there is no goodwill in the books, then the entry to be passed is:
(a) Goodwill A/c debit and capital A/c credit
(b) Partner A/c debit and goodwill A/c credit
(c) General Reserve A/c debit and goodwill A/c credit
(d) None of these
Answer:
(a) Goodwill A/c debit and capital A/c credit

30. The excess amount which the firm can get on selling its assets over and above the saleable value of its assets is called:
(a) Surplus
(b) Superprofits
(c) Reserve
(d) Goodwill
Answer:
(d) Goodwill

31. Which of the following is NOT true in relation to goodwill?
(a) It is an intangible asset
(b) It is a fictitious asset
(c) It has a realisable value
(d) None of the above
Answer:
(b) It is a fictitious asset

32. Purchasing year means:
(a) Number of years for which the profits is calculated
(b) Number of years for which the goodwill is expected to remain
(c) Number of years in which the goodwill is to be purchased
(d) None of these
Answer:
(b) Number of years for which the goodwill is expected to remain

33. The Goodwill of the firm is NOT affected by:
(a) Location of the firm
(b) Reputation of firm
(c) Better customer service
(d) None of the above
Answer:
(d) None of the above

34. The capital employed in a firm is ₹ 50,000 and the normal rate of return is 20%. The profits for the last three years are:

Year Profits (₹)
2000 20,000
2001 25,000
2002 15,000

Calculate the goodwill on the basis of capitalisation of super profits:
(a) ₹ 50,000
(b) ₹ 60,000
(c) ₹ 20,000
(d) None of these
Answer:
(a) ₹ 50,000

35. The net assets of a firm including fictitious assets of ₹ 5,000 are ₹ 85,000. The net liabilities of the firm are ₹ 30,000. The normal rate of return is 10% and the average profit of the firm is ₹ 8,000. Calculate the goodwill as per capitalisation of super profits.
(a) ₹ 20,000
(b) ₹ 30,000
(c) ₹ 25,000
(d) None of these
Answer:
(b) ₹ 30,000

36. Capital employed by a partnership firm is ₹ 5,00,000. Its average profit is ₹ 60,000. The normal rate of return in similar type of business is 10%. What is the amount of super profits?
(a) ₹ 50,000
(b) ₹ 10,000
(c) ₹ 6,000
(d) ₹ 56,000
Answer:
(b) ₹ 10,000
Capital Employed = ₹ 5,00,000
Normal rate of return = 10%
Average Profit = ₹ 60,000
Normal Profit = Capital employed x normal rate of return = 5,00,000 x 10%
= ₹ 50,000
Super Profit = Average Profit – Normal Profit
= 60,000 – 50,000
= ₹ 10,000
Super Profit is ₹ 10,000

37. If the new partner brings any additional amount in cash other than his capital contribution then, it is termed as:
(a) Capital
(b) Reserves
(c) Profits
(d) Goodwill
Answer:
(d) Goodwill
Whenever a new partner is admitted, he is generally expected to pay cash to old partners for his share of goodwill for the right he acquires to share in super profit of the firm in future.
The payment is made to the old partners for the sacrifice they make on their shares of profits for future. In other words, if a new partner brings any additional amount in cash other than his capital contribution then, it is termed as Goodwill:

38. A firm earns profit of ₹ 1,10,000. The normal rate of return in a similar type of business is 10%. The total assets (excluding goodwill) and total outside liabilities are ₹ 11,00,000 and ₹ 1,00,000 respectively. The value of goodwill as per capitalisation method will be:
(a) ₹ 1,00,000
(b) ₹ 10,00,000
(c) ₹ 10,000
(d) None of the above
Answer:
(a) ₹ 1,00,000
Actual earned profit = ₹ 1,10,000
Normal rate of return = 10%
Total Assets = ₹ 11,00,000
Outside Liabilities = ₹ 1,00,000
Capital Employed = Total Assets – Outside Liabilities = 11,00,000- 1,00,000 = ₹ 10,00,000
Normal Profit = Capital Employed x Normal rate of return = 10,00,000 x 10% = ₹ 1,00,000
Super Profit = Actual Profit – Normal Profit = 1,10,000 – 1,00,000 = ₹ 10,000
Goodwill = \(\frac { Super Profit × 100 }{ Normal rate of return }\)
= \(\frac{10,000 \times 100}{10}\) = ₹ 1,00,000
Goodwill will be ₹ 1,00,000.

39. Total capital employed in the firm is ₹ 8,00,000, reasonable rate of return is 15% and Profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per capitalization method would be:
(a) ₹ 82,00,000
(b) ₹ 12,00,000
(c) ₹ 72,00,000
(d) ₹ 42,00,000.
Answer:
(c) ₹ 72,00,000
Calculation of Goodwill according to capitalization method would be:
Notional Capital Employed = \(\frac{12,00,000}{15 \%}\)
= 80,00,000
Less: Actual
Capital Employed 8,00,000
Goodwill (operating in the business) 72,00,000

40. A firm earns a profit of ₹ 1,10,000. The normal rate of return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outside liabilities are ₹ 11,00,000 and ₹ 1,00,000 respectively. The value of goodwill is _________.
(a) ₹ 1,00,000
(b) ₹ 10,00,000
(c) ₹ 10,000
(d) None of the above
Answer:
(a) ₹ 1,00,000
Calculation of Value of Goodwill
Profit = ₹ 1,10,000
Normal value of Capital Employed
= \(\frac { Profit }{ Normal rate of return }\) x 100
Normal Rate of Return = 10%
= \(\frac{1,10,000}{10 \%}\)
= ₹ 11,00,000
Capital Employed = Total Assets Total Liabilities
= 11,00,000 – 1,00,000
= ₹ 10,00,000
Goodwill = 11,00,000 – 10,00,00
= ₹ 1,00,000

41. A firm of X, Y and Z has a total capital investment of ₹ 2,25,000. The firm earned net profit during the last four years ₹ 35,000, 40,000, 60,000, 50,000. The fair return on the net capital employed is 15% . Find the value of goodwill if it is based on 3 years purchase of average super profit of past 4 years.
(a) ₹ 35,000
(b) ₹ 36,500
(c) ₹ 40,000
(d) ₹ 37,500
Answer:
(d) ₹ 37,500
Average Profit = \(\frac{35,000+40,000+50,000+60,000}{4}\)
= \(\frac{1,85,000}{4}\) = 46,250
Normal profit = Capital employed x Rate
= 2,25,000 x \(\frac{15}{100 }\) = 33,750
Super profit = Average profit – Normal profit
= 46,250 – 33,750 = 12,500
Goodwill of 3 years purchase = 12,500 x 3 = 37,500.

42. Goodwill is which type of asset:
(a) Tangible
(b) Intangible
(c) Depleting
(d) Current.
Answer:
(b) Intangible
An intangible asset is an asset:

  • which cannot be touched
  • or felt
  • but which assists the firm in acquiring long term wealth, ex. goodwill patents, copyrights, etc.

Hence, option (b) is correct.

43. Sona purchased Simmi’s business from 1sl Jan, 1981. The profit disclosed by Simmi’s business for last 3 years:
1985 – ₹ 40,000 [including abnormal gain of ₹ 5,000]
1986 – ₹ 50,000 [after charging abnormal loss of ₹ 10,000]
1987 – ₹ 45,000 [excluding ₹ 5,000 for insurance premium of firms property now to be insured]
Calculate the goodwill on the basis of 2 years purchase of average profit of last 3 years.
(a) ₹ 80,000
(b) ₹ 90,000
(c) ₹ 1,20,000
(d) ₹ 1,00,000
Answer:
(b) ₹ 90,000
Corrected Actual Profits:
Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting Notes 1
Value of Goodwill = Average Actual Profit x Years of Purchase
= 45,000 x 2 = 90,000

44. The goodwill of a business is to be valued at 3 years purchase of the average profits of the last three years. The profits of the last three years are ₹ 5,000, ₹ 6,000 and ₹ 7,000 respectively. Hence, the goodwill be valued at:
(a) ₹ 12,000
(b) ₹ 15,000
(c) ₹ 18,000
(d) ₹ 6,000
Answer:
(c) ₹ 18,000
Under this method, goodwill is valued on the basis of a certain years purchases of the average profits of the past years:
Profits for the last year – ₹ 5,000, ₹ 6,000 and ₹ 7,000.
Average profit = \(\frac{5,000+6,000+7,000}{3}\)
= \(\frac{18,000}{3}\)
= ₹ 6,000
Goodwill = Average profit x No. of yrs. purchase
= 6,000 x 3
= ₹ 18,000

45. Find the average profit of last 3 years and the goodwill of the firm for 2 years of purchase. If the profit for last 2 years is 2010 – ₹ 50,000, 2011 – ₹ 30,000, 2012 – ₹ 1,00,000:
(a) ₹ 80,000, 1,20,000
(b) ₹ 60,000, 1,20,000
(c) ₹ 60,000, 1,00,000
(d) ₹ 70,000, 80,000
Answer:
(b) ₹ 60,000, 1,20,000
Average Profit = \(\frac{50,000+30,000+1,00,000}{3}\)
= \(\frac{1,80,000}{3}\)
= ₹ 60,000
No. of year purchase = 2 years
Goodwill = Average Profit x No. of year purchase
= 60,000 x 2
= ₹ 1,20,000

46. Find the goodwill by super profit method where capital is ₹ 1,00,000, Rate 20%, Average profit is ₹ 25,000:
(a) ₹ 7,000
(b) ₹ 4,000
(c) ₹ 2,000
(d) ₹ 5,000
Answer:
(d) ₹ 5,000
Capital = ₹ 1,00,000
Rate = 20%
Average Profit = ₹ 25,000
Normal Profit = \(\frac{Capital invested × Rate}{100}\)
= \(\frac{1,00,000×20}{100}\)
= ₹ 20,000
Super Profit = Average Profit – Normal Profit
= 25,000 – 20,000
= ₹ 5,000
Goodwill = Super Profit x No. of year purchase
= 5,000 x 1
= ₹ 5,000

47. The profit of last five years are ₹ 85,000, ₹ 90,000, ₹ 70,000, ₹ 1,00,000 and ₹ 80,000. Find the goodwill if it is calculated on average profit of last five years on the basis of 3 years of purchase.
(a) ₹ 2,85,000
(b) ₹ 85,000
(c) ₹ 2,55,000
(d) ₹ 2,75,000
Answer:
(c) ₹ 2,55,000
Average Profit = \(\frac{(85,000+90,000+70,000+1,00,000+80,000)}{5}\)
= 85,000
Goodwill = 85,000 x 3
= 2,55,000

48. A firm has total investment of ₹ 2,25,000. The firm earned net profit for the last 4 years as ₹ 35,000, ₹ 40,000; ₹ 60,000 and ₹ 50,000. The fair return on capital employed is 15%. The value of goodwill on the basis of 3 years purchase of average super profits of past 4 years will be:
(a) ₹ 37,500
(b) ₹ 12,500
(c) ₹ 46,250
(d) ₹ 33,750
Answer:
(a) ₹ 37,500
Profit of last 4 years: 35,000, 40,000, 60,000, 50,000
Average profit = ₹ 46,250
Total Investment = ₹ 2,25,000
Fair Return =15%
Normal Profit = ₹ 33,750
Super profit = Average profit – Normal profit = 46,250 – 33,750 = 12,500
Goodwill = Super profit x No. of purchase year
= 12,500 x 3
= ₹ 37,500.

49. Vales and Wells were in partnership sharing profits and losses equally. They admit Sparks as a partner and decide to share profits equally between the three partner. Goodwill is valued at ₹ 60,000 but is to be immediately written off. What will be the effect of this on Yale’s capital?
(a) Will increase by ₹ 20,000
(b) Will increase by ₹ 30,000
(c) Will increase by ₹ 10,000
(d) Will decrease by ₹ 10,000
Answer:
(c) Will increase by ₹ 10,000
Goodwill = ₹ 60,000
Sparks Share of Goodwill = ₹ 60,000/3
= ₹ 20,000
This amount of Goodwill will be divided between Yales and Wells in equal ratio and as a result the capital of both will be increased by 10,000.

50. Partners who actively take part in the business?
(a) Active partner
(b) Sleeping partner
(c) Partner by estoppels
(d) All of the above
Answer:
(a) Active partner
An invested person who is involved in the daily operations of the partnership. An active partner helps run the business to enhance his or her returns and is therefore considered a material participant. This person typically shares more risk and return versus a limited or silent partner.

51. The profits of last three years are ₹ 43,000, ₹ 38,000 and ₹ 45,000. Find out the goodwill of two years purchase of average profits.
(a) ₹ 84,000
(b) ₹ 42,000
(c) ₹ 36,000
(d) ₹ 1,26,000
Answer:
(a) ₹ 84,000
Avg. profit = \(\frac{43,000+38,000+45,000}{3}\)
Goodwill = 42,000 x 2 = ₹ 84,000

52. P, Q and R are Partners and Sharing profit and losses equally. Their capital balance stood at ₹ 25,000, ₹ 20,000 and ₹ 18,000 respectively. Their last three years profit were ₹ 18,000, ₹ 12,000 and ₹ 15,000. Q died, P and R decided to continue with the partnership and Q’s share is purchased by P and R in 2:3. As per agreement, the value of goodwill is calculated at 3 years purchase price of average profit of last three years. It is decided that no goodwill account is opened in the books of account and if is to be adjusted through capital account. After the adjustment, the capital of P would be:
(a) ₹ 19,000
(b) ₹ 25,000
(c) ₹ 20,000
(d) ₹ 18,000
Answer:
(a) ₹ 19,000
Avg. profit = \(\frac{12,000+15,000+18,000}{3}\)
= 15,000
Goodwill = 15,000 x 3 = 45,000
Q share of Goodwill = \(\frac{45,000}{3}\) = 15,000
Q’ share is purchased by P & R is Ratio of 2 : 3
P’ share of contribution in Goodwill = 15,000 x \(\frac{2}{5}\) = 6,000
Capital After Retirement = 25,000 – 6,000 = 19,000

53. Total capital employed in the firm is ₹ 8,00,000. Reasonable rate of return is 15% and profit for the year is ₹ 12,00,000. The value of goodwill of the firm as per capitalization method would be:
(a) ₹ 82,00,000
(b) ₹ 12,00,000
(c) ₹ 72,00,000
(d) ₹ 42,00,000
Answer:
(c) ₹ 72,00,000
Normal Profit = \(\frac{Capital Employed × Normal Rate of Return}{100}\)
\(\frac{8,00,000 \times 15}{100}\) = ₹ 1,20,000
Normal Profits for the year = ₹ 12,00,000
Capitalisation Profit = \(\frac{12,00,000}{15}\) x 100
= ₹ 80,00,000
Goodwill = Profits – Capital Employed
= 80,00,000 – 8,00,000
= ₹ 72,00,000

54. Calculate the amount of goodwill for 3 years purchase of following 5 years ₹ 2,00,000, 2,80,000, 3,20,000, 2,40,000 (including loss 4,000), (14,000)
(a) ₹ 31,200
(b) ₹ 6,15,600
(c) ₹ 42,000
(d) ₹ 18,200
Answer:
(b) ₹ 6,15,600
Calculate the Goodwill
Partnership Accounts-Goodwill – CS Foundation Fundamentals of Accounting Notes 2

55. A firms earns a profit of ₹ 1,10,000. The normal rate of return in a similar type of business is 10%. The value of total assets (excluding goodwill) and total outside liabilities are ₹ 11,00,000 and ₹ 1,00,000 respectively. The value of goodwill is:
(a) ₹ 1,00,000
(b) ₹ 10,00,000
(c) ₹ 10,000
(d) None of the above
Answer:
(a) ₹ 1,00,000
Net Capital Employed = Assets – Liabilities
= 11,00,000 – 1,00,000
= 10,00,000
Normal Return = 10,00,000 x 10%
= 1,00,000
Super Profit = 1,10,000 -1,00,000
= 10,000
Goodwill = \(\frac{Super Profit}{Normal Rate of return}\)
= \(\frac{10,000}{10 \%}\)
= 1,00,000

56. Find the goodwill of the firm on the basis of 3 years purchase by average profit method from the profit of last 5 years were 32,000; 35,000; 28,000; 26,000; 40,000 respectively.
(a) 32.200
(b) 96,600
(c) 42,000
(d) 32,000
Answer:
(b) 96,600
Average Profit of last 5 years
= 32,000 + 35,000 + 28,000 + 26,000 + 40,000
= \(\frac{1,61,000}{5}\)
= 32,200 5
G/W of A.P = 32,200 x 3 = 96,600

Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting Notes

Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting Notes

Go through this Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Accounting for Non-Profit Organisation – CS Foundation Fundamentals of Accounting Notes

Meaning of Not-for-profit Organisation:
1. There are certain organisation which are formed not to earn profits but to render services to its members and to the public. Such organisations include clubs, hospitals, libraries, schools, religious institutions, charitable institutions and literary societies.

2. These organisations exists with the- primary motive of providing services.

Some Important Items Relating to Non-Profit Seeking Organisations:
1. Subscription:

  • It is the main source of income of non-profit entity.
  • It will be appearing on the debit side of Receipts and Payments Account.

2. Life-Membership Fees:
These could be taken as capital receipts and every year a charge is debited based on some logic.

3. Endowments:

  • Sometimes, donations are also in the form of endowments to be’ used as per instructions of the donor.
  • These are to be treated as capital receipts.

4. Legacy:

  • It is the amount which a non-profit entity receives as per the ‘WILL’ of a deceased person.
  • It appears on the debit side of Receipt and payments A/c.
  • This amount is not of recurring nature, and such it treated as capital receipt and shown on the liabilities side.

5. Donation:

  • They could be used for meeting capital or revenue expenses.
  • It donations are received for a specific purpose, the amount is credited to a fund from which the amounts are distributed.
  • The fund may be invested in specific securities.
  • Income from such investment is credited to the Fund A/c only.
  • Small donation amounts which are not embarked for any specific purpose may be treated as revenue receipt.

6. Entrance Fees:

  • It is received from the new members apart from the amount of annual subscriptions.
  • Some people favour capitalising the entrance fee on the ground that it is collected once for all and as such it is not of the recurring nature.
  • It is treated as revenue income.

Final Accounts or Financial Statements:
1. The Non-Profit Organisations are also required to prepare financial statements at the end of the each accounting period.

2. Although these organisation are non-profit making entities and they are not required to make Trading and Profit & Loss A/c but it is necessary to know whether the income during the year was sufficient to meet the expenses or not.

3. The final accounts of a ‘non-profit organisation’ consist of the following

  • Receipts and Payments A/c.
  • Income and Expenditure A/c.
  • Balance Sheet.

Preparation of Financial Statements of a Non-Trading Concern:
There are certain organisations that are not established for making profit but to provide some service. These services are generally given to members who make subscriptions to avail them. These are also called as non-trading entities. The examples of such organisations are:

  1. Gymkhana / sports clubs
  2. Educational institutions
  3. Public hospitals
  4. Libraries
  5. Cultural clubs like Rotary or Lions club
  6. Religious institutions
  7. Charitable trusts

Receipt and Payment Account:
This is similar to cash book. Entries are made on cash basis and items pertaining to previous year or current year or subsequent years are also recorded. Receipts are shown on debit side and payments are shown on credit side. Capital as well as revenue items are entered in the R & P Account. This account is real account in nature. No provisions are recorded in this account.

Features of Receipts and Payment Account:

  1. It is an Account which contains all Cash and Bank transactions made by a nonprofit organization during a particular financial period.
  2. It starts with the opening balances of Cash and Bank. All Cash Receipts both capital and revenue during the period are debited to it.
  3. All Cash Payments both capital and revenue during the period are credited to this Account. It ends with the Closing Cash and Bank Balances.
  4. While recording the Cash and Bank transactions all entries are made on Cash Basis.
  5. It is a summary of Cash Book.
  6. It follows Real Account.

Income and Expenditure Account:
This is similar to the Profit and Loss Account and is prepared exactly based on same principles. As the name suggests only revenue items are recorded herein. Incomes are recorded on the credit side while the expenses on the debit side. Both incomes and expenses must be taken on the basis of accrual concept.

Features of Income and Expenditure Account:

  1. It follows Nominal Account.
  2. All expenses of revenue nature for the particular period are debited to this Account on accrual basis.
  3. Similarly all revenue incomes related to the particular period are credited to this account on accrual basis.
  4. All Capital incomes and Expenditures are excluded.
  5. Only current year’s incomes and expenses are recorded. Amounts related to other periods are deducted. Amounts outstanding for the current year are added.
  6. Profit on Sale of Asset is credited. Loss on Sale of Asset is debited. Annual Depreciation on Assets is also debited.
  7. If income is more than expenditure, it is called a Surplus, and is added with Capital or General Fund etc. in the Balance Sheet.
  8. If expenditure is more than income, it is a deficit, and is deducted from Capital or General Fund etc, in the Balance Sheet.

Fund Asset Accounting and its peculiarities:
Following are the concepts of some funds which are generally maintained by organizations:
(i) Capital Fund: It is also called “General Fund” or “Accumulated Fund.” It is actually the Capital of a non-profit concern. It may be found out as the excess of assets over liabilities. Usually “Surplus” or “Deficit” during a period is added with or deducted from it.

(ii) Special Fund: It may be created out of special donation or subscription or out of a portion of the “Surplus”. For example a club may have a “Building Fund”. It may be used for meeting some specific expenses or for acquiring an asset.

Basic of Distinction Receipts and Payment A/c Income and Expenditure
1. Nature It is the summary of cash book. It is like a profit and loss account.
2. Side Debit side of this account records receipt and credit side payment. Debit side of this account records receipt and credit side payment.
3. Types of Account It is a real account. It is a nominal a/c.
4. Opening Balance It starts with the opening balance of cash and bank. It has no opening balance.
5. Closing Balance Balance at the end represents cash in hand at the end and balance of bank overdraft. Balance at the end represents excess of income over expenditure vice – versa.
6. Period Receipts and payments may also relate to preceding and succeeding period. Income and expenditure items relate only to the current period.

Accounting for Non-Profit Organisation MCQ Questions

In each of the following one of them is correct. Indicate the correct answer:

1. Subscription received in advance is shown in ________.
(a) Liabilities side of the Balance Sheet
(b) Assets side of the Balance Sheet
(c) Receipt Item
(d) None of the above
Answer:
(a) Liabilities side of the Balance Sheet

2. Non-Recurring Expenses mean ________.
(a) Expenses incurred at regular intervals
(b) Expenses incurred at irregular intervals
(c) Expenses not incurred more than once
(d) Expenses not incurred at all
Answer:
(c) Expenses not incurred more than once

3. Organisations established for the purpose of providing services to members and beneficiaries are ________.
(a) Private Limited Companies
(b) Public Limited Companies
(c) Partnership Firms
(d) Non Profit Making Organisations
Answer:
(d) Non Profit Making Organisations

4.

No. of Members of Hare Ram Club 250.00
Annual subscription 500.00
Subscription received 97,500.00
Subscription receivable as on 31.03.2007 47,500.00
Subscription received in Advance ?

(a) ₹ 27,500.00
(b) ₹ 77,500.00
(c) ₹ 20,000.00
(d) ₹ 25,000.00
Answer:
(c) ₹ 20,000.00

5. Life membership fees received by a non-profit organisation is treated as:
(a) Revenue receipt.
(b) Capital receipt.
(c) Deferred revenue
(d) Both revenue & capital receipt
Answer:
(b) Capital receipt.

6. Subscription received for current year ₹ 50,000; Subscription of current year received in the previous year ₹ 5,000; Subscription received in advance in the current year ₹ 2500 and Subscription of previous year received in current year ₹ 10000. The amount of subscription to be shown in receipts and payments account is
(a) ₹ 50,000
(b) ₹ 62,500
(c) ₹ 60,000
(d) ₹ 55,000
Answer:
(b) ₹ 62,500

7. On 31st December 2011, a club had subscription in arrears of ₹ 16,000 ‘ and in advance ₹ 4,000 respectively. During the year ended 31.12.2012, the club received subscription of ₹ 2,08,000 which includes ₹ 10,400 relating to 2013. What amount of subscription will be recognized as income for the year 2012?
(a) 2,12,000
(b) 1,96,000
(c) 1,81,600
(d) 1,85,600
Answer:
(d) 1,85,600

8. Which one of the following financial statements is not prepared by a Non-profit organization?
(a) Balance Sheet
(b) Income and Expenditure Account
(c) Cash Flow Statement
(d) Receipt and Payment Account
Answer:
(c) Cash Flow Statement

9. Donations received by Gymkhana club in the form of endowment are treated as ________.
(a) Revenue receipts
(b) Deferred revenue receipts
(c) Capital receipts
(d) General income
Answer:
(c) Capital receipts

10. Subscription fees paid: 4,000; Prepaid fees at end: 1,000; Outstanding fees at end: 500. Profit & loss account is to be debited with:
(a) ₹ 3,500
(b) ₹ 4,500
(c) l 5,500
(d) ₹ 2,500
Answer:
(a) ₹ 3,500

11. Any donation received for a specific purpose is a:
(a) Liability
(b) Assets
(c) Revenue receipts
(d) Capital receipts.
Answer:
(b) Assets

12. Endow fund received by a club is a:
(a) Revenue Receipt
(b) Capital Receipt
(c) Advance Payment
(d) Revenue Payment.
Answer:
(b) Capital Receipt

13. Non profits organisations do not have:
(a) Income
(b) Share holders
(c) Tax-exempt
(d) Employees.
Answer:
(b) Share holders

14. The subscription details of club are given below:
Received during the year ₹ 1,080
Subscription is advance on 31.12.2014 ₹ 300
Subscription in advance on 31.12.2014 ₹ 50.
What amount will be entered in the income & expenditure account for the year ended 31st Dec., 2014?
(a) ₹ 1,330
(b) ₹ 830
(c) ₹ 1,080
(d) ₹ 1,380
Answer:
(a) ₹ 1,330

15. What does a credit balance of Income & Expenditure Account show at the end of a year?
(a) Surplus
(b) Loss
(c) Deficit
(d) Gross profit
Answer:
(a) Surplus

16. Non profits organisations do not have:
(a) Income
(b) Share holders
(c) Tax-exempt
(d) Employees.
Answer:
(b) Share holders

17. The capital of a non-profit organization is generally known as :
(a) Equity
(b) Accumulated fund
(c) Finance Reserve
(d) Cash Fund
Answer:
(a) Equity

18. The capital of non – profit organisation is generally known as ________.
(a) Equity
(b) Accumulated fund
(c) Finance Reserve
(d) Cash Fund.
Answer:
(a) Equity

19. Endowment fund receipt is treated as ________.
(a) Capital Receipt
(b) Revenue Receipt
(c) Loss
(d) Expenses
Answer:
(a) Capital Receipt

20. Income and Expenditure Account shows subscriptions at ₹ 10,000. Subscriptions accrued in the beginning of the year and at the end of the’ year were ₹ 1,000 and ₹ 1,500 respectively. The figure of subscriptions received appearing in receipts and payments account will be ________.
(a) ₹ 9,500
(b) ₹ 11,000
(c) ₹ 10,000
(d) None of the above
Answer:
(a) ₹ 9,500

21. Receipts and Payments Account generally shows:
(a) A Debit Balance
(b) A Credit Balance
(c) Surplus or Deficit
(d) Capital Fund.
Answer:
(a) A Debit Balance

22. Income and Expenditure Account records transactions of:
(a) Revenue nature only;
(b) Capital nature only;
(c) Both revenue and capital nature.
(d) Income of only revenue nature and expenditure of revenue and capital nature.
Answer:
(a) Revenue nature only;

23. Income and Expenditure Account reveals:
(a) Surplus or Deficiency
(b) Cash in Hand
(c) Net Profit
(d) Capital Account.
Answer:
(a) Surplus or Deficiency

24. Donation received for special purpose:
(a) Should be credited to Income and Expenditure Account.
(b) Should be credited to separate A/c and shown in the Balance sheet.
(c) Should be shown on the asset side.
(d) Should not be recorded at all.
Answer:
(b) Should be credited to separate A/c and shown in the Balance sheet.

25. Subscription received by a school for organising annual function is treated as ________.
(a) Capital Receipt (i.e. liability)
(b) Revenue Receipt (i.e. Income)
(c) Assets
(d) Earned Income.
Answer:
(a) Capital Receipt (i.e. liability)

26. Amount received from sale of grass by club should be treated as :
(a) Capital Receipt
(b) Revenue Receipt
(c) Asset
(d) Earned Income.
Answer:
(b) Revenue Receipt

27. If there is a ‘Match Fund’ then match expenses and income are transferred to ________.
(a) Income and Expenditure A/c
(b) Assets side of Balance sheet.
(c) Liabilities side of Balance sheet.
(d) Both Income and Expenditure A/c and to Balance Sheet.
Answer:
(c) Liabilities side of Balance sheet.

28. Subscription received in cash during the year amounted to ₹ 40,000 subscription outstanding at the end of previous year was ₹ 1,500 and outstanding at the end of current year was ₹ 2,000. Subscription received in advance for next year was ₹ 800. The amount credited to Income and Expenditure Account will be ________.
(a) ₹ 38,700
(b) ₹ 39,700
(c) ₹ 40,300
(d) ₹ 41,300
Answer:
(b) ₹ 39,700

29. Subscription received in cash during the year amounted to ₹ 60,000 subscription received in advance for next year was ₹ 3,000 and received in advance during previous year was ₹ 2,000. Subscription in arrear at the end of the current year was ₹ 5,400. The amount credited to Income and Expenditure account will be ________.
(a) ₹ 53,600
(b) ₹ 66,400
(c) ₹ 55,600
(d) ₹ 64,400
Answer:
(d) ₹ 64,400

30. The opening balance of Price fund was ₹ 32,800. During the year, donations received towards this fund amounted ₹ 15,400; amount spent on prizes was ₹ 12,300 and was ₹ 4,000. The closing balance of Prize fund will be:
(a) ₹ 56,500
(b) ₹ 67,500
(c) ₹ 39,900
(d) ₹ 31,900
Answer:
(c) ₹ 39,900

31. Salary paid in cash during the current year was ₹ 80,000; outstanding salary at the end was ₹ 4,000; Salary paid in advance last year pertaining to the current year was ₹ 3,200; paid in advance during current year for next year was ₹ 5,000. The amount debited to Income and Expenditure Account will be :
(a) ₹ 85,800
(b) ₹ 77,800
(c) ₹ 82,200
(d) ₹ 74,200
Answer:
(c) ₹ 82,200

32. Subscription received in advance during the current year:
(a) An income
(b) An asset
(c) A liability
(d) None of these.
Answer:
(c) A liability

33. Which of the following is generally considered as non-profit oriented ________.
(a) Charitable Organization
(b) Corporation
(c) Audit Firm
(d) Insurance Companies.
Answer:
(a) Charitable Organization

34. Outstanding Subscription for non-profit organization is considered as/an ________.
(a) Expense
(b) Liability
(c) Equity
(d) Asset.
Answer:
(d) Asset.

35. Expenditure greater than Income of non-profit organization given rise to a ________.
(a) Loss
(b) Profit
(c) Surplus
(d) Deficit
Answer:
(d) Deficit

36. Income earned which is yet to be collected results in:
(a) Increase in capital and increase in liability
(b) Decreases in liability and increase in capital
(c) Increase in assets and increase in liability
(d) Increase in capital and increase in assets.
Answer:
(d) Increase in capital and increase in assets.
Income earned but not received is accrued income so, when it will be collected, it will result in increase in assets with increase in capital also.

37. Receipt and Payment Account is based on ________.
(a) Cash Book
(b) Profit and Loss A/c
(c) Both a and b
(d) None of the above
Answer:
(a) Cash Book
Receipts and Payments Account is prepared at the end of the accounting year on the basis of cash receipt and cash payments recorded in the Cash Book. It is a summary of cash and bank transactions under various heads.

38. Income and Expenditure is which account ________.
(a) Real A/c
(b) Nominal A/c
(c) Personal A/c
(d) Cash A/c
Answer:
(b) Nominal A/c
Income and Expenditure Account is a Nominal Account, Therefore, the rule of Nominal Account debit all expenses and losses and credit all incomes and gains is followed while preparing it while preparing the account, only items of revenue nature are recorded and all items of capital nature are ignored.

Joint Venture and Consignment Account – CS Foundation Fundamentals of Accounting Notes

Joint Venture and Consignment Account – CS Foundation Fundamentals of Accounting Notes

Go through this Joint Venture and Consignment Account – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Joint Venture and Consignment Account – CS Foundation Fundamentals of Accounting Notes

Meaning of Consignment:
The term “Consignment” relates to dealing with a situation where one person or firm sends goods to another person or firm on the basis that the goods will be sold on behalf of and at the risk of the former.

Features of Consignment:

  • The party which sends the goods is called consignor.
  • The party to whom goods are send is called consignee.
  • The ownership of goods remains with the consignor.
  • The consignor sends to consignee a Performa invoice, statement that books like an invoice but is really not one.
  • The object of perform a invoice is only to convey information to the consignee regarding particulars of the goods sent.
  • The consignee recovers from the consignor all expenses in awed by him on the consignment and charge commission on Sales made by him also.

Accounting Entries in the Books of Consignor:
(1) On dispatch of goods:
Consignment A/c (with the cost of goods)
To Goods sent on consignment A/c

(2) On Payment of expenses on dispatch (with the amount spent as expenses)
Consignment A/c To Bank A/c

(3) On receiving advance (with the amount cash or bill)
Cash or bills receivable A/c
To Consignee personal A/c

(4) On the consignee reporting sale (with gross proceeds of sales) Consignee’s personal A/c
To consignment A/c

(5) For expenses incurred by the consignee, (with the amount of expenses)
Consignment A/c
To Consignee’s personal A/c

(6) For commission payable to the consignee (with the amount of expenses)
Consignment A/c
To Consignee’s personal A/c
Assuming that all the goods sent have been sold, the consignment account will show at this stage the actual Profit or loss made on it the same is transferred to profit and loss A/c.

The entry in case of profit is:
Consignment A/c
To Profit and loss A/c In case of loss the entry is:
Profit and loss A/c
To Consignment A/c
When Consignment is Partly Sold.
Stock on Consignment A/c To consignment A/c

Accounting Entries in the Books of Consignee:
(1) When Consignment goods are received:
No Entry

(2) For expenses incurred by the consignee:
Consignor’s personal A/c
To Cash A/c

(3) When advance is given:
Consignor personal A/c
To Cash or bills payable A/c

(4) When goods are sold:
Cash or Bank A/c
To Consignor’s personal A/c

(5) For Commission due:
Consignor’s personal A/c
To Commission A/c

Joint Venture A/c’s:
A Joint venture is a short duration “business” entered in to by two or more persons jointly.
Joint venture may be described as a temporary partnership between two or more persons without the use of the firm name, for a limited purpose.

Features of Joint Venture:

  • It is short duration special purpose partnership and also may be described as temporary partnership.
  • Parties in venture are called co-ventures.
  • Co ventures may contribute funds for running the venture.
  • Co-ventures share profit or loss of the venture at the agreed ratio, if agreement is event on this point the equal ratio.
  • Generally profit or loss of the venture is computed on completion of the venture.

Difference between Joint Venture and Consignment:

Basics of Difference Joint Venture Consignment
1. Nature It is a temporary partnership business without a firm name. It is an extension of business by principal through agent
2. Parties The parties involved in joint venture are known as co-ventures. consignor and consignee are involving parties in the consignment
3. Relation The relation between co-ventures is just like the partners in the partnership firm. The relation between the consignor and consignee is ‘principle and agent’.
4. Sharing Profit The profits and losses of joint venture are shared among the co-ventures in their agreed proportion. The profits and losses are not shared between the consigner, and consignee. Consignee gets only the commission.
5. Right The Covertures in the joint ventures have equal right The consignment, the consignor enjoys principals right where as consignee enjoys the right of agent
6. Exchange of Information The Co-ventures exchange the required information among the regularly. The consignor is the owner of the business.
7. Method of Maintaining A/c There are different method of maintaining accounts in joint venture as per agreement the co ventures maintain the account. In consignment there is only one method of maintaining account.
8. Basis of Accounting Cash basis of accounting is applicable in joint venture. Actual basis is adopted in consignment
9. Continuity It is terminated after the particular completion of business. It exist according to the willingness of both consignor and consignee.

Joint Venture and Consignment Account MCQ Questions

1. Consignment Account is a:
(a) Real Account
(b) Nominal Account
(c) Trading Account
(d) Personal Account
Answer:
(b) Nominal Account

2. A invoiced certain goods so as to show a profit of 20% on invoice price 1/10th of the goods were lost in transit. The cost price of goods lost is ₹ 40,000. The invoice value of goods sent out is:
(a) ₹ 5,00,000
(b) ₹ 4,80,000
(c) ₹ 4,50,000
(d) ₹ 4,00,000
Answer:
(a) ₹ 5,00,000

3. X sends out 400 bags to Y costing ₹ 200 each, consignor expenses were ₹ 4000. Y’s non selling expenses ₹ 2,000. and selling expenses of ₹ 1000. 300 bags were sold by Y. Value of consignment stock will be :
(a) ₹ 20,400
(b) ₹ 20,700
(c) ₹ 22,000
(d) ₹ 21,500
Answer:
(d) ₹ 21,500

4. X sends out goods costing ₹ 3,00,000 to Y at cost plus 25%, consignor’s expenses ₹ 5,000. 1/10th of goods were lost in transit. Insurance claim received ₹ 3,000. The net loss on account of abnormal loss is :
(a) ₹ 27,500
(b) ₹ 25,500
(c) ₹ 30,500
(d) ₹ 38,000
Answer:
(a) ₹ 27,500

5. P sent out goods costing ₹ 45,000 to Y at cost + 331/3%. 1/10th of goods were lost in transit. 2/3rd of the goods are sold at 20% above IP. The amount of sale value will be :
(a) ₹ 54,000
(b) ₹ 43,200
(c) ₹ 60,000
(d) ₹ 36,000
Answer:
(b) ₹ 43,200

6. Account Sales indicates :
(a) The net amount due from consignor to consignee by way of commission
(b) The net amount due from consignee to consignor
(c) Net sales effected by consignee
(d) None of these
Answer:
(b) The net amount due from consignee to consignor

7. X sends out goods costing ₹ 2,00,000 to Y. 3/5th of the goods were sold by consignee for ₹ 1,40,000.
Commission 2% on sales plus 20% of gross sales less all commission exceeds cost price. The amount of commission will be :
(a) ₹ 5,667
(b) ₹ 5,800
(c) ₹ 6,000
(d) ₹ 5,600
Answer:
(a) ₹ 5,667

8. A sends out goods costing ₹ 2,00,000 to B. Consignor’s expenses ₹ 5,000. Consignee’s expenses in relation to sales ₹ 3000. 4/5th of the goods were sold at 20% above cost. The profit on consignment will be:
(a) ₹ 25,000
(b) ₹ 31,000
(c) ₹ 25,200
(d) ₹ 5,000
Answer:
(a) ₹ 25,000

9. Goods sent on consignment account is a :
(a) Personal account
(b) Real account
(c) Nominal account
(d) Sales A/c
Answer:
(b) Real account

10. The abnormal loss on consignment is credited to :
(a) Consignment A/c
(b) Profit & Loss A/c
(c) Consignee’s personal A/c
(d) All of the above
Answer:
(a) Consignment A/c

11. A proforma invoice is sent by :
(a) Consignee to consignor
(b) Consignor to consignee
(c) Debtors to consignee
(d) Debtors to consignor
Answer:
(b) Consignor to consignee

12. X sends out 200 boxes to Y costing ₹ 100 each. Consignor’s expenses ₹ 4000. Consignee’s non-recurring expenses ₹ 900.1/10th of the boxes were lost in transit. 2/3rd of the boxes received by consignee were sold for ₹ 20,000. The amount of consignment stock will be :
(a) ₹ 7,200
(b) ₹ 7,500
(c) ₹ 7,000
(d) ₹ 6,000
Answer:
(b) ₹ 7,500

13. X sent out certain goods to Y. 1/10th of goods were lost in transit. Invoice value of goods lost is ₹ 12,500. Invoice value of goods sent out on consignment will be :
(a) ₹ 1,20,000
(b) ₹ 1,25,000
(c) ₹ 1,40,000
(d) ₹ 1,00,000
Answer:
(b) ₹ 1,25,000

14. Suresh consigned 600 fans to Naresh to be sold at his risk. The cost of each fan is ₹ 300. Suresh paid ₹ 6000 as freight. Naresh paid ₹ 1500 for octroi; ₹ 3500 for godown rent. 500 fans were sold for ₹ 1,80,000. Naresh was entitled to 4% commission on sale @ ₹ 350 per fan and 20% of any surplus price realized Profit on consignment will be :
(a) ₹ 12,250
(b) ₹ 12,000
(c) ₹ 14,000
(d) ₹ 15,000
Answer:
(a) ₹ 12,250

15. Commission provided by the consignor to the consignee to promote credit sale is know as :
(a) Ordinary commission
(b) Del credere commission
(c) Over – riding commission
(d) Special commission
Answer:
(b) Del credere commission

16. If no del – credere commission is paid to the consignee, ________ account will be debited for credit sale :
(a) Consignment account
(b) Consignee account
(c) Consignor account
(d) Consignment debtors account
Answer:
(d) Consignment debtors account

17. On 1st Sept., 2006 goods costing ₹ 33,000 were consigned by X to his agent Y at a proforma price which was cost plus one sixth profit on invoice price. What is the invoice price of goods :
(a) ₹ 39,000
(b) ₹ 39,600
(c) ₹ 40,000
(d) ₹ 45,000
Answer:
(b) ₹ 39,600

18. Overriding commission is calculated on :
(a) Cash sales
(b) Credit sales Only
(c) Total sales
(d) Credit sales less Cash sale
Answer:
(c) Total sales

19. X consigns 500 bags to Y costing ₹ 400 each at an inflated price of ₹ 450 each. Consignor’s expenses ₹ 4000. Consignee’s expenses freight ₹ 1000, selling 7 2000,400 bags were sold. The amount of stock reserve will be :
(a) ₹ 5,000
(b) Nil
(c) ₹ 10,000
(d) ₹ 10,200
Answer:
(a) ₹ 5,000

20. What entry is required to be passed to nullify the effect of Loading:
(a) Goods sent on consignment A/c Dr.
To Trading A/c
(b) Goods sent on consignment A/c Dr.
To Consignment A/c
(c) Consignment A/c Dr.
To Goods sent on consignment A/c
(d) None
Answer:
(b) Goods sent on consignment A/c Dr.
To Consignment A/c

21. The risk of stock on consignment lies with ________.
(a) Consignor
(b) Consignee
(c) Buyer
(d) Seller
Answer:
(a) Consignor

22. X sends out 4000 boxes to Y costing ₹ 100 each. Consignor’s expenses 10,000.1/10th of boxes were lost in consignee’s godown and treated as normal loss. 2400 boxes were sold by consignee. The value of consignment stock will be :
(a) ₹ 1,36,667
(b) ₹ 1,23,000
(c) ₹ 1,20,000
(d) ₹ 1,20,500
Answer:
(a) ₹ 1,36,667

23. If the del credere commission is 10%, cash sales is ₹ 5,000 and credit sales is ₹ 10,000. Calculate the amount of del credere commission.
(a) 1,500
(b) 1,000
(c) 500
(d) None
Answer:
(a) 1,500

24. The Stock lying unsold with the consignee belongs to :
(a) Consignor
(b) Consignee as he bears the risk
(c) Both (a) and (b)
(d) None of these
Answer:
(a) Consignor

25. J of Jaipur sends 500 radios @ 7 200 each to D of Delhi. All the radios are sold by D at a profit of 25% on cost. D is entitled to a commission of 7 25 per radio sold plus 20% of gross sale proceeds as exceeds an amount calculated @ 20% profit on cost. Calculate commission.
(a) ₹ 12,500
(b) ₹ 13,500
(c) ₹ 11,500
(d) ₹ 10,500
Answer:
(b) ₹ 13,500

26. Account Sales includes ;
(a) Sales made
(b) Stock left with consignee
(c) Commission earned
(d) All of above.
Answer:
(d) All of above.

27. A sends 1000 units @ ₹ 56 to be sold on consignment basis. Consignor expenses amounted to ₹ 1000. 50 units were cost in transit. Find the new price per unit. (Loss is unavoidable).
(a) ₹ 50 per unit
(b) ₹ 60 per unit
(c) ₹ 58.95 per unit
(d) ₹ 57 per unit
Answer:
(b) ₹ 60 per unit

28. A consigned 1000 litres of coconut oil @ ₹ 50 per It. to B. The normal loss is estimated at 5%. The profit was fixed at 14% on the total cost. What is the sale price per litre?
(a) ₹ 57
(b) ₹ 60
(c) ₹ 70
(d) ₹ 55
Answer:
(b) ₹ 60

29. X sends goods to Y on consignment, but 15% of the goods were lost in transit. Such loss will be borne by:
(a) Consignee
(b) Consignor
(c) Both (a) and (b)
(d) Insurance company
Answer:
(b) Consignor

30. Who is owner of the unsold stock left with the consignee?
(a) Consignee
(b) Consignor
(c) Co-venturer
(d) Both (a) and (b)
Answer:
(b) Consignor

31. The Consignor sends ________ along With the consigned goods to the consignee.
(a) account sales
(b) proforma invoice
(c) both
(d) none
Answer:
(b) proforma invoice

32. X consigned goods to Y costing ₹ 30,000 at cost plus 25%. These goods are to be sold at invoice value plus 10%. Y sold a part of the goods for ₹ 33,000. What will be the value of stock lying with Y that will be shown by X at the closing of accounts?
(a) ₹ 8,250
(b) ₹ 6,000
(c) ₹ 7,500
(d) ₹ 8,000
Answer:
(b) ₹ 6,000

33. Del credere commission is fixed in terms of percentage say 10% and credit sales and cash sale are ₹ 10,000 and ₹ 5,000 respectively. Amount of del-credere commission will be?
(a) ₹ 1,000
(b) ₹ 1,500
(c) ₹ 500
(d) None of the above
Answer:
(b) ₹ 1,500

34. X sends out 400 bags costing ₹ 200 each to Y. Sales are to be made at cost +45%. X draws a bill on Y for an amount equivalent to 60% of sales value. The amount of bill will be:
(a) ₹ 69,600
(b) ₹ 60,300
(c) ₹ 61,250
(d) ₹ 63,000
Answer:
(a) ₹ 69,600

35. Goods costing ₹ 1,00,000, Invoice Price ₹ 1,20,000, send to consignee. Goods sold by consignee for ₹ 96,000 at Invoice Price. Consignee is entitled to a commission of 5% to cost price of sale made and 10% additional commission on difference of invoice price and cost price of sale made. Amount of commission payable to the consignee will be:
(a) ₹ 4,000
(b) ₹ 5,600
(c) ₹ 1,600
(d) ₹ 9,600
Answer:
(b) ₹ 5,600

36. Mr. A sold goods amounting to ₹ 30,000 (cost of goods ₹ 24,000) received on consignment, during the month of April, 2009. Half of the sales was on credit. He is entitled for 5% commission on sales. In addition to that he is also entitled for 2% del credere commission. What is the total amount of commission due to Mr. A for the month of April, 2009?
(a) ₹ 4,000
(b) ₹ 1,500
(c) ₹ 1,800
(d) ₹ 2,100
Answer:
(d) ₹ 2,100

37. ________ Commission is given to consignee for his hardwork in introducing a new product in the market.
(a) del credere
(b) extra salary
(c) over riding commission
(d) commission on total sales.
Answer:
(c) over riding commission

38. If stock is left with consignee at the end of the year, then it will be credited to ________?
(a) P/L a/c
(b) consignment A/c
(c) trading a/c
(d) none of these.
Answer:
(b) consignment A/c

39. The revenue for the transaction of consignment sales is recognized ________.
(a) When the goods are sold to customers by consignee.
(b) When the goods are sent to consignee.
(c) When the advance against delivery is received by consignor.
(d) When consignor receives the payment from consignee.
Answer:
(a) When the goods are sold to customers by consignee.

40. X Ltd. sends 5,000 bags of cement on consignment to Y Ltd. The Cost per bag is ₹ 40. The Carriage Inward in ₹ 25,000. It is estimated that the normal loss rate is 10%. Calculate the cost per bag?
(a) ₹ 45
(b) ₹ 45.50
(c) ₹ 50.00
(d) ₹ 40.00
Answer:
(c) ₹ 50.00

41. The balances of “goods sent on consignment account” is transferred to:
(a) Trading Account
(b) Profit and Loss Account
(c) Consignment Account
(d) Consignee’s Account
Answer:
(c) Consignment Account

42. S of Surat sent goods costing ₹ 3,00,000 to C of Chennai at cost + 20%. Half of the goods sent were sold by C at 10% above the invoice value. The sales value of goods will be
(a) ₹ 1,98,000
(b) ₹ 1,50,000
(c) ₹ 1,80,000
(d) ₹ 1,65,000
Answer:
(a) ₹ 1,98,000

43. Radhika sent goods worth ₹ 1,20,000 on consignment to Sarika. 1 /8th of the goods were lost in transit. No claim was receivable for the same. Sarika sold 2/3 of the goods received for ₹ 1,00,000. What was the cost of the goods lying with Sarika?
(a) ₹ 29,000
(b) ₹ 35,000
(c) ₹ 29,167
(d) ₹ 40,000
Answer:
(b) ₹ 35,000

44. When the del-credere commission is allowed by consignor to consignee, abnormal loss will be borne by:
(a) Consignor
(b) Consignee
(c) Both, consignor and consignee in equal proportion.
(d) Neither consignor nor consignee.
Answer:
(a) Consignor

45. 1000 kgs of vegetables were consigned at ₹ 18,000 and freight expenses amounted to ₹ 4,000. During the transit there is a normal loss of 40 kg. If 800 kgs were sold, what will be the value of stock at the end?
(a) ₹ 2,880
(b) ₹ 3,000
(c) ₹ 3,520
(d) ₹ 3,667
Answer:
(d) ₹ 3,667

46. Mr. X paid commission to his consignee Y, ₹ 25,000 which was @ 5% on sales affected by him. Goods were sold by Mr. Y at a profit of 25% on cost. Stock in hand on 31/3/11 is ₹ 50,000 at cost. So, cost of goods
(a) ₹ 4,50,000
(b) ₹ 75,000
(c) ₹ 5,50,000
(d) ₹ 6,00,000
Answer:
(a) ₹ 4,50,000

47. Overriding commission is given by consignor to consignee in order to:
(a) to encourage the consignee to overcome bad-debts
(b) to encourage the consignee to promote the sales at a price higher than the specified selling price
(c) to sell the goods sent by consignor
(d) to sell and take care of goods sent by consignor to consignee
Answer:
(b) to encourage the consignee to promote the sales at a price higher than the specified selling price

48. A loss which is natural and unavoidable is called:
(a) Abnormal Loss
(b) Normal Loss
(c) Contingent Loss
(d) None of these.
Answer:
(b) Normal Loss

49. Periodical statement sent by consignee to consignor is known as ________:
(a) performa invoice
(b) account sale
(c) bill of exchange
(d) hundi
Answer:
(b) account sale

50. Goods sent on consignment at cost of ₹ 50,000. 1 /4th of the goods lost in transit and claim received ₹ 10,000. The amount of abnormal loss to be transferred to General P & L account is:
(a) ₹ 12,500
(b) ₹ 10,000
(c) ₹ 2,500
(d) None of the above.
Answer:
(c) ₹ 2,500

51. Del-credere commission is given for:
(a) Sales at higher price than specified.
(b) Speeding up the collection.
(c) Covering the risk of bad debts.
(d) Prompt payment from consignee.
Answer:
(c) Covering the risk of bad debts.

52. At the time of valuation of unsold stock on consignment, which of the following expenses will not be included?
(a) Insurance of warehouse of consigner
(b) Carriage
(c) Loading expenses
(d) Octroi
Answer:
(a) Insurance of warehouse of consigner

53. P of Punjab sent goods costing ₹ 6,00,000 to A of Aligarh. Goods were to be sold at cost plus. The consignee had to send advance to the consigner at a fixed percentage of sales value and A sent accordingly ₹ 4,80,000. What is the percentage of such advance on sales value?
(a) 60%
(b) 50%
(c) 45%
(d) 40%
Answer:
(a) 60%

54. Del-Credere commission is fixed in terms of percentage say 10%. The credit sales is of ₹ 1,00,000 and cash sales is of ₹ 50,000, amount of del-credere commission will be:
(a) ₹ 10,000
(b) ₹ 15,000
(c) ₹ 5,000
(d) None of the above.
Answer:
(b) ₹ 15,000

55. Overriding commission is a commission:
(a) Based on fixed percentage of the gross sales proceeds made by the consignee
(b) Based on fixed percentage of the cash sales made by the consignee
(c) An extra commission to promote sales of higher price than specified
(d) A commission on credit sales for protection from bad debts
Answer:
(a) Based on fixed percentage of the gross sales proceeds made by the consignee

56. Yojan Kumar consigned goods of ₹ 1,00,000 at an invoice price of 20% above the cost to Singham Kumar. Consignee is entitled for 5% commission on total sales up to invoice, 20% commission on sale proceeds in excess of invoice price and 2% del credere commission on credit sales. Singham Kumar sold 25% goods for cash at ₹ 40,000; 50% goods at ₹ 70,000 on credit and kept 10% goods at invoice price for himself. Calculate the commission payable to Singham Kumar.
(a) ₹ 10,500
(b) ₹ 9,900
(c) ₹ 10,200
(d) None of the above
Answer:
(d) None of the above

57. In absence of any agreement in consignment business, the loss of goods by fire in consignees godown is borne by:
(a) Consignor
(b) Consignee
(c) Shared by both consignor and consignee
(d) Insurance company
Answer:
(a) Consignor

58. On 1.1.2014, Amit of Varanasi consigned goods of the value of ₹ 50,000 to Sumit of Chennai. Amit paid ₹ 2,500 as freight and ₹ 1,500 for insurance. During transit, 1/10th of the goods were totally destroyed by fire. 1 /9th of the remaining goods were again destroyed by fire in godown. On 1.4.2014 half of the original goods were sold for ₹ 30,000. You are required to ascertain the stock:
(a) ₹ 15,000
(b) ₹ 24,000
(c) ₹ 16,200
(d) ₹ 20,000
Answer:
(c) ₹ 16,200

59. Goods sent on consignment by Kumar to Suresh. Invoice value of goods sent is ₹ 6,00,000 at cost + 25% profit 1/4th of the goods were lost in transit. Insurance claim received ₹ 72,000. The amount of abnormal loss to be transferred to General Profit and Loss A/c will be:
(a) ₹ 40,500
(b) ₹ 48,000
(c) ₹ 1,20,000
(d) ₹ 1,50,000
Answer:
(b) ₹ 48,000

60. R of Dwarka sends out certain goods at cost + 25%. Invoice value of goods sent out ₹ 2,00,000.4/5,h of the goods were sold by consignee at ₹ 1,76,000. Commission 2% upto invoice value and 10% of any surplus above invoice value. The amount of commission will be:
(a) ₹ 4,800
(b) ₹ 5,200
(c) ₹ 3,200
(d) ₹ 1,600
Answer:
(a) ₹ 4,800

61. 5,000 metres of cloth sent out on consignment at the invoice price of ₹ 30 per metre which were purchased by consignor at the cost price of ₹ 20 per metre. Consignor’s expenses ₹ 5,500. Consignee’s expenses ₹ 2,000. Consignee sold 4,000 metres ₹ 40 per metre. Consignee is entitled to a commission of 5% on total sales proceeds plus a further 20% of any surplus above ₹ 30 per metre. Owing to a fall in market price, the inventories of cloth in hand is to be reduced by 10%. What will be the profit on consignment?
(a) ₹ 54,500
(b) ₹ 63,500
(c) ₹ 56,490
(d) ₹ 55,490
Answer:
(d) ₹ 55,490

62. D of Delhi sent out goods on consignment so as to show a profit of 20% on invoice price. 1/5,h of the goods were lost in transit. The cost of goods lost is ₹ 60,000. The invoice value of goods sent out was:
(a) ₹ 3,75,000
(b) ₹ 3,60,000
(c) ₹ 3,50,000
(d) ₹ 3,00,000
Answer:
(a) ₹ 3,75,000

63. Munnabhai of Mumbai send out certain goods to Chunky of Chennai at cost + 25%. 3/4,h of the goods received by Chunky is sold at ₹ 1,98,000 at 10% above invoice price. Cost value of goods send out is :
(a) ₹ 2,40,000
(b) ₹ 1,44,000
(c) ₹ 1,80,000
(d) ₹ 1,92,000
Answer:
(d) ₹ 1,92,000

64. Over-riding commission is generally calculated on:
(a) Credit Sales
(b) Total sales excluding invoice value/cost
(c) Cash sales only
(d) Both on Credit and Cash Sale
Answer:
(b) Total sales excluding invoice value/cost

65. 1000 kgs of bananas are consigned to a wholesaler, the cost being ₹ 8 per kg, plus ₹ 925 of freight. It is considered that a loss of 15% is unavoidable. The cost per kg of banana will be:
(a) ₹ 9.41
(b) ₹ 10.50
(c) ₹ 10.00
(d) ₹ 8.925
Answer:
(b) ₹ 10.50

66. Gautam of Goa consigned goods for the value of ₹ 74,500 to Rama of Rameshwaram and paid freight etc. of ₹ 7,000. He drew a bill on Rama for 3 months after date for ₹ 25,500 as an advance against consignment and discounted the bill for ₹ 24,500. Further he received Account Sales showing that, part of the goods had realized gross ₹ 83,500 and that his expenses and commission amounted to ₹ 2,500 and ₹ 6,000 respectively. The inventory unsold was valued at ₹ 27,500. Consignee wants to remit a draft for the amount due. The amount of draft will be:-
(a) ₹ 56,500
(b) ₹ 55,500
(c) ₹ 50,500
(d) ₹ 49,500
Answer:
(d) ₹ 49,500

67. If Del-credere commission is allowed for bad – debt, consignee will debit the bad – debt, amount to:
(a) Commission earned A/c
(b) Consignor A/c
(c) Trade Receivable A/c
(d) General Trading A/c
Answer:
(a) Commission earned A/c

68. X consigned goods costing ₹ 1,50,000 to Y of Navi Mumbai at cost plus 25%. 1/10th goods are lost in transit. Y sold 3/5th of the remaining goods at 10% above invoice price. The amount of sales will be:
(a) ₹ 1,85,625
(b) ₹ 1,01,250
(c) ₹ 1,23,750
(d) ₹ 1,11,375
Answer:
(d) ₹ 1,11,375

69. Roy of Chennai sends goods costing ₹ 2,00,000 to Sai of Delhi. 3/5th of the goods were sold by consignee for ₹ 1,40,000. Commission 2% on sales plus 20% of gross sale less all commission as exceeds cost price. The amount of commission will be:
(a) ₹ 5,666
(b) ₹ 5,800
(c) ₹ 6,000
(d) ₹ 5,600
Answer:
(a) ₹ 5,666

70. Goods sent out on consignment ₹ 2,00,000. Consignor’s expenses ₹ 5,000. Consignee’s expenses ₹ 2,000. Cash sales ₹ 1,00,000. Credit sales ₹ 1,10,000. Consignment inventories ₹ 40,000. Ordinary commission payable to consignee ₹ 3,000. Del-credere commission ₹ 2,000. The amount irrecoverable from customer ₹ 2,000. What will be the profit on consignment?
(a) ₹ 38,000
(b) ₹ 40,000
(c) ₹ 36,000
(d) ₹ 43,000
Answer:
(a) ₹ 38,000

71. Del-Credere Commission is allowed for bad-debts, consignee will debit the bad-debts amount to:
(a) Commission earned A/c
(b) General P/L A/c
(c) Trade receivables A/c
(d) Consignor A/c
Answer:
(b) General P/L A/c

72. Consignment Account is a account and consignee account is the nature of ________.
(a) nominal, real
(b) real, nominal
(c) nominal, personal
(d) artificial, personal.
Answer:
(c) nominal, personal

73. Goods sent on consignment ₹ 50,000. During transit 1/10th of goods were destroyed by fire later, 1/9th of the goods received by consignee were also destroyed by fire in godown. Half of the remaining goods were sold ₹ 30,000. Freight and Insurance paid by consignor ₹ 2,500 and ₹ 1,500 respectively. Calculate closing stock.
(a) ₹ 24,000
(b) ₹ 21,600
(c) ₹ 20,000
(d) None of the above.
Answer:
(b) ₹ 21,600

74. Mukesh purchased 5000 bags of wheat costing ₹ 250 each and sent them to Manoj on consignment basis. Carriage ₹ 1,500 and Insurance expense ₹ 3,500 were paid by Mukesh. 3/5’h of the stock were sold by Manoj at ₹ 300 per bag. Remaining stock was taken over by Manoj at cost. The amount of stock taken over will be:
(a) ₹ 5,00,000
(b) ₹ 12,55,000
(c) ₹ 5,02,000
(d) ₹ 5,51,000
Answer:
(c) ₹ 5,02,000

75. Rishi of Kolkata sent out goods costing ₹ 50,000 to Zenith of Mumbai at cost + 20%. 10% of the goods were lost in transit. 70% of the goods received are sold at 15% above invoice price. The amount of sales value will be ________.
(a) ₹ 37,800
(b) ₹ 39,600
(c) ₹ 43,470
(d) ₹ 44,370
Answer:
(c) ₹ 43,470

76. If consigner draws a bill on consignee and discounted it with the banker, the discounting charges will be debited in:
(a) Trade Debtors Account
(b) Consignment Account
(c) Consignee’s Account
(d) General Profit and Loss Account.
Answer:
(b) Consignment Account

77. M and N enter into a joint venture where M supplies goods worth ₹ 6000 and spends ₹ 300 on expenses. N sells the entire lot for ₹ 7,800 meeting selling expenses amounting to ₹ 300. Profit sharing ratio equal. N remits to M the amount due. The amount of remittance will be:
(a) ₹ 6,900
(b) ₹ 7,500
(c) ₹ 6,300
(d) ₹ 6,600
Answer:
(a) ₹ 6,900

78. What is the nature of joint venture with co-venture’s A/c :
(a) Nominal account
(b) Real account
(c) Personal account
(d) None
Answer:
(c) Personal account

79. When unsold stock is taken away by a co – venturer, then ________ account is debited:
(a) joint stock
(b) joint venture
(c) joint bank account
(d) co – venturers capital account
Answer:
(d) co – venturers capital account

80. A bought goods costing 2,00,000. B sold 4/5th of goods for ₹ 2,50,000. Balance goods were taken over by B at cost less 20%. Find out profit on venture :
(a) ₹ 82,000
(b) ₹ 90,000
(c) ₹ 50,000
(d) None
Answer:
(a) ₹ 82,000

81. Joint Venture Accounting follows which concept:
(a) Accrual Concept
(b) Going Concern Concept
(c) Cost Concept
(d) Cash Basis
Answer:
(d) Cash Basis

82. Joint venture is a ________ Account.
(a) personal
(b) real
(c) nominal
(d) capital
Answer:
(c) nominal

83. A for joint venture with B, purchased goods costing ₹ 2,00,000. B sold the goods for ₹ 2,80,000. Unsold material costing ₹ 10,000 was taken over by A at ₹ 8,000. A is entitled to get 1 % commission on purchases. B is entitled to get 2% commission on sales, Profit on venture will be :
(a) ₹ 80,000
(b) ₹ 80,800
(c) ₹ 81,200
(d) ₹ 80,400
Answer:
(d) ₹ 80,400

84. The parties to joint venture are called ________.
(a) Co-venturers
(b) Partners
(c) Principal and agent
(d) Friends
Answer:
(a) Co-venturers

85. When co-ventures initially contribute for a joint should be debited in case when separate set of books are maintained:
(a) Purchases A/c
(b) Joint ventures A/c
(c) Venture’s Capital A/c
(d) Joint Bank A/c
Answer:
(d) Joint Bank A/c

86. A and B enter into a joint venture to underwrite the shares of K Ltd. K Ltd. make an issue of 1,00,000 equity shares of ₹ 10 each. 80% of issue are subscribed by the party. The profit sharing ratio between A and B is 3 : 2. The balance unsubscribed shares are purchased by A and B in profit sharing ratio. How many shares are purchased by A?
(a) 80,000 shares
(b) 72,000 shares
(c) 12,000 shares
(d) 8,000 shares
Answer:
(c) 12,000 shares

87. If separate set of books is maintained and discount is received at the time of purchase of goods then such a discount will be treated as :
(a) Income of Joint Venture hence credited to joint venture account
(b) Expense of Joint Venture hence debited to joint venture account
(c) Will not be recorded in books of account
(d) Credited to co-venturers account
Answer:
(a) Income of Joint Venture hence credited to joint venture account

88. X and Y enter into a joint venture. X supplied goods to Y worth ₹ 70,000. X incurred expenses amounting to ₹ 6,000 on joint venture. The venture resulted in a total profit of ₹ 15,000 of which their ratio of distribution is 2:1. The entire sale proceeds were received by Y. Amount received by X from Y in final settlement will be :
(a) ₹ 85,000
(b) ₹ 86,000
(c) ₹ 80,000
(d) ₹ 75,000
Answer:
(b) ₹ 86,000

89. For material supplied from over stock by any of the venture, the correct journal entry will be :
(In case of Separate set of books of a joint venture)
(a) Joint Venture A/c Dr.
To Venturer’s Capital A/c
(b) Joint Venture A/c Dr.
To Joint Bank A/c
(c) Joint Venture A/c Dr.
To Materials A/c
(d) Joint Bank A/c Dr.
To Joint Venture A/c
Answer:
(a) Joint Venture A/c Dr.
To Venturer’s Capital A/c

90. Memorandum joint venture account is prepared :
(a) When separate set of books is maintained
(b) When each co-venturer keeps record of all the transactions himself
(c) When each co-venturer keeps records of their own joint venture transaction
(d) None of these
Answer:
(c) When each co-venturer keeps records of their own joint venture transaction

91. X spending a sum of ₹ 10000 on account of joint venture, will be credited to ________ account in case of the records being maintained in the books of X.
(a) memorandum J.V.
(b) joint venture
(c) co – venturers
(d) cash
Answer:
(d) cash

92. A and B enter into a joint venture sharing profits and losses equally. A bought 5000 Kg of rice @ ₹ 25/Kg. B bought 1000 Kg of wheat @ * 30/Kg. A sold 1000 Kg of wheat @ ₹ 35/Kg and B sold 5000 Kg of rice @ ₹ 30/ Kg. The profit on venture will be :
(a) ₹ 55,000
(b) ₹ 50,000
(c) ₹ 60,000
(d) ₹ 30,000
Answer:
(d) ₹ 30,000

93. Following are the characteristics of joint venture except:
(a) No common firm name
(b) Contribution of funds
(c) Sharing of profits/losses
(d) None of these
Answer:
(d) None of these

94. Which of the following methods of valuation of closing stock is followed in joint venture accounting?
(a) Net realizable value
(b) Cost price
(c) Least of cost or Net realizable value
(d) None of these
Answer:
(d) None of these

95. Karim and Rahim enter a joint venture sharing profits in 2:1. Karim purchases goods of ₹ 2,00,000 and Rahim sells goods of ₹ 2,50,000. Karim gets 1% commission on purchase and Rahim gets 5% commission on sales. Find profit on joint venture.
(a) ₹ 35,500
(b) ₹ 36,000
(c) ₹ 34,000
(d) ₹ 38,000
Answer:
(a) ₹ 35,500

96. A and B entered into a joint venture. They agreed to share profits and losses equally. A purchased goods worth ₹ 16,000. Goods of ₹ 4,000 were destroyed by fire. Insurance claim of ₹ 3,000 is received. B sold the rest of the goods for ₹ 20,000. A and B share profits equally A’s share of profits is:
(a) ₹ 4,000
(b) ₹ 3,000
(c) ₹ 3,500
(d) None
Answer:
(c) ₹ 3,500

97. A and B entered into joint venture. A supplied goods worth ₹ 7,000 and incurred expenses of ₹ 300. B sold the goods for ₹ 10,000 and incurred expenses of ₹ 500. What is the amount of final remittance?
(a) ₹ 8,400
(b) ₹ 7.900
(c) ₹ 8,900
(d) None of these.
Answer:
(a) ₹ 8,400

98. Which of the following is incorrect?
(a) Joint Venture is not based on going concern.
(b) Joint Venture can be formed with minor.
(c) A bill of exchange is a negotiable instrument.
(d) Noting charges are the expenses of drawee.
Answer:
(b) Joint Venture can be formed with minor.

99. A and B entered into a Joint Venture. A bought goods for ₹ 6,00,000. He sold 80% of the goods for ₹ 5,60,000 and took the remaining goods at cost less 20%. Find the amount of profit.
(a) ₹ 56,000
(b) ₹ 60,000
(c) ₹ 70,000
(d) None
Answer:
(a) ₹ 56,000

100. When Memorandum Joint Venture Method is followed, in Books of X, “Joint Venture with Y A/C” will be credited with ________, for amount received by X.
(a) y
(b) sales
(c) debtor
(d) cash
Answer:
(d) cash

101. A & B started a joint venture. After the sales the unsold stock worth ₹ 15,000 was taken over by B at a cost of ₹ 20,000. The amount to be credited to Joint venture Account will be?
(a) ₹ 20,000
(b) ₹ 15,000
(c) ₹ 5,000
(d) ₹ 35,000
Answer:
(a) ₹ 20,000

102. X and Y entered into a joint venture to sell 1,000 bags of wheat costing ₹ 200 each. X paid ₹ 2,000 for freight and ₹ 3,000 for insurance. 4/5th of the bags were sold by Y at ₹ 250 each bag. Remaining stock was taken over by Y at cost. The amount of the stock taken over by Y will be ________.
(a) ₹ 40,000
(b) ₹ 45,000
(c) ₹ 41,000
(d) ₹ 50,000
Answer:
(c) ₹ 41,000

103. Tinku and Bunty enter into a joint venture to share profits and losses equally. Tinku supplied 200’Refrigerators costing ₹ 2,00,000 to Bunty incurring freight charges ₹ 10,000. Bunty sold 140 Refrigerators for ₹ 2,40,000. He took over 10 refrigerators himself.
The profit & loss on joint venture will be:
(a) Loss ₹ 40,000
(b) Profit ₹ 30,000
(c) Profit ₹ 40,000
(d) Profit ₹ 40,500
Answer:
(d) Profit ₹ 40,500

104. In case of Joint Venture, a minor:
(a) Can be a co-venturer for the benefit of the venture.
(b) Can be a co-venturer if all other co-venturers agree.
(c) Can be a co-venturer if permitted by the competent authority.
(d) Cannot be a co-venturer
Answer:
(d) Cannot be a co-venturer

105. A and B entered in a joint venture and decided to share profits and losses equally.
A supplied goods worth ₹ 7,000 and incurred expenses of ₹ 300. B sold •the goods for ₹ 10,000 and incurred expenses of ₹ 500. What will be the amount of the final remittance to be send by B to A?
(a) ₹ 7,900
(b) ₹ 5,200
(с) ₹ 8,400
(d) ₹ 8,800
Answer:
(с) ₹ 8,400

106. Which of the following statement is true?
(a) Co-venturers always shares profits and losses equally.
(b) Number of co-venturers can never be more than two.
(c) The relationship between co-venturers is principal & agent.
(d) Co-venturers may contribute funds for running the venture.
Answer:
(d) Co-venturers may contribute funds for running the venture.

107. A & B has started a joint venture for purchase and sale of garments. Initial capital contribution was ₹25,000 and ₹ 50,000 respectively. There is no written agreement about share of profit/loss amongst them. They purchased garments worth ₹ 50,000 and sold for ₹ 75,000. The profit of ₹ 25,000 shared by them as:
(a) ₹ 8,333 and ₹ 16,667
(b) ₹ 10,000 and ₹ 15,000
(c) ₹ 12,500 and ₹ 12,500
(d) ₹ 20,000 and ₹ 5,000.
Answer:
(c) ₹ 12,500 and ₹ 12,500

108. Karthik and Dhoni enter into a joint venture sharing profit and loss in the ratio of 2 : 1. Karthik purchased the goods costing ₹ 2,00,000. Dhoni sold the goods for ₹ 2,50,000. Karthik is entitled to get 1 % commission on purchase and Dhoni is entitled to get 5% commission on sales. The profit on venture will be:
(a) ₹ 35,500
(b) ₹ 36,000
(c) ₹ 34,000
(d) ₹ 38,000.
Answer:
(a) ₹ 35,500

109. The minimum number of co-venture will be atleast ________ in joint venture business.
(a) 2
(b) 5
(c) 7
(d) 4
Answer:
(a) 2

110. Which of the following is true?
(a) Co-ventures always shares profit equally
(b) Number of co-ventures can never be more than two
(c) The relationship between co-ventures is principal & agent
(d) Co-ventures may contribute funds for running the venture
Answer:
(d) Co-ventures may contribute funds for running the venture

111. C and D enter into a joint venture to share profit in the ratio 5: 3. Apart from the profit, D is entitled to a commission of 5% of net profit after charging such cpmmission. If net profit of joint venture is ₹ 33,600 before charging such commission. What will be share profit of C and D:
(a) C will get profit ₹ 19,950 and D ₹ 11,970
(b) C will get profit ₹ 20,000 and D ₹ 12,000
(c) C will get profit ₹ 21,000 and D ₹ 12,600
(d) C will get profit 7 21,600 and D ₹ 12,000
Answer:
(b) C will get profit ₹ 20,000 and D ₹ 12,000

112. Aastha and Shivani entered into a Joint venture sharing profits and losses in the ratio 2:1. Aastha purchased goods costing ₹ 30,000. Shivani sold the goods for ₹40,000. Aastha was entitled to get 1% Commission on purchase and Shivani was entitled for 5% Commission on sales. Aastha’s and Shivani’s share in profit on venture would be:
(a) ₹ 1,467 and ₹ 733 respectively
(b) ₹ 5,133 and ₹ 2,567 respectively
(c) ₹ 4,400 and ₹ 2,200 respectively
(d) ₹ 3,667 and ₹ 1,833 respectively.
Answer:
(b) ₹ 5,133 and ₹ 2,567 respectively

113. In case of Joint Venture business, the method of accounting to be followed is decided by:
(a) Separate act for Joint Venture
(b) Accounting Standard
(c) Co-ventures as per their convenience
(d) ICAI
Answer:
(c) Co-ventures as per their convenience

114. In case of Joint Venture, for purchase of machinery from Joint Bank a/c, in case separate set of books are maintained, the correct journal entry will be:
(a) Debit Machinery A/c and Credit Joint Bank A/c
(b) Debit Joint Venture A/c and Credit Joint Bank A/c
(c) Debit Machinery A/c and Credit Venture’s Capital A/c
(d) Debit Joint Venture A/c and Credit Machinery A/c
Answer:
(b) Debit Joint Venture A/c and Credit Joint Bank A/c

115. Mohit and Rohit entered into a joint venture sharing profits and losses in the ratio 2:1 respectively. Mohit purchased goods costing ₹ 2,00,000 and incurred ₹ 15,000 as freight and sent it to Rohit. Rohit purchased goods to the value of ₹ 56,000 and incurred expenses amounting to ₹ 5,000. Rohit sold the goods on behalf of the joint venture and realized ₹ 4,00,000. He was entitled to 10% commission on sales. How much amount will Rohit pay to Mohit as final settlement?
(a) ₹ 1,85,000
(b) ₹ 2,71,000
(c) ₹ 3,11,000
(d) ₹ 2,99,000
Answer:
(b) ₹ 2,71,000

116. When the record of transactions relating to joint venture are made in the books of one venturer, then the venturer recording the transactions, records his share of investment by ________.
(a) debiting cash a/c
(b) crediting cash a/c
(c) crediting his personal a/c
(d) no entry required.
Answer:
(b) crediting cash a/c

117. A and B were partners in joint venture sharing profit and losses in proportion of 3 : 2. A supplies goods to the value of ₹ 60,000 and incurs expenses amounting ₹ 6,000. B supplies to the value of ₹ 14,000 and his expenses amounted ₹ 1,000. B sells goods on behalf of the joint venture and realises ₹ 1,00,000. B is entitled to a commission of 5% on sales. B settles his account by a bank draft. Find out the profit on venture.
(a) ₹ 14,400
(b) ₹ 14,000
(c) ₹ 13,000
(d) ₹ 13,200
Answer:
(b) ₹ 14,000

118. In a joint venture X contributes ₹ 25,000 and Y contributes ₹ 50,000. Goods are purchased for ₹ 56,000. Expenses amount to ₹ 4,000, sales amount to ₹ 70,000, the remaining goods costing ₹ 3,000 were taken over by Y at an agreed price of ₹ 2,000. X and Y share profit and losses in ratio of 1:2 respectively. As a final settlement, how much X will receive?
(a) ₹ 29,333
(b) ₹ 30,000
(c) ₹ 25,000
(d) ₹ 29,000
Answer:
(d) ₹ 29,000

119. Memorandum joint venture account is prepared:
(a) When each co-venture keeps records of all the joint venture transactions himself.
(b) When separate set of joint venture books is prepared.
(c) When each co-venture keeps records of their own joint venture transaction.
(d) None of the above.
Answer:
(c) When each co-venture keeps records of their own joint venture transaction.

120. Raj and Simran enter into a joint venture to sell silk, sharing profits anc losses equally. Raj provides silk from his inventory ₹ 1,00,000. He pay expenses amounting ₹ 10,000. Simran incurs further expenses or carriage ₹ 10,000. She received cash on sale of silk ₹ 1,50,000. She also takes over goods to the value of ₹ 20,000. Profit on venture will be ________.
(a) ₹ 30,000
(b) ₹ 40,000
(c) ₹ 50,000
(d) ₹ 60,000
Answer:
(c) ₹ 50,000

121. X and Y enter into a joint venture sharing profits and losses equally purchased 1,000 kg. of sugar @ ₹ 25 per kg. Brokerage paid ₹ 1,00 and carriage paid ₹ 500. Y sold 950 kg. of sugar @ ₹ 32 per kc Balance sugar was taken over by Y at cost. The value of sugar take: over to be recorded in joint venture will be ________.
(a) ₹ 1,325
(b) ₹ 1,250
(c) ₹ 1,300
(d) ₹ 1,275
Answer:
(a) ₹ 1,325

122. A minor can join as a co-ventures in a joint venture business:
(a) Yes, if accepted by all co-ventures
(b) Yes, if accepted by competent authority
(c) Cannot become co-ventures
(d) Yes, for the benefit of joint venture.
Answer:
(c) Cannot become co-ventures

123. Aar and Bar were partners in a joint venture sharing profits and losses in the ratio of 4/5th and 1/5th respectively. Aar supplies goods to the value of ₹ 50,000 and his expenses amount to ₹ 5,400. Bar supplies goods to the value of ₹ 14,000 and his expenses amount to ₹ 800. Bar sells goods on behalf of the joint venture and realises ₹ 92,000. Bar is entitled to a commission of 5% on sales. Bar settles his account by bank draft. What will be the final remittance?
(a) Bar will remit ₹ 69,160 to Aar
(b) Aar will remit ₹ 69,160 to Bar
(c) Aar will remit ₹ 69,000 to Bar
(d) Bar will remit ₹ 69,000 to Aar.
Answer:
(a) Bar will remit ₹ 69,160 to Aar

124. Sales made by A and B ________.
(a) ₹ 30,000; ₹ 39,375
(b) ₹ 40,500; ₹ 39,375
(c) ₹ 40,500; ₹ 35,625
(d) ₹ 41,250; ₹ 24,375
Answer:
(a) ₹ 30,000; ₹ 39,375

125. Profit for the venture will be:
(a) ₹ 7,000
(b) ₹ 7,375
(c) ₹ 8,875
(d) Long ₹ 1,500
Answer:
(b) ₹ 7,375

126. Which of the following terms are not true with regard to Joint Venture business?
(a) Account Sales
(b) Account Current
(c) Del-Credere Commission
(d) All of the above.
Answer:
(d) All of the above.

127. Which of the following statement is true?
(a) Memorandum joint venture account is prepared to find out amount due from co-venturer.
(b) In memorandum joint venture account only one venturer’s transaction is recorded.
(c) Memorandum joint venture account is prepared to find out profit on venture.
(d) Memorandum joint venture account is prepared when separate set of books is maintained for joint venture.
Answer:
(c) Memorandum joint venture account is prepared to find out profit on venture.

128. Which of the following statements is not true?
(a) Joint Venture is a going concern.
(b) Joint Venture is terminable in nature.
(c) Joint Venture does not follow accrual basis of accounting if lasts for less than a year.
(d) The Co-venturer shares the profit in agreed ratio.
Answer:
(a) Joint Venture is a going concern.

129. Ram and Rahim entered into a joint venture to underwrite the equity shares of M/s Antony Ltd. @ 5% underwriting commission. M/s Antony Ltd. made a public issue of 1,00,000 equity shares of ₹ 10 each. 90% of the issue was subscribed by the public. The profit sharing ratio between Ram and Rahim is 2:3. The balance shares not subscribed by the public are to be purchased by Ram and Rahim in profit sharing ratio. How many shares are to be purchased by Rahim?
(a) 4,000 shares
(b) 2,000 shares
(c) 6,000 shares
(d) 3,000 shares
Answer:
(c) 6,000 shares

130. Joint Venture Account is the nature of:
(a) Personal A/c
(b) Nominal A/c
(c) Real A/c
(d) None of these
Answer:
(b) Nominal A/c

131. In banking method, if a co-venture makes payment for the joint venture, the amount is Credited to:
(a) Joint venture A/c
(b) Co- venture’s A/c
(c) Joint Bank A/c
(d) None of these
Answer:
(b) Co- venture’s A/c

132. In banking method, a co-venture takes over the unsold goods, the amount is credited to.
(a) Joint Bank A/c
(b) Co- ventures’s A/c
(c) Joint venture A/c
(d) None of these
Answer:
(c) Joint venture A/c

133. Joint Venture with B is the nature of:
(a) Nominal A/c
(b) Real A/c
(c) Personal A/c
(d) None of these
Answer:
(c) Personal A/c

134. When A advances money to B, in the course of Joint Venture, A debits such money to:
(a) Expenses A/c
(b) B’sA/c
(c) Joint Venture A/c
(d) Advance A/c
Answer:
(b) B’sA/c

135. When a venture supplies goods to the Joint venture from his own stock, he credits the amount to:
(a) Joint Venture Account
(b) Capital A/c
(c) Sales A/c
(d) Purchases A/c
Answer:
(d) Purchases A/c

136. The amount of discount on the discounting of B/R from the bank by a co-venture will be debited:
(a) Discount A/c
(b) Bank A/c
(c) Joint Venture A/c
(d) None of the above
Answer:
(d) None of the above

137. In the case of joint venture, when each party records all the transactions in the books, on stock being taken by the other co-venture, debit is made to
(a) Co-ventu re’s A/c
(b) Joint Venture A/c
(c) Stock A/c
(d) Goods A/c
Answer:
(c) Stock A/c

138. When goods are purchased for Joint Venture out of joint bank, the amount is debited to ________.
(a) Joint- Bank A/c
(b) Joint venture A/c
(c) Purchases A/c
(d) Goods A/c
Answer:
(a) Joint- Bank A/c

139. When separate set of books are maintained of Joint Venture, the Ledger accounts prepared are:
(a) Memorandum Joint Venture A/c and Joint Venture A/c with the other party.
(b) Joint Venture A/c and the personal A/c of the party.
(c) Joint Bank A/c, joint venture A/c and Co-venture’s capital A/c
(d) Memorandum Joint Venture A/c and Personal account of the other a party.
Answer:
(b) Joint Venture A/c and the personal A/c of the party.

140. If unsold goods costing ₹ 20,000 is taken over by a co-venture at cost less 25% the joint venture A/c will be credited by
(a) ₹ 20,000
(b) ₹ 15,000
(c) ₹ 5,000
(d) Nil
Answer:
(c) ₹ 5,000

141. Commission will be shared by:
(a) Consignor and consignee
(b) Only consignee
(c) Only consignor
(d) Third Party
Answer:
(b) Only consignee

141. Commission will be shared by:
(a) Consignor and consignee
(b) Only consignee
(c) Only consignor
(d) Third party
Answer:
(b) Only consignee

142. Goods costing ₹ 3,00,000 sent out to consignee at cost + 25% invoice price invoice value of goods will be ________.
(a) ₹ 3,75,000
(b) ₹ 4,00,000
(c) ₹ 4,25,000
(d) None
Answer:
(b) ₹ 4,00,000

143. A purchased an old computer costing ₹ 10,000 and incurred ₹ 1,000 on its repairs and ₹ 500 on its packing. He sold the computer at 20% margin on selling price. The sales value will be:
(a) ₹ 12,500
(b) ₹ 11,000
(c) ₹ 14,375
(d) ₹ 13,800
Answer:
(c) ₹ 14,375
Cost of old computer purchased = ₹ 10,000
Repairs on old computer = ₹ 1,000
Packing charges = ₹ 500
Total Cost of old computer = 10,000 + 1,000 + 500 = ₹ 11,500
If 20% or \(\frac { 1 }{ 5 }\) on selling price then 25% or \(\frac { 1 }{ 4 }\) on cost price. So, Sales
Value will be = 11,500 + 11,500 x \(\frac { 1 }{ 4 }\)
= 11,500 + 2,875
= ₹ 14,375

144. If there is no agreement between the joint ventures then the profit and loss is shared.
(a) Equally
(b) In capital ratio
(c) In agreed ratio
(d) Any of the above.
Answer:
(a) Equally
Co-ventures share profits or losses of the venture at the agreed ratio; if there is no agreement on this point then in equal ratio.
Hence, option (a) is correct.

145. Del Credere Commission is given by ________.
(a) Consignee
(b) Consignor
(c) Seller
(d) Buyer
Answer:
(b) Consignor
Del Credere Commission is a special kind of commission given by Consignor to Consignee to undertake the risk of any bad debts out of the credit sale; so we can also treat it as insurance premium against bad debts.

146. Consignment A/c is a:
(a) Nominal A/c
(b) Real Nc
(c) Personal A/c
(d) None of the above.
Answer:
(a) Nominal A/c
Consignment Account is a nominal account.
Hence, option (a) is correct.

147. Commission will be shared by:
(a) Consignor and Consignee
(b) Only Consignee
(c) Only Consignor
(d) Third party.
Answer:
(b) Only Consignee
Commission is given by consignor to consignee and only borne by consignee. Thus, option (b) is correct.

148. When A advances money to B, in the course of Joint Venture, A debits such money to ________.
(a) Expenses A/c
(b) B’s A/c
(c) Joint Venture A/c
(d) Advance A/c
Answer:
(c) Joint Venture A/c
When A advance money, in the course ot Joint venture, such amount will be debited to:
In case of advanced money by one co-venture to other, the entry will be,
Joint venture A/c Dr.
To A’s Account Hence, option (c) is correct.

149. The consignor sends along with the consigned goods to the consignee.
(a) Account Sales
(b) Proforma Invoice
(c) Both of the above
(d) None of the above.
Answer:
(b) Proforma Invoice
The consignor sends “Proforma Invoice” along with consigned goods to the consignee. Hence, option (b) is correct.

150. Account Sales includes:
(a) Sales Made
(b) Commission earned
(c) Stock left with consignee
(d) All of the above
Answer:
(d) All of the above
Sales Account: Contains all sales transactions includes both cash & credit sales. The account total is then paired with the sales returns and allowances account to derive the net sales. Thus, option (d) is correct.

151. The stock lying unsold with the consignee belongs to:
(a) Consignor
(b) Consignee as he bears the risk
(c) Both (a) and (b)
(d) None of these.
Answer:
(a) Consignor
The stock left unsold with consignee belongs to consigner as he has the ownership of such goods. Thus, option (a) is correct.

152. If the del credere commission is 10% cash sales is ₹ 5,000 and credit + sales is ₹ 10,000. Calculate the amount of del credere commission.
(a) ₹ 1,500
(b) ₹ 1,000
(c) ₹ 500
(d) None of the above.
Answer:
(b) ₹ 1,000
If the del credere commission is 10%, cash sales ₹ 5,000, credit sales ₹ 10,000. Calculate the amount of commission: Del credere commission is charged on Credit Sales only;
Hence, @ 10% of credit sales = 10,000 x \(\frac { 10 }{ 100 }\) = ₹ 1,000
Thus, option (b) is correct.

153. Joint Venture calculate their profit ________.
(a) After sale
(b) After purchase
(c) After specific time
(d) After completion of venture
Answer:
(d) After completion of venture
Profit of Joint Venture is calculated after completion of venture.

154. Consignee A/c is a ________?
(a) Real A/6
(b) Nominal A/c
(c) Personal A/c
(d) All of the above
Answer:
(c) Personal A/c
Consignee’s Account is a personal account and therefore, in case the consignee has not remitted thebalance due by him in full, he will be a debtor, whereas it has remitted more than the balance due by him, he will be a creditor. Goods sent on consignment account is a real account.

155. Co-venturer are ________?
(a) Partners
(b) Agent
(c) Principal – Agent
(d) Relatives
Answer:
(a) Partners
The relation between the consignor and consignee is principal and agent. But the relation between co-ventures is just like the partners in partnership firm.

Concept of Auditing – CS Foundation Fundamentals of Auditing Notes

Concept of Auditing – CS Foundation Fundamentals of Auditing Notes

Go through this Concept of Auditing – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Concept of Auditing – CS Foundation Fundamentals of Auditing Notes

Auditing – An introduction:

  1. The term “audit” has originated from a Latin word “audire” which means to hear.
  2. Authenticity of accounts is assured with the help of Independent audit.
  3. Audit is performed to ascertain the validity and reliability of information.
  4. Auditing is defined as a systematic and independent examination of data, statements, records, operations or performances (financial or non-financial) of an enterprise for a stated purpose.
  5. The goal of an audit is to express an opinion on financial and non financial matters.
  6. Audit deals with checking, verification and examination of accounts.
  7. Traditionally, Audits were associated with gaining information about financial system and financial records of a company or business, but recently it has begun to include non financial subject areas such as Safety,
  8. Security, Information system performance, Environmental concern.
  9. Financial statements are said to be true & fair when they are free from material misstatement.

Meaning and Definitions of Auditing:
The word audit means a thorough scrutiny of the books of accounts and its ultimate aim is to verify the financial position disclosed by the balance sheet and the profit and loss account of a company.

The followings are some definitions of audit given by some writers:
Lawrence R. Dicksee: “An audit is an examination of accounting records undertaken with a view to establishing whether they correctly and completely reflects the transactions to which they purport to relate.”

Taylor and Perry: “Audit is defined as an investigation of some statements of figures involving examination of certain evidence, so as to enable an auditor to make a report on the statement.”

F.R.M De Paula: “An audit denotes the examination of Balance Sheet and Profit & Loss Account prepared by others together with the books of accounts and vouchers relating there to in such manner that the auditor may be able to satisfy himself and honestly report that, in his opinion such Balance Sheet is properly drawn up so as to exhibit a true and correct view of the state of affairs of the particular concern according to the information and explanations given to him and as shown by the books.”

Prof. Montgomery: “Auditing is a systematic examination of the books and records of business or other organization, in order to ascertain or verify and to report upon the facts regulating its financial operations and the result thereof.”

Spicer & Pegler: “Audit such an examination of the books of accounts and vouchers of a business, as will enable the auditor to satisfy himself that the Balance Sheet is properly drawn up, so as to give a true and fair view of the state affairs of the business, and whether the profit and loss account gives a true and fair view of the profit or ioss for the financial period according to the best of his information and explanations given to him and as shown by the books, and if,not, in what respect he is not satisfied.”

Institute of Chartered Accountants of India (ICAI) defines Auditing as:
“Auditing is defined as a systematic and independent examination of data, statements, records, operations and performance of an enterprise for a stated purpose. In any auditing situation the auditor perceives and recognizes the propositions before him for examination, collect evidences, evaluates the same and on this basis formulates his judgement which is communicated through his audit report.”

The meaning of an Audit contains:

  1. An intelligent and critical examination of the books of accounts of business.
  2. It is done by an independent qualified person.
  3. It is done with the help of vouchers, documents, information and explanations received from the clients.
  4. The auditor satisfies himself with the authenticity of the financial accounts prepared for a particular period.

Features of Auditing:
(i) It is a systematic examination of books of accounts by an independent person.

(ii) Time, extent and nature of audit depends on the effectiveness of internal control system.

  • Internal control system refers to the organisational plan and all methods or procedures adopted by management of an entity to achieve efficient conduct of business, safeguarding assets, preventing frauds and errors, accuracy of accounting records etc.
  • This control is exercised by the management of the organisation.

(iii) Auditing may be on test basis or in depth checking of books and accounts.

(iv) Various method and procedures can be used for performing audit.

(v) It involves reporting by the auditor on the accounts examined by him and prepared as per GAAP principle and present true and fair view.

(vi) Auditing is not limited only to examination of financial records but it also includes other areas like – operational audit, process audit, tax audit, secretarial audit, efficiency audit, social audit etc.

(vii) Auditing has nothing to do with Accounting.

Objectives of Auditing:
Concept of Auditing – CS Foundation Fundamentals of Auditing Notes 1

Remember:

  • Detection of fraud and error is only a secondary objective of auditing.
  • Auditor’s duty is to examine the accounts and report those fraud and errors which comes to his knowledge during such examination.
  • Auditor is a watchdog and not a blood hound. In India the Companies Act, 2013 made audit of company account compulsory. Recently Companies Act, 2013 has been implemented w.e.f. 1st April, 2014 and this contain provision about statutory audit, cost audit, internal audit and secretarial audit.

Functions of Auditing:

  • Examination of books of accounts to detect and prevent errors and frauds with supporting vouchers and documents.
  • Express opinion on financial or non-financial area.
  • Safeguarding the financial interest of persons not associated with management like partners, shareholders etc.
  • To act as a moral check on the employees and prevents from committing fraud.
  • Providing a reasonable assurance that the statements are free from material error.
  • To state that whether the books and accounts show a true and fair picture.

Basic Principle Governing Audit:

  • Integrity, objectivity and independence
  • Confidentiality
  • Skill and competence
  • Worked performed by other
  • Documentation
  • Planning
  • Audit evidence
  • Accounting System and Internal Control
  • Auditing conclusions and reporting.

Principal aspects to be covered in Auditing/ Functions of Audit:

  • Review of systems and procedures: adopted by the entity – primary function of auditing.
  • Review of internal control system: If the internal control system is stronger then the extent of checking can be reduced and vice versa.
  • Routine checking/arithmetical accuracy.
  • Review of the accounting principles followed by the entity.
  • Comparison of financial statements with books and accounts.
  • Verification of assets by physically inspecting the assets.
  • Verification of liabilities by verifying legal and official documents.
  • Ensuring that financial statements shows a true and fair view.
  • Ensuring statutory compliances has been complied by the entity.
  • Reporting to the authority appointing him for conducting audit.

Benefits of Auditing:

  • It provides satisfaction to the owner.
  • It detects and prevents occurrence of frauds and errors.
  • It helps in verification of books.
  • The auditor is independent and hence, his opinion on financial statements is unbiased.
  • Auditing keeps a moral check on the employees and prevents them to commit fraud or error.
  • Auditing involves examination of all records whereas investigation involves deep & special examination of a particular record.
  • It gives assurance to the shareholders that the books and accounts are managed in proper way.
  • If the firm is audited, more reliance is placed by the outsiders on it.
  • Auditing ensures compliance with legal requirements.
  • By keeping a check on internal control system, auditing helps to strengthen internal control system.
  • On the basis of audited balance sheet, it becomes easy to obtain loan/credit facility

Limitations of Audit:

  • It involves huge cost however, sometimes the benefits from auditing may not make up for the cost.
  • When auditing is performed on test check basis, the results may not be reliable.
  • There are insufficient time deadlines to complete audit which may leave scope for errors.
  • Evidence obtained by auditor are not conclusive rather they are persuasive.
  • Certain Information is based on estimates, which cannot be checked by the auditors.
  • If information provided by the management is faulty, the result of auditing will also be incorrect.

Investigation:

  • It refers to the critical checking of particular records.
  • In simple words, it is the deep examination of those points on which auditor’s suspicion has arisen while conducting audit.
  • Auditing and investigation have different purposes

Differences between auditing and investigation:

  • Investigation is voluntary while auditing is mandatory for companies though voluntary for others.
  • Auditing covers generally a period of one financial year whereas investigation has no fixed duration.
  • The evidences obtained under auditing are persuasive whereas under investigation are conclusive.
  • An investigator can be engaged by owners or management or even by third parties while auditor can be appointed by owners or shareholders.
  • Investigation is carried out for the appointing agency while auditing is carried out on behalf of the owners.
  • Investigation is not restricted to any number of financial year though auditing is generally for one financial year.
  • Scope of auditing is specific and seeks to answer only those questions laid down in the engagement letter whereas investigation in general seeks to form opinion on the financial statement.
  • Audit is not based on suspicion unless circumstances exist to arouse suspicion whereas in investigation its essence lies in going into the matter with some pre-conceived notion suited to the objective.

Concept of Auditing MCQ Questions

1. The term audit originated from a __________ word “audire” which means to hear.
(a) Latin
(b) French
(c) Greek
(d) None
Answer:
(a) Latin

2. The goal of audit is to express an opinion on _________ areas.
(a) Only financial
(b) Financial and operational
(c) Financial or non financial
(d) None of these.
Answer:
(c) Financial or non financial

3. “Accounting begins where auditing ends” This statements is _________.
(a) True
(b) False
(c) Partly true
(d) None.
Answer:
(b) False

4. Auditor is a _________ person.
(a) Dependent
(b) Independent
(c) Sometimes dependent sometimes independent
(d) None of these.
Answer:
(b) Independent

5. Principal aspects covered in an audit refers to the _________ of audit.
(a) Features
(b) Functions
(c) Essentials
(d) Advantages.
Answer:
(b) Functions

6. Compliance and substantive procedures will determine the:
(a) Effectiveness of internal control system
(b) Extent of errors and frauds
(c) Role of management in the organisation
(d) All of these.
Answer:
(d) All of these.

7. Principal aspects to be covered in an audit involves.
(a) Review of system and procedures
(b) Review of internal control system
(c) Ensuring statutory compliance
(d) All of these
Answer:
(d) All of these

8. Stronger the internal control, _________ will be the checking by the auditor.
(a) Stronger
(b) Lesser
(c) Any of these
(d) None of these.
Answer:
(b) Lesser

9. Verification of assets is done to ascertain.
(a) Existence of asset
(b) Ownership of asset
(c) Possession of asset
(d) All of these.
Answer:
(d) All of these.

10. Auditor is a _________.
(a) Watchdog
(b) Blood hound
(c) Investigator
(d) All of these.
Answer:
(a) Watchdog

11. Which of these is not a benefit of auditing?
(a) Moral check on employees
(b) Strengthening internal control
(c) Protection of interest of shareholders
(d) None of these.
Answer:
(d) None of these.

12. The primary objective of auditing is:
(a) Detection of fraud
(b) Expression of opinion
(c) Checking efficiency of internal control
(d) All of these.
Answer:
(b) Expression of opinion

13. Evidence obtained by audit are _________ whereas of investigation are _________.
(a) Conclusive, persuasive
(b) Persuasive, conclusive
(c) Persuasive, persuasive
(d) None
Answer:
(b) Persuasive, conclusive

14. An investigator _________ be a Chartered Accountant.
(a) Must
(b) May or may not
(c) Should
(d) None.
Answer:
(b) May or may not

15. Investigation is done _________.
(a) Mandatory
(b) Voluntary
(c) As per the statute
(d) None
Answer:
(b) Voluntary

16. Auditing assures that financial statements are _________.
(a) True and fair
(b) True and correct
(c) Free from errors
(d) None of these
Answer:
(a) True and fair

17. Time, extent and nature of audit depends upon:
(a) Fees paid to the auditor
(b) Effectiveness of internal control
(c) Report of previous auditor
(d) Time available with the auditor
Answer:
(b) Effectiveness of internal control

18. Internal Control is exercised by _________.
(a) Management
(b) Auditor
(c) Special investigators
(d) Any of these
Answer:
(a) Management

19. _________ is the responsibility of management.
(a) Accounting
(b) Auditing
(c) Both (a) and (b)
(d) None
Answer:
(a) Accounting

20. _________ are the test designed to obtain evidence as to completeness, accuracy and validity of data produced by accounting system.
(a) Substantive procedures
(b) Compliance procedures
(c) In depth examination
(d) None of these.
Answer:
(a) Substantive procedures

21. _________ is referred as a special purpose examination.
(a) Auditing
(b) Investigation
(c) Test checks
(d) None of these.
Answer:
(b) Investigation

22. Primary responsibility for the adequacy of financial statements rests with:
(a) Auditor
(b) Management
(c) Auditor’s staff
(d) Central Government.
Answer:
(b) Management

23. Weakness in internal control system, _________ the risk of fraud and error.
(a) Increases
(b) Decreases
(c) Does not affect
(d) None.
Answer:
(a) Increases

24. Who appoints internal auditor?
(a) Management
(b) Shareholder
(c) Government
(d) Stock exchange.
Answer:
(a) Management

25. An audit is _________ examination of financial or non-financial information of any entity.
(a) A true
(b) A true and fair
(c) An independent
(d) A dependent
Answer:
(c) An independent

26. ‘Investigation’ is done for __________.
(a) Satisfaction
(b) An opinion
(c) Special purpose
(d) None
Answer:
(c) Special purpose

27. Tick the best statement related to word “Corroborative”
(a) Agreement on a secret plot
(b) An action or motion that stops expression
(c) Improver or developer
(d) To strengthen or support with additional evidence
Answer:
(d) To strengthen or support with additional evidence

28. The statement “As per my opinion, the books and accounts show a true and fair picture” is a part of _________.
(a) Audit plan
(b) Audit report
(c) Audit programme
(d) Audit evidence
Answer:
(b) Audit report

29. Which of the following is not a benefit of auditing?
(a) Moral check
(b) Increasing the sales volume
(c) Compliance with legal requirements
(d) Loan facility
Answer:
(b) Increasing the sales volume

30. Owners or management or even third party may appoint the _________.
(a) Auditor
(b) Investigator
(c) Financial auditor
(d) All of them
Answer:
(b) Investigator

31. The authenticity of the accounts can be ensured by conducting _________.
(a) Independent audit
(b) Audit by the internal management
(c) Management audit
(d) Cost audit
Answer:
(a) Independent audit

32. The main objective of audit is to _________.
(a) Gain information about the financial system
(b) Improving the efficiency of the management
(c) Increasing the profitability
(d) Express an opinion on the financial statement
Answer:
(d) Express an opinion on the financial statement

33. Audit is performed to ascertain _________.
(a) Validity of information
(b) Reliability of information
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(c) Both (a) and (b)

34. Which of the following statement is False?
(a) Audit is conducted by an independent person
(b) Nature, time and extent of audit depends upon the effectiveness of internal control
(c) Audit includes maintenance of books of accounts
(d) All of the above
Answer:
(c) Audit includes maintenance of books of accounts

35. GAAP stands for _________.
(a) Generally accepted auditing principles
(b) Generally accepted accounting principles
(c) Globally accepted accounting principles
(d) Globally accepted auditing principles
Answer:
(b) Generally accepted accounting principles

36. The systematic, critical and special examination of the records for a special purpose is called _________.
(a) Auditing
(b) Inspection
(c) Investigation
(d) None of the above
Answer:
(c) Investigation

37. An investigator can be appointed by __________.
(a) Owners
(b) Management
(c) Third parties
(d) All of the above
Answer:
(d) All of the above

38. Which of the following statement is correct?
(a) Investigator seeks conclusive and corroborative evidence
(b) Auditor seeks persuasive rather than conclusive evidence
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(c) Both (a) and (b)

39. Auditing provides a complete guarantee that the books of accounts are free from errors and there is no chance of any fraud.
(a) True
(b) Partly true
(c) False
(d) Partly false
Answer:
(c) False

40. A valuation certificate issued by some authority is _________.
(a) Persuasive audit evidence
(b) Conclusive audit evidence
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(a) Persuasive audit evidence

41. The auditor submits his audit report to the _________.
(a) Government
(b) Appointing authority
(c) Directors
(d) Registrar of companies
Answer:
(b) Appointing authority

42. _________ are not legally required to get their financial statements audited.
(a) Companies
(b) Banks
(c) Partnership firms
(d) Insurance companies
Answer:
(c) Partnership firms
Auditing refers to systematic and independent examination of date, statements, records, operations or performances of an enterprise for a stated purpose. Auditing is mandatory for companies whereas it is voluntary for others. Moreover, banks and insurance companies are a form of company form of organisation.
Thus, among the following only partnership firms are not legally required to get their financial statements audited.

43. In audit, investigation exercise is _________.
(a) Mandatory
(b) Recommendatory
(c) Voluntary
(d) Voluntary but recommendatory in all cases
Answer:
(c) Voluntary
The difference between audit and investigation lies in the fact that- Audit is mandatory for companies but voluntary for others whereas Investigation is a voluntary exercise.

44. The format of investigation report is _________.
(a) Prescribed by law
(b) Not prescribed by any law
(c) Standardized
(d) Neither standardized nor prescribed by any law
Answer:
(d) Neither standardized nor prescribed by any law
Auditing and investigation differs from each other in point that – The format of audit report has been prescribed by law whereas there is no statutory form of investigation report neither any form has been prescribed by law.

45. Which of the following is true about audit?
(a) Audit starts after accounting ends
(b) Accounting starts after auditing ends
(c) Accounting and auditing exercise are parallel
(d) Accounting is complementary to auditing.
Answer:
(a) Audit starts after accounting ends
Relationship exists between accounting and auditing :

  • Accounting is the art of recording the transactions whereas auditing is the independent examination of such recorded information.
  • Accounting is the management’s responsibility whereas auditing is the auditor’s responsibility appointed by the owner.
  • Auditing starts where accounting ends.

Thus, only the statement, “Audit starts after accounting ends” is true about audit.

46. Which of the following is a type of persuasive audit evidence for the auditor?
(a) Client’s Bank statements
(b) Documents obtained by auditor directly from third parties
(c) Carbon copies of sales invoices
(d) Computations made by the auditor himself.
Answer:
(c) Carbon copies of sales invoices
The evidences obtained by the auditor are persuasive rather than conclusive. Persuasive means intended or having the power to induce action or belief. E.g. an architects, certificate of valuation for a newly constructed building of a client is a persuasive evidence of the correct value of building; carbon copies of sales invoice etc.

47. For an auditor, to check arithmetical accuracy is _________.
(a) Not required
(b) Mandatory
(c) Voluntary
(d) Recommendatory
Answer:
(b) Mandatory
It is the duty of the auditor to check the arithmetical accuracy of the books of accounts by checking the proper posting and balances of the books of accounts. Thus, checking of arithmetical accuracy is mandatory.

48. Verification of assets is done to ascertain _________.
(X) Existence of asset
(Y) Ownership of asset
(Z) Possession of asset
The correct option is:
(a) (X) and (Y)
(b) (Y) and (Z)
(c) (X) and (Z)
(d) (X), (Y) and (Z).
Answer:
(d) (X), (Y) and (Z).
It is the duty of the auditor to physically inspect the assets and their recording in the books of accounts and verify the legal and official documents to ascertain the existence, ownership, possession, classification and valuation of assets of an entity.

49. Which of the following is not correct about investigation?
(a) Investigation may be done by any person having the knowledge of entity’s business
(b) Investigation is mandatory in nature and needs to be done on yearly basis
(c) The scope of investigation is decided by the appointing authority
(d) There is no standard format of investigation report.
Answer:
(b) Investigation is mandatory in nature and needs to be done on yearly basis
The investigation is the critical checking of particular records of business for specific purpose.
It has following features:

  • It is voluntary in nature.
  • It can be conducted by any person who may not be a CA.
  • He is appointed by the owners or management or even by third parties.
  • Work is carried out from the viewpoint of the appointing agency.
  • It answers those questions as laid down in the engagement letter.
  • It is not restricted to one financial year,
  • It seeks conclusive and corroborative evidence.
  • There is no statutory form of investigation report.

Thus, the option that investigation is mandatory in nature and needs to be done on yearly basis is not correct about investigation.

50. Principal aspects to be covered in an audit involves:
(X) Review of system and procedures
(Y) Review of internal control system
(Z) Ensuring statutory compliance The correct option is:
(a) (X) and (Y)
(b) (Y) and (Z)
(c) (X) and (Z)
(d) (X), (Y) and (Z)
Answer:
(d) (X), (Y) and (Z)
The following principal aspects also known as functions of audit are required to be covered by an auditor while doing audit of an organisation:

  • Review of system and procedures
  • Review of internal control system
  • Routine checking/arithmetical accuracy
  • Accounting principles
  • Books and statements
  • Verification of assets
  • Verification of liabilities
  • True and fair view
  • Statutory compliance
  • Reporting.

Thus, the correct option is (d) which means all three are the principle aspects of audit

51. Detection and prevention of fraud is the _________ objective of auditing activity.
(a) Primary
(b) Secondary
(c) Single
(d) Specific.
Answer:
(b) Secondary
“Auditing is defined as a systematic and independent examination of data, statements, records, operations and performances of an enterprise for a stated purpose, on the basis of which he formulates his judgement which is communicated through his audit report”. Thus, primary purpose of auditing is to examine the company’s financial statement and form an opinion. During this process, auditor comes across various frauds and errors which help in their detection and prevention. This is the secondary objective of audit.

52. Quality of auditor to be free from influence is defined by which term?
(a) Independence
(b) Confidentiality
(c) Skill
(d) Integrity
Answer:
(a) Independence
Auditing is very useful in obtaining the independent opinion of the auditor about business condition. If the accounts are audited by an independent auditor, the report of the auditor will be true and fair in all respects and it will be of extreme importance for the management of the company. Thus, quality of auditor to be free from influence is defined by Independence.

53. Auditing exercise includes:
(i) Checking of accounts
(ii) Verification of accounts
(iii) Examination of accounts The options are:
(a) I and III
(b) I, II and III
(c) I and II
(d) II and III
Answer:
(b) I, II and III
Auditing exercise includes:

  • Checking of accounts
  • Verification of accounts
  • Examination of accounts
  • Investigation of some statements
  • Examination of evidence.

So, the option (b) is correct answer i.e. I, II and III.

54. In case of investigation, the period of investigation coverage _________.
(a) Is 2 years
(b) Is 1 year
(c) Differs on case to case basis
(d) Is 6 months
Answer:
(c) Differs on case to case basis
In case of investigation, the period of investigation coverage is not necessarily restricted to a financial year. It can be extended for a period consisting of a number of years.
Thus, option (c) is the correct answer i.e. it may differs on case to case basis.

55. The primary objective of statutory auditing is to – (x) detect errors (y) prevent errors (z) express an opinion. The options are:
(a) (x) and (y)
(b) (z) only
(c) (y) only
(d) (x), (y) and (z).
Answer:
(b) (z) only
Primary objective of statutory auditing is to ascertain whether financial statement present true and fair view of financial position. Therefore, give an opinion. And secondary objective is to detect and present frauds and errors.

56. Audit working papers are the property of _________.
(a) Income Tax Department
(b) Auditor
(c) Owner
(d) Government
Answer:
(b) Auditor
Audit working papers are property of auditors.

57. Which of the following best describes the primary purpose of audit programme preparation?
(a) To detect errors or fraud
(b) To assets audit risk
(c) Together sufficient appropriate evidence
(d) To comply with GAAP.
Answer:
(c) Together sufficient appropriate evidence
Audit program contains the measures that are generally employed to determine what, and how much evidence must be collected and evaluated.

58. _________ is an independent person who check the companies book:
(a) Auditor
(b) CS
(c) Shareholder
(d) Board
Answer:
(a) Auditor
Auditor is an independent person who check the companies book. Auditor is a watchdog and not a blood hound. Auditor’s duty is to examine the accounts and report those fraud and errors which comes to his knowledge during such examination.

59. Meaning of ‘Audire’:
(a) Audit
(b) Investigation
(c) Both (a) & (b)
(d) None of the above
Answer:
(d) None of the above
Meaning of ‘Audire’ means to hear.

60. _________ evidence are not conclusive.
(a) Investment
(b) Corroboration
(c) Audit
(d) Can’t say
Answer:
(c) Audit
The auditor should obtain sufficient appropriate evidences through the performance of compliance and other substantive procedure to enable him to draw reasonable conclusion to form an opinion on the financial information. The evidences obtained by an auditor are persuasive rather than conclusive.

61. Which of the following is started with some pre-conceived notion suited to the objective?
(a) Audit
(b) Verification
(c) Vouching
(d) Investigation
Answer:
(d) Investigation
Investigation is started with some pre-conceived notion suited to the objective as it is done when a lapse already exist to pin point the reason and person involved in it so that responsibility for such lapse could be fixed.

62. The auditing exercise acts as a moral check for?
(I) Management only
(II) Employee only
(III) Regulation. This option are:
(a) (I), (II) and (III)
(b) (I) and (II)
(c) (II) and (III)
(d) (I) and (III)
Answer:
(b) (I) and (II)
Audit is performed to ascertain the validity and reliability of information. The goal of an audit is to express an opinion on the financial or non-financial areas, as audit safeguards the financial interest of person not associated with the management and thus act as a moral check and prevents from committing fraud.

63. Systematic, critical and special examination of the records of a business for a specific purpose in known as:
(a) Investigation
(b) Audit
(c) Verification
(d) Vouching
Answer:
(a) Investigation
Investigation is systematic, critical and special examination of the business records for a specific purpose.

64. Which one of the following is primary function of statutory audit? (i) Review of system and procedures (ii) Report whether accounts show true and fair view of entry’s operation (iii) detection of fraud. The options are:
(a) I and II
(b) I, II and III
(c) I and III
(d) II and III
Answer:
(a) I and II
The functions of Statutory Audit are:

  • Review of system and procedure
  • Review of internal control system
  • Routine checking/Arithmetical Accuracy
  • Accounting principle are followed
  • Books and statement comply with each other
  • Verification of Asset
  • Verification of Liabilities
  • True and fair view
  • Statutory compliance
  • Reporting

65. Full form-of MIP _________.
(a) Mandatory Inspection Point
(b) Modification Instruction Package
(c) Mobile Internet Package
(d) Monthly Income Ran
Answer:
(a) Mandatory Inspection Point
MIP stands for Mandatory Inspection Point.

66. The purpose of Auditing and Investigation is:
(a) Similar
(b) Contrary
(c) Same
(d) Different
Answer:
(d) Different
Purpose of Auditing + Investigation is Different.

67. The Statutory auditor of a company can act as:
(a) Tax Auditor
(b) Internal Auditor
(c) Concurrent Auditor
(d) Cost Auditor
Answer:
(a) Tax Auditor
The Statutory Auditor can Act as a Tax Auditor.

68. Which of the following is not correct about investigation?
(a) Investigation may be done by any person having the knowledge of entity’s business
(b) Investigation is mandatory in nature and needs to be done on yearly basis
(c) The scope of investigation is decided by the appointing authority.
(d) There is no standard format of Investigation report.
Answer:
(b) Investigation is mandatory in nature and needs to be done on yearly basis
It is not mandatory or compulsory to investige on yearly basis, investigation is not needed to be done annually, it is not of compulsory nature.

69. In Audit assignment, who among the following set the level of materiality?
(a) Shareholders
(b) Board of Directors
(c) Auditor
(d) Manager of the entity/department concerned
Answer:
(c) Auditor
In an audit assignment, the materiality level is set by the auditor of the entity, based on his objectivity and scope of audit. The Management or Board of Director etc. have no role in it.

70. Principals aspect to be covered in an audit involves:
(x) Review of system and procedures
(y) Review of internal control system
(z) Ensuring statutory compliance The correct option is:
(a) (x) and (y)
(b) (y) and (z)
(c) (x) and (z)
(d) (x), (y) and (z)
Answer:
(d) (x), (y) and (z)
Auditing is done on the basis of some principles and audit covers:

  • Review of system and procedures
  • Review of internal central system
  • Ensuring statutory compliance

71. Verification of Assets is done to ascertain
x. Existence of Assets
y. Ownership of Assets
z. Possession of Assets
The Correct option is:
(a) (x) and (y)
(b) (y) and (z)
(c) (x) and (z)
(d) (x), (y) and (z)
Answer:
(d) (x), (y) and (z)
Verification of Assets is done every year to know the existence of assets means asset is in business or not, ownership of asset means asset is sold or not, possession of assets mean asset is transferred to anybody or not.

72. Auditing is compulsory for which organisation _________.
(a) Profit organisation
(b) Non-profit organisation
(c) Both (a) and (b)
(d) None of the above.
Answer:
(c) Both (a) and (b)
Auditing is compulsory for profit organisation as well as for Non¬profit organisation too under certain circumstances, (include capital, turnover limits etc.). Hence, option (c) is correct.

73. In general, the scope of management audit is:
(a) Flexible
(b) Rigid
(c) Prescribed by law
(d) Prescribed by the appointing authority
Answer:
(a) Flexible
In general, the scope of management audit is flexible and incorporates all the needs of the company.

74. Detection and prevention of fraud is the _________ objective of auditing activity.
(a) Primary
(b) Secondary
(c) Single
(d) Specific
Answer:
(b) Secondary
Detection and prevention of fraud is the secondary objective of accounting activity.

75. Investigation is for _________.
(a) 1 year
(b) 2 year
(c) Differ case to case
(d) 4 years
Answer:
(c) Differ case to case
Period covered Under investigation is not necessarily restricted to a financial year. It may be extended to a period more than one year. Even it may be less than one year. It is voluntary and any person, who may not be a Charted Accountant may conduct investigation.

76. Limitations of internal audit _________.
(a) Time log
(b) Duties
(c) Costly
(d) All of the above
Answer:
(d) All of the above
Limitations of Internal Audit are:

  • Staff shortage
  • Time Log
  • Error
  • Responsibility
  • Duties
  • Lost consuming
Tools of Auditing – CS Foundation Fundamentals of Auditing Notes

Tools of Auditing – CS Foundation Fundamentals of Auditing Notes

Go through this Tools of Auditing – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Tools of Auditing – CS Foundation Fundamentals of Auditing Notes

Audit Plan:

  1. Audit planning is one of the basic principles governing an audit.
  2. Auditor should plan his work to enable him to conduct an effective audit in an efficient manner.
  3. For this purpose, audit plan is prepared.
  4. An audit plan lays down the strategies to be followed to conduct an audit.

An audit plan should cover the following :

  1. acquiring knowledge of clients accounting systems, policies and internal control procedures.
  2. establishing expected degree of reliance to be placed on internal control.
  3. determining the nature, timing and extent of the procedures to be performed.
  4. coordinating the work to be performed.

Before making an Audit Plan, the auditor should consider the following points:

  1. terms of engagement and statutory responsibilities.
  2. accounting policies followed by enterprise and changes in it.
  3. identifying significant audit areas.
  4. setting materiality levels.
  5. degree of reliance to be placed on internal control.
  6. nature and extent of audit evidence, etc.
  7. affects of new accounting or auditing requirements.
  8. work of internal auditor.
  9. establishing and co-ordinating staffing requirements
  10. nature and timing of report or other communication.
  11. Audit plans are flexible and should be changed by the auditor depending upon the changing conditions.
  12. Audit planning is covered under SA 300.

Audit Programme:

  1. An audit programme is a detailed plan of work, prepared by the auditor for carrying out an audit.
  2. It is a set of instructions which are to be followed for proper execution of audit.
  3. It consist of a set of techniques and procedures which the auditor plans to apply in the given audit.
  4. There is no standard audit programme applicable for all situations.
  5. Audit programme is documented in the audit working papers.

Benefits of Audit Programme:

  1. ensures that all areas have been covered during audit.
  2. acts as an evidence against charge of negligence.
  3. helps in fixing responsibilities.
  4. helps in providing clear instructions and setting guidelines for the audit staff.
  5. helps in distributing work among assistants.
  6. helps in assessing the progress of work.
  7. provides records for future reference.

Limitations of an Audit Programme:

  1. An audit programme is rigid i.e. not flexible. One audit programme may not suit all organisations.
  2. Independent judgement and initiative of the audit staff may be restricted. It may frustrate the talented and efficient audit staff.
  3. With an audit programme, the audit work becomes mechanical. Special circumstances, unusual features of the client may not be referred.
  4. New areas will be overlooked as the audit will be carried out based on traditional audit programme only.

Remedy of Disadvantage of Audit Programme:

  1. Programme should be flexible
  2. Audit staff should be encouraged to draw attention of the auditor to any defect in the programme
  3. The staff should be encouraged to explore fully unusual transaction and do not get restricted with the audit programme.

In order to attain the benefits of audit programme, an auditor should:

  1. Make a flexible audit programme.
  2. Encourage the staff to keep an open mind while auditing and consider all unusual transactions.
  3. Modify the audit programme depending upon the type of business.

Difference between audit plan and audit programme:

Audit Plans Audit Programmes
(i) Lays down the audit strategies for conducting an audit (i) It refers to those outlines needed for auditing
(ii) Plan should cover the things:
(1) Extract information of accounting systems, policies and control procedures.
(2) Putting the reliance on internal control.
(3) To determine the nature, timing and limit of auditing procedures.
(4) Coordinating the work to be done.
(ii) Lays down the following procedure to follow:
(1) Internal control evaluation
(2) Arithmetical accuracy
(3) Vouching of transactions
(4) Verification and valuation of assets and liabilities
(5) Ledger scrutiny and checking of overall disclosures.
(6) Preparation and sub-mission of audit report.
(7) Checking of overall disclosures and presentation of all items in final accounts.

Audit Evidence:
1. Audit evidence refers to any information, verbal or written, obtained by the auditor during the course of audit to arrive at the conclusion on which he bases his opinion on financial statements.

2. Audit evidence provides grounds for believing that a particular thing is true or not
Tools of Auditing – CS Foundation Fundamentals of Auditing Notes 1

Essentials of a good audit evidence:

  • Should be sufficient i.e. in adequate quantity.
  • Should be reliable, (reliability depends upon source and nature)
  • Should be relevant to the matter being checked.

Judging appropriateness of evidence:

  • Documentary evidence is better than testimonial evidence.
  • Obtaining same evidence from different sources makes it more reliable.
  • Original documents are more reliable than its copies.
  • Evidence obtained from third parties is more reliable.
  • The auditor’s direct observation inspection and computation is more reliable.
  • Quality of information generated by the audited organisation is directly related to the strength of the organisation internal audit

Testimonial evidence:
It is the evidence that is obtained from a witness who makes a solemn statement or declaration of fact. It may be oral/written and usually made by an oath.

Factors to be considered while obtaining audit evidence:

  • The quality of evidence (i.e. its relevancy, reliability and validity)
  • The materiality of the evidence (i.e. its level of significance). The higher the materiality, higher will be the standard that evidence will have to meet.
  • What level of assurance is required (audit (high) level or review (low) level).
  • Risk involved in making incorrect observation.
  • Cost of obtaining evidence relative to likely benefit in items of supporting observations and conclusion.

Techniques of obtaining audit evidence:

  • Inspection (documentary evidences like papers etc).
  • Observation (physical verification, counting etc).
  • Enquiry (from staff, client etc).
  • Confirmation (from the third parties)
  • Computation (checking arithmetical accuracy of accounting records)
  • Analytical review procedures (analysis of ratios)
  • Independent execution.

Audit Working Papers:
1. These are documents prepared or obtained by the auditor during the course of audit.

2. Audit working papers are maintained to ensure that

  • Audit was properly planned
  • Audit was carried out
  • Audit was adequately supervised
  • Review was undertaken
  • Evidence is sufficient to obtain audit evidence

3. Working papers act as a link between client’s record and audit report.

4. Working papers are the property of the auditor.

5. Auditor should maintain confidentiality of the clients information

Benefits of maintaining audit working papers:

  • Helps in proper planning and performance of audit.
  • Helps the auditor to supervise the work of juniors
  • Acts as an evidence for audit work performed.

Types of working papers:
Working papers are categorized and maintained under two heads :
(a) Permanent Audit File
(b) Current Audit File

Permanent Audit File Current Audit file
It consist of data which is of continuous use in current as well as subsequent audits. It consist of data which is relevant only for the current period audit.
This file has:
(a) Articles of incorporation
(b) Loan agreements
(c) Leases
(d) Audit observations of previous years
(e) Others
This file has:
(a) Working trial balance and work sheets
(b) Audit programmes
(c) Financial statements
(d) Others

Tools of Auditing MCQ Questions

1. lays down the strategies to be followed to conduct an audit.
(a) Audit plan
(b) Audit Programme
(c) Working Papers
(d) All of these
Answer:
(a) Audit plan

2. Audit plan and programme means the same thing. State true or false:
(a) True
(b) False
(c) Partly true
(d) None
Answer:
(b) False

3. Audit planning is covered under:
(a) SA 200
(b) SA 300
(c) SA 400
(d) SA 450
Answer:
(b) SA 300

4. Audit Programme is not prepared by :
(a) the auditor
(b) the client
(c) the audit assistants
(d) the auditor and his audit assistants
Answer:
(b) the client

5. The working papers which auditor prepares for financial statement audit are:
(a) For property of government.
(b) owned by the client.
(c) owned by the auditor.
(d) retained in auditors office until a change in auditors.
Answer:
(c) owned by the auditor.

6. Which of the following are not considered by an auditor before making an audit plan :
(a) level of internal control effectiveness
(b) significant audit areas
(c) accounting policies of the enterprise
(d) None of these.
Answer:
(d) None of these.

7. An auditor made an audit programme for conducting an audit in a textile firm. He used the same audit programme with no changes for conducting the audit of an automobile firm. Here the auditor:
(a) was right in doing so as he can use the same audit programme for all types of audit.
(b) was wrong, as the audit programme should be changed depending upon the nature of organisation.
(c) was right as it was his standard audit programme.
(d) None of these.
Answer:
(b) was wrong, as the audit programme should be changed depending upon the nature of organisation.

8. Obtaining same evidence from different sources make it ________ reliable.
(a) More
(b) Less
(c) Both
(d) None
Answer:
(a) More

9. Stock statement is a ________ evidence.
(a) Internal
(b) External
(c) Cant say
(d) None of these
Answer:
(a) Internal

10. Which of these is not a technique of obtaining audit evidence?
(a) Observation
(b) Enquiry
(c) Analytical Review
(d) Investigation
Answer:
(d) Investigation

11. Audit working papers are the property of:
(a) Auditor
(b) Owner
(c) Government
(d) Income Tax Department.
Answer:
(a) Auditor

12. Audit working papers act as a link between.
(a) Client records and audit report
(b) Audit report and financial statements
(c) Auditor and his staff
(d) None.
Answer:
(a) Client records and audit report

13. Working papers are classified into:
(a) Permanent audit file
(b) Temporary audit file
(c) Special audit file
(d) Both (a) and (b)
Answer:
(d) Both (a) and (b)

14. The file which is used only for current period audit is ________.
(a) Temporary audit file
(b) Special audit file
(c) Running audit file
(d) current audit file
Answer:
(d) current audit file

15. Financial statements of an entity are kept in :
(a) Permanent file
(b) Temporary file
(c) Current file
(d) None of these
Answer:
(c) Current file

16. Analytical review involves:
(a) test checking
(b) ratio analysis
(c) physical verification
(d) All of these
Answer:
(b) ratio analysis

17. An audit evidence can be of the following types :
(a) Based on source
(b) Based on nature
(c) Based on impact
(d) All of these
Answer:
(d) All of these

18. Audit programme is documented in the ________.
(a) Permanent audit file
(b) Audit working paper
(c) Current Audit file
(d) Audit paper
Answer:
(c) Current Audit file

19. Whether a client has a right to ask for the custody of working papers from the auditor?
(a) Yes
(b) No
(c) Not fully
(d) None of these
Answer:
(b) No

20. The extent and ________ of audit depends upon effectiveness of internal control.
(a) Nature
(b) Periodicity
(c) Relevance
(d) Format
Answer:
(a) Nature

21. The auditor’s permanent working paper file should not normally, include:
(a) Extracts from client’s bank statement
(b) Past year’s financial statement
(c) Attorney’s letters
(d) Debt agreements
Answer:
(a) Extracts from client’s bank statement

22. Which of the following factors is most important in determining the appropriations of audit evidence:
(a) The reliability of audit evidence and its relevance in meeting the audit objective
(b) The objectivity and integrity of the auditor
(c) The quantity of audit evidence
(d) The independence of the source of evidence.
Answer:
(a) The reliability of audit evidence and its relevance in meeting the audit objective

23. Which of the following statement is true regarding an auditor’s working papers :
(a) They document the level of independence maintained by the auditor
(b) They should be considered as the principle support for the auditor’s report
(c) They should not contain details regarding weakness in the internal control system.
(d) They help the auditor to monitor the effectiveness of the audit firm’s quality control procedures.
Answer:
(b) They should be considered as the principle support for the auditor’s report

24. The current file of the auditor’s working paper’s generally, should include:
(a) A flowchart of the internal controls
(b) Organisation charts
(c) A copy of financial statement
(d) Copies of bond & debentures
Answer:
(c) A copy of financial statement

25. Appropriateness of evidence depends on the following:
(a) Information must be true
(b) Information must be affordable
(c) Information must be relevant
(d) Information must be valid
Answer:
(c) Information must be relevant

26. Auditor has to obtain ________ audit evidence.
(a) Adequate
(b) Correct
(c) Relevant
(d) Sufficient & appropriate
Answer:
(d) Sufficient & appropriate

27. Due to lock of audit evidence, auditor issues a:
(a) Qualified opinion
(b) Unqualified opinion
(c) Adverse opinion
(d) Disclaimer of opinion
Answer:
(d) Disclaimer of opinion

28. Current Audit file contains information relating to the audit of the ________.
(a) Current Period
(b) Permanent Period
(c) None of these
(d) Both (a) & (b)
Answer:
(a) Current Period

29. Current audit file can include the following data:
(a) Financial statement & audit report
(b) Working trail balance & work-sheets
(c) Audit Programmes
(d) All of these
Answer:
(d) All of these

30. Data in Permanent Audit file can include:
(a) Articles of incorporation
(b) Loan agreement
(c) Leases
(d) All of these
Answer:
(d) All of these

31. Auditor working paper are dividend into:
(a) Three parts
(b) Four parts
(c) Two parts
(d) None
Answer:
(c) Two parts

32. Techniques of obtaining audit evidence:
(a) Inspection
(b) Enquiry
(c) Observation
(d) All of these
Answer:
(d) All of these

33. Benefit of maintaining audit working papers:
(a) Helps in Proper Planning & Performance of audit
(b) Helps the auditor to supervise the work of juniors
(c) Acts as an evidence for audit work performed
(d) All of these
Answer:
(d) All of these

34. Audit working papers are maintained to ensure that:
(a) Audit was Properly Planned
(b) Audit was carried out
(c) Both (a) & (b)
(d) None of these
Answer:
(c) Both (a) & (b)

35. Benefits of Audit Programme are:
(a) Helps in fixing responsibilities
(b) Helps in providing clear instructions
(c) Ensures that all areas have been covered during audit
(d) All of these
Answer:
(d) All of these

36. Before making an audit plan, the auditor should consider:
(a) Setting materiality levels
(b) Identifying materiality levels
(c) Both (a) & (b)
(d) None of these
Answer:
(c) Both (a) & (b)

37. Audit evidence based on source:
(a) Internal
(b) External
(c) Both (a) & (b)
(d) None
Answer:
(c) Both (a) & (b)

38. Types of Audit evidence:
(a) Based on Source
(b) Based on Nature
(c) Based on Impact
(d) All of these
Answer:
(d) All of these

39. Working papers are the property of the auditor:
(a) True
(b) False
(c) Not fully true
(d) None of these
Answer:
(a) True

40. Disadvantages of audit programme are:
(a) Flexibility
(b) Praises the efficient audit
(c) New areas are looked at
(d) None
Answer:
(d) None

41. Sufficient evidence can be obtained by test checking instead of ________ checking.
(a) 95%
(b) 100%
(c) 50%
(d) None of these
Answer:
(b) 100%

42. An audit programme is a set of instructions:
(a) False
(b) Partly true
(c) True
(d) None of these
Answer:
(c) True

43. Which of the following are not considered by an auditor before making an audit plan:
(a) Level of internal control
(b) Significant audit areas
(c) Accounting policies of enterprise
(d) None of the above
Answer:
(d) None of the above

44. Stock statement is a/an ________ statement:
(a) Internal
(b) External
(c) Both
(d) None of the above
Answer:
(a) Internal

45. Audit Program is not prepared by:
(a) Auditor
(b) Client
(c) Auditor assistants
(d) Auditor and his audit assistant
Answer:
(b) Client

46. The nature, timing and extent of the audit procedures are contained in ________.
(a) Audit plan
(b) Audit status
(c) Audit evidence
(d) Audit programme.
Answer:
(a) Audit plan

47. The materiality level should be ascertained at the ________.
(a) Execution stage
(b) Reporting stage
(c) Planning stage
(d) None of the above
Answer:
(c) Planning stage

48. ________ is a set of instructions that are required to be followed for proper execution of audit.
(a) Audit file
(b) Working papers
(c) Audit status
(d) Audit programme
Answer:
(d) Audit programme

49. The official records containing the planning and execution of the audit agreement is called as ________.
(a) Audit status
(b) Audit working papers
(c) Audit plan
(d) None of the above
Answer:
(d) None of the above

50. Which of the following is NOT an advantage of audit programme?
(a) It serves as an evidence against charge of negligence
(b) It serves as an audit record
(c) It ensures that all the important areas are covered
(d) It is flexible in nature and a same audit programme can be used in different organisation.
Answer:
(d) It is flexible in nature and a same audit programme can be used in different organisation.

51. The internal audit is ________.
(a) Mandatory
(b) Beneficiary
(c) Both (a) & (b)
(d) None of the above
Answer:
(b) Beneficiary

52. Which of the following statement is True?
(a) There exists direct relationship between the effectiveness of internal control and the extent of checking to be done
(b) There exists an inverse relation between the effectiveness of internal control and the extent of checking to be done by the auditor
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(b) There exists an inverse relation between the effectiveness of internal control and the extent of checking to be done by the auditor

53. The analysis of significant trends for investigating unusual fluctuations and items is called.
(a) Analytical review procedures
(b) Independent execution
(c) Observation
(d) Computation
Answer:
(a) Analytical review procedures

54. The audit working papers are the property of ________.
(a) Auditor
(b) Management
(c) Shareholders
(d) Registrar
Answer:
(a) Auditor

55. Audit observations of the previous year’s leases, loan agreements etc. are the elements of ________.
(a) Permanent audit file
(b) Temporary audit file
(c) Routine audit file
(d) None of the above.
Answer:
(a) Permanent audit file

56. Working trial balance, audit programme, MRL, records of test of control etc. are the elements of ________.
(a) Permanent audit file
(b) Routine audit file
(c) Temporary audit file
(d) All of the above
Answer:
(c) Temporary audit file

57. Primary responsibility for the adequacy of financial statements disclosures rests with _________.
(a) Auditor
(b) Management
(c) Auditor’s Staff
(d) Central Government
Answer:
(b) Management
The Control of the company is in the hands of Management. Moreover the financial statements are also prepared by Management. Management has to ensure that all the disclosures relating to accounting standards and principles that are followed in the preparation of financial statements have been made properly and they are followed consistently.
Thus, the primary responsibility for the adequacy of financial statements disclosures rests with management.

58. Which one shall be kept in mind while carrying out audit?
(a) High risk areas should be checked as others
(b) High risk areas should be checked in detail
(c) High risk areas should not be checked
(d) High risk areas should be checked briefly
Answer:
(b) High risk areas should be checked in detail
Before planning for an audit is important for the auditor to identify the areas which involves greater audit risk, so that audit can be planned in such a way that overall audit risk will be less. .More high risky areas should be checked in detail and vice-versa.

59. Which of the following is not a method of obtaining evidence ________.
(a) Observation
(b) Confirmation
(c) Declaration
(d) Analytical review
Answer:
(c) Declaration
Following are the techniques of obtaining evidences:

  • Inspection
  • Observation
  • Enquiry
  • Confirmation
  • Computation
  • Analytical Review Production
  • Independent Execution.

Thus, declaration is not a method of obtaining audit evidence.

60. Articles of Association of a company should be stored in a ________
(a) Permanent audit file
(b) Current audit file
(c) System audit file
(d) None of the above
Answer:
(a) Permanent audit file
Permanent file includes the data which is of continuous interest and relevant to succeeding audits. It includes the following.

  • Articles of Incorporation /Articles of Association/ Memorandum of Association.
  • Loan agreements.
  • Documents related to understanding internal control.
  • Leases
  • Significant audit observations of earlier years.
  • Notes regarding significant accounting policies.

Thus, Articles of Association should be stored in a Permanent Audit File.

61. In audit assignment, who among the following set the level of materiality?
(a) Shareholders
(b) Board of Directors
(c) Auditor
(d) Manager of the entity/department concerned.
Answer:
(c) Auditor
At the planning stage, the auditor sets the materiality levels. For example, the auditor may decide that in the case of audit of sales he will examine all sales transactions above ₹ 5,000.

62. Audit working papers are the property of:
(a) Owner
(b) Government
(c) Auditor
(d) Income Tax Department.
Answer:
(c) Auditor
Audit working papers are the documents prepared or obtained by the auditors and retained by him in connection with the audit. They are the connecting link between the client’s record and the audited accounts. They are the property of the auditor and the client cannot ask the auditor for their custody.

63. Primary responsibility for the adequacy of financial statement disclosures rest with the:
(a) Auditor
(b) Management
(c) Auditor’s staff
(d) Central Government
Answer:
(b) Management
The control of the company is in the hands of management.
Moreover, the financial statements are also prepared by management. Management has to ensure that all the disclosures . relating to accounting standards and principles that are followed in the preparation of financial statements have been made properly and they are followed consistently.
Thus, the primary responsibility for the adequacy of financial statements disclosures rests with the management.

64. Which of the following is not an advantage of the preparation of audit working paper?
(a) To provide a basis for review of audit work
(b) To provide a basis for subsequent audits
(c) To ensure audit work is being carried out as per program
(d) To provide a guide for advising another client on similar issues.
Answer:
(d) To provide a guide for advising another client on similar issues.
Following are the advantages of the audit working papers:

  • It helps in proper planning and performance of audit.
  • Seniors can supervise the audit work performed by the juniors by examining their working papers.
  • It provide an evidence of the audit work performed to support the auditor’s opinion.
  • It ensures that the appropriate review was undertaken.
  • These also serves as a guide to the staff to whom the work of audit has been assigned after the previous year audit.
  • It provides an assurance that the audit was performed in accordance with the relevant auditing standards.

Thus, audit working papers cannot in any way provide a guide for advising another client on similar issues since, it is the duty of the auditors to maintain confidentiality of the client information and if they are disclosed then it will amount to professional misconduct.

65. Which of the following is not true about audit plan?
(a) Audit plan lays out the strategies to be followed to conduct an audit
(b) Audit plan is made to ensure that audit assignment is done smoothly
(c) Audit plan is not made from audit programme
(d) Audit plan is prepared considering the terms of engagement and statutory responsibilities.
Answer:
(c) Audit plan is not made from audit programme
Following are the features of audit plan:

  • It lays out the strategies to be followed to conduct an audit.
  • It includes the nature, timing and extent of audit procedures to be performed by the engagement team members.
  • It is made to ensure that audit assignment is done smoothly. However the audit plan is not made from audit programme. In fact after the development of audit plan, a detailed audit programme is prepared.

66. The nature, time and extent of audit procedure are covered under:
(a) Audit Programme
(b) Audit Execution
(c) Audit Plan
(d) None of the above
Answer:
(c) Audit Plan
Audit Plan covers the nature, timing and extent of audit procedure for conducting audit by engagement of team members. Auditor shall develop audit plan by considering :

  • The nature, timing and extent of planned risk assessment procedures.
  • Nature and timing of audit procedures at the assertion level.
  • Other planned audit procedure that are required to be carried out, so that engagement complies with SAS.

67. Which of the following technique is used to ascertain the correctness of debtors balance in books?
(a) Observation
(b) Enquiry
(c) Computation
(d) Confirmation.
Answer:
(d) Confirmation.
Confirmation is a technique to obtain audit evidences which involves seeking information from third party having knowledge about a particular transaction e.g. debtors.

68. For auditors, which of the following document generally contains the scope of work:
(a) Appointment letter
(b) Terms of engagement
(c) Offer letter
(d) None of the above.
Answer:
(b) Terms of engagement
Before planning for an audit, the auditor form the terms of engagement which contains the scope of audit work to be performed by the auditor.

69. Which of the following are techniques of gathering audit evidence?
X. Inspection
Y. Enquiry
Z. Observation Correct option is:
(a) X and Y
(b) Y and Z
(c) X and Z
(d) X, Y and Z
Answer:
(d) X, Y and Z
Following are the techniques of obtaining audit evidences –

  • Inspection
  • Observation
  • Enquiry
  • Confirmation
  • Computation
  • Analytical Review Procedures
  • Independent Execution

Thus, all the given evidences in the question are the audit evidences and so the answer is X, Y and Z.

70. Who is the custodian authority for audit working papers?
(a) Shareholders
(b) Managing Director
(c) Company Secretary
(d) Auditor
Answer:
(d) Auditor
Audit working papers are the documents prepared or obtained by the auditors and retained by him in connection with the audit. They are property of auditor and the client cannot ask the auditor for their custody.

71. Audit working papers acts as a link between ________.
(a) Client records and audit reports
(b) Audit report and financial statements
(c) Auditor and his staff
(d) None of these
Answer:
(a) Client records and audit reports
Audit working papers are documents prepared or obtained by the auditor during the course of audit, Audit working papers act as a link between client records and audit report.

72. Which of the following is not recorded in current Audit working file?
(a) Financial statement in audit report
(b) Audit programme
(c) Confirmation responses
(d) Articles of Association
Answer:
(d) Articles of Association
Current Audit file contains information relating to the audit of the current period. Data in this file includes

  • Financial Statements and Audit Report
  • Working Trial Balance and Worksheets
  • Adjusting journal entries and reclassification entries
  • Audit Programs
  • Documentation of the consideration of internal control and the consideration of fraud risk factors
  • Record of test of controls and substantive tests
  • Record of audit exceptions and their resolutions
  • Letter of attorneys, representation letter
  • Confirmation responses.

Thus, Articles of Association is not recorded in current audit working file but in permanent file.

73. Which of the following is dis-advantage of Audit programme?
(a) Reduces scope of misunderstanding
(b) Serve as evidence
(c) Against charge of negligence
(d) New area may be overlooked.
Answer:
(d) New area may be overlooked.
Following are the disadvantages of audit programme:

  • Rigidity
  • Reduces the initiative of efficient staff
  • Audit work becomes mechanical
  • New areas may be overlooked.

Thus, Option (d) is correct.

74. Terms of engagement between auditor and client are given in ________.
(a) Audit Engagement Letter
(b) Audit Plan
(c) Audit Programme
(d) None of these
Answer:
(a) Audit Engagement Letter.
While framing an audit plan auditor should ascertain his terms of appointment and responsibilities cast by various legislations on him. The auditor should then prepare his audit plan based on what he is required to do.
This shows that there is an official relationship between the auditor and the client which is written in the audit engagement letter.

75. Which of the following is an example of external:
(a) Carbon Copies of cheques
(b) Bank statements
(c) Employees time reports
(d) Purchase order of company purchases
Answer:
(a) Carbon Copies of cheques
Audit working papers are documents prepared or obtained by the auditor during the course of audit, Audit working papers act as a link between client records and audit report.

76. Which of the following factors would least likely affect the quantity and content of an auditors working papers.
(a) The nature of auditors report
(b) The assessed level of control risk
(c) The possibility of peer review
(d) The content of management representation letter
Answer:
(a) The nature of auditors report
Working papers are the connecting link between the client’s records and audited accounts. Working papers helps in proper planning, performance, supervision of audit. Audit working paper can be divided in permanent and current audit file.

It includes :

  • Record of test of controls and substantive test
  • Peer review [external confirmation]
  • Letter of attorneys, representation letters.

Hence, working papers are least affected by the nature of auditor’s report.

77. An audit plan is an integral part of which of the:
(a) Closing
(b) Initiation
(c) Reporting
(d) Preparation
Answer:
(b) Initiation
Bank statements are the statement which are given by the bank of a customer of his/her banking transactions. So, it is an example of external. Inspite of above, other things i.e. carbon copies of cheques, employees time reports, purchase order of company purchases are the internal sources.

78. The format of Audit programme is:
(a) Prescribed in Companies Act
(b) Prescribed in Chartered Accountants Act
(c) Prescribed by appointing authority
(d) Not prescribed in any law
Answer:
(d) Not prescribed in any law
An audit programme is a set of instructions which are to be followed for proper execution of audit. It contains the measures that are generally employed to determine what, and how much evidence must be collected and evaluated. There is no standard audit programme applicable for all situations.
So, the format of audit programme is not prescribed in any law.

79. The evidence gathered during investigation exercise are:
(a) Corroborative
(b) Corroborative and conclusive
(c) Persuasive
(d) Corroborative and Persuasive
Answer:
(b) Corroborative and conclusive
Evidences obtained from investigation are corroborative and conclusive rather than corroborative and persuasive.

80. The methodology of audit planning is:
(a) Not prescribed in any law
(b) Prescribed in Companies Act, 2013
(c) Prescribed in Chartered Accountants Act, 1949
(d) Prescribed by the appointing authority.
Answer:
(a) Not prescribed in any law
Auditor develops an audit plan considering:

  • Nature, timing and extent of planned risk assessment procedures
  • Nature, timing and extent of audit procedures at assertion level. But there is no prescribed method by law.

81. Which of the following are techniques of gathering audit evidence?
(x) Inspection
(y) Enquiry
(z) Observation.
Correct option is:
(a) x and z only
(b) y and z only
(c) x and y only
(d) x, y and z
Answer:
(d) x, y and z
Inspection, observation enquiry confirmation, computation, analytical review procedures and independent execution are all techniques of obtaining evidences.

82. Audit program does not consist of:
(a) Technique
(b) Procedure
(c) Working paper
(d) Evidence
Answer:
(c) Working paper
Audit programme consist of technique, procedure set of instructions but it does not consist of working paper. Working paper are the documents prepared or obtained by auditor and retained by him in connection with audit. These are prepared in the course of execution of audit programme. Thus, audit program does not consist working papers.

83. ________ is a detailed plan of work prepared by auditor for carrying out an audit:
(a) Audit programme
(b) Audit plans
(c) Working papers
(d) Evidence
Answer:
(a) Audit programme
Audit programme is a set of instructions which are to be followed for proper execution of audit. It is a detailed plan of work prepared by an auditor for carrying out an audit.

84. Which of the following factor is most important in determining the appropriation of audit evidence?
(a) The reliability of audit evidence and in relevance in meeting the audit objective
(b) The objectivity and integrity of the auditor
(c) The quality of audit evidence
(d) The independence of the source of evidence.
Answer:
(a) The reliability of audit evidence and in relevance in meeting the audit objective
The auditor has to obtain sufficient and appropriate evidence to substantiate his opinion making reliable and in relevant in meeting the audit objective. It provides the grounds for believing that a particular thing is true or not by providing support for a fact or a point in question.

85. In which of the following phase of audit, knowledge of accounting system, policies and internal control procedure are accepted?
(a) Audit charter
(b) Audit follow-up
(c) Audit planning
(d) Audit reporting.
Answer:
(b) Audit follow-up
Audit follow up is the phase where accounting system, policies and internal control procedures are accepted. Thereby review and corrective measures if needed are taken to perform properly.

86. Audit working papers are useful for:
(I) Auditor
(II) Management
(III) Government.
(a) (III) only
(b) (I) only
(c) (II) only
(d) (I), (II) and (III)
Answer:
(b) (I) only
Audit working papers are useful for auditors as it is required to comment whether the company is having sound internal audit system or not, to review the working of business, locate the weak points etc.

87. Which of the following statement is true about audit planning?
(I) Audit planning depends on nature, timing and scope of audit
(II) Effectiveness of system and procedure does not affect the audit planning
(III) In audit planning the significant audit areas are identified.
The options are:
(a) (I) and (II) only
(b) (I) and (III) only
(c) (I), (II) and (111)
(d) (I) and (III)
Answer:
(b) (I) and (III) only
Audit plans lays out the strategies to be followed to conduct an audit and includes the nature, timing and extent of audit procedures to be performed by the team members. The objective of the auditor is to plan the audit so that it will be performed in an effective manner.

88. Which of the following expression identifies the significant audit areas?
(a) Audit programme
(b) Audit plan
(c) Audit engagement letter
(d) Audit charter
Answer:
(b) Audit plan
Audit plan lays down strategies to be followed to conduct an audit and it include nature timing and extent of audit procedure to be performed by team members. So, it is audit plan which identifies significant audit areas.

89. Which of the following is an example of external evidence?
(a) Employee’s time reports
(b) Bank statements
(c) Purchase order for company purchases,
(d) Carbon copies of cheques.
Answer:
(b) Bank statements
Bank Statement is an example of External Evidence because it is prepared by Bank which is external to company.

90. For what minimum period should audit working paper be retained by audit firm?
(a) For a period auditor opines them to be useful in servicing the client
(b) For the period the audit firm is in existence
(c) Seven year
(d) For a period of 10 year.
Answer:
(c) Seven year
Auditor should retain audit working paper for a minimum period of seven years.

91. Unpaid salary for 340 is to be provided for in the accounts. The entry will be entered in:
(a) Bills receivable Book
(b) Journal Proper (General Journal)
(c) Purchases Book
(d) Purchase Return Book
Answer:
(b) Journal Proper (General Journal)
Journal proper or General Journal is used for making the original record of such transaction for which no special book is allotted.

For Example:
Unpaid Salary/Expense, Prepaid Expense, Accrued Income, etc.

92. The format of audit programme is:
(a) Not prescribed in any law
(b) Prescribed in Chartered Accountants Act, 1949.
(c) Prescribed in Companies Act, 2013.
(d) Prescribed by appointing authority.
Answer:
(a) Not prescribed in any law
Audit programme is a set of instructions which are to be followed for proper execution of audit. There is no standard audit programme applicable for all situation and the format of audit programme is not prescribed in any law.

93. Who prepares audit programme?
(a) CS
(b) Auditor
(c) CA
(d) Government
Answer:
(b) Auditor
Auditor uses various types of tools such as audit plan, audit programme etc. for carrying out an audit. An audit plan lays down the strategies to be followed for carrying out an audit. It is the first step of audit. After preparing an audit plan, the auditor will make an audit programme which contains the instructions to be followed by the audit staff. This helps auditor in proper supervision of the audit,

94. Which of the following is not a limitation of internal audit?
(a) Time lag
(b) Responsibility
(c) Error
(d) Investigation
Answer:
(d) Investigation
Internal audit is of help to investigate in to the business matters, in case of doubt internal auditor can be asked to examine the facts and figures to confirm or clear any doubt. The internal auditor can investigate the matter in any manner. Such investigation can be made at the request of management or owners. Thus investigation is not a limitation but counted under the benefits of the internal audit.

95. Which of the following lays out the strategies to be followed to conduct an audit?
(a) Audit programme
(b) Audit plan
(c) Audit evidence
(d) Audit report
Answer:
(b) Audit plan
An audit plan lays out the strategies to be followed to conduct an audit. It includes the nature, timing and extent of audit procedures to be performed by the engagement team members. The auditor shall develop an audit plan while considering the following:

  • The nature, timing and extent of planned risk assessment procedures.
  • The nature, timing and extent of audit procedures at the assertion level.
  • Other planned audit procedures that are required to be carried out so that the engagement complies with Standard on Auditing (SA).

96. Essential of good audit report does not includes ________.
(a) Sufficient
(b) Reliable
(c) Relevant
(d) Inspection
Answer:
(d) Inspection
The auditor’s report is a formal opinion, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit or evaluation performed on an organisation. The auditor should review and assess whether the financial statements have been prepared in accordance with an acceptable financial reporting framework applicable to the entity under audit. Therefore, the auditor’s report should contain a clear written expression of opinion on the financial statements taken as a whole. Hence, option

97. It is always voluntary?
(a) Auditing
(b) Investigation
(c) Both (a) & (b)
(d) None of above.
Answer:
(b) Investigation
The investigation is related to critical checking of particular records. Investigation is done when a lapse already exists to pin point the reason and person involved in it so that responsibility for such lapse could be fixed. It is thus, voluntary in nature.

98. Which of the following are techniques of gathering audit evidence?
(x) Inspection
(y) Enquiry
(z) observation correct option is:
(a) y and z only
(b) x and y only
(c) x and z only
(d) x, y and z
Answer:
(d) x, y and z
Technique of Audit Evidence:

  • Inspection
  • Enquiry
  • Observation

99. The objective of the audit plan is: (I) To conduct the audit in accordance with Generally Accepted Auditing Standard (II) Reduce the risk of material misstatements to an acceptably low level (III) Prepare an unqualified report the options are:
(a) I and III
(b) I and II
(c) II and III
(d) I, II and III
Answer:
(b) I and II
The objectives of Audit Plan are:

  • To conduct audit according to GAAP
  • Reduce the Risk of Material Misstatement

100. Consider the following statements:
Statement A: It is the responsibility of the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base an audit opinion.
Statement B: Different types of audit have different objectives. Which of the following combinations is correct?
(a) Statement A and Statement B both are false
(b) Statement A is true but Statement B is false
(c) Statement A and Statement B both are true
(d) Statement A is false but Statement B is true
Answer:
(c) Statement A and Statement B both are true
Both the Statement are true.

101. Who is the custodian authority for audit working papers?
(a) Shareholders
(b) Auditors
(c) Company Secretary
(d) Managing Directors
Answer:
(b) Auditors
Audit Working Papers are property of Auditors.

102. Which of the following process is carried out offer the preparation and finalization of audit programme?
(a) Audit Charter
(b) Audit Planning
(c) Audit Execution
(d) Audit Engagement Letter
Answer:
(c) Audit Execution
Audit execution is done after the Audit programme has been finalised.

103. Audit working papers are the property of ________.
(a) Owner
(b) Government
(c) Auditor
(c) Income Tax Department
Answer:
(c) Auditor
Audit working papers prepared or obtained by auditors and retained by them in connection with the audit.
Audit working papers are connecting link between client’s records and audited accounts. These provide permanent historic record. These are property of auditor work as evidence in future.

104. Which of the following is not an advantage of the preparation of audit working paper?
(a) To provide a basis for review of audit work
(b) To provide a basis for subsequent audits
(c) To ensure audit work is being carried out as per program
(d) To provide a guide for advising another client on similar issues.
Answer:
(d) To provide a guide for advising another client on similar issues.
Preparation of Audit working paper is done for taking some advantages by both client and auditor. There are so many advantages which are:

  • Audit working paper is to be prepared to provide a basis for review of audit work.
  • To ensure audit work is being carried out as per program
  • To provide basis for subsequent audit
  • To provide as evidence in case of dispute between client and auditor.

Audit working paper is not prepare to provide a guide for advising another client on similar issues.

105. Which of the following is not true about Audit Plan?
(a) Audit plan lays out the strategies to be followed to conduct an audit
(b) Audit plan is made to ensure that audit assignment is done smoothly
(c) Audit plan is made from audit programme
(d) Audit plan is prepared considering the term of engagement and statutory responsibilities
Answer:
(c) Audit plan is made from audit programme
Audit Plan is not made from audit programme.

106. Which of the following statement is correct
(a) Audit programme dosn’t help in distributing the work.
(b) In audit programme new area may not be over looked.
(c) Audit programme is set of instructions which execution.
(d) All of the above.
Answer:
(d) All of the above.
Audit Programme: It is a set of instruction which are to be followed for proper execution of audit. It’s concern with distribution of work of audit team, (not of organisational activities). With the passage of time new problem arising during audit may not be over looked in Audit programme. Hence, option (d) is correct.

107. Audit working papers are:
(a) Documents prepared by auditors
(b) Documents prepared by management
(c) Normal working papers
(d) All of the above
Answer:
(a) Documents prepared by auditors
Audit working papers are the official record that contains the planning and execution of the audit programme prepared by an auditor. Hence, option (a) is correct.

108. An auditor cannot ask for:
(a) Vouchers
(b) Accounting documents
(c) MOA
(d) None of the above.
Answer:
(c) MOA
An auditor cannot ask for MOA because his only responsibility is audit the financial statements of a company not to legal or privacy matters (which are disclosed in MOA). Hence, option (c) is correct.

109. Audit plan is not include:
(a) Accounting Policies & Practices
(b) Statutory Planning
(c) Audit Programme
(d) None of the above.
Answer:
(d) None of the above.
Audit plan include the following:

  • Accounting Policies and Procedures
  • Statutory Planning and Responsibilities
  • Nature, Time, extent of Audit procedures etc., hence, option (d) is correct.

110. Which of the following are techniques of gathering audit evidence?
X. Inspection
Y. Enquiry
Z. Observation Correct option is:
(a) X and Y
(b) Y and Z
(c) X and Z
(d) X, Y and Z
Answer:
(d) X, Y and Z
Techniques of Obtaining Audit Evidence are Inspection, observation, Enquiry, Confirmation, Computation, Analytical Review Procedures, Independent Execution.

111. Who is the custodian authority for audit working papers?
(a) Shareholders
(b) Managing Director
(c) Company Secretary
(d) Auditor
Answer:
(d) Auditor
Audit working papers are the documents prepared or obtained by the auditor and retained by him in connection with the audit. The working papers are the property of the auditor and the client cannot ask the auditor for their custody.

112. The nature, time and extant of audit procedure are covered under:
(a) Audit Programme
(b) Audit Execution
(c) Audit Plan
(d) None of the above
Answer:
(c) Audit Plan
An audit plan lays out the strategies to be followed to conduct an audit. It includes the nature, timing and extent of audit procedures to be preformed by team members. Audit plan is developed by the auditor.

113. Which of the following technique is used to ascertain the correctness of debtors balance in books ________.
(a) Observation
(b) Enquiry
(c) Computation
(d) Confirmation
Answer:
(d) Confirmation
Technique used to ascertain the correctness of debtors balance is known as confirmation.

114. The checking of arithmetical accuracy of source documents ________.
(a) Confirmation
(b) Computation
(c) Investigation
(d) Enquiry
Answer:
(b) Computation
lt involves checking of the arithmetical accuracy of a source document and accounting rewards.
Hence, option ‘b’ is correct.

115. Audit working papers are used to support and provide assurance that audit was performed in relevance with ________.
(a) Accounting Standard
(b) Standards on Auditing
(c) Auditing Standards
(d) Both (a) and (c)
Answer:
(c) Auditing Standards
Audit working papers are used to support the audit work done in orders to provide assurance that the audit was performed in accordance with the relevant auditing standards.
Hence, option ‘c’ is correct.

116. Sufficient evidence can be obtained by instead of ________.
(a) 100% test checking, checking
(b) checking, test checking
(c) test checking, 100% checking
(d) audit, investigation
Answer:
(c) test checking, 100% checking
The audit evidence are said to be sufficient when they are in adequate quantity. Sufficient evidence can be obtained by test checking instead of 100% checking.
Hence, option ‘c’ is correct.

117. Evidence generated through ________ is usually better evidence obtained indirectly.
(i) Auditor’s direct observation
(ii) Inspection
(iii) Computation
(iv) Investigation
(a) I & II
(b) II & III
(c) I, II, III, IV
(d) I, II, III
Answer:
(d) I, II, III
The rules of thumb have proven helpful in judging the appropriateness of evidence that the evidence generated through the auditor’s direct observation, inspection and computation is usually better than evidence obtained indirectly.

Audit and Auditors Under Companies Act, 2013 – Basic Provisions – CS Foundation Fundamentals of Auditing Notes

Go through this Audit and Auditors Under Companies Act, 2013 – Basic Provisions – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Audit and Auditors Under Companies Act, 2013 – Basic Provisions – CS Foundation Fundamentals of Auditing Notes

Auditor – an introduction:

  • A person who conducts an audit is known as an auditor.
  • He is charged with the responsibility of reporting whether the books show a true or fair view or not.
  • Auditor does not have any connection with the company.

Types of Auditor:
1. Internal auditor:
He acts as an employee of the company and is responsible for conducting periodical audits.

2. External Auditor:
The organizations are also required to get their accounts audited by an external agency. These are known as the external auditors.
External auditors are not the employees of the company and hence management cannot influence triem.

Appointment of Auditor:

  • Appointment, qualifications, disqualifications etc of the auditors are governed by the Companies Act 2013.
  • Auditors are appointed under Sec. 139 of The Companies Act, 2013.

Audit and Auditors Under Companies Act, 2013 - Basic Provisions - CS Foundation Fundamentals of Auditing Notes - 2

Appointment of first auditors [Sec. 139(6)]

Audit and Auditors Under Companies Act, 2013 - Basic Provisions - CS Foundation Fundamentals of Auditing Notes - 1

  • Such auditor shall hdld office till the conclusion of first AGM.
  • Such auditor can be removed by a company in general meeting.
  • Company is not required to send any information to the registrar for the appointment of the first auditor.

Appointment of Subsequent Auditor [Section 139(1)]:

  • Every subsequent appointment of auditor is done by shareholders in general meeting.
  • Every company shall, at its first AGM, appoint an individual or a firm, as an auditor, who shall hold office from the
  • conclusion of that meeting till the conclusion of every 6th AGM and thereafter till the conclusion of every 6th meeting.
  • Every company shall place the matter relating to such appointment for ratification by members at every AGM.
  • Before appointment the company should obtain a wr itten consent and a certificate from the auditor. Such certificate shall indicate whether the auditor satisfies the criteria provided in Section 141.
  • After appointment, the company shall inform the auditor of his appointment and also file a notice of such appointment with registrar within 15 days of concerned AGM.
  • If at any AGM, no auditor is appointed or reappointed, the existing auditor shall continue to be the auditor of the company.

Appointment to fill the casual vacancy [Sec 139(8)]:

  • Casual vacancy means vacancy created by the auditor ceasing to act after being validly appointed.
  • It can occur on account of following reasons: resignation, death, disqualification, etc.
  • Such auditor shall hold office till conclusion of next A.G.M
  • Any casual vacancy other than government company, shall be filled by the BoDs within 30 days.
  • If Vacancy is result of registration of an auditor it shall be also approved by the company at a general meeting convened with in months of the recommendation.

Audit and Auditors Under Companies Act, 2013 - Basic Provisions - CS Foundation Fundamentals of Auditing Notes - 3

Note this:
A casual vacancy can be created only when the appointment was effective eg- If Mr. X refused to accept appointment it will not be said to be a casual vacancy.

  • Casual vacancy shall be filled after taking into account the recommendation of audit committee.

Appointment of Auditors of Government Companies :
(1) First Auditor:

  • The Comptroller and Auditor-General ol India shall appoint the first auditor of the Government Company within 60 days from the date of incorporation.
  • In case of failure to do so the BoD(s) of the company shall appoint such auditors within the next 30 days.
  • Or in case of failure of BoD(s) members of the company shall appoint such auditor within the 60 days at an EGM, such auditor shall loss office till conclusion of First AGM.

(2) Subsequent Auditor:
In respect of financial year the Comptroller and Auditor-General of India shall appoint an auditor within a period of one hundred and eighty days (180 days) from the commencement of the financial year.

(3) Casual Auditor:

  • Any casual vacancy in the office of an auditor of a government company shall be filled by the Comptroller and Auditor-General of India within 30 days.
  • Or in failure of Comptroller and Auditor General of India by the BoD(s) within next 30 days.

Mandatory Rotation of Auditors:
The Companies Act, 2013 has introduced the system of rotation of auditors which is applicable to:

  • All listed companies.
  • All unlisted companies, having paid up share capital of ₹ 10 crore or more;
  • All private companies having paid up share capital of ₹ 20 crore or more;
  • All companies having public borrowing from financial institutions, banks or public deposits of ₹ 50 crore or more.
  • The concept of rotation of auditors shall not apply to one person companies.
  • All the companies mentioned above shall not appoint or re-appoint an individual as an auditor of the company for more than 1 term of 5 consecutive years.
  • All the companies mentioned above shall not appoint or re-appoint an audit firm as an auditor of the company for more than 2 terms of 5 consecutive years.

Remuneration of the Auditors:

  • The remuneration of the auditor of a company shall be fixed in its General Meeting.
  • The Board may fix remuneration of the first auditor appointed by it. The remuneration shall be in addition to the fee payable to an auditor, includes the expenses, if any, incurred by the auditor in connection with the audit of the company and any facility extended to him.

Qualification and Disqualification of Auditors:

Qualification [Sec 141(1) & 141(2)]:

  • Only a CA (individual) or a firm where majority of partners practicing in India are CA can be appointed as auditor.
  • Where a firm including an LLP is appointed as an auditor, only the partners who are CA shall be authorised to act and sign on behalf of the firm.

Disqualification [Sec. 141(3)]:

An auditor should not be a _________

  • a body corporate except LLP
  • an officer or employee of the company
  • any partner or employee of office or employee of a company
  • a person who himself or his relative or partner

(i) is holding any security or interest in the company, or any company which is its holding, subsidiary, associate;
Provided that Relative may hold security or interest not exceeding ₹ 1 Lac in above mentioned companies.

(ii) is indebted to the company or its subsidiary, holding or associate company or a subsidiary of such holding company, in excess of ₹ 5 Lacs.

(iii) has given a guarantee or provided any security in connection with the indebted-ness of any third person to the company or its subsidiary, holding or associate company or a subsidiary of such holding company, in excess of ₹ 1 Lac.

person or a firm who, whether directly or indirectly has the business relationship with the company or its subsidiary, holding or associate company.

  • a person whose relative is a director or is in the employ-ment of the company as a director or key managerial personnel (kmp).
  • a person who is a full time employment else where.
  • a person who is the auditor of more than 20 companies.
  • a person who has been convicted by the court of an offence involving fraud and a period of 10 years has not elapsed from the date of such conviction.
  • a person whose subsidiary or associate company or any other form of company, is engaged as on the date of appointment in consulting and specialised services as provided in Section 144.

Points to be noted:

  • A firm can be appointed as an auditor if all the partners of the firm are practicing Chartered Accountant.
  • Even if any one of the partners is disqualified under 141 (3), the whole firm will be disqualified .
  • If a person is insolvent or of an unsound mind, he ceases to be a member of CA and automatically be disqualified for appointment as an auditor.
  • If any relative of CA has substantial interest in the company, he should disclose his interest.
  • The department of company affairs has clarified that a statutory auditor cannot act as internal auditor of the company.

Rights of the Auditor:

  • Right to access the books of account
  • Right to obtain information and explanation from officers.
  • Right to receive notice of and attend general meetings
  • Right to visit branch offices and access books
  • Right to receive notice for removal
  • Right to make a representation on removal
  • Right to receive remuneration
  • Right to sign the audit report.

Duties of the Auditor [Section 143(1)]:

  • Proper examination of books of account
  • Report to the members
  • Make adequate disclosure in audit report

To inquire into the following matters:
(a) whether loans and advances made by the company are properly secured and terms and conditions are prejudicial to the interest of the co. and its members.
(b) whether transactions of the company represented merely by book entries are prejudicial to the interest of the company .
(c) Where the company is not an investment or banking company, whether the securities have been sold at a price less than the purchase price.
(d) whether loans and advances made by the company have been shown as deposits.
(e) whether personal expenses have been charged to revenue.
(f) whether cash has actually been received in case of shares allotted for cash.

Auditor not to render certain services:

  1. Accounting and book keeping services.
  2. Internal Audit
  3. Design and implementation of any financial information system
  4. Actuarial Services
  5. Investment advisory services
  6. Investment banking services
  7. Rendering of outsourced financial services
  8. Management services and
  9. Any other kind of services as may be prescribed.

Auditor’s Report [Section 143(2)]:

  • Auditor shall make a report to the members of the company on the accounts examined by him and on every financial statement which is required to be laid before the general meeting of the company.

The auditors report besides other things shall also state other details as following –

  1. Whether he has obtained all the necessary information and explanation for the purpose of his audit.
  2. Whether proper books of accounts as required by the law have been kept by the company and proper returns have been received from branches not visited by him.
  3. Whether branch audit report prepared by person other than company’s auditor has been sent to him.
  4. Whether company’s financial statement are in agreement with the books of accounts and returns.
  5. Whether financial statements comply with the accounting standard.
  6. Observation or comments of the auditors on the financial transactions or matter which have any adverse effect on the functioning of the company.
  7. Whether any director is disqualified from being appointed as a director under section 164 (2).
  8.  any qualification, reservation or adverse remark relating to the maintenance of accounts and other connected matters.
  9. Whether company has adequate internal financial control system.
  10. The auditor’s report shall include their views and comments on:
    • Whether the company has disclosed the impact of pending litigations on its financial position in its financial statement.
    • Whether the company has made provision for material foreseeable losses if any, on long term contracts including derivative contracts.
    • Whether there has been any delay in transferring amounts to the Investor Education and Protection Fund by the company.

Importance of Audit Report:

  1. Audit Report helps an auditor to express his opinion on financial statements
  2. It shows the scope of work done and the responsibility assumed by the auditor while conducting audit.
  3. The conclusions drawn by the auditor are communicated to the management through audit report
  4. It helps the shareholders of the company to know the state of affairs of the company

Elements (Essentials) of Audit Report:

  1. Title
  2. Addressee
  3. Identification
  4. Reference to Auditing Standards
  5. Opinion
  6. Date of report
  7. Auditor’s Address
  8. Auditor’s signature.
  9. Description of the responsibility of management.
  10. Place of signature

Specimen Of Audit Report:
Auditor’s Report – Title
To the shareholders of _________ . (company name) – Addressing
1. We have audited the B.S of _________ – Opening paragraph (Identification)
2. We conducted our audit in accordance with the auditing standards _________ – Scope paragraph (Ref. to auditing std.)
3. In accordance with Section 143 (2) of Companies Act, 2013, we report as under _________ – Opinion paragraph
(i) _________
(ii) _________
(iii) _________
(iv) _________
(v) _________
(vi) _________
(vii) _________
(viii) _________
(ix) _________

Sd/ …………..
(Firm Name)
(Name of Partner)

Place:
Date:

Auditor’s opinion:

  • it is the duty of the auditor to express his opinion on the books and accounts examined by him.
  • Auditor’s opinion can be of the foilowing types:

(a) Unqualified opinion
(b) Adverse opinion
(c) Qualified opinion
(d) Disclaimer of opinion

(a) Unqualified opinion:

  • It is given when auditor has no reservations or objections regarding the information under audit.
  • This shows that according to the audit the books and account show a true and fair view.
  • It is also known as the clean report.

(b) Adverse / Negative opinion:

  • an auditor gives an adverse or negative opinion when he does not agree with the books and accounts examined by him.
  • It is given when the reservation on matters are so significant that they destroy the true and fair view of books and accounts (financial statements)

(c) Qualified opinion:

  • This is given when the auditor has some reservations about the financial statements.
  • These reservations are not so significant, but still relevant
  • This opinion means that “subject” to certain matters, the auditor agrees with the financial statements that they are true and fairly viewed and by that he gives qualified opinion.
  • It is a situation when the reservations are not so significant so as to give an adverse opinion and not so insignificant so as to give an unqualified opinion.

(d) Disclaimer of opinion:

  • When an auditor is not able to collect appropriate audit evidence, then he must give a disclaimer of opinion.
  • Disclaimer of opinion shows that adequate books/accounts and other information were not being provided to the auditor so that he can form an audit opinion.
  • The auditor should give a reason for giving a disclaimer of opinion. So that the readers can assess their significant and effect.

Branch Audit:
If any company has a branch office, the accounts of that office shall be audited either by the auditor of the company or by any other person qualified for appointment as an auditor of the company or appointed as auditor under the Act.

Secretarial Audit:
Secretarial audit is an audit to check compliance ot various legislation including the Companies Act and other corporate and economic laws applicable to the company.
As per Companies Act, 2013 and the ComparHes (Appointment and Remuneration of Managerial Personnel) Rules, 2014, the following companies are required to obtain Seci-etarial Audit Report:

  • Every hsted company
  • Every public company having a paid-up capital of 54) crore or more.
    or
  • Every public company having a turnover of 250 crore or more.

Eligibility:
Company Secretary in practice.
Secretarial Auditor needs to examine and report on the compliance of the following five specific laws:
1. The Companies Act, 2013 and the rules macfe under there,
2. The Securities Contracts (Regulation) Act, 1956 (SCRA),
The Depositories Act. 1996 and the regulations and Bye-laws framed thereunder. Foreign Exchange Manageaient Act, 1999 and the rules and regulations made under there. The Regulations and Guidelines prescribed under the Securities and Exchange Board of India Act, 1992 (SEBI Act).

Modified Report:
An auditor’s report Is considered to be modified when it includes:
(a) Matters that do not affect the auditors opinion-emphasis of matter
(b) Matters that do affect the auditor’s opinion
qualified opinion
disclaim of opinion
adverse opinion

Audit and Auditors Under Companies Act, 2013-Basic Provisions MCQ Questions

1. External auditor is an employee of the company. State true or false.
(a) True
(b) False
(c) Partly true
(d) None.
Answer:
(b) False

2. Appointment of auditors is made under section _________ of the Companies Act 2013.
(a) 139(1)
(b) 139(2)
(c) 139(3)
(d) None
Answer:
(a) 139(1)

3. The first auditor of the company shall be appointed within _________ of the Registration of the company.
(a) 6 months
(b) 1 month
(c) 7 days
(d) None
Answer:
(b) 1 month

4. Which of the following is NOT an essential of an audit report?
(a) Title
(b) Date of report
(c) Summary
(d) Opinion.
Answer:
(c) Summary

5. Mr. A was appointed as the auditor of the company. Two months after his appointment, he resigned from the post on some personal grounds. Board of Directors filled the vacancy by appointing Mr. Q. Is the appointment of Mr. Q valid?
(a) Yes
(b) No
(c) Can’t say
(d) None
Answer:
(b) No

6. An auditor appointed to fill casual vacancy shall hold office till:
(a) The year end
(b) Conclusion of next AGM
(c) The desire of Board of Directors
(d) Any of these
Answer:
(b) Conclusion of next AGM

7. When the auditor has a few reservations which he wants to bring to the notice of the stakeholders, then he issues:
(a) Qualified opinion
(b) Adverse opinion
(c) Disclaimer of opinion
(d) Unqualified opinion.
Answer:
(a) Qualified opinion

8. Qualifications and disqualification of an auditor are explained under:
(a) Sec 141
(b) Sec 142
(c) Sec 143
(d) Sec 144
Answer:
(a) Sec 141

9. An auditor not having a certificate of practice can also become an auditor of the Company. This statement is:
(a) True
(b) False
(c) Partly true
(d) None
Answer:
(b) False

10. ABC & Associates is a firm of Chartered Accountants wherein B and C hold a part time certificate of practice. Can the firm ABC & Associates be appointed as an auditor of the company?
(a) Yes, since atleast one partner holds full time COP.
(b) Yes, the firm is comprised of practicing chartered accountants either full time or part time.
(c) No, since all partners should hold a full time COP
(d) None of these.
Answer:
(b) Yes, the firm is comprised of practicing chartered accountants either full time or part time.

11. Which of these is not one of the rights of the auditor?
(a) Right to receive remuneration
(b) Right to access books of account
(c) Right to remove a director
(d) Right of lien
Answer:
(c) Right to remove a director

12. Which of these is not an element of Audit Report?
(a) Title
(b)Addressee
(c) Name of auditor
(d) None of these.
Answer:
(c) Name of auditor

13. Where the auditor is unable to give his opinion due to insufficiency of evidence, then he gives:
(a) Adverse opinion
(b) Disclaimer of opinion
(c) Qualified opinion
(d) Unqualified opinion.
Answer:
(b) Disclaimer of opinion

14. When an auditor has no reservations regarding the information then he gives a
(a) Qualified opinion
(b) Unqualified opinion
(c) Disclaimer of opinion
(d) None of these
Answer:
(b) Unqualified opinion

15. If an auditor is not able to draw appropriate audit conclusions due to lack of audit evidence and available information, he shall give:
(a) Qualified opinion
(b) Unqualified opinion
(c) Disclaimer of opinion
(d) None of these
Answer:
(c) Disclaimer of opinion

16. …………….. is also known as the clean report:
(a) Qualified Report
(b) Unqualified Report
(c) Disclaimer
(d) None
Answer:
(b) Unqualified Report

17. When reservations are so significant that they destroy the true and fair view of books, the auditor gives-
(a) Qualified Report
(b) Adverse Report
(c) Disclaimer
(d) None
Answer:
(b) Adverse Report

18. A persons who conduct an audit is:
(a) Auditor
(b) First auditor
(c) Subsequent auditor
(d) All of the above
Answer:
(a) Auditor

19. Appointment of first auditor is made under which section:
(a) Section 139(1)
(b) Section 139(2)
(c) Section 139(3)
(d) Section 139(6)
Answer:
(d) Section 139(6)

20. When an auditor is not able to collect appropriate audit evidence, then he must give which opinion:
(a) Adverse opinion
(b) Qualified opinion
(c) Unqualified opinion
(d) Disclaimer
Answer:
(d) Disclaimer

21. An auditor may function as:
(a) Employee
(b) Independent Professional
(c) Both
(d) None
Answer:
(c) Both

22. The first auditor appointed shall hold office till:
(a) End of company
(b) End of 2 years
(c) End of 1st year
(d) End of first A.G.M.
Answer:
(d) End of first A.G.M.3

23. _________ is not a right/power of auditor:
(a) To receive remuneration
(b) To sign the audit report
(c) To check position as stated is correct
(d) Both (a) & (b)
Answer:
(c) To check position as stated is correct

24. Sec. _________ contains the Auditor’s opinion that financial statements comply with Accounting standards
(a) 143(1)
(b) 143(2)
(c) 143(3)
(d) 143 (2A)
Answer:
(b) 143(2)

25. When the auditor does not agree with the true and fair view of financial position, he expresses which opinion
(a) Unqualified
(b) Qualified
(c) Adverse
(d) None
Answer:
(c) Adverse

26. Vacancy caused by resignation of auditor shall only be filled by
(a) Company in A.G.M.
(b) Central Government
(c) Board of Director
(d) Chartered Accountant
Answer:
(c) Board of Director

27. Sec. 141 provides that only a _________ in practice can act as an auditor of a Limited Company.
(a) Company Secretary
(b) Director
(c) Chartered Accountant
(d) Both (a) & (c)
Answer:
(c) Chartered Accountant

28. Auditors report is laid down before company is
(a) General Meeting
(b) Annual General Meeting
(c) Emergency General Meeting
(d) Any of above
Answer:
(a) General Meeting

29. Even if any one partner is disqualified, the whole firm will
(a) Remain qualified
(b) As per situation
(c) Disqualified
(d) None
Answer:
(c) Disqualified

30. If any relative of CA has substantial interest in the company, he should _________
(a) Not disclose
(b) Disclose
(c) His wish
(d) As per company
Answer:
(b) Disclose

31. The first auditor of the company is appointed by:
(a) Board of directors
(b) Shareholders
(c) Central Government
(d) None of the above.
Answer:
(a) Board of directors

32. The first auditor should be appointed within:
(a) 2 months of incorporation
(b) 1 month from the date of incorporation
(c) 3 months from the date of commencement of business
(d) Within 7 days of incorporation.
Answer:
(b) 1 month from the date of incorporation

33. Where the auditor does not have any reservation, objection regarding the information under audit, then he gives:
(a) Unqualified opinion
(b) Qualified opinion
(c) Disclaimer of opinion
(d) Negative opinion.
Answer:
(a) Unqualified opinion

34. If a partner of an audit firm is disqualified, then:
(a) The firm will be disqualified
(b) The firm will not be disqualified
(c) Both (a) & (b)
(d) None of the above.
Answer:
(a) The firm will be disqualified

35. Which of the following is NOT a right of an auditor?
(a) Right to access books of accounts
(b) Right to receive dividend
(c) Right to visit the branch office
(d) None of the above.
Answer:
(b) Right to receive dividend

36. The duties of an auditor are contained under which section of the Companies Act, 2013?
(a) Section 143(1)
(b) Section 143(2)
(c) Section 143(3)
(d) Section 143(4).
Answer:
(a) Section 143(1)

37. The observations of the auditor which have an adverse effect on the functioning are written in:
(a) Thick type
(b) Italics
(c) Colored text
(d) Either (a) or (b)
Answer:
(d) Either (a) or (b)

38. Who appoints the subsequent auditors of a company:
(a) Shareholders
(b) Central Government
(c) Board of directors
(d) Registrar of companies
Answer:
(a) Shareholders
Section 139(1) of The Companies Act, 2013 contains provisions
regarding the appointment of the auditor. As per this section, the auditor of a company can be appointed by the shareholders.

39. Board meeting is the meeting of:
(a) Shareholders
(b) Government
(c) Creditors and debtors
(d) Directors of the company
Answer:
(d) Directors of the company
Board Meeting refers to the meeting of Board of Directors of the Company.

40. A statutory auditor reports to:
(a) Debenture holders
(b) Central Government
(c) Board of directors
(d) Share holders
Answer:
(d) Share holders
Under Section 143(2) of the companies Act, 2013, it is the duty of the auditor to make a report to the members of the company on the accounts examined by him. Audit report can be regarded as a formal communication by the auditor to the shareholders throwing light on the state of affairs of the company. Audit Report is addressed to the members of the company and is considered at the AGM.

41. When an auditor does not have any reservation/objection regarding the information under audit, which type of audit report is issued to him?
(a) Qualified report
(b) Clean report
(c) Adverse audit report
(d) Disclaimer of opinion
Answer:
(b) Clean report
Where auditor does not have any reservation, objection regarding the information under audit, then he issues an unqualified opinion. It is also known as Clean Report.

42. The first auditor of a company is appointed:
(a) Within one month of completion of capital subscription of the company
(b) Within one month of promotion of the company
(c) Within one month of the commencement of the business of the company
(d) Within one month of incorporation of the company.
Answer:
(d) Within one month of incorporation of the company.
Section 139(6) provides that the first auditor or auditors are to be
appointed by the Board of Directors within one month of the date of the registration of the company.
In case the Board of Directors fails to appoint the first auditors within one month of its incorporation the company in general meeting may appoint the first auditors.

43. The duties of a company auditor are defined under/in:
(a) Memorandum of association
(b) Articles of association
(c) Companies Act, 2013
(d) Agreement between company and the auditor
Answer:
(d) Agreement between company and the auditor
Duties of an auditor are many and varied. Such duties of an auditor are determined by an agreement between the company and the auditor.
Auditor must examine the original books of account kept by the company to discover any inaccuracies or omission therein, to examine company’s balance sheet and profit and loss account and report on the original books of account and the annual accounts to the members. However, the company’s management cannot in any manner what soever limit the scope of audit.

44. Under which meeting is an auditor usually appointed₹
(a) Board meeting
(b) Shareholders meeting or general meeting
(c) Debenture holders meeting
(d) Class meeting
Answer:
(b) Shareholders meeting or general meeting
Section 139(1) of the Companies Act, 2013 contains provisions regarding the appointment of the auditor. As per this section, the auditor of any company can be appointed by the shareholders in general meeting who shall hold office till conclusion of its 6th AGM.

45. Casual vacancy arising due to resignation of an auditor may be filled by:
(a) Board of director
(b) Shareholder’s in general meeting
(c) Audit committee
(d) Debenture holders
Answer:
(a) Board of director
If a casually vacancy arises due to resignation of auditor then new auditor will be appointed by Board of Directors but such appointment shall be approved by the shareholders in their EGM.

46. Due to lack of audit evidences, auditor issues a:
(a) Qualified opinion
(b) Unqualified opinion
(c) Adverse opinion
(d) Disclaimer of opinion
Answer:
(d) Disclaimer of opinion
Where there is a situation where auditor is not in a position to collect sufficient appropriate audit evidence which enables him to draw his conclusion then it is proper for the auditor to disclaim an opinion due to lack of sufficient appropriate audit evidence.

47. In which section of The Companies Act, 2013, the provisions relating to an Auditor’s Report are covered₹
(a) Section 143 (1)
(b) Section 143 (2)
(c) Section 143 (3)
(d) Section 143 (4).
Answer:
(b) Section 143 (2)
Under Section 143(2) of the Companies Act, 2013, it is the duty of the auditor to make a report to the members of the company on the accounts examined by him.

48. The board of directors shall appoint first auditor of a company:
(a) within one month of completion of capital subscription by the company
(b) within one month of the promotion of the company
(c) Within one month of the commencement of the business of the company
(d) Within one month of incorporation of the company.
Answer:
(d) Within one month of incorporation of the company.
Section 139(6) provides that the first auditors are to be appointed by the Board of directors within one month of the date of the registration of the company. In case the BOD fails to appoint the first auditors within one month of its incorporation the company in general meeting may appoint the first auditors.

49. The client changed method of depreciation from straight line to written down value method. This has been disclosed as a note to the financial statements. It has an immaterial effect on the current financial statements. It is expected, however, that the change will have a significant effect on future periods. Which of the following option should the auditor express₹
(a) Unqualified opinion
(b) Qualified opinion
(c) Disclaimer of opinion
(d) Adverse opinion.
Answer:
(b) In a situation where neither the unqualified, nor adverse opinion is appropriate, the auditor gives the qualified opinion. This is a situation where the auditor has some reservation about the financial statements which though significant but not that significant so as to warrant adverse opinion and auditor agrees to a large extent with the true and fair view of the financial statement that he gives a qualified opinion.

50. ‘Disclaimer of Opinion’ means:
(a) The auditor gives clean report
(b) The auditor gives qualified report
(c) The auditor gives adverse report
(d) The auditor is unable to expresses his opinion.
Answer:
(d) The auditor is unable to expresses his opinion.
Disclaimer of Opinion is a situation when auditor is not in a position to give his opinion.

51. Statutory audit report of a company is addressed to:
(a) Board of Directors
(b) Ministry of Corporate Affairs
(c) Employees of the company
(d) Members of the company.
Answer:
(d) Members of the company.
The audit report is the end product of every audit. It is the medium
through which an auditor expresses his opinion on the financial statements. It is a formal communication by the auditor to the shareholders throwing light on the state of affairs of the company. It is addressed to the members of the company and is considered at the AGM.

52. Which of the following are the rights of a Statutory Auditor?
X. To receive remuneration
Y. To attend Board of Director’s meeting
Z. To attend the general meeting
W. To visit the branch office
correct option is –
(a) XandY
(b) X, Y and Z
(c) X, ZandW
(d) X, Y, Z and W.
Answer:
(c) X, ZandW
A statutory auditor has the following rights

  1. access to books, accounts and vouchers.
  2. obtain information and explanation
  3. sign the audit report
  4. receive notice of and attend AGM and GM.
  5. visit branch office and access the books.
  6. receive remuneration.

Thus, all options except y i.e. right to attend BOD’s meeting is not a right of statutory auditor. Thus, the answer is X, Z and W.

53. The form and basic contents of statutory audit report are –
(a) Provided in the Companies Act, 2013
(b) Provided in the Chartered Accountants Act, 1949
(c) Provided in the Code of Civil Procedure, 1908
(d) Not provided anywhere.
Answer:
(a) Provided in the Companies Act, 2013
Under Section 143(1) of the Companies Act, 2013, it is the duty of the auditor to make a report to the members of the company on the accounts examined by him.
Section 143(2) states that auditor’s report must state the negative points noticed by him along with the reasons for the same.
Under the relevant section, the CG is empowered to issue order requiring the auditor to include in his report a statement on such matters as may be specified.
Thus, form and basic contents of statutory audit report are provided in the Companies Act, 2013.

54. Duties of auditor are given in –
(a) 144
(b) 146
(c) 143
(d) 139
Answer:
(c) 143
Section 143 of Companies Act talks about the duties of auditor.

53. The first auditor holds the office till –
(a) Auditor dies
(b) Auditor retires
(c) Holding of 1st AGM
(d) Conclusion of 1st AGM.
Answer:
(d) Conclusion of 1st AGM.
The first auditor is appointed by the Board who holds the office till the conclusion of 1st AGM

54. Which of the following is not mentioned in Audit Report?
(a) Whether HR practices are going right or wrong.
(b) Whether any Director is disqualified from appointment.
(c) Whether Balance Sheet gives true fair view.
(d) Whether he has obtained all the information and explanation required by him for the purpose of audit.
Answer:
(a) Whether HR practices are going right or wrong.
In the audit report, the auditor shall expressly state:
(a) Whether the accounts give the information as required by law.
(b) Whether the financial statements show a true and fair view.
(c) Whether proper books of account as required by law has been kept by the company.
(d) Whether financial statements comply with accounting standards.
(e) Whether any director has been disqualified from being acting as the director of the company. Thus option (a), whether HR practices are going on right or wrong are not mentioned in Audit Report.

55. When does casual vacancy arises in.the office of the auditor?
(a) Arises due to resignation
(b) Arises due to death
(c) Arises due to disqualification
(d) All of the above.
Answer:
(d) All of the above.
Casual vacancy means vacancy created by auditor ceasing to act
after being validly appointed. It can occur on account of following reasons – resignation, death, disqualification, etc. Hence, all of the above are reasons for casual vacancy.

56. A person who is indebted to the company for which amount cannot be appointed to set as an auditor of a company –
(a) As may be prescribed
(b) more than 1 Lac
(c) more than 3 Lac
(d) more than 5 Lac.
Answer:
(d) more than 5 Lac.
A person who is indebted to the company in exempt of 5 lac cannot be appointed to act as an auditor.

57. XYZ, a C.A. firm is an auditor of Lawan Pvt Ltd. X included Y as a partner in the firm. Then who will be the auditor?
(a) X
(b) Y
(c) Both X and Y
(d) None of the above.
Answer:
(c) Both X and Y
A firm whereof all the partners are practicing Chartered Accountants can be appointed by its firm name as auditor in which case any partner may act in the name of the firm. As in the given question XYZ, a C.A. firm is an auditor of Laxman Pvt. Ltd. X included Y as a partner in the firm. So, Both X & Y will be the auditors.

58. If an individual partner of a C.A. firm is disqualified to be an auditor, then which of the following is correct?
(a) Whole firm will be disqualified
(b) Whole firm will not be disqualified
(c) Only that C.A. will be disqualified
(d) None of the above.
Answer:
(a) Whole firm will be disqualified
If an individual partner of a C.A. firm is disqualified to be an auditor, then whole firm will be disqualified under Section 141.

59. Appointment of an auditor is done under which section of Companies Act, 2013?
(a) 139
(b) 142
(c) 137
(d) 140.
Answer:
(a) 139
Section 139 of the Companies Act 2013 contains provisions regarding the appointment of the auditor.

60. Under which Section of Companies Act, 2013, qualifications and disqualifications of an auditor are mentioned?
(a) 140
(b) 143
(c) 141
(d) 145.
Answer:
(c) 141
The qualifications and disqualifications of the auditor are mentioned under Section 141 of the Companies Act, 2013.’Section 141, of Companies Act, 2013, defines qualifications and disqualifications of the auditor are mentioned.

61. A clean audit report is:
(a) A qualified audit report
(b) A modified audit report
(c) An unqualified audit report
(d) A audit report that has an adverse opinion.
Answer:
(c) An unqualified audit report
A clean audit report is an unqualified audit report. This opinion signifies that the auditor accepts the accounting treatment given to the various transactions and the profit and loss account shows the true and fair view of the transaction entered by the organisation during the period and the balance sheet shows the true and fair view of the state of affairs of the organisation at that point of time.

62. The retiring auditor can:
(i) Make written representations
(ii) Get his representation circulated
(iii) Be given an opportunity of being heard. The options are:
(a) I, II and III
(b) I and III
(c) I and II
(d) II and III
Answer:
(a) I, II and III
The retiring auditor can:
make written representations.
get his representation circulated.
be given an opportunity of being heard.
So, the option (a) is correct answer.

63. As per Companies Act, 2013, which of the following sections deal with qualifications of the audit?
(a) Section 226(3) and 226 (4)
(b) Section 141
(c) Section 224(1) and 224 (2)
(d) Section 224 (3) and 224.
Answer:
(b) Section 141
Section 141(1) & 141(2) deals with the qualifications of an auditor i.e.
Only a CA (individual) or a firm where majority of partners practicing in India are CA can be appointed as auditor.
Where a firm including an LLP is appointed as an auditor, only the partners who are CA shall be authorized to act and sign on behalf of the firm.

64. Under which Section of Companies Act, 2013, the auditor has a duty to sign audit report:
(a) Section 227 (4A)
(b) Section 227 (3)
(c) Section 227 (2)
(d) Section 145
Answer:
(d) Section 145
Sec. 145 of the Companies Act, 2013, the auditor has a duty to sign audit report and other documents. Auditor shall be punishable with fine which shall not be less than ₹ 25,000 but which may extend to ₹ 5,00,000.

65. The auditor has a right to:
(a) To direct the officers of the company
(b) Retain the books of accounts
(c) Attend all the board meetings
(d) Access the books of Accounts and vouchers of the company.
Answer:
(d) Access the books of Accounts and vouchers of the company.
Rights of the auditors under Companies Act are as follows:
(i) Right to access to books, accounts and vouchers
(ii) Right to obtain information and explanation
(iii) Right to sign audit report
(iv) Right to receive notice and attend General Meeting
(v) Right to receive remuneration.

66. Which of the following may be appointed as the first auditor of the company₹ (i) A Chartered Accountant in practice (ii) A firm of Chartered Accountants in practice (iii) A limited liability partnership of Chartered Accountants in practice. The options are:
(a) I, II and III
(b) I and III
(c) II and III
(d) I and II.
Answer:
(a) I, II and III
Chartered Accountant in practice is appointed as first auditor of the company or a firm of Chartered Accountants in practice.

67. In which section of Companies Act, 2013, the provisions relating to an auditor’s remuneration is covered?
(a) Section 140
(b) Section 141
(c) Section 142
(d) Section 139.
Answer:
(b) Section 141
Section 141 states provision relating to remuneration of auditor for auditing accounts of the company.

68. Who will be responsible for errors in report if external auditor relies on the work of internal auditor?
(a) External auditor
(b) Internal auditor
(c) Management
(d) Shareholder.
Answer:
(a) External auditor
Statutory auditor has to review the work done by internal auditor to determine the extent of reliance they can place on them. Auditors cannot completely /ely on internal audit, they are responsible if there are any errors in report, if it is made by being fully dependent on internal audit.

69. What is the qualification of an auditor:
(a) CA
(b) CS
(c) CMA
(d) Key managerial person of the Company
Answer:
(a) CA
Section 141 contains that a person shall be eligible for appointment
as an auditor of a company only if he is a Chartered Accountant.

70. Rights of auditor:
(a) Notice of AGM
(b) Notice of Board Meeting
(c) Right to have remuneration
(d) Both (a) & (c)
Answer:
(d) Both (a) & (c)
Rights of an auditor:
(i) Right to access to books, accounts and vouchers
(ii) Right to obtain information and explanation
(iii) Right to sign the audit report
(iv) Right to receive notice and attend general meeting
(v) Right to receive remuneration
(vi) Right to visit Branch Office and right of access to books.

71. Disqualification of auditor:
(a) A body corporate other than LLP Act 2008
(b) Employee of company
(c) Relative of a director
(d) All of the above
Answer:
(d) All of the above
Disqualification of an Auditor:
(i) A body corporate except LLP registered under Limited Liability Partnership Act, 2008.
(ii) An officer of employer of the Company
(iii) Any person who is a partner, or who is in the employment, of an officer or employee of the company
(iv) Relative of a director or who is in employment of the company ] as director or KMP.
(v) A person who himself or his relative or partner
(a) is holding any security or interest in the company in excess of ₹ 1 Lac
(b) is indebted to the company or its subsidiary, holding or associate company or a subsidiary of such holding company in excess of ₹ 5 lacs.
Thus, all options are correct. Thus, the answer is option (d).

72. If an auditor is not in a position to give an opinion then it is:
(a) Unqualified opinion
(b) Adverse or negative opinion
(c) Qualified opinion
(d) Disclaimer of opinion
Answer:
(d) Disclaimer of opinion
Disclaimer of opinion is a situation when auditor is not in a position to give his opinion. Where auditor is not in a position to collect sufficient appropriate audit evidence which enables him to draw his conclusion then it is proper for the auditor to disclaim an opinion due! to lack of sufficient appropriate audit evidence.

73. The first auditor of a company shall be appointed by _________ within 30 days from the date of registration of the company.
(a) Creditor of the company
(b) Board of Director
(c) Member of the company
(d) The Central Government.
Answer:
(b) Board of Director
Sec. 139(6) of the Companies Act, 2013 provides that the first auditor are to be appointed by the Board of Directors within 30 days from the date of registration of the company. He shall hold office till the conclusion of first AGM.

74. Which of the following are the rights of a statutory auditor?
(X) To receive remuneration
(Y) To attend board of directors meeting
(Z) To attend the general meeting
(W) To visit the branch office
(a) X, Y, Z and W
(b) X and Y
(c) X, ZandW
(d) X, YandZ
Answer:
(c) X, ZandW
As per Sec. 143 (1) of the Companies Act, 2013 every statutory auditor has a right to receive remuneration, to receive notice of or attend general meeting, to visit the branch office and access to the books.

75. Which of the following may be appointed as the first auditor of company?
(I) A Chartered Accountant in practice
(II) A firm of Chartered Accountant in practice
(III) A limited liability partnership of Chartered Accountant in practice.
(a) (I) and (III)
(b) (I), (II) and (III)
(c) (I) and (II)
(d) (I) and (III)
Answer:
(b) (I), (II) and (III)
Sec. 141(1) and Sec. 141(2) of Companies Act, 2013 contains provisions as regards to qualification of auditors. A Chartered Accountant in practice, a firm whereof majority of partners are qualified for or are CA in practice including LLP is appointed as an auditor of a company.

76. A negative audit report is:
(a) A qualified audit report
(b) A modified audit report
(c) An audit report that has an adverse opinion
(d) An unqualified audit report.
Answer:
(c) An audit report that has an adverse opinion
Where as a result of the examination of books of accounts, the auditor concludes that he does not agree with the true and fair view of financial statement under audit, he express adverse opinion or negative opinion.

77. In the course of audit the auditor observed that loans and advances made by the company have been shown as deposits. The auditor will:
(a) Report it to SEBI
(b) State this in his audit report
(c) Not state this in his audit report
(d) Report it to the Central Government.
Answer:
(b) State this in his audit report
The Auditor, will have to state his observation in his audit report that the loans and advances made by the company have been wrongly shown as deposits.

78. Which of the following is not disqualified for appointment as auditor of “a” Co.?
(a) An employee of the company
(b) A person whose relative is a director of the company
(c) A limited liability partnership firm
(d) A body corporate other than LLP.
Answer:
(c) A limited liability partnership firm
Sec. 141(1) and 141(2) of the Companies Act. 2013 contains provisions stating hrm including LLP is appointed as an auditor of a company, only the partners who are Chartered Accountants shall be authorised to act and sign on behalf of a firm.

79. Which of the following is not a type of audit opinion?
(a) Reserve
(b) Disclaimer
(c) Adverse
(d) Qualified
Answer:
(a) Reserve
Types of Auditor’s opinion:
(a) Unqualified opinion: Where auditor does not have any reservation, objection regarding the information under audit then he issues an unqualified opinion. It is also known as clean report.
(b) Adverse opinion: Where auditor does not agree with the true and fair view of Financial Statement. He express adverse opinion.
(c) Qualified opinion: When auditor has some reservation which though significant but not that much so as to give an adverse opinion. In that case, Auditor gives a qualified opinion.
(d) Disclaimer of opinion: It is a situation when auditor is not in position to collect sufficient and appropriate audit evidence, then he expresses a disclaimer of opinion.

80. Which of the following may be appointed as first auditor of Company (1)A Chartered Accountant in practice (2) A firm of Chartered Accountants in practice (3) A Limited Liability Partnership of Chartered Accountants in practice
(a) 1 and 2
(b) 1,2 and 3
(c) 2 and 3
(d) 1 and 3
Answer:
(b) 1,2 and 3
As per Sec. 141 (1) of Companies Act, 2013:
(a) A person shall be eligible for appointment as auditor of company only if he is a Chartered Accountant in practice
(b) A firm where majority of partners are Chartered Accountant in practice
(c) A Limited Liability partnership of Chartered Accountant in practice

81. Which account will be credited for the excess money received on share application that is to be adjusted against allotment₹
(a) Share allotment A/c
(b) Share First Call A/c
(c) Share Capital A/c
(d) Share application A/c
Answer:
(d) Share application A/c
The Journal Entry for money received on Application is
Bank A/c Dr.
To Share Application A/c
The Amount received in excess is first credited to Share Application A/c and then it is transferred to Share Allotment A/c at the time of adjustment.

82. Which of the following is disqualified for appointment as auditor of a Company?
(a) A limited liability partnership
(b) An officer or Employee of the Company.
(c) A Chartered Accountant holding a Certificate of Practice.
(d) A firm of Chartered Accountants
Answer:
(b) An officer or Employee of the Company.
As per Sec. 141(3) of the Companies Act, 2013 following person shall not be eligible for appointment as auditor.
(a) A body corporate other than LLP of Chartered Accountant
(b) An officer or employee of company.
(c) A person who is a partner.
(d) A person who or his relative
(i) is holding security of face value more than ₹ 1 lakh.
(ii) is indebted with a debt of more than ₹ 5 lakhs.
(iii) has given guarantee in debt of ₹ 1 lakh or more.
(e) A person who has business relationship with the company.
(f) A person whose relative is director.
(g) A person who is afthe time of appointment or reappointment is auditor of more than 20 companies.
(h) A person who has been convicted and a period of 10 years has not elapsed.
(i) A person whose subsidiary or associate company is engaged in providing any service under section 144.

83. The audit report of the statutory auditor shall report on the: (i) Books of accounts examined by him (ii) Balance Sheet of the company (iii) Profit and loss account of the Company (iv) Direction report of the Company. The options are:
(a) I,II, III and IV
(b) I,II and IV
(c) I,II, and III
(d) II,III and IV
Answer:
(c) I,II, and III
(c) The auditor’s report shall also state under section 143(3) of the Companies Act, 2013:
(a) Information and explanation obtained for the purpose of audit.
(b) Proper books of account as required by law have been kept or not.
(c) Report on accounts of Branch office audited by other person.
(d) Financial statement are in agreement with books.
(e) Financial Statement comply with accounting standards.
(f) Any observation or comment of auditor on financial transaction or matter.
(g) Any director being disqualified under section164 (2).
(h) Any qualification, reservation or adverse mark on maintenance of account.
(i) Whether company has adequate internal financial control or not

84. Which of the following are the rights of a Statutory Auditor₹ (X) To receive remuneration (Y) To attend Board of Direction’s meeting (Z) To attend the general meeting (W) To visit the branch office.
The Correct opinion is:
(a) X, Z and W
(b) X, Y, Z and W
(c) X and Y
(d) X, Y and Z
Answer:
(a) X, Z and W
As per Sec. 143(1), The rights and power enjoyed by auditor are:
(a) Right to access books, accounts and vouchers
(b) Right to obtain Information and explanation
(c) Right to sign the Audit Report
(d) Right to Receive Notice of and Attend General Meeting
(e) Right to Visit Branch Office and access books of accounts.

85. Audit report is prepared by
(a) Auditor
(b) Assistants of auditor
(c) Both
(d) None of these
Answer:
(a) Auditor
The auditor’s report is a formal opinion, issued by either an internal auditor or an independent external auditor as a result of an internal or external audit or evaluation performed on an organisation. The auditor should review and assess whether the financial statements have been prepared in accordance with an acceptable financial reporting framework applicable to the entity under audit. It is also necessary to consider whether the financial statements comply with the relevant statutory requirements and then the audit report is prepared. The report is subsequently provided to the stakeholders such as shareholders, creditors, financial institutions, banks, government, or the general public at large as an assurance service so that the user can make decisions based on the results of the audit.

86. What is a negative report?
(a) Qualified report
(b) Unqualified report
(c) Adverse opinion report
(d) None of these
Answer:
(c) Adverse opinion report
If any of the matters required to be included in the audit report is answered in the negative or with a qualification, the report shall also state the reasons for the same. An adverse opinion is expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to disclose the misleading or incomplete nature of the financial statements.

87. Appointment of auditor is given in section _________ of Companies Act 2013.
(a) 139(6)
(b) 143
(c) 144
(d) 126
Answer:
(a) 139(6)
As per Companies Act, 2013 the auditors of the company are appointed as per the provisions provided in section 139(6) of the act. Hence, we can say that Statutory Audit is also a financial audit as the objectives are same.

88. Auditor’s report is to be laid before the company _________ meetings.
(a) AGM
(b) EGM
(c) Board meeting
(d) All of the above
Answer:
(a) AGM
Auditor’s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, shall be sent to every member of the company, to every trustee for the debenture-holder of any debentures issued by the company. Thus auditor report is laid before the company in the annual general meetings.

89. First auditor is to be appointed by _________
(a) Shareholders
(b) Members
(c) Board of Directors
(d) CA
Answer:
(c) Board of Directors
The Board of Directors of a company shall appoint an individual or firm as the first auditor of a company, other than a Government company, within thirty days from the date of registration of the company. In the case of failure of the Board to appoint the first auditor, it shall inform the members of the company, who shall within ninety days at an extraordinary general meeting appoint such auditor and such auditor shall hold office till the conclusion of the first annual general meeting.

90. When auditor does not have any reservation, objective regarding the information under audit, then he gives-
(a) Unqualified opinion
(b) Negative opinion
(c) Positive opinion
(d) Qualified opinion
Answer:
(a) Unqualified opinion
An unqualified opinion is expressed when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the financial statements. An unqualified opinion indicates, implicitly, that any changes in the accounting principles or in the method of their application, and the effects thereof, have been properly determined and disclosed in the financial statements. Thus option A is correct.

91. The client changed method of depreciation from straight line to written down value method. This has been disclosed as a note to the financial statements. It has an immaterial effect on the current financial statements. It is expected, however, that the change will have a significant effect on future periods. Which of the following option should the auditor express?
(a) Adverse opinion.
(b) Disclaimer of opinion
(c) Qualified opinion
(d) Unqualified opinion
Answer:
(c) Qualified opinion
(c) In a situation where neither the unqualified, nor adverse opinion is appropriate, the auditor gives the qualified opinion. This is a situation where the auditor has some reservation about the financial statements which though significant but not that significant so as to ₹ warrant adverse opinion and auditor agrees to a large extent with the true & fair view of the financial statement that he gives a qualified opinion. In the given case, there is a change in accounting principle or , account of change in method of depreciation which the company has disclosed as notes in the financial statements. Moreover, it has an immaterial effect on the current year’s financial statements. Thus, the auditor will issue a qualified opinion.

92. Which of the following may be appointed as the first auditor of company₹ (I) A Chartered Accountant in practice (II) A firm of Chartered Accountants in practice (III) A Limited Liability Partnership of Chartered Accountants in practice. The options are:
(a) I, II and III
(b) II and III
(c) I and III
(d) I and II
Answer:
(a) I, II and III
Following may be appointed as auditor:
(a) A Chartered Accountant in practice
(b) A Firm of Chartered Accountant in practice
(c) An LLP of Chartered Accountant in practice

93. In the course of audit, the auditor observed that loans and advances made by the company have been shown as deposits. The auditor will:
(a) State this in his audit report
(b) Report it to Central Government
(c) Not state this in his report
(d) Report it to SEBI
Answer:
(a) State this in his audit report
Auditor shall state all the relevant matter in this report and he should also state this matter in his report.

94. Which of the following is not disqualified for appointment as auditor of a company₹
(a) A limited liability partnership firm.
(b) A person whose relative is a director in the company.
(c) An employee of the company.
(d) A Body corporate other than LLP.
Answer:
(a) A limited liability partnership firm.
As per Companies Act, 2013 an LLP of Chartered Accountant in practice shall not be disqualified for being appointed as auditor.

95. Disclaimer of Opinion means:
(a) The auditor gives clean report
(b) The auditor gives qualified report
(c) The auditor is unable to express his opinion
(d) The auditor gives adverse report.
Answer:
(c) The auditor is unable to express his opinion
Disclaimer of Opinion mean the auditor is unable to form an opinion.

96. Which of the following are the rights of a statutory auditor (X) To receive remuneration (Y) To attend Board of Directors meeting (Z) To attend the general meeting (W) To visit the branch office. The correct option is:
(a) X, Y and Z
(b) X, Z and W
(c) XandY
(d) X, Y, Z and W
Answer:
(b) X, Z and W
Rights of Statutory Auditor:
(a) To receive Remuneration
(b) To attend General Meeting either by himself or by proxy
(c) To visit branch office.

97. The board of directors shall appoint first auditor of a company:
(a) within one month of completion of capital subscription by the company .
(b) within one month of the promotion of the company
(c) within one month of the commencement of the business of the company
(d) within one month of incorporation of the company
Answer:
(d) within one month of incorporation of the company
Board of Directors shall appoint as first auditor of the company within 30 days or one month after the registration of company. The first auditor shall be ratified by company at the first annual general meeting. Board of Directors shall be appointed as first auditor in Government Companies within 60 days after registration of company.

98. The client changed method of depreciation from straight line to written down value method. This has been disclosed as a note to the financial statements. It has an immaterial effect on the current financial statements. It is expected, however, that the change will have a significant effect on future periods. Which of the following option should the auditor express?
(a) Unqualified opinion
(b) Qualified opinion
(c) Disclaimer of opinion
(d) Adverse opinion
Answer:
(b) Qualified opinion
Qualified opinion is an opinion which is given by the auditor to show the audit report clean if audit report of firm is not clean. In this question, if is not clear that what effect has been drawn after changing depreciation method from straight line to written down value method. So, Auditor give qualified opinion to show that audit report is clean.

99. If a casual vacancy in the office of Auditor arises by his resignation, it should only be filled by the company in a:
(a) Board meeting
(b) General meeting
(c) Annual general meeting
(d) Statutory meeting
Answer:
(b) General meeting
If there is a vacancy arises of auditor by his resignation then it is only filled by company in a General Meeting to appoint new auditor or old auditor by solving his problem with company.

100. Duties of auditor are given in :
(a) Section 144
(b) Section 146
(c) Section 143
(d) Section 139
Answer:
(c) Section 143
(c) The Auditor of an organisation may also have specific statutory dulies and powers under the act governing suck organisation. In case of a company Auditor, its duties and powers are defined under Companies Act, 2013 under Section 143.

101. An auditor expresses when he has no reservations
(a) Unqualified opinion
(b) Disclaimer of opinion
(c) Adverse opinion
(d) Can’t say
Answer:
(a) Unqualified opinion
If an auditor expressed that every estimates and matter disclosed in audit report is adequate and in accordance to financial reporting framework; it is unqualified opinion. Hence, option (a) is correct

102. Who is not qualified for doing Audit (financial).
(a) Practicing Chartered Accountant
(b) Practicing Company Secretary
(c) Practicing Cost Accountant
(d) (b) and (c) both.
Answer:
(d) (b) and (c) both.
Disqualification of an Auditor: Except of Practicing Chartered Account and in case of LLP as auditor an audit is done by a Chartered Accountant of a firm; every person is disqualified for Audit (financial). Thus, option (d) is correct.

103. For which companies it is compulsory to do secretarial audit?
(a) Every listed company
(b) Every public company having a paid-up capital of ₹ 50 cr. or more
(c) Private company which is a subsidiary of a public company
(d) All of the above.
Answer:
(d) All of the above.
Mandatory Secretarial Audit:
(i) Every listed company
(ii) Every Public listed company, having paid up capital of ₹ 50 crore or more
(iii) Every Private company is a subsidiary of a public company etc. Thus, option (d) is correct.

104. An Auditor is a:
(a) A practicing Company Secretary
(b) A practicing Chartered Accountant
(c) A Cost and Management Accountant
(d) None of these
Answer:
(b) A practicing Chartered Accountant
An Auditor is a Practicing Chartered Accountant. Option (b) is correct.

105. Who will be member of IBC 2016 as a Insolvency resolution professional?
(a) Practicing Company Secretary
(b) Practicing Chartered Accountant .
(c) Practicing Cost and Management Accountant
(d) All of the above.
Answer:
(d) All of the above.
The member of insolvency resolution professional are :
(i) Practicing Company Secretary
(ii) Practicing Chartered Accountant
(iii) Practicing Cost and Management Accountant

106. Statutory audit report of a company is addressed to:
(a) Board of Directors
(b) Ministry of Corporate Affairs
(c) Employees of the company
(d) Members of the company
Answer:
(d) Members of the company
(d) Statutory audit report of a company is addressed to the members of the Company.

107. The form and basic contents of statutory audit report are:
(a) Provided in the Companies Act, 2013
(b) Provided in the Chartered Accountants Act, 1949
(c) Provided in the Code of Civil Procedure, 1908
(d) Not provided any where
Answer:
(a) Provided in the Companies Act, 2013
The format and basic contentb of statutory audit report are contained in Companies Act, 2013.

108. Which of the following is necessarily to be included in an auditor’s report:
(a) Whether the company has followed best HR practices in recruitment of employees
(b) Whether fhe company is an equal opportunities employer
(c) Whether the company has taken any loan from its directors
(d) Whether any director is disqualified from being appointed under Section 164g Companies Act, 2013.
Answer:
(d) Whether any director is disqualified from being appointed under Section 164g Companies Act, 2013.
The fact whether any director is disqualified from appointment u/s 164g of Companies Act, 2013 should necessarily be mentioned in auditor report.

109. ‘Disclaimer of Opinion’ means:
(a) The auditor gives clean report
(b) The auditor gives qualified report
(c) The auditor gives adverse report
(d) The auditor is unable to expresses his opinion.
Answer:
(d) The auditor is unable to expresses his opinion.
A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient appropriate evidence and is therefore, unable to express an opinion on financial Statements.

110. The controller and Auditor General of India in respect of _________ shall appoint an auditor within a period of _________
(a) Calendar year, 180 days
(b) Financial year, 180 days
(c) Financial year, 182 days
(d) Calendar year, 90 days
Answer:
(b) Financial year, 180 days
In the case of Subsequent Auditor of Government Companies, the Comptroller and Auditor General of India in respect of a financial year shall appoint an auditor within a period of 180 days from the commencement of the financial year.
Hence option ‘c’ is correct.

111. The Comptroller and Auditor-General of India shall appoint the first auditor of the Government Company within _________ from the date of registration of the company.
(a) sixty days
(b) sixty weeks
(c) six months
(d) six days
Answer:
(a) sixty days
The Comptroller and Auditor-General of India shall appoint the first auditor of the Government Company within sixty days from the date of registration of the company.

112. Is it the duty of auditor whether personal expenses have been charged to revenue account.
(a) False
(b) True
(c) Can’t say
(d) Partly True and Partly False
Answer:
(b) True
According to section 143(1), powers and duties of auditors, it is the duity of the auditor to see wheather the personal expenses have been charged to revenue accounts.
Hence option ‘b’ is correct.

113. As per Companies Act, 2013 matters to be included in auditor’s report
(a) Fixed and Non Fixed Assets
(b) Fixed Assets
(c) Both (a) and (b)
(d) None of those
Answer:
(c) Both (a) and (b)
According to section 143(2) the auditor’s power Report also includes.
(i) Fixed assets
(ii) Inventory
(iii) Granting of loans to certain parties
(iv) Internal control system etc.

114. The secretarial auditor shall submit his report in _________ form
(a) MR-3
(b) MR-2
(c) MR-1
(d) None of above
Answer:
(a) MR-3
The board is required to provide explanation in the Board’s report to every qualification, observation or other adverse remark made by company secretary in his report. The Secretarial Auditors will submit his report in Form MR-3.

115. Which of the following is (are) case of casual vacancy
(i) Resignation due to family issues
(ii) Any disqualification as per sec. 141 (3)
(iii) Any quarrels with management
(iv) Any issue regarding remuneration
(a) Only I
(b) II & III
(c) II,III,IV
(d) I, II, III,
Answer:
(c) II,III,IV
Causal vacancy of the auditor means a vacancy caused due to death, disqualification as per section 141(3), resignation of an auditor only.

Types of Auditing – CS Foundation Fundamentals of Auditing Notes

Go through this Types of Auditing – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Audit:

  1. Financial Audit, Secretarial Audit, Cost Audit, Tax Audit, Bank Audit, Govt. Audit, Audit of Co-operative Society, Trust, Insurance, Partnership Firm, management and etc.
  2. In new Companies Act, 2013 attempt has been made to cover each aspect of corporate functioning under audit by prescribing various types of audit like internal and secretarial audit.
  3. Traditionally auditing was limited to finance audit and internal audit.
  4. Over the years, many other fields of auditing have been evolved.

Types of Audit depends upon various factors:

  1. Nature of work undertaken
  2. approach used for conducting Audit
  3. organization structure
  4. legal requirement etc.

Categories of Audits:

  1. Audit required by law.
  2. Voluntary audit.

Audit required by Law:
Audits which have been made mandatory by a statute comes under the category of audit required by law.
Example – Audit of companies, banking companies, co-operative societies, trusts etc.

Voluntary Audit:
When there is no statutory obligation to conduct audit, still the audit is carried out, it is known as voluntary audit. The main purpose of this type of audit is to keep a check on the accounting records or other areas.
Example – Audit of sole proprietorship concern, audit of partnership firm etc.

Types of Audit:
Based on the scope and area of work, audits can be of the following types:

  1. Internal audit.
  2. Financial audit.
  3. Secretarial audit.
  4. Cost audit
  5. Tax audit.
  6. Bank audit.
  7. Co-operative societies audit.
  8. Trust audit.
  9. Insurance audit.
  10. Partnership audit.
  11. Sole proprietorship audit.
  12. Government audit.
  13. Management audit.
  14. Functional audit.
  15. Proprietary audit.
  16. Efficiency audit.

Internal Audit:

  • Section 138 of the Companies Act, 2013 contains provision regarding internal Audit.
  • As per Companies Act, 2013 certain class or classes of company as may be prescribed shall appoint an internal auditor.
  • Walter B. Meigs, “Internal auditing consist of a continuous critical reviews of financial and operating activities by a staff of auditors functioning as full time salaried employees.”
  • It refers to the analysis and evaluation of business operations done by the staff and employees.
    it is a type of control which functions by measuring and evaluating the effectiveness of other types of control.
  • Internai auditor is appointed by the management.
  • It is a continuous process and carried out throughout the year.
  • It is not mandatory but is recommended for evaluating the effectiveness of internal control, soundness of financial system, etc.
  • Internal audit report has no such prescribed format and the report is submitted to the management.

Scope of audit is defined by the management –
(a) Every listed company

(b) Every unlisted company having

  • Paid up share capital ₹ 50 crore or more.
  • Turnover ₹ 200 crore or more.
  • Outstanding Loan or borrowings from banks or Public financial institutions exceeding ₹ 100 crore or more at any, point of time during the preceding financial year.
  • Outstanding deposit ₹ 25 crore or more.

(c) Every Private Company

  • Turnover ₹ 200 crore or more
  • Outstanding Loan, borrowing etc. exceeding ₹ 100 crore or more at any point of time during the preceding financial year.

Objectives:

  1. Exercising proper control over business activities so as to ensure maximum efficiency.
  2. Evaluation of accounting system and checking proper authority for transactions.
  3. Helps the management in removing weaknesses of the organisation.
  4. Review the working of the business.
  5. Protection of assets.
  6. Evaluation of internal check system.
  7. Detection of errors in accounting records.
  8. Determination of liability of employees.
  9. Helping the external auditor.
  10. Checking performance appraisals.
  11. Providing suggestions to the management for improvement of system.
  12. Proper use of resources.
  13. To ensure that proper accounting policies have been followed.
  14. Seek new ideas
  15. Detect Fraud

Internal Check:
These are the checks on day-to-day transactions which operate continuously as part of routine system whereby the work of one person is checked by another.

Benefits:

  1. Proper accounting system is achieved.
  2. It facilitate better management by proper internal control, internal check and internal audit.
  3. Reviewing the progress of business concern.
  4. Exercising effective control over business activities.
  5. Preventing occurrence of errors/frauds.
  6. Safeguarding assets.
  7. It helps to apply division of labour.
  8. It helps to establish the performance standards/ fixing responsibility.
  9. It helps the external auditor.
  10. Enables proper use of resources.
  11. Improves performance of business and employees.
  12. Helpful to investigate into the business matters at the request of management or owner.

Limitations:

  1. Shortage of audit staff.
  2. There is a time gap between recording and checking entries because auditing can start only after accounting ends.
  3. Some errors may remain undetected.
  4. Management may not be responsive to the auditors.
  5. If the duties are not properly divided among the audit staff, benefits of internal audit cannot be attained.

Nutshell:
Audit of the internal control system established by the management is known as the internal audit.

Financial Audit:

  1. Statutory audit is also called financial audit.
  2. Financial audit refers to the audit of financial statements.
  3. Need for financial Audit arises as control is vested in hands of management and financial statement are prepared by the management.
  4. It is done to ensure that the financial statements depicts a true and fair picture.
  5. An independent auditor (external auditor) is appointed to conduct the audit.
  6. Audited financial statements are more reliable.
  7. Section 139(1) of the Companies Act, 2013 contains provisions regarding the appointment of the auditor.
  8. Sections 139 to 147 under chapter X of the Companies Act, 2013 contains provisions regarding statutory audit and auditors.

Secretarial Audit:
A Company Secretary in Practice has been assigned the role of Secretarial Audit under Section 2(2) (c) (v) of the CS Act, 1980.

  1. It is also known as compliance audit.
  2. Helps to detect non-compliance and to take corrective measures.
  3. This is done to ensure that all legal and other compliance’s have been adhered to by the company.
  4. Secretarial audit is an effective tool for corporate compliance management.
  5. This type of audit is performed by practicing company secretaries.
  6. Secretarial audit helps a company to strengthen its compliance mechanism.
  7. It is generally carried out periodically (quarterly/half yearly).
  8. Section 204 of Companies Act, 2013 provides that every listed company and a company belonging to other class shall annex with its Board’s Report, a Secretarial Audit Report given by practicing CS.

As per Rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, other class of companies for the purpose of Section 204 of the Companies Act, 2013 include:

  • Every public company having a paid-up share capital of fifty crore rupees or more; or
  • Every public company having a turnover of two hundred fifty crore rupees or more; or

The secretarial auditor will submit his report in form MR – 3.

Cost Audit:
The “Institute of Cost Accountants of India” defines Cost audit as “a system
of audit introduced by the Government of India for the review, examination and appraisal of cost accounting records and attendant information, required to be maintained by specified industries.” According to CIMA, London, cost audit is “the verification of the correctness of cost accounts and of adherence to the Cost Accounting plan.”

  • Cost audit refers to the audit of costing records of an entity.
  • It is an audit introduced by the Government of India for review, examination and appraisal of cost accounting records.
  • Section 148 of Companies Act, 2013 contains separate provisions on cost audit.
  • Central Government may direct, by an order to the prescribed class of companies to maintain the cost records.
  • Section 148 of the Act contains provisions regarding cost audit and contains that a cost audit wherever conducted is in addition to statutory audit conducted under Section 143.
  • Central Government by order, may direct for the audit of cost records of class of companies having net worth or turnover of such amount as may be prescribed.
  • It shall be conducted by a cost accountant in practice who shall be appointed by the board within 180 days from commencement of every financial year.
  • Person appointed under Section 139 as an auditor of a company i.e. a financial auditor shall not be appointed as a cost auditor of the same company.
  • Such audit shall be in addition to the audit conducted under Section 143 i.e. statutory or Financial Audit.
    Cost audit report shall be submitted by the cost accountant to the board of directors of the company within 180 days from close of financial year.
  • Company shall within 30 days from the date of receipt of the copy of the cost audit report furnish CG such report with full information and explanation.
  • CG can call for further information or explanation from the company if necessary.
    Cost records include: Cost accounts, cost reports, cost statements, cost data, cost techniques etc.

Cost Audit is mandatory for:

Industry Criteria
1. Bulk drugs
2. Formulations
3. Fertilizers
4. Sugar
5. Industrial alcohol
6. Electricity
7. Petroleum
8. Telecommunications
During immediate previous F.Y.
(a) Aggregate value of net worth exceeding ₹ 5 crores OR
(b) Aggregate value of turnover exceeding ₹ 20 crores OR
(c) Company’s equity or debt securities are listed or are in the process of getting listed whether in India or outside India.
1. Cement
2. Tyre and tube
3. Steel Plant
4. Steel tubes and pipes
5. Paper or insecticides
During immediately preceding F.Y.
(a) Aggregate value of turnover exceeds ₹ 100 crores.

The Cost Auditor has:

  • To see whether the planned expenditure is designed to give optimum results.
  • To see whether size and channels of expenditure were designed to produce best results.
  • Whether return from expenditure on capital and current operations can be improved.

Benefits of Cost Audit:

  • It ensures that cost control and cost reduction techniques are followed.
  • It ensures efficient utilisation of scarce resources.
  • It ensures that proper cost records are maintained.
  • It also ensures that the units has been running economically and efficiently.

Tax Audit:

  • Audit of accounts required under the Income Tax Act, 1961 Section 44AB is known as Tax Audit.
  • It is done to assist the income tax authorities in assessing correctly the income tax of assessees.

Such audit is mandatory for the following persons:

(a) For person carrying on profession. If gross receipts exceeds ₹ 50,00,000 in the previous year.
(b) For person carrying on a business. If turnover exceeds ₹ 1,00,00,000 in the previous year.

Bank Audit:
Audit performed for monitoring and regulating the activities of a bank is known as Bank Audit.

The Auditor has to:

  • Ensure that financial statements show a true and fair view.
  • Adequate provisions for non performing assets/ Bad Debts have been made in the books.
  • All expenses/incomes have been duly accounted for.
  • Profit is correctly worked out.

The audit of banks is governed by the Banking Regulation Act, 1949.

Audit of Co-operative Societies:

  • A co-operative society is an association where in some people work together in order to achieve a common economic objective.
  • Here capital is contributed by all the members where as society is managed by some’elected people.
  • Due to separation of ownership and management, audit is required by law.
  • The affairs of co-operative societies are often managed by persons with no managerial, technical or accounting skills. Thus, an independent financial auditor is required to report on these aspects also.

Audit of Trust:

  • A trust is a relationship created at the direction of an individual, in which one or more persons hold the individual’s property subject to certain duties to use it and protect it for benefit of others.
  • Audit of trust ensures the reliability of financial statements to those for whose benefit the trust is created.
  • Trusts are required to be audited under the provisions of Income Tax Act, 1961.

Audit of Insurance:

  • Audit of insurance/insurance audit involves examination of the operations, records and books of account of the insurance company.
  • Audit of insurance companies is governed under Insurance Regulatory and Development Act, 1999.
  • Auditor has to see customers have paid the appropriate premium for risk cover provided to him.

Audit of Partnership Firms
1. Audit of books and accounts of partnership firm is called as partnership firm audit.

2. This audit is not mandatory, under Partnership Act, 1932.

3. These firms are required to get their accounts audited under the provisions of Income Tax Act, 1961, but on satisfying the prescribed criterion.

4. Benefits of partnership firm audit:

  • Helps in proper valuation of goodwill.
  • Distribution of share of deceased partner.
  • Enables easy availability of loans.

5. This audit is carried as per the terms of partnership deed and Partnership Act.

Sole Proprietorship Audit:

  • It refers to the audit of books and accounts of sole proprietorship concern.
  • It is not mandatory.
  • But on satisfying the prescribed criterion they can get their accounts audited under Income Tax Act, 1961.

Benefits:

  • Ensures proper maintenance of books and accounts by the accountant.
  • Prevention and detection of errors/frauds.
  • Audited Books are relied well by banks, statutory authorities etc.

Government Audit:

  • Auditing of government departments and companies is called as government audit.
  • It is conducted by the Comptroller and Auditor General of India (C & AG).
  • It ensures that the transactions of government are properly executed, books are properly maintained, income/expenditure are correctly recorded, etc.
  • C & AG shall be appointed by the President and can be removed from office on the like grounds as a judge of supreme court.
  • The audit report relating to the accounts of UG & SG should be submitted by C & AG to the president or governor of the state.
  • The first auditor of the government company shall be appointed by C & AG within 60 days from the date of incorporation. And in case of failure, the board shall appoint the auditor in next 30 days.
  • Subsequent auditor shall be appointed by C & AG within 180 days from the commencement of the financial year.
  • C&AG also audits Government Companies under the provision of Companies Act, 2013 and other legislature.

Management Audit:

  • It has been originated from America.
  • It is a future oriented task, which evaluates the activities of all departments to provide proper suggestions to the management to help their work.
  • It helps in attaining organisational goals, refers to existence of control system, compliance of rules & regulations, process of managerial decisions etc.
  • It refers to the audit of a company’s management.
  • It checks the effectiveness of an organisation’s systems and procedures.
  • Management audit is also known as operational audit.
  • It is not mandatory but recommendatory certainly.

Management audit involves:

  • Establishing performance objectives.
  • Setting standards and criteria for assessment.
  • Evaluating actual performance against targeted ones.

Functions of Management Audit:

  • It identifies objectives of organisation and allocates overall objectives in small parts.
  • It reviews structure of organisation and asset and decides whether goals can be obtained or not.
  • It examines all scope of work and liability centre.
  • It provides valuable suggestions to management after evaluation.

Functional Audit:

  • Checking of the system, processing, input/output of a function is referred as a functional audit.
  • It is carried out to evaluate the effectiveness of department processes.
  • It helps to fill the gaps which creates a difference between targeted performance and actual performance.

Propriety Audit:
1. Kohler defined proprietary audit as that which meets the test of public interest, commonly accepted customs and standards of conduct and particularly as applied to professional performance, requirements of Govt, regulations and professional codes.

2. It mean to check that the transactions have been done in conformity with established rules, principles etc.
It means verification of following:

  • Proper recording has been done in appropriate books of accounts.
  • The assets have not been misused & properly safeguarded.
  • The business funds have been properly utilized.
  • The concern is yielding the expected results.
  • There may be cases where an expenditure is done in conformity with laws and rules, still either the expenditure was improper or was not required to be made.
  • To keep a check on such expenditures, propriety audit is done.
  • it is an important form of management audit.
  • This audit is done in respect of Government Companies and Government departments because public money and public interest are involved in it.

Efficiency Audit:

  • It is carried out to ascertain the efficiency of a process/system.
  • It is also known as performance audit.
  • A performance audit can be in the form of review of a program to assure that it is satisfying its objectives.
  • It may be initiated by the organisation or any outside interested party.
  • It enables the management or owner to know whether the departments and agencies are managing resources with due regard and efficiency.
  • It also helps the department and agencies to identify opportunities to provide more or better services at the same or lower cost.

Inputs are resources used to produce outputs. Outputs are goods and services produced to meet client needs. It is defined in terms of quantity and quality. Quantity refers to amount, volume or number of outputs produced. Quality refers to amount, volume or number of outputs produced. Productivity is the ratio of the amount of acceptable goods and services produced to amount of resources used to produced them.

It is measured by comparing achieved productivity with desired norm, target or standard.

Types of Auditing MCQ Questions

1. In earlier times, auditing was limited to:
(a) Finance Audit
(b) Internal Audit
(c) Cost Audit
(d) Both (a) and (b).
Answer:
(a) Finance Audit

2. Audit of a Partnership firm Is a:
(a) Audit required by law
(b) Audit by agreement
(c) Voluntary audit
(d) Audit required by owners.
Answer:
(c) Voluntary audit

3. Audit of Trust is governed under:
(a) Indian Trust Act
(b) Income Tax Act
(c) Miscellaneous Act
(d) None of these.
Answer:
(b) Income Tax Act

4. Audit of the internal control system established by the management is known as __________.
(a) Internal Audit
(b) Management Audit
(c) Operational Audit
(d) Propriety Audit.
Answer:
(a) Internal Audit

5. Scope of Internal Audit is defined by:
(a) Statute
(b) Owner
(c) Shareholders
(d) Management.
Answer:
(d) Management.

6. Secretarial audit is also known as __________ .
(a) Propriety Audit
(b) Compliance Audit
(c) Operational Audit
(d) Procedural Audit.
Answer:
(b) Compliance Audit

7. Secretarial audit is conducted by:
(a) Practicing Chartered Accountant
(b) Practicing Company Secretary
(c) Any Company Secretary
(d) Cost and Works Accountant
Answer:
(b) Practicing Company Secretary

8. Cost records include:
(a) Cost accounts
(b) Cost statements
(c) Cost reports
(d) All of these
Answer:
(d) All of these

9. Cost audit is mandatory for every manufacturing industry. This statement is __________.
(a) True
(b) False
(c) Partly true
(d) None
Answer:
(b) False

10. Tax audit is mandatory for a person carrying on a profession, if its gross receipts in the previous year exceeded __________.
(a) ₹ 1,00,00,000
(b) ₹ 25,00,000
(c) ₹ 15,00,000
(d) ₹ 50,00,000
Answer:
(d) ₹ 50,00,000

11. Which of these is not an objective of carrying out a bank audit?
(a) To ensure financial statements show true and fair view.
(b) To ensure adequate provisions are made.
(c) To ensure profit is correctly worked out.
(d) To check the reasons for losses in the bank.
Answer:
(d) To check the reasons for losses in the bank.

12. Audit of Insurance Companies is governed by:
(a) Companies Act
(b) Income Tax Act
(c) Insurance Regulatory Development Act
(d) Miscellaneous Acts.
Answer:
(c) Insurance Regulatory Development Act

13. Audit of a proprietorship concern is also known as __________.
(a) Sole Proprietorship Audit
(b) Propriety Audit .
(c) Operational Audit
(d) Financial Audit.
Answer:
(a) Sole Proprietorship Audit

14. Government audit is conducted by:
(a) Practicing Chartered Accountant
(b) Practicing Company Secretary
(c) An expert
(d) Comptroller and Auditor General of India.
Answer:
(d) Comptroller and Auditor General of India.

15. Operational audit is the other name of:
(a) Management Audit
(b) Functional Audit
(c) Efficiency Audit
(d) None
Answer:
(a) Management Audit

16. Management audit is __________.
(a) Voluntary
(b) Mandatory
(c) Required by law
(d) None of these
Answer:
(a) Voluntary

17. Performance audit is the other name of:
(a) Operational Audit
(b) Functional Audit
(c) Efficiency Audit
(d) Propriety Audit.
Answer:
(c) Efficiency Audit

18. Which type of audit is conducted by Internal Audit Staff?
(a) Cost Audit
(b) Functional Audit
(c) Internal Audit
(d) Efficiency Audit.
Answer:
(c) Internal Audit

19. For a sugar manufacturing company, having a net worth of ₹ 4.5 crores, cost audit is __________.
(a) Mandatory
(b) Voluntary
(c) Required by Government
(d) None
Answer:
(b) Voluntary

20. Audit of Co-operative Societies is a __________.
(a) Voluntary Audit
(b) Audit Government
(c) Audit Required under Law
(d) None of these
Answer:
(c) Audit Required under Law

21. Progressive Review is __________ of Internal audit.
(a) Limitation
(b) Benefit
(c) both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(b) Benefit

22. A Company Secretary in practice has been assigned role of secretarial auditor under.
(a) Section 2(2)(c)(iv)
(b) Section 2(2)(d)(v)
(c) Section 2(2)(d)(iv)
(d) Section 2(2)(c)(v)
Answer:
(d) Section 2(2)(c)(v)

23. __________ is useful for purpose of cost control, cost reduction and proper utilization of resources.
(a) Bank audit
(b) Cost audit
(c) Tax audit
(d) Efficiency audit
Answer:
(b) Cost audit

24. __________ audit helps the management in finding out the inefficiencies in system.
(a) Efficiency
(b) Functional
(c) Propriety
(d) Management
Answer:
(a) Efficiency

25. Secretarial audit is voluntary for companies which are not covered under section 204.
(a) True
(b) Partly true
(c) Partly false
(d) False
Answer:
(a) True

26. Operational audit is also known as __________.
(a) Management audit
(b) Functional audit
(c) Propriety audit
(d) Efficiency audit
Answer:
(a) Management audit

27. “Secretarial audit can be performed by Practising Company Secretary.”
(a) True
(b) False
(c) Partly True
(d) Partly false
Answer:
(b) False

28. Who appoints internal auditor?
(a) Shareholder
(b) Management
(c) Government
(d) All of above
Answer:
(b) Management

29. Auditor has to obtain __________ audit evidence.
(a) Correct
(b) Sufficient and appropriate
(c) Adequate
(d) Useful
Answer:
(b) Sufficient and appropriate

30. Government audit is conducted by __________.
(a) Central Government
(b) Bank
(c) C & AG
(d) Board of Directors
Answer:
(c) C & AG

31. What are the factors affecting types of audit?
(a) Nature of work undertaken
(b) Approach used for conducting audit
(c) Organisation structure
(d) All of these
Answer:
(d) All of these

32. What are the categories of audit?
(a) Audit required under law
(b) Voluntary audit
(c) None
(d) both (a) and (b)
Answer:
(d) both (a) and (b)

33. Voluntary audit includes the following types of Organisation __________.
(a) Audit of partnership firm
(b) Sole proprietorship
(c) Hindu undivided families
(d) All of these
Answer:
(d) All of these

34. Organisations gets Internal audit with a view to evaluate __________.
(a) Effectiveness of internal control
(b) Soundness of financial system
(c) Effectiveness of business processes
(d) All of the above
Answer:
(d) All of the above

35. Objectives of audit __________.
(a) Working review
(b) Determine liabilities
(c) Special investigation
(d) All of these
Answer:
(d) All of these

36. Advantage of Internal Audit __________.
(a) Liabilities Protection
(b) Performance Improvement
(c) Ineffective Control
(d) All of the above
Answer:
(b) Performance Improvement

37. Users of financial statement are __________.
(a) Trade Creditor
(b) Labour Union
(c) Both (a) and (b)
(d) None of these
Answer:
(c) Both (a) and (b)

38. According to Section 139(1) of Company Act, Auditor can be appointed by __________.
(a) Shareholder
(b) Board of Directors
(c) In General Meeting
(d) None of these
Answer:
(a) Shareholder

39. Which of the following is NOT an objective of internal audit?
(a) To ensure effective control,
(b) To protect the organisations assets
(c) To help the external auditor
(d) To give an opinion on the true & fair view of the financial statements.
Answer:
(d) To give an opinion on the true & fair view of the financial statements.

40. Internal audit is __________.
(a) Beneficiary
(b) Mandatory
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(a) Beneficiary

41. The provisions relating to the appointment of auditor are contained in which section of the Companies Act, 2013?
(a) Sec. 141(1)
(b) Sec. 141(2)
(c) Sec. 139(1)
(d) Sec. 139(2)
Answer:
(c) Sec. 139(1)

42. The audit conducted to check the performance of a system or a process is called __________.
(a) Functional audit
(b) Propriety audit
(c) Management audit
(d) Efficiency audit.
Answer:
(d) Efficiency audit.

43. The objective of compliance management system is __________.
(a) To protect the interest of all stakeholders
(b) To avoid any legal action against the company and its management
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(c) Both (a) and (b)

44. Income Tax Audit is mandatory for professionals if the gross receipts exceeds __________.
(a) ₹ 10,00,000
(b) ₹ 25,00,000
(c) ₹ 60,00,000
(d) ₹ 50,00,000
Answer:
(d) ₹ 50,00,000

45. NPA stands for.
(a) Net Performing Audit
(b) Notional Performance Audit
(c) Non Performing Auditor
(d) Non Performing Assets
Answer:
(d) Non Performing Assets

46. The provisions relating to audit & accounts of Banks are contained in __________.
(a) Bank Audit Act, 1949
(b) Companies Act, 2013
(c) Banking Regulation Act, 1949
(d) None of the above.
Answer:
(c) Banking Regulation Act, 1949

47. The audit of partnership is carried out as per the __________.
(a) Partnership deed
(b) Partnership Act.
(c) Both (a) & (b)
(d) Neither (a) nor'(b)
Answer:
(a) Partnership deed

48. The audit of receipts and expenditure of the union and state government is done by __________.
(a) Comptroller and Auditor General of India
(b) A Chartered Accountant
(c) Registrar
(d) Ministry of Corporate Affairs.
Answer:
(a) Comptroller and Auditor General of India

49. The audit which is carried so as to evaluate the effectiveness of the department process and for finding gaps in the desired and actual output is called __________.
(a) Propriety audit
(b) Functional audit
(c) Management audit
(d) Efficiency audit
Answer:
(b) Functional audit

50. The audit which is conducted to check unavoidable expenses is termed as __________.
(a) Functional audit
(b) Propriety audit
(c) Management audit
(d) None of the above
Answer:
(b) Propriety audit

51. Statutory audit is to be done by:
(a) A practicing Chartered Accountant or a firm of practicing Chartered Accountants
(b) A practicing Company Secretary or a firm of practicing Company Secretaries.
(c) A practicing Cost Accountant or a firm of practicing Cost Accountants
(d) None of the above
Answer:
(a) A practicing Chartered Accountant or a firm of practicing Chartered Accountants
A practicing Chartered Accountant or a firm of practicing Chartered Accountants Statutory Audit or Financial Audit refers to the audit of financial statements to depict a true and fair picture. An independent auditor (external auditor) is appointed to conduct the audit.
Thus a practicing CA or a firm of practicing CAs are appointed to conduct a statutory audit.

52. Balance sheet audit includes verification of:
(a) Assets
(b) Liabilities
(c) Income accounts and expenses accounts wherever appropriate
(d) All of the above
Answer:
(d) All of the above
Balance Sheet audit involves the verification of all the balance sheet items which involves both assets and liabilities as well as verification of income and expenses accounts whenever required.
Thus, a company having internal audit system in place statutory audit is mandatory.

53. The audit conducted by Comptroller and Auditor General of India is a form of:
(a) Bank Audit
(b) Financial Audit
(c) Routine Audit
(d) Government Audit
Answer:
(d) Government Audit
Government Audit aims to ensure that the financial transactions of the government are executed properly. It is the duty of comptroller and Auditor General of India (C & AG) to audit the receipts and expenditure of the union and State Governments.
Thus, audit conducted by the C & AG is a form of Government Audit

54. __________ is useful for the purpose of cost control, cost reduction and proper utilization of scarce resources:
(a) Financial Audit
(b) Cost Audit
(c) Secretarial Audit
(d) Tax Audit
Answer:
(b) Cost Audit
Cost Audit refers to the audit of costing records of an entity. Costing records includes cost accounts, cost reports, cost statements, cost data, cost techniques etc.
Thus, cost audit is useful for the purpose of cost control, cost reduction and proper utilisation of scarce resources.

55. Who can order management audit?
(a) Workers of a company
(b) Central Government
(c) Board of Directors
(d) Securities and Exchange Board of India
Answer:
(c) Board of Directors
Management audit is a structured review of the systems and procedures of an organisation in order to evaluate whether they are being conducted efficiently and effectively. Thus, the Board of Directors in whose hands the management of the company rests can order the management audit.

56. Cost Audit is:
(a) Mandatory for all companies
(b) Mandatory for manufacturing companies covered by Cost Audit Report Order
(c) Mandatory for all trading companies
(d) Mandatory for all manufacturing companies
Answer:
(b) Mandatory for manufacturing companies covered by Cost Audit Report Order Ministry of corporate affairs has issued mandatory cost audit orders on companies engaged in bulk drugs, fertilisation, sugar telecommunication, industrial alcohol and electricity & petroleum and if in immediate previous year aggregate value of net worth exceeds the specified limits.
Thus, cost audit is mandatory for manufacturing companies covered by cost audit report order.

57. Statutory audit of a company is:
(a) Mandatory
(b) Voluntary
(c) Recommendatory
(d) Voluntary but recommendatory
Answer:
(a) Mandatory
Statutory audit is conducted to ascertain whether the financial statements presents a true and fair view of the financial position. The need for statutory audit arises because of the separation of ownership and management of the company. Shareholders need to be assured that the financial statements prepared by the management are reliable. Thus, statutory audit is mandatory for companies.

58. Who appoints an internal auditor?
(a) Shareholders of the company
(b) Statutory auditor
(c) Institute of the Internal auditors of India
(d) Board of Director of the company
Answer:
(d) Board of Director of the company
Internal audit is an evaluation and analysis of the business operation conducted by the internal audit staff who are appointed by the Board of Directors of the company.

59. Ram is a chartered accountant working as proprietor. His gross receipts are ₹ 51 Lakhs for the year. Which type of audit will necessarily be applicable for him?
(a) Statutory audit
(b) Tax audit
(c) Internal audit
(d) None of the above
Answer:
(b) Tax audit
In India, the Income Tax Act, 1961, provides for the compulsory audit of the accounts of certain income tax assessee whose turnover or receipts exceed the specified limits.
As per the Income Tax Act, every person carrying on the business whose turnover or gross receipts exceeds ₹ 100,00,000 2 crores for assessee claiming presumptive taxation benefits and ₹ 50,00,000 in case of profession in the previous year shall get his accounts audited. In this case, Ram should necessarily get his accounts audited.

60. In comparison to the independent auditor, an internal auditor is more likely to be concerned with:
(a) Cost accounting system
(b) Internal control system
(c) Legal compliance
(d) Accounting system.
Answer:
(b) Internal control system
Internal audit is an evaluation and analysis of the business operation conducted by the internal audit staff. It is the part of the overall system of internal control established in an organisation. Moreover, it helps the statutory auditors in getting the statutory audit done effectively. The statutory audit is also required to comment whether the company is having sound internal audit system or not.
Thus, in comparison to the independent statutory auditors, an internal auditor is more likely to be concerned with the Internal Control System.

61. Which of the following is primarily carried out to ascertain the cases of improper, avoidable and infructuous expenditure?
(a) Propriety audit
(b) Statutory audit
(c) Tax audit
(d) Functional audit
Answer:
(a) Propriety audit
Under propriety audit, the expenditure is analysed with a view to ascertain the cases of improper, avoidable and infructuous expenditure even though the expenditure has been incurred in conformity with the existing rules and regulations.

62. In general, the scope of management audit is:
(a) Flexible
(b) Rigid
(c) Prescribed by law
(d) Prescribed by the appointing authority.
Answer:
(a) Flexible
Management audit is a structured review of the systems and procedures of an organisation in order to evaluate whether they are being conducted efficiently and effectively. It is not mandatory but is recommendatory. Thus, its scope is flexible.

63. The statutory auditor of a company can act as:
(a) Internal Auditor
(b) Cost Auditor
(c) Tax Auditor
(d) None of the above
Answer:
(c) Tax Auditor

The internal and statutory auditor of a company cannot be the same persons.
Cost auditor must be a member of ICWA and statutory auditor must be a member of ICAI. Thus, cannot be the same persons.
Tax auditor and statutory auditor means one and the same thing. Thus, statutory auditor of a company can act as a tax auditor.

64. In general, what is the period covered in a statutory audit?
(a) 1 Year
(b) 2 Year
(c) 3 Year
(d) Depending upon the auditor’s wish.
Answer:
(a) 1 Year
The statutory auditor reports on the original books of account and the financial statement to the members. Thus, statutory audit covers a period of 1 year.

65. As per Companies Act, 2013, which of the following is not voluntary for Companies in India:
X. Secretarial Audit
Y. Statutory Audit
Z. Cost Audit W.
Internal Audit Correct option is:
(a) X and Y
(b) X and W
(c) X and Z
(d) X, Y, Z and W
Answer:
(d) X, Y, Z and W
Various types of audit prescribed under Companies Act, 2013 are:
1. Statutory Audit: Sec. 139 to 147 under chapter -10 contains provisions regarding audit and auditors. Statutory auditor appointed for a term of 5 years. All companies are required to appoint the same.

2. Internal Audit: Certain class or classes of companies as may by prescribed shall appoint internal auditor and report to BOD. — Secretarial Audit: Every listed company and other class of companies as maybe prescribed is required to annex to the board’s report, a secretarial audit report.

3. Cost Audit: Certain class of companies engaged in the production of such goods or providing such services as may be prescribed may be directed to get their cost audit records audited.
Thus, option (d) is correct.

66. Who appoints the auditor for government company:
(a) Comptroller and Auditor general of India
(b) Shareholders
(c) Central Government
(d) Directors
Answer:
(a) Comptroller and Auditor general of India
“Comptroller and Auditor General of India” appoints the auditor for Government company.

67. Statutory Audit is to be done by:
(a) A practicing Chartered Accountant or a firm of practicing CA.
(b) A practicing CS or a firm of practicing CS
(c) A practicing cost accountant or a firm of practicing cost accountant
(d) None of the above.
Answer:
(a) A practicing Chartered Accountant or a firm of practicing CA.
Statutory Audit or Financial Audit refers to the audit of financial statements to depict a true and fair view. An independent auditor (external auditor) is appointed to conduct the audit. Thus, a practicing CA or a firm of practicing CA’s are appointed to conduct a statutory audit.

68. Which of the following is voluntary audit.
(a) Internal Audit
(b) Tax Audit
(c) Cost Audit
(d) Statutory Audit
Answer:
(a) Internal Audit
When there is no statutory obligation to conduct audit, still the audit is carried out, it is known as voluntary audit. Internal audit is also a voluntary audit.

69. Income tax Audit is conducted under:
(a) Income Tax Act
(b) Banking Regulation Act
(c) Companies Act
(d) Insurance Act
Answer:
(a) Income Tax Act
Tax audit is the audit of accounts required under the Income Tax Act, 1961. It is done to assist the Income Tax authorities in assessing correctly the Income Tax of assessees.

70. Who can do a Bank Audit?
(a) C.A.
(b) C.S.
(c) CMA
(d) All of the above
Answer:
(a) C.A.
Audit performed for monitoring and regulating the activities of a bank is known as Bank Audit. It is performed by CA.

71. The given statement regarding bank audit “Adequate Provision for non perlorming assets/ Bad debts has to be made in the books” is:
(a) True
(b) False
(c) Partly True
(d) Partly False
Answer:
(a) True
Under bank audit, the auditors have to certify that statement of accounts of the bank as at the closure of the financial year to reveal true and fair view of the bank’s financial positions, adequate provision for NPA/ bad debts has been made in the books or not. Thus, the given statement is True.

72. Tax audit is conducted _________number of times in a year.
(a) 1
(b) 2
(c) 3
(d) ‘n’ no. of times
Answer:
(a) 1
Tax audit is conducted once in a year.

73. Which type of audit may be conducted by organisation’s staff?
(a) Internal Audit
(b) External Audit
(c) Cost Audit
(d) Tax Audit
Answer:
(a) Internal Audit
Internal Audit is an evaluation and analysis of the business operation conducted by the internal audit staff. It is the part of overall system of internal control established in an organisation.

74. Who will be responsible for errors in audit report If external auditor relies on the work of internal auditor?
(a) External Auditor
(b) Internal Auditor
(c) Both (a) and (b)
(d) Management
Answer:
(a) External Auditor
External Audit is generally conducted to ascertain whether the Financial Statement presents a true and fair view of the financial position and working result of the organization under audit. The opinion of the auditor, an independent expert assures the owners about the reliability of the financial statements. They will also place greater reliance on financial statements if they have been audited. In some cases, external auditor may use the work of internal auditor by preparing his audit report. However, this does not relieves the external auditor and he continues to remain responsible for errors in the audit report.
Thus, external auditor will be responsible for the errors in audit report even if external auditor relies on the work of internal auditor.

75. Cost Audit is compulsory for __________.
(a) Fertilization Company
(b) Sugar Company
(c) Tele Communication
(d) All of the above.
Answer:
(d) All of the above.
Cost Audit is a system of audit introduced by the Government of India for the review, examination and appraisal of the cost accounting records and attendant information, required to be maintained by specified industries.
Thus, Cost Audit is compulsory for Fertilization, Sugar Companies and Tele Communication.

76. Why auditing cannot be done by internal audit staff?
(a) Biased nature
(b) Incapable staff
(c) Both (a) & (b)
(d) None of the above.
Answer:
(a) Biased nature
An internal audit is carried out by the team of professionals in the organization. If internal audit is done by the internal audit staff, bias ness arises, thus due to biased nature, internal audit should not be done by internal audit staff.

77. Provisions related to bank audit is given in:
(a) Banking Regulation Act, 1949
(b) Companies Act, 2013
(c) Income Tax Act, 1961
(d) None of the above.
Answer:
(a) Banking Regulation Act, 1949
The Banking Regulation Act, 1949 contains the provisions relating to the maintenance of accounts and their audit in case of banking sector.

78. Audit is:
(a) Internal
(b) External
(c) Both (a) and (b)
(d) None of the above
Answer:
(c) Both (a) and (b)
Audit are Internal as well as External. Internal audit is when the management appoints auditor while external audit comprises of statutory audit, etc as demanded by law.

79. Which of following audits are done every year?
(i) Tax Audit
(ii) Statutory Audit
(iii) Concurrent Audit
(a) (i) & (ii)
(b) (ii) & (iii)
(c) (i) & (iii)
(d) All of the above
Answer:
(a) (i) & (ii)
The Tax Audit and Statutory Audit are the audits which are done every year while concurrent audit is voluntary and management can decide whether to perform it per year or not.

80. The cost auditor is to Judge whether the planned expenditure is designed to give optimum result. This exercise may be categorised as:
(a) Operation audit
(b) Financial audit
(c) Efficiency audit
(d) Management audit
Answer:
(c) Efficiency audit
The cost auditor is to judge whether the planned expenditure is designed to give optimum result. This exercise may be categorised as efficiency audit which refers to comparing the actual results with the desired/ projected results. It is directed towards the measurement of whether plans have been effectively executed.

81. For a tax audit, the specified limit given under Income tax Act, 1961 for a person carrying on business shall be:
(a) Turnover exceeds ₹ 40,00,000 in the previous year
(b) Turnover exceeds ₹ 2,00,00,000 for assessee claiming presumptive scheme in the previous year
(c) Turnover is below ₹ 40,00,000 in the previous year
(d) Turnover is below ₹ 60,00,000 in the previous year.
Answer:
(b) Turnover exceeds ₹ 2,00,00,000 for assessee claiming presumptive scheme in the previous year
As per the Income Tax Act, 1961, every person carrying on business whose turnover or gross receipts exceeds ₹ 2,00,00,000 for assessee claiming presumptive scheme (₹ 50,00,000 if carrying on profession) in the previous year shall get his accounts audited.

82. Consider the following statements about Bank Audit in India₹ (X) The Bank audit may be done by any person who possesses the prescribed qualification i.e. CA, CS and CMA (Y) one of the objectives of Bank audit is to ascertain the adequacy of the provisions of Non-performing assets in Bank. On the basis of above.
(a) Statement X is false and statement Y is true
(b) Statement X and statement Y both are false
(c) Statement X is true and statement Y is false
(d) Statement X and statement Y both are true.
Answer:
(a) Statement X is false and statement Y is true
In case of a bank audit, the person who possesses the qualification of a practicing Chartered Accountant is to be appointed as an auditor as per CA Regulations Act, 1988. The Auditors have to certify that statement of accounts of the bank as at the closure of the financial year reveal true and fair view of the banks financial, position, adequate provision for Non-performing Asset (NPA)/bad debts has been made in the books.
So, on the basis of above, statement X is false and statement Y is true.

83. An auditor of a partnership firm is appointed as per __________.
(a) Status
(b) Agreement
(c) Convention
(d) Government Orders.
Answer:
(b) Agreement
At present, partnership firms in India are not legally bound to get their financial statements audited. Still, many firms get their financial statement audited as it helps to get loan sanctioned from bank. The audit should be carried out as per the terms of partnership deed and Partnership Act.

84. Cost audit is useful for the purpose of proper utilization of scarce resources through (i) cost control (ii) cost reduction (iii) cost minimisation. The options are:
(a) II and III
(b) I and II
(c) I, II and III
(d) I and III
Answer:
(b) I and II
Benefits of Cost audit:

  • It ensures that cost control and cost reduction techniques are followed.
  • It ensures efficient utilization of scarce resources.
  • It ensures that proper cost records are maintained.
  • It also ensures that unit has been running economically and efficiently.

85. The statutory auditor is duty bound to enquire whether __________ expenses have been charged to __________ Account.
(a) Fixed, Revenue
(b) Personal, Revenue
(c) Personal, Capital
(d) Capital, Profit and Loss
Answer:
(c) Personal, Capital
The Statutory auditor is duty bound to enquire whether personal expenses have been changed to Capital Account. The personal expenses are not the expenses of the business and as per the separate entity concept, books of business should be kept free from the personal transactions of proprietor/partner.
Hence, the auditor is duty bound check the above.

86. For a tax audit, the specified limit given under Income Tax Act, 1961 for a person carrying on business shall be:
(a) Turnover exceeds ₹ 2,00,00,000 for assessee claiming presumptive scheme in the previous year
(b) Turnover exceeds ₹ 40,00,000 in the previous year
(c) Turnover is below ₹ 40,00,000 in the previous year
(d) Turnover is below ₹ 60,00,000 in the previous year
Answer:
(a) Turnover exceeds ₹ 2,00,00,000 for assessee claiming presumptive scheme in the previous year
As per Income Tax Act, every person carrying on business whose turnover or gross receipts exceeds ₹ 2,00,00,000 for assessee claiming presumptive scheme (50,00,000 if carrying profession) in previous year shall get his accounts audited.

87. In India, the audit of co-operative society:
(a) Voluntary
(b) Mandatory
(c) Mandatory on satisfying certain criterion
(d) Mandatory for some specified class of societies.
Answer:
(b) Mandatory
In co-operative society there is separation of ownership from management. Management is in hands of elected members which necessitates an independent financial audit of accounts of co-operative society. Considering this, audit of co-operative societies is required by law in India. Thus, it is mandatory.

88. The audit conducted by CAG (Comptroller Auditor General of India) is a form of:
(a) Propriety Audit
(b) Statutory Audit
(c) Bank Audit
(d) Routine Audit.
Answer:
(b) Statutory Audit
If is duty of Comptroller and Auditor General of India to audit the receipts and expenditure of Union Govt, and State Govt. So it can be said the audit conducted by CAG is form of statutory audit.

89. Company secretary are granted for __________ audit:
(a) Statutory Audit
(b) Secretarial Audit
(c) Cost Audit
(d) Tax Audit
Answer:
(b) Secretarial Audit
Secretarial Audit is a Compliance Audit. A Company Secretary in practice has been assigned the role of Secretarial Audit under section 2(2)(c)(v) of Company Secretaries Act, 1980.

90. What is the capital that makes it mandatory to have company secretary:
(a) 2,00,00,000 and above
(b) 3,00,00,000 and above
(c) 5,00,00,000 and above
(d) None of the above
Answer:
(c) 5,00,00,000 and above
A Company having paid-up share capital 5,00,00,000 and above shall have a Company Secretary.

91. The auditor of a Government company is appointed by the:
(a) Comptroller & Auditor General of India
(b) The Shareholder in a general meeting
(c) The board of directors
(d) The shareholders at an annual general meeting
Answer:
(a) Comptroller & Auditor General of India
Government audit also includes the audit of government companies conducted by Comptroller and Auditor General of India (C & AG) in accordance with the provisions of Companies Act, 2013 and other relevant legislations. The auditor of a Government Company is appointed by Comptroller and Auditor General of India (C & AG).

92. If a sole proprietor ship firm has turnover of 10000000 or more, conduct of audit is:
(a) Mandatory
(b) Voluntary
(c) Both
(d) None
Answer:
(a) Mandatory
If a sole proprietorship firm has turnover of ₹ 1,00,00,000 or more, then conduct of audit is mandatory for the firm, under the provision of Income Tax Act, 1961.

93. As per the Banking Regulation Act, the bank audit may be done by:
(a) A Chartered Accountant in practice or a firm of Chartered Accountants in practice
(b) A lawyer
(c) A Company Secretary in practice or a firm of Company Secretary in practice
(d) A cost accountant in practice or a firm of cost accountant in practice.
Answer:
(a) A Chartered Accountant in practice or a firm of Chartered Accountants in practice
Audit forms an integral and important part of banks monitoring and regulation. The auditor being Chartered Accountant in practice or a firm of Chartered Accountant in practice certify that statement of accounts of bank as at the closure of the financial year reveal true and fair view of the bank financial position.

94. Management decides the scope of __________.
(a) Cost audit
(b) Financial audit
(c) Internal audit
(d) Tax audit
Answer:
(c) Internal audit
An internal audit is carried out by the team of professionals in the organization. It is not mandatory but organization gets the internal audit done with a view to evaluate the effectiveness of internal control, soundness of financial system, effectiveness of business process etc., overall the scope of internal audit.

95. Balance Sheet audit does not include:
(a) Examination of adjusting and closing entries
(b) Routine check
(c) Vouching of income and expenses accounts related to assets & liabilities
(d) Verification of assets and liabilities.
Answer:
(b) Routine check
Balance sheet audit does not include routine check. Its primary objective is to report to the owners that the accounts, financial statements give a true and fair view of the state of company’s affairs at the end of the financial year.

96. The statutory auditor of a company can act as:
(a) Internal auditor
(b) Tax auditor
(c) Cost auditor
(d) Concurrent auditor
Answer:
(b) Tax auditor
The Statutory Auditor also act as a Tax Auditor.

97. The operations of a Co-operative society are managed by:
(a) Auditor
(b) Government
(c) Elected member
(d) Volunteer
Answer:
(c) Elected member
In the Cooperative Society, there is separation of ownership from management while capital is contributed by all the members. The management of its affairs are in the hands of some of the members elected for this purpose.

98. Which of the following statements is not true about continuous audit?
(a) It may be carried out on daily basis.
(b) It is expensive
(c) It is needed when the organization does not have a good internal control system.
(d) It is conducted at regular interval.
Answer:
(d) It is conducted at regular interval.
The point that continuous audit is conducted at regular interval is not true as it is the type of audit thats carried out on daily basis and is running continuously in the company.

99. __________ is conducted to ascertain whether the financial statements present a true and fair view of the financial position of the Organisation under audit:
(a) Cost Audit
(b) Secretarial Audit
(c) Tax Audit
(d) Financial Audit
Answer:
(d) Financial Audit
Financial Audit is generally conducted to ascertain whether the financial statement present a true and fair view of financial position and working result of an organisation under audit.

100. Statutory audit is to be done by __________.
(a) Practicing CA or a firm of practicing CA
(b) A Practicing CS or a firm of practicing CS
(c) Practicing cost accountant or a firm
(d) BOD
Answer:
(a) Practicing CA or a firm of practicing CA
Statutory Audit is often called Financial Audit. Independent financial audit is generally conducted to ascertain whether the financial statement presents a true and fair view of the financial position and working result of the organization under audit. The need for financial audit arises as the control of the company is vested in the hands of the management of the company and the financial statements are also prepared by the management.
Thus this audit Is done by CA in practice or a firm.

101. Who can order management audit?
(a) Management
(b) Central Government
(c) Workers of Company
(d) BOD
Answer:
(a) Management
Management audit is an emerging concept of auditing. It has been originated from America. Management audit is an act of evaluation of all the activities of all the departments with a view to provide appropriate suggestions to the management to help their work. In other words, management auditing is a future oriented task which evaluates timely in all the levels of management like production management, sales management etc.

The main objective of management audit is to improve the profit earning capacity, work of management, objectives of program, social objectives and human resource development so that organizational goal can be easily attained. It refers to the existence of control system, compliance of rules and regulations, process of managerial decisions etc. Generally management audit/operational audit are not mandatory but it recommendatory certainly. Hence it is conducted by the management.

102. Statutory audit is often called ‘financial audit’
(a) True
(b) False
(c) Can’t say
(d) None of these
Answer:
(a) A financial audit is an independent, objective evaluation of an organization’s financial reports and financial reporting processes. The primary purpose for financial audits is to give regulators, investors, directors and managers reasonable assurance that financial statements are accurate and complete.
Hence, we can say that Statutory Audit is also a financial audit as the objectives are same.

103. For big companies having turnover of ₹ 200 crore or more, which one of the following is not mandatory but recommendatory in nature?
(a) Propriety Audit
(b) Management Audit
(c) Statutory Audit
(d) Tax Audit
Answer:
(b) Management Audit
Management Audit is an Emerging concept, originated in America. It is an act of evaluation of all the activities of all the departments with a view to provide appropriate suggestions to the management to help their work.
It is generally not mandatory but recommendatory.

104. The internal auditor is appointed by:
(a) Stock Exchange
(b) Shareholders
(c) Management
(d) Government
Answer:
(c) Management
The Internal Auditor is appointed by Management and thus, he report to management.

105. Which of the following organisations does not require statutory audit?
(a) Public limited companies
(b) Sole trading Firm
(c) Electricity supply companies
(d) Banking companies
Answer:
(c) Electricity supply companies
The Internal Auditor is appointed by Management and thus, he report to management.

106. Ram is a chartered accountant working as proprietor. His gross receipts are ₹ 50 Lakhs for the year. Which type of audit will necessarily be applicable for him?
(a) Statutory audit
(b) Tax audit
(c) Internal audit
(d) None of the above
Answer:
(b) Tax audit
In India, Income tax Act, 1961, Section 44AB provides for the compulsory audit of the account of certain income for assessee whose turnover or receipts exceeds the specified limits.
As per income tax Act, every person carrying on business whose turnover or gross receipts exceeds ₹ 1,00,00,000 (₹ 25,00,000 if carrying on profession) in previous year shall get accounts audited. Here, Ram is a C.A. which is professional and his gross receipts is ₹ 50 lakhs. So, he shall get accounts audited.

107. Primary responsibility for the adequacy of financial statement disclosures rest with the:
(a) Auditor
(b) Management
(c) Auditor’s Staff
(d) Central Government
Answer:
(b) Management
Internal auditor is more likely to be concerned with internal control system in comparison to independent auditor and internal auditor has to keep control over its business activities. The internal control can determine the degree of control over work.

108. In comparison to the independent auditor, an internal auditor is more likely to be concerned with:
(a) Cost accounting system
(b) Internal control system
(c) Legal compliance
(d) Accounting system
Answer:
(b) Internal control system
It is primary responsibility of firm or business that firstly the financial statement is to be disclosed with management then to auditor or any other person because management first check all the transactions are correctly posted or not or there is need of auditing or not need of auditing.

109. Which of the following is primarily carried out to ascertain the cases of importer, avoidable and infructuous expenditure?
(a) Propriety audit
(b) Statutory audit
(c) Tax audit
(d) Functional audit
Answer:
(a) Propriety audit
Kohler has defined the propriety audit as that which meets the test of public interest, commonly accepted customs. Propriety Audit mean whether the transactions have been done in conformity with established rules, principles and some established standard. It is essential function of audit to bring to light not only cases of clear irregularity but also every matter which in its judgement appears to involve improper expenditure or waste of public money or stores.

110. Who is disqualified to be a cost auditor?
(a) Employee of an organisation
(b) Company Secretary in practice
(c) Chartered Accountant
(d) All of the above.
Answer:
(d) All of the above.
The following persons shall not be eligible for appointment as an auditor of a company:

A body corporate other than a limited liability partnership
An officer / Employee of the company
A person who is a partner, or is in the employment, of an officer or employee of the company
A person who, or his relative or partner and holding security of or interest in the company or its subsidiary, or of its holding or associate company or a subsidiary of such holding company not exceed ₹ 1 lakh.

Hence, option (d) is correct.

111. Tax audit is regulated under the:
(a) Income Tax Act, 1961.
(b) Companies Act, 2013.
(c) Under the provisions of Insurance, Regulatory Act, 2015.
(d) None of the above.
Answer:
(a) Income Tax Act, 1961.
Income Tax Act, 1961 is regulate tax audit. Hence, option (a) is correct.

112. Statutory audit is also known as __________.
(a) Bank Audit
(b) Financial Audit
(c) Insurance Audit
(d) Government Audit
Answer:
(b) Financial Audit
Statutory Audit is often called financial audit it is covered under Companies Act, 2013. Hence, option (b) is correct.

113. Company Secretary is a __________ for a company.
(a) Key Managerial personnel
(b) Managing Director
(c) Manager
(d) All of the above
Answer:
(a) Key Managerial personnel
Company Secretary is a Key Managerial Personnel of a company.
Thus, option (a) is correct.

114. Who is eligible for doing Secretarial Audit.
(a) Practising CA
(b) Practicising CS
(c) Practising CMA
(d) None of the above.
Answer:
(b) Practicising CS
A practicing Company Secretary has been assigned for the role of Secretarial Audit under Section 2 of the Company Secretary Act, 1980. Thus, option (b) is correct.

115. Tax audit is mandatory for:
(a) Partnership
(b) Company
(c) Sole proprietorship
(d) None of the above.
Answer:
(b) Company
Tax audit is mandatory for a company:

  • Every listed company
  • Every Unlisted public company having paid-up share capital of ₹ 10 crore or more
  • Every Unlisted Private company having paid-up capital of ₹ 20 crore or more.

Thus, option (b) is correct.

116. Internal audit is conducted by __________.
(a) Management
(b) Shareholders
(c) Internal Staff
(d) None of the above
Answer:
(c) Internal Staff
Internal audit is an evaluation and analysis of the business operation conducted by the internal audit staff. Hence, option (c) is correct.

117. The statutory auditor of a company can act as:
(a) Internal Auditor
(b) Cost Auditor
(c) Tax Auditor
(d) None of the above
Answer:
(c) Tax Auditor
The Statutory Auditor of the company can act as tax auditor.

118. In general, what is the period covered in a statutory audit?
(a) 1 Year
(b) 2 Years
(c) 3 years
(d) Depending upon the deditors wish
Answer:
(a) 1 Year
Audit Report is prepared at the end of each financial year.

119. As per the Company Act, 2013, which of the following audit is voluntary Companies in India:
X. Secretarial Audit
Y. Statutory Audit
Z. Cost Audit
W. Internal Audit Correct option is:
(a) X and Y
(b) X and W
(c) X and Z
(d) X, Y, Z and W
Answer:
(b) X and W
As per Companies Act, 2013 the following audits are voluntary i.e. Secretarial Audit and internal audit.

120. Which of the following are the rights of a statutory auditor?
X. To receive remuneration
Y. To attend Board of Director’s meeting
Z. To attend the general meeting
W. To visit the branch office
Correct option is:
(a) X and Y
(b) X, Y and Z
(c) X, Z and W
(d) X, Y, Z and W
Answer:
(c) X, Z and W
Auditor has a right to:

  • Receive remuneration as fixed
  • Attend the general meeting of the company
  • Visit the branch offices

121. For auditors, which of the following document generally contains the scope of work:
(a) Appointment letter
(b) Terms of engagement
(c) Offer letter
(d) None of the above
Answer:
(b) Terms of engagement
The scope of work of an auditor is contained in terms of engagement.

122. Turnover for secretarial audit __________.
(a) 200 crores
(b) 200-250 crores
(c) 250 crores
(d) Approx 250 crores
Answer:
(c) 250 crores
As per rule 9 of the Companies Rules’ 2014, other class of companies for the purpose of sec. 204 of Companies Act, 2013 includes:

  • Every Public Company having a paid-up share capital of fifty crore rupees or more, or
  • Every public company having a turnover of two hundred fifty crore rupees or more.

123. __________ contains provision regarding cost audit.
(a) Sec. 147
(b) Sec. 146
(c) Sec. 148
(d) None of these
Answer:
(c) Sec. 148
Section 148 of the Act contains provisions regarding cost audit and contains that a cost audit wherever conducted is in addition to statutory audit conducted under section 143.

124. Who appoints internal auditors __________.
(a) Board of Director
(b) Management
(c) Members
(d) Government
Answer:
(b) Management
An internal auditor is an auditor who is appointed by the management of the company in order to carry out the internal audit function. Generally an employee of the company acts as an internal auditor, where as some companies appoint an external expert as an internal auditor.

Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes

Go through this Theoretical Framework – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes

Basic Concepts of Company Accounts:

  1. The company form of business organization is an association of persons who contribute money for some common purpose.
  2. The money so contributed is the capital of the company.
  3. The persons who contribute capital are its members.
  4. Therefore members of a joint stock company are known as shareholders and the capital of the company is known as share capital.
  5. The total share capital is divided into a number of units known as ‘shares’.
  6. The word company is derived from a Latin word “Com” meaning with or together and “Panis” meaning bread.
  7. It originally referred to association of people taking food together and discussing matters.
  8. It is a form of business organisation of people to carry on a business.
  9. Company law recognizes a company as one which is formed and registered under the Companies Act, 2013 or under any previous company law.

Features of a Company:

  1. Incorporated association
  2. Separate legal entity
  3. Perpetual existence
  4. Limited liability
  5. Transferability of shares

Artificial legal person:

  • The persons who contribute money in the company are called the members of the company.
  • The total amount of capital of the company is termed as stock and part of stock to which every member is entitled, is called the share and the persons are called shareholders.
  • As per the Companies Act, a company is an artificial person created by law, having separate legal entity with a perpetual succession.

As per the Companies Amendment Act, 2015:
In Section 22 of the Principal Act –
(i) in sub section (2)
(a) for the words “under its common seal”, the words “under its common seal, if any, “shall be substituted;

(b) the following proviso shall be inserted, namely:
“Provided that in case a company does not have a common seal, the authorisation under this sub-section shall be made by two directors or by a director and the company secretary, wherever company has appointed a company secretary.”

(ii) in sub-section (3), the words “and have the effect if it were made under its common seal” shall be omitted.
In Section 46 of the Principal Act, in sub-section (1), for the words” issued under the common seal of the company” the words “issued under the common seal, if any, of the company or signed by two directors or by a director and the company secretary, wherever the company has appointed a company secretary” shall be substituted.

Types of Companies:
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 1
1. Statutory Company:
Companies that have been incorporated under a special act of Parliament E.g. Unit Trust of India, Life Insurance Corporation of India.

2. Government Company:
It means a company in which not less than 51% of the paid up share capital is held by –
(a) Central Government ;or
(b) any State government or governments; or
(c) partly by central government and partly by one or more state governments and includes a company which is a subsidiary company of such a government company.

3. Foreign Company:
Foreign company means any company or body corporate incorporated outside India which –
(a) has a place of business in India, whether by itself or through agent, physically or through electronic mode; and

(b) conducts any business activity in India in any other manner.
Thus, the companies doing business through electronic mode are also termed as foreign company and need to comply with the specified provision.

4. Holding Company and Subsidiary Company:
When a Company –
(a) controls the composition of the board of directors; or

(b) exercises or controls more than one half of the total share capital either at its own or together with one or more of its subsidiary companies, then it is known as the holding company and the other company is the subsidiary company.

Total share capital for this purpose means the aggregate of –
1. paid up equity share capital; and
2. convertible preference share capital.

5. Registered Companies:
All companies registered under the Companies Act, 2013 or under any previous company law are called the registered companies.

6. Public Company
Public company means a company which –
(a) Is not a private company;

(b) Has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed. [Omitting requirement for minimum paid up share capital and consequential changes [Section 2 (71)] of the Companies Act, 2013.]

(c) Is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act;

(d) Should have minimum seven members and have no limit for maximum members.

7. Private Company:
A company which has the following features is a private company:

  • Restricts the right to transfer its shares.
  • Except in case of one person company, limits the number of its members to 200.
  • Prohibits any invitation to the public to subscribe for any securities of the company.
  • Has a minimum paid up capital of one lakh rupees or such higher paid – up capital as prescribed [Omitting requirement for minimum paid up capital and consequential changes (Section 2 (68)) of Companies Act. 2013.]

8. One Person Company (OPC):
it means a company which has only one person as a member. It is considered as a private company. Only a natural person who is an Indian citizen and resident in India is eligible to incorporate OPC.

9. Small Company:
it means a company other than a public company, whose –
(a) Paid-up capital does not exceeds ₹ 50 lakh or such higher amount as maybe prescribed which shall not be more than crore; or

(b) Turnover as per last profit and loss account does not exceeds ₹ 2 crore or such higher amount as may be prescribed, which shall not be more than ₹ 20 crore.

Amendment made by Companies (Amendment) Act, 2017:
“Small Company means a company, other than a public company, –
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and

(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees.”

10. Producer Company:
Sec. 465(1) of the Companies Act, 2013 provides that the Companies Act, 1956 and the registration of the Companies (Sikkim) Act, 1961 (hereafter) in this section referred to as the repeated enactments shall stand repeated.

According to the provisions as prescribed under Section 581 A(1) of the Companies Act, 1956, a producer company is a body corporate having objects or activities specified in this Section 581B and which is registered as such under the provision of the Act. The membership of producer company is open to such people who themselves are the primary producers. Which is an activity by which some agricultural produce is produced by such primary producers.

Share:

  • Shares are defined under Section 2(84) of the Companies Act, 2013
  • A share is defined as the share in the share capital of a company and includes stock.
  • A share is one unit into which total share capital is divided.
  • Every person who contributes capital into the company gets a share in the company which represents his capital in the company.

Types of Shares:

  • Preference Shares
  • Equity Shares

(i) Preference Shares:
1. Preference Shares are those shares which have the following preference rights over other shares:

2. Rights conferred by Article of Association.

  • Payment of dividend at a fixed rate or as a fixed amount
  • Return of capital on winding up of a company

3. The holders of preference shares are called preference shareholders.

4. Preference shareholders do not have a voting right.
Note: When dividend is outstanding for more than 2 years for cumulative preference shares and 3 years for non cumulative preference share, the preference shareholders will get voting right.

5. Depending upon the articles of association of the company, in addition to the preferential rights, they may also get the following:

  • to participate in surplus profits after payment of dividend at a fixed rate to equity.
  • to receive arrears of dividend at the time of winding up.
  • to receive premium on redemption of preference shares.
  • to participate in surplus remaining after the equity shares are redeemed in winding up.

Types of preference shares:
1. Cumulative preference shares – The holders of cumulative preference shares have a fixed right to receive present as well as future dividend. This means that even if the company does not have sufficient profit to pay dividend, the dividend of such shareholders keeps on accumulating and will be paid in future in the years of profits.

2. Non cumulative preference shares – When the preference shares do not have a right to cumulate their dividend then, these are called non cumulative preference shares.

3. Participating preference shares – Holders of these shares have a right to participate in the surplus profits if any, after equity shareholders have been paid at a fixed rate.

4. Non participating preference shares – When shareholders have a fixed right of dividend and not over and above that, even in case of surplus profits then, these are called non participating preference shares.

5. Redeemable preference shares – When shares are issued with a condition that they will be repaid (redeemed) after a fixed period of time, these are called redeemable preference shares.

A company may issue preference shares for a period exceeding 20 years but not exceeding 30 years for infrastructure projects [Specified in Schedule VI). However, it is subject to redemption of minimum 10% of such preference shares per year from the twenty-first year onwards or early on proportionate basis, at the option of the preference shareholders.

6. irredeemable Preference Shares – No company Ltd. by share, can issue any preference shares which are irredeemable.

7. Convertible Preference Shares – The shares which carry an option to get converted into equity shares are called convertible preference shares.

8. Non Convertible Preference Shares – Preference shares which do not have an option of conversion are called non convertible preference shares.

(ii) Equity Shares:

  • Shares other than preference shares are termed as equity shares.
  • They do not carry a preferential right but have a right to vote.
  • There is no compulsion to pay equity dividend they are paid dividends only when there are sufficient profits after payment of preference dividends.
  • These are also called as risk bearing shares as they do not have a fixed rate of dividend. But after payment to preference shareholders ail surplus remaining will he distributed among equity shareholders.

Share Capital:

  • The total capital of the company is divided into small shares, hence it is known as the share capital.
  • Every share has a face or nominal value. Share capital is the sum of the total face value of all the shares.

Categories / Types of Share Capital:
1. Authorized (Nominal) Capital:
This is the maximum amount of capital mentioned in the Memorandum of Association of a company, which it can raise during its life time it is also known as the registered capital. In order to increase the limit of authorized capital, the memorandum of the company should be altered.

2. issued Capital:
It refers to that portion of authorised capital which has been offered to the public for subscription.

3. Subscribed Share Capital:
It refers to that part of the issued share capital which has been subscribed by the public. It also includes the issue of shares for consideration other than cash.

4. Called up Share Capital:
It is that portion of subscribed capital which the shareholders are called upon to pay. The amount remaining to be called up is called as the uncalled capital.

5. Paid up Capital:
It is that portion of called up capital that is paid by the shareholders. The amount that is not paid is known as the calls in arrear. This is the actual capital of the company that is included in the Balance Sheet.

Capital Reserve:
Reserves which are created out of capital profits and cannot be used for declaration of dividend are called capital reserve.

Issue of Shares:
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 2
(a) Issue of Shares for Cash
When a company issues share for cash either full amount is received at once or in installments. The share price is generally received in installments and these are known as :

  • First installment – Application money
  • Second installment – Allotment money
  • Third installment – First call money
  • Fourth installment – Second call money
  • Last/fifth – Final call money

Note : Nowadays, practically the whole amount is received at once and hence, above installments are not required. We will use this method only for academic purpose.

Journal entries for issue of shares :
(a) When shares are issued at par:
(i) On receipt of application money :
Bank A/c                              Dr.
To Share Application A/c

(ii) On allotment of share :
Share Allotment A/c            Dr.                 (Amount due on allotment)
Share Application A/c          Dr.
(Application amount received on allotment) To Share Capital A/c

(iii) On receipt of allotment money :
Bank A/c                               Dr.
To Share Allotment A/c

(iv) On call being made :
Share Call A/c                       Dr.                  (With amount due on calls)
To Share Capital A/c
Bank A/c                               Dr.                  (With amount received on calls)
To Share Call A/c

Notes:

  1. Unless the shares are allotted, it cannot become the share capital of the company hence, cannot be credited to Share Capital A/c.
  2. When a company fails to raise minimum subscription then, no shares can be allotted and the amount received on application will be refunded back.

→ entry for refund of application money.
Share Application A/c
Dr.                                 (with application money received)
To Bank A/c

Concept of minimum subscription :
Minimum subscription refers to that amount that the company should raise as subscription before allotment of shares. A public Ltd. company cannot make allotment of shares unless the amount of minimum subscription is received. As per the SEBI guidelines a company must receive 90% subscription against the entire issue before making allotment of any shares or debentures.

(b) Issue of shares at premium:

  • When a company issues a share at a price which is more than its face value, it is called issue at premium.
  • Premium = Issue price – face value.
  • Premium amount is generally called at the time of allotment.
  • Amount of premium is credited to a separate account called “Securities Premium A/c.”
  • Securities premium is not a part of share capital of the company, it is a type of capital receipt.
  • Securities premium is shown in the liability side of Balance Sheet under the head “Reserves and Surplus.
  • Generally, highly reputed companies or companies with a huge market value issue shares at a premium. A new company cannot issue shares at premium.

Accounting Treatment:
When allotment money becomes due :
Share Allotment A/c Dr.
(Amount due on allotment + premium)
To Securities Premium A/c  (Amt. of premium)
To Share Capital A/c
(Amount of share allotment)
Always remember Share Capital A/c will always be shown at face value.

Note :
Section 52 : Use of Securities Premium:
Securities premium amount can be used only for the following purposes –

  • For issuing fully paid bonus shares.
  • To write off preliminary expenses of the company.
  • To write off the expenses of, or commission paid or discount allowed on any securities or debentures of the company.
  • For purchase of its own shares or other securities u/s 68.
  • To pay premium on redemption of preference shares or debentures of the company.

Securities premium can never be used for any other purpose.

Note:
If Securities Premium amount is utilised for any purpose, other than stated above, then it will attract provisions relating to reduction of share capital of company [Section 66].

(c) Issue of Shares at a discount:
Section 53 of the Companies Act, 2013 provides that the company shall not issue shares at a discount except in case of issue of sweat equity shares. Any share issued by a company at a discount shall be void.

Note:
Since, new shares can not be issued at a discount, any problem relating to’t is not relevant as per the provisions of Companies Act, 2013. If company contravenes this provision shall be punishable with:

  • fine which shall not be less than ₹ 1 lakh but may exceed to ₹ 5 lakh and
  • every officer in default shall be punishable within imprisonment for a term which may extend to 6 months or
  • with fine which shall not be less than 1 lakh but may extend to 5 lakh rupees, or
  • with both.

Amendment made by Companies (Amendment) Act, 2017 in sub-section (2), for the words “discounted price”, the word “discount” shall be substitued.

Subscription of Shares:
Subscription means the application received from the applicants for issue of shares to them.
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 3
1. Full Subscription:
In case of full subscription, accounting entries will be the same as done earlier.

2. Under Subscription:

  • Under subscription means that the number of shares subscribed by public is less than the number of shares offered for subscription.
  • Allotment can be made in this case only if minimum subscription is received.
  • All accounting entries will be same by taking the number of shares actually applied and allotted.

3. Over Subscription:

  • This means when the number of shares subscribed by the public is more than the shares offered for subscription by the company.
  • As per the guidelines issued by SEBI the company cannot reject out rightly any application for shares unless it has incomplete information or absence of signature(s) or insufficient application money.

In such case the company adopts the following procedure:

  • Total rejection of some applications.
  • Acceptance of some applications in full.
  • Allotment to the remaining applicants on pro-rata basis.

Note : Pro rata basis allotment :
1. Under pro rata basis, no applicant is refused, no applicant is allotted in full.

2. They are allotted shares proportionately.

3. Here the excess amount received is not refunded but will be adjusted in further calls.

4. In case of pro rata allotment, the excess amount is not refunded but it is first adjusted towards the amount due on allotment and if the amount is still remaining to be adjusted then it is adjusted from amount due on calls.

5. Thus, the excess amount which is adjusted from the calls is called as calls in advance in the case of pro rata adjustment.

6. However, the company can adjust this amount from calls only if the following conditions are satisfied

  • Acceptance of calls in advance is agreed by the articles of the company.
  • The consent of the applicant has been taken either by a separate letter or by inserting a clause in the company’s prospectus.

7. For adjusting the excess money, the following entry is passed – Share Application A/c Dr.
To Share Allotment A/c
(Being excess amount received on application adjusted in allotment)

Calls in Advance and Calls in Arrears:
1. Calls in Advance –
(i) When the call is not yet due but the amount is paid by the applicant it is known as Calls in Advance.

(ii) For recording calls in advance the following entry is passed :
1. For receiving calls in advance :
Bank A/c Dr.
To Calls in Advance A/c

2. When that call finally becomes due :
Calls in Advance A/c Dr.
To Particular call A/c

(iii) Since the amount is received in advance by the company, hence it is a liability for the company and shown under the heading namely “Calls in Advance” on the liability side of Balance Sheet. Till the call becomes due, the company is liable to pay interest to the applicant. If the articles do not specify the rate, then, such internet will be charge against profits of the company.

(iv) According to Table F, interest at such rate not exceeding 12% p.a. is to be paid on such advance call money.

(v) No dividend is paid on calls in advance.

2. Callls in arrear:
(i) When the shareholders fail to pay amount due on allotment or calls it is said to be calls in arrear/unpaid calls.

(ii) Calls in arrear are recorded as follows :
Calls in Arrear A/c Dr.
To Share Allotment A/c
To Share A/c

(iii) This amount represents the uncollected amount of capital from the shareholders hence, it is shown by way of deduction from “called up capital” to arrive at paid value of share capital which is shown in the Balance Sheet.

(iv) Since the amount of the call is due hence, the applicants are required to pay interest on the amount due but not paid to the company.

If the articles are silent:

  • According to table F, interest @ 10% or such lower rate as the board may determine is charged from the date the call becomes due till the date of actual payment.
  • However the directors have a right to waive the interest i.e. the company will not charge interest on calls in arrears.
  • Interest on call in Arrears are transferred to P&L A/c at the end of the year.

Issue of Shares for consideration other than cash:
Share issued for consideration other than cash can be in two forms –

  • Issue of shares to vendors
  • Issue of shares to promoters

1. Issue of Shares to vendors:

  • When assets are purchased from vendors then, payment is made to them.
  • Sometimes instead of paying them cash the company issues its shares to the vendors in the settlement of the payment.
  • These shares can be issued at par or premium

Journal entries recording issue of shares to vendors –
1. On acquisition of asset –
Sundry Asset A/c                  Dr.
To Vendor A/c

2. When fully paid shares are issued to vendors –
(a) At par : Vendor A/c           Dr.
To Share Capital A/c

(b) At premium : Vendor A/c  Dr.
To Share Capital A/c To Securities premium A/c

Note: Students should note that the Companies Act, 2013 totally prohibits the issue of shares at a discount.

2. Issue of Shares to promoters:

  • Promoters are the persons who actively participate in the incorporation of the company.
  • Sometimes for the services rendered by them, the company may issue shares to them.
  • The amount paid to the promoters is treated as a capital expenditure of the company and debited to Goodwill A/c.
  • Accounting entry
    Goodwill A/c          Dr
    To share Capital A/c

(Being shares issued to promoters as a consideration other than cash)

Forfeiture and Reissue of Shares:
Forfeiture of Shares –
1. The term forfeiture means taking away a property if a condition has not been fulfilled.

2. When shares are allotted to the applicants, a condition is imposed on them that they will have to pay calls on their due date.

3. When the shareholders fails to pay call money, their shares are forfeited by the company.

4. Once the shares are forfeited, the shareholders name is removed from the register of members and he is not entitled to any future claim on such shares.

5. The amount already paid on shares will not be refunded to the defaulting shareholder.

6. A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares, but shall remain liable to pay the company all the monies which, at the date of forfeiture, were presently payable by him to the company in respect of the shares. He is not entitled to future dividends and rights of membership.
The liability ceases when the company shall have received payment in full of all such monies in respect of such shares.

7. For carrying out forfeiture “Share Forfeiture A/c” is opened in the books. It is shown on the liability side of Balance Sheet as an addition to paid up share capital. Forfeiture of share is not a cancellation of shares, it is just the cancellation of present membership as the forfeited shares can be further reissued.

8. Forfeiture can be done of shares issued at par, at premium.

9. Shares can be forfeited only if it is permitted by the articles.

10. The directors must pass a resolution for forfeiting the shares at Board Meeting and send a notice to the members requiring them to pay the amount due along with interest within the time specified in the notice. However, the time specified cannot be less than 14 days.
(i) Forfeiture of Share issued at par:
(a) When all unpaid calls have been transferred to Calls in Arrear A/c :
Share Capital A/c Dr.
(No. of shares x called up value)
To Shares Forfeiture A/c
(Amount paid-up by shareholders)
To Calls in Arrear A/c
(Amount of unpaid calls)

(b) When unpaid calls have not been transferred to Calls in Arrear A/c:
Share Capital A/c Dr. (Amount called up)
To Share Forfeiture A/c (Amount paid)
To Share Allotment A/c (Unpaid on allotment)
To Share First Call A/c (Unpaid on calls)
To Share Final Call A/c (Unpaid on calls)

Example :
Y Ltd. forfeited 200 equity shares of ₹ 10 each, ₹ 8 called up for non payment of first call @ ₹ 2 each. Application money @ ₹ 2 per share and allotment money @ ₹ 4 per share have already been received by the company. Give journal entry for forfeiture of shares.
Solutions:
Equity Share Capital A/c (200 x 8)       Dr.     1,600
To Calls in arrear A/c (200 x 2)                        400
To Share forfeiture A/c (200 x 6)                   1,200
(Being forfeiture of shares, ₹ 8 called up for non payment of first call of ₹ 2)

2. Forfeiture of Shares issued at premium:
When shares were issued at premium there can be two situations:
(i) If the premium is not paid by the shareholder – securities premium will be debited to cancel it.

(ii) If premium has already been received by the company – it cannot be cancelled even if the shares are forfeited in future.
Share Capital A/c                  Dr.
Securities Premium A/c        Dr.
To Share Forfeiture A/c
To Calls in Arrear A/c
(Being forfeiture of shares for non-payment of calls and premium money)

Re-issue of forfeited Shares:

  • The shares forfeited shall be re-issued on some specific terms.
  • Forfeited shares can be reissued at par, premium or discount.

Note:
During the reissue of the forfeited shares, the following things should be kept in mind:

  • The amount receivable on reissue together with the amount already received from defaulting member shall not be less than the face value of shares.
  • Loss on reissue should not exceed the forfeited amount.
  • If the loss on reissue is less than the amount forfeited, the surplus should be transferred to capital reserve in proportion to the number of shares reissued.
  • When shares are forfeited at a loss, such loss is to be debited to Share Forfeiture A/c.
  • Even though original shares can not be issued at a discount, but forfeited shares can be issued at a discount.
  • If forfeited shares are re-issued at a discount, the amount of discount can in no case, exceed the amount credited to the share forfeiture account.

1. Reissue of shares at par:
(a) On reissue of shares :
Bank A/c                                 Dr.                                 (Amt. received on reissue)
To Share Capital A/c
(No. of share x amt. received)

(b) On transfer of Share Forfeited A/c to Capital Reserve :
Share Forfeiture A/c               Dr.
To Capital Reserve A/c

Note:
On reissue of shares, if there is any loss then it is made good from the balance in Share Forfeiture A/c. After reissue, the balance in Share Forfeiture A/c becomes a capital profit for the company and is transferred to the Capital Reserve A/c.

2. Reissue of forfeited shares at a premium:
(a) On reissue of shares :
Bank A/c Dr.                         (amt. received on reissue)
To Share Capital A/c            (paid up value of shares)
To Securities Premium A/c   (premium received)

(b) Transfer of Share Forfeited A/c to Capital Reserve A/c :
Share Forfeiture A/c Dr.
(with forfeited amt. on shares reissued)
To Capital Reserve A/c

3. Reissue of forfeited shares at a discount:

  • Amount of discount cannot be more than balance in Share Forfeiture A/c
  • Discount allowed will be debited to Share Forfeiture A/c.
  • If discount allowed is less than balance in Share Forfeiture A/o, the surplus of Share Forfeiture A/c, will be transferred to Capital Reserve A/c in proportion to the number of shares reissued.

(a) On reissue of shares :
Bank A/c Dr. (amt. received on reissue)
Share Forfeiture A/c Dr. (discount allowed)
To Share Capital A/c

(b) On transfer of balance to Share Forfeiture A/c :
Share Forfeiture A/c Dr.
To Capital Reserve A/c

General Instructions for preparing the Balance Sheet of a company:
1. An asset shall be classified as current when it satisfies any of the following criteria:

  • It is expected to be realized in, or is intended for sale or consumption in, the company’s normal operating cycle;
  • it is held primarily for the purpose of being traded;
  • it is expected to be realized within twelve months after the reporting date; or
  • It is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date.

All other assets shall be classified as non-current.

2. An operating cycle is the time between the acquisition of assets for processing and their realization in Cash or cash equivalents. Where the normal operating cycle cannot be identified. it is assumed to have a duration of 12 months.

3. A liability shall be classified as current when it satisfies any of the following criteria:

  • it is expected to be settled in the company’s normal operating cycle;
  • it is held primarily for the purpose of being traded:
  • it is due to be settled within twelve months after the reporting date: or
  • the company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. Terms of a liability that could, at the option of the counter party, result in its settlement by the issue of equity instruments do not affect its classification.

All other liabilities shall be classified as non-current,”

4. A receivable shall be classified as a ‘trade receivable’ if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business.

5. A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due on account of goods purchased or services received in the normal course of business.

6. Depending upon the turnover of the company, the figures appearing in the financial statement may be rounded o ff as given below:

Turnover Rounding off
(a) Less than one hundred crore rupees To the nearest hundreds thousands, lakhs or millions or decimals thereof
(b) One hundred crore rupees or more To the nearest lakhs, millions or crores or decimals thereof.

A. Share Capital:
For each class of share capital(different classes of preference shares to be treated separately):

  • The number and amount of shares authorized;
  • The number of shares issued, subscribed and fully paid, and subscribed but not fully paid;
  • Par value per share;
  • A reconciliation of the number of shares outstanding at the beginning and at the end of the period;
  • The rights, preferences and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital;
  • Shares in the company held by its holding company or its ultimate holding company or by its subsidiaries or associates;
  • Shares in the company held by any shareholder holding more than 5 percent shares;
  • Shares reserved for issue under options and contracts/commitments for the sale of shares/disinvestment, including the terms and amounts;
  • Separate particulars for a period of five years following the year in which the shares have been allotted/bought back, in respect of;
  • Aggregate number and class of shares allotted as fully paid up pursuant to contract(s) without payment being received in cash.
  • Aggregate number and class of shares allotted as fully paid up by way of bonus shares (Specify the source from which bonus shares are issued).
  • Aggregate number and class of shares bought back.
  • Terms of any security issued along with the earliest date of conversion in descending order starting from the farthest such date.

B. Reserves and Surplus:
(i) Reserves and Surplus shall be classified as:

  • Capital Reserves;
  • Capital Redemption Reserves;
  • Securities Premium Reserve;
  • Debenture Redemption Reserve;
  • Revaluation Reserve;
  • Share Options Outstanding Account;
  • Other Reserves – (specify the nature of each reserve and the amount in respect thereof);
  • Surplus i.e. balance in statement of Profit & Loss disclosing allocations and appropriations such as dividend paid, bonus shares and transfer to/from reserves.

(Additions and deductions since last balance sheet to be shown under each of the specified heads)

(ii) A reserve specifically represented by earmarked investments shall be termed as a fund.

(iii) Debit balance of Statement of Profit and Loss shall be shown as a negative figure under the head -Surplus’ Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus, if any shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure is in the negative.

C. Long – term Borrowings:
(i) Long-term borrowings shall be classified as:

  • Bonds/debentures
  • Term loans – From banks, From other parties
  • Deferred payment liabilities.
  • Deposits.
  • Loans and advances from related parties.
  • Long-term maturities of finance lease obligations
  • Other loans and advances (specify nature).

(ii) Borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be specified separately in each case.

(iii) Where loans have been guaranteed by directors or others, the aggregate amount of such loans under each head shall be disclosed.

(iv) Bonds/debentures (along with the rate of interest and particulars of redemption or conversion, as the case may be) shall be stated in descending order of maturity or conversion, starting from farthest redemption or conversion date, as the case may be. Where bonds/debentures are redeemable by installments, the date of maturity for this purpose must be reckoned as the date on which the first installment becomes due.

(v) Particulars of any redeemed bonds/ debentures which the company has power to reissue.

(vi) Terms of repayment of term loans and other loans shall be stated.

(vii) Period and amount of default in repayment of dues, providing break¬up of principal and interest shall be specified separately in each case.

D. Other Long-term Liabilities:
Other Long-term Liabilities shall be classified as:

  • Trade payables
  • Others

E. Long-term Provisions:
The amounts shall be classified as:

  • Provision for employee benefits.
  • Others (specify nature).

F. Short-term borrowings
(i) Short-term borrowings shall be classified as:

  1. Loans repayable on demand – (a) from banks, (b) from other parties.
  2. Loans and advances from subsidiaries/ holding company/ associates/ business ventures.
  3. Deposits.
  4. Other loans and advances (specify nature).

(ii) Borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be specified separately in each case.

(iii) Where loans have been guaranteed by directors or others, a mention thereof shall be made and also the aggregate amount of loans under each head.

(iv) Period and amount of default in repayment of dues, providing break up of principal and interest shall be specified separately in each case.

G. Other current liabilities:
The amounts shall be classified as:

  • Current maturities of long-term debt;
  • Current maturities of finance lease obligations;
  • Income received in Advance;
  • Interest accrued but not due on borrowing;
  • Interest accrued and due on borrowings;
  • Unpaid Dividends;
  • Unpaid matured deposits and interest accrued thereon;
  • Unpaid matured debentures and interest accrued thereon;
  • Other payables (specify nature);

Application money received for allotment of securities and due for refund and interest accrued thereon. Share application money includes advances towards allotment of share capital. The terms & conditions including the number of shares proposed to be issued, the amount of premium, if any, and the period before which shares shall be allotted shall be disclosed.

It shall also be disclosed whether the company has sufficient authorized capital to cover the share capital amount resulting from allotment of shares out of such share application money. Further, the period for which the share application money has been pending beyond the period for allotment as mentioned in the document inviting application for shares along with the reason for Such share application money being pending shall be disclosed.

Share application money not exceeding the issued capital and to the extent not refundable shall be shown under the head Equity and share application money to the extent refundable i.e., the amount in excess of subscription or in case the requirements of minimum subscription are not met, shall be separately shown under ‘Other current liabilities’;

H. Short-term provisions:
The amounts shall be classified as:

  • Provision for employee benefits;
  • Others (specify nature).

I. Tangible assets
(i) Classification shall be given as:

  • Land
  • Buildings
  • Plant and Equipment
  • Furniture and Fixtures
  • Vehicles
  • Office Equipment
  • Others (specify nature)

(ii) Assets under lease shall be separately specified under each class of asset.

(iii) A reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions and other movements and the related depreciation and impairment losses/reversals shall be disclosed separately.

(iv) Where sums have been written off on a reduction of capital or revaluation of assets or where sums have been added on revaluation of assets, every balance sheet subsequent to date of such write-off, or addition shall show the reduced or increased figures as applicable and shall by way of a note also show the amount of the reduction or increase as applicable together with the date therefore for the first five years subsequent to the date of such reduction or increase.

J. Intangible assets:
(i) Classification shall be given as:

  • Goodwill
  • Brands/trademarks.
  • Computer software.
  • Mastheads and publishing titles.
  • Mining rights.
  • Copyrights, and patents and other intellectual property rights, services and operating rights.
  • Recipes, formulae, models, designs and prototypes.
  • Licences and franchise.
  • Others (specify nature).

(ii) A reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions and other movements and the related amortization and impairment losses/reversals shall be disclosed separately.

(iii) Where sums have been written off on a reduction of capital or revaluation of assets or where sums have been added on revaluation of assets, every balance sheet subsequent to date of such write-off, or addition shall show the reduced or increase as applicable and shall by way of a note also show the amount of the reduction or increase as applicable together with the date therefore for the first five years subsequent to the date of such reduction or increase.

K. Non-Current Investments
(i) Non- current investments shall be classified as trade investments and other investments and further classified as:

  • Investment property;
  • Investments in Equity Instruments;
  • Investments in Preference shares;
  • Investments in Government or trust securities;
  • Investments in units, debentures or bonds;
  • Investments in Mutual Funds;
  • Investments in partnership firm;
  • Other non-current investments (specify nature)

Under each classification, details shall be given of names of the bodies corporate (indicating separately whether such bodies are –

  • subsidiaries
  • associates
  • joint ventures
  • controlled special purpose entities

in whom investments have been made and the nature and extent of the investment so made in each such body corporate (showing separately investments which are partly paid). In regard to investments in the capital of partnership firms, the names of the firms (with the names of all their partners, total capital and the shares of each partner) shall be given.

(ii) Investments carried at other than at cost should be separately stated specifying the basis for valuation thereof.

(iii) The following shall also be disclosed:

  • Aggregate amount of quoted investments and market value thereof;
  • Aggregate amount of unquoted investments;
  • Aggregate provision for diminution in value of investments;
  • Aggregate amount of partly paid-up investments;
  • The names of bodies corporate (indicating separately the names of subsidiaries, associates and other business ventures) in whose securities, investments have been made and the nature and extent of the investments so made in each such body corporate.

L. Long-term loans and advances:
(i) Long-term loans and advances shall be classified as:

  • Capital Advances;
  • Security Deposits;
  • Loans and Advances to related parties (giving details thereof);
  • Other Loans and Advances (specify nature).

(ii) The above shall also be separately sub-classified as;

  • To the extent secured, considered good;
  • Others, considered good;
  • Doubtful.

(iii) Allowance for bad and doubtful loans and advances shall be disclosed under the relevant heads separately.

(iv) Loans and Advances due by directors or other officers of the company or any of them either severally or jointly with any other persons or amounts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated.

M. Other non-current assets:
Other non-current assets shall be classified as:
(i) Long-term Trade Receivables (including trade receivables on deferred credit terms);

(ii) Others (specify nature)

(iii) (a) Long-term Trade Receivables, shall be sub-classified as:

  • secured, considered good;
  • unsecured, considered good;
  • Doubtful

(b) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.

(c) Debts due by directors or other officers of the company or any of them either severally or jointly with any other person debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated.

N. Current Investments:
(i) Current investments shall be classified as:

  • Investments in Equity Instruments;
  • Investments in Preference shares;
  • Investments in Government or trust securities;
  • Investments in units, debentures or bonds;
  • Investments Mutual Funds;
  • Investments partnership firm;
  • Other investments (specify nature)

Under each classification, details shall be given of names of the bodies corporate (indicating separately whether such bodies are (i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special purpose entitles) in whom investments have been made and the nature and extent of the investment so made in each such body corporate (showing separately investments which are partly paid).

In regard to investments in the capital of partnership firms, the names of the firms (with the names of all their partners, total capital and the shares of each partner) shall be given.

(ii) The following shall also be disclosed:

  • The basis of valuation of individual investments:
  • Aggregate amount of quoted investments and market value thereof;
  • Aggregate amount of unquoted investments;
  • Aggregate amount of partly paid-up investments.
  • Aggregate provision for diminution in value of investments.

O. Inventories:
(i) Inventories shall be classified as :

  • Raw material;
  • Work-in-progress;
  • Finished goods;
  • Stock-in-trade;
  • Stores and spares;
  • Loose tools;
  • Others (specify nature).

(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.

(iii) Mode of valuation should be stated.

P. Trade Receivables:
(i) Aggregate amount of Trade Receivables outstanding for a period exceeding six months from the date they are due for payment should be separately stated.

(ii) Trade receivables shall also be classified as:

  • To the extent secured, considered good;
  • Others, considered good;
  • Doubtful

(iii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.

(iv) Debts due by directors or other officers of the company or any of them either severally or jointly with any other person debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated.

Q. Cash and cash equivalents:
(i) Classification shall be made as:

  • Bank balances;
  • Cheques, drafts on hand;
  • Cash on hand;
  • Cash equivalents – short-term, highly liquid investments that are readily convertible into known amount of cash and which are subject to an insignificant risk of changes in value;
  • Others (specify nature)

(ii) Earmarked bank balances (example – unpaid dividend) shall be separately stated.

(iii) Balance with banks to the extent held as security against the borrowings, guarantees, other commitments shall be disclosed separately.

(iv) Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated.

(v) Bank deposits with more than 12 months maturity shall be disclosed separately.

R. Short-term loans and advances:
(i) Short-term loans and advances shall be classified as:

  • Loans and Advances to related parties (giving details thereof);
  • Others (specify nature).

(ii) The above shall also be sub-classified as:

  • To the extent secured, considered good;
  • Others, considered good;
  • Doubtful;

(iii) Allowance for bad and doubtful loans and advances shall be disclosed under the relevant heads separately.

(iv) Loans and Advances due by directors or other officers of the company or any of them either severally or jointly with any other person debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated.

S. Other current assets (specify nature):
This is an all-inclusive heading, which incorporates current assets that do not fit into any other assets categories.

T. Contingencies and commitments:
(to the extent not provided for)
(i) Contingent liabilities shall be classified as:

  • Claims against the company not acknowledged as debt;
  • Guarantees;
  • Other money for which the company is contingently liable

(ii) Commitments shall be classified as:

  • Estimated amount of contracts remaining to be executed on capital account and not provided for;
  • Uncalled liability on shares and other investments partly paid;
  • Other commitments (specify nature).

U. The amount of dividends proposed to be distributed to equity holders for the period and the related amount per share shall be disclosed separately. Arrears of fixed cumulative dividends shall also be disclosed separately.

V. Where in respect of an issue of securities made for a specific purpose, the whole or part of the amount has not been used for the specific purpose at the Balance Sheet date, they shall be indicated by way of note how such unutilized amounts have been used or invested.

W. If, in the opinion of the board, any of the assets other than fixed assets and non-current investments do not have a value on realization in the ordinary course of business at least equal to the amount at which they are stated, the fact that the board is of the opinion, shall be stated.

PART – II
Form of statement of profit and loss
Name of Company __________
Profit and Loss Statement for the year ended __________

(₹ in ……….)

Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 4

General Instructions for Preparation of Statement of Profit and Loss:
1. The Provision of this Part shall apply to the Income and Expenditure account referred to in sub-section (2) of Section 210 of the Act, in like manner as they apply to a statement of profit and loss.

2. (A) In respect of a company other than a finance company, revenue from operations shall be disclosed separately in the notes revenue from –

  • Sale of products;
  • Sale of services;
  • Other operating revenues;
  • Excise duty.

(B) In respect of a finance company, revenue from operations shall include revenue from –

  • Interest; and
  • Other financial services

Revenue under each of the above heads shall be disclosed separately by way of notes to accounts to the extent applicable.

3. Finance Costs:
Finance costs shall be disclosed as:

  • Interest expense;
  • Other borrowing costs;
  • Applicable net gain/loss on foreign currency transaction and translation.

4. Other Income:
Otner income shall be classified as:

  • Interest Income (in case of a company other than a finance company);
  • Dividend Income;
  • Net gain/loss on sale of investments
  • Other non-operating income (net of expenses directly attributable to such income).

5. Additional Information:
A Company shall disclose by way of notes additional information regarding aggregate expenditure and income on the following items:

  • Employee Benefits Expense [showing separately –
    (a) salaries and wages
    (b) contribution to provident and other funds
    (c) expense on Employee Stock Option Scheme (ESOP) and Employee Stock Purchase Plan (ESPP)
    (d) staff welfare expense
  • Depreciation and amortization expense;
  • Any item of income or expenditure which exceeds one percent of the revenue from operations or ? 1,00,000, whichever is higher;
  • Interest Income;
  • Interest Expense;
  • Dividend Income;
  • Net gain/loss on sale of investments;
  • Adjustments to the carrying amount of investments;

6. Net gain or loss on foreign currency transaction and translation (other than considered as finance cost);

7. Payments to the auditors as –

  • audit
  • for taxation matters
  • for company matters
  • for management services
  • for other services
  • for reimbursement of expense;

8. Details of items of exceptional and extraordinary nature;
(i) Prior Period Items;

(ii) (a) In the case of manufacturing companies;

  • Raw materials under broad heads.
  • Goods purchased under broad heads.

(b) In the case of trading companies, purchases in respect of goods traded in by company under broad heads.

(c) In the case of companies rendering or supplying services, gross income derived from services rendered or supplied under broad heads.

(d) In the case of a company, which falls under more than one of the categories mentioned in (a), (b) and (c) above, it shall be sufficient compliance with the requirements herein if purchase, sales and consumption of raw material and the gross income from services rendered is shown under broad heads.

(e) In the case of other companies, gross income derived under broad heads.

(iii) In the case of all concerns having work-in-progress, work-in-progress under broad heads.

(iv) (a) The aggregate, if material, of any amounts set aside or propose to be set aside, to reserve, but not including provisions made to meet any specific liability, contingency or commitment known to exit at the date as to which the Balance Sheet is make up.

(b) The aggregate, if material, of any amounts withdrawn from such reserves.

(v) (a) The aggregate, if material, of the amounts set aside to provisions made for meeting specific liabilities, contingencies or commitment.

(b) The aggregate, if material, of the amounts withdrawn from such provisions, as no longer required.

(vi) Expenditure incurred on each of the following items, separately for each item:

  • Consumption of stores and spare parts
  • Power & fuel
  • Rent
  • Repairs to building
  • Repairs to Machinery
  • Insurance
  • Rates and Taxes, excluding, taxes on income.
  • Miscellaneous expense,

(vii)

  • Dividends from subsidiary companies
  • Provisions for losses of subsidiary companies

(viii) The profit and loss account shall also contain by way of a note the following information, namely:
(a) Value of imports calculated on C.I.F. basis by the company during the financial year in respect of –

  • Raw materials;
  • Companies and spare parts;
  • Capital goods;

(b) Expenditure in foreign currency during the financial year on account of royalty, know-how, professional and consultation fees, interest, and other matters;

(c) Total value of all imported raw materials, spare parts and the components consumed during the financial year and the total value of all indigenous raw materials, spare parts and components similarly consumed and the percentage of each to the total consumption;

(d) The amount remitted during the year in foreign currencies on account of dividends with specific mention of the total number of nonresidents shareholders, the total number of shares held by them on which the dividends were due and the year to which the dividends relate;

(e) Earnings in foreign exchange classified under the following heads, namely:

  • Exports of goods calculated on F.O.B basis;
  • Royalty, know-how professional and consultation fees;
  • Interest and dividends;
  • Other Income, indicating the nature thereof.

Note:
Broad heads shall be decided taking into account the concept of materiality and presentation of true and fair view of Financial Statements.

Introduction to Company Accounts MCQ Questions

1. Member’s in private company are (Maximum):
(a) 100
(b) 200
(c) 500
(d) Unlimited.
Answer:
(b) 200

2. Amount of share application should not be less than _________ % of face value:
(a) 5%
(b) 10%
(c) 75%
(d) None.
Answer:
(a) 5%

3. Amount of share forfeited after re-issue of shares should be transferred to:
(a) Add to Share Capital
(b) Capital Reserve A/c
(c) The Head Revenue & Surplus
(d) Share Forfeited A/c.
Answer:
(b) Capital Reserve A/c

4. If shares are issued at premium then, the amount of premium can be utilized.
(a) for issue of bonus shares
(b) for payment of dividend
(c) for redemption of debenture
(d) None.
Answer:
(a) for issue of bonus shares

5. Value of share is ₹ 100 and only ₹ 80 called up only and a shareholder did not paid the final call of ₹ 30 and his share is forfeited. On forfeiture Share Capital A/c will be debited by:
(a) ₹ 100
(b) ₹ 80
(c) ₹ 50
(d) ₹ 70
Answer:
(b) ₹ 80

6. All those companies, which operate under the special act passed by the state Legislature or Parliament, are called:
(a) Unregistered Company
(b) Registered Company
(c) Statutory Company
(d) Government Company.
Answer:
(c) Statutory Company

7. Time period between 2 calls should be _________.
(a) Minimum 15 Days
(b) Minimum 21 Days
(c) Minimum 1 Month
(d) Minimum 3 Months.
Answer:
(c) Minimum 1 Month

8. “Securities Premium A/c” is shown in B/S on:
(a) Asset side (Loan & Advances)
(b) Liabilities side (Reserve & Surplus)
(c) Liabilities side (Loan & Advances)
(d) Asset side (Misc Assets).
Answer:
(b) Liabilities side (Reserve & Surplus)

9. Which capital is shown in B/S:
(a) Authorised Share Capital
(b) Issued Share Capital
(c) Subscribed Share Capital
(d) All of the above.
Answer:
(d) All of the above.

10. The maximum amount beyond which a company is not allowed to raise funds by issue of shares is known as:
(a) Nominal Capital
(b) Issued Capital
(c) Subscribed Capital
(d) None.
Answer:
(a) Nominal Capital

11. Maximum amount that can be collected as premium as a percentage of face value:
(a) 10%
(b) 20%
(c) 30%
(d) Unlimited.
Answer:
(d) Unlimited.

12. The minimum amount that should be called by a company with application for its shares is the following percent of face value of shares:
(a) 2%
(b) 5%
(c) 10%
(d) 15%.
Answer:
(b) 5%

13. A company cannot issue:
(a) Redeemable Equity Shares
(b) Redeemable Preference Shares
(c) Redeemable Debentures
(d) Fully Convertible Debentures.
Answer:
(a) Redeemable Equity Shares

14. Which of the following is not a capital profit?
(a) Profit prior to incorporation of the company
(b) Profit from the sale of fixed assets
(c) Premium on issue of shares
(d) Compensation received on the termination of a contract.
Answer:
(d) Compensation received on the termination of a contract.

15. Unless otherwise stated, a preference share is always deemed to be:
(a) cumulative, participating and non – convertible
(b) non – cumulative, non – participating and non – convertible
(c) cumulative, non – participating and non – convertible
(d) non – cumulative, participating and non – convertible.
Answer:
(c) cumulative, non – participating and non – convertible

16. Premium on issue of shares can be used for:
(a) issue of bonus shares
(b) payment of dividends
(c) payment of operating expenses
(d) redemption of debentures.
Answer:
(a) issue of bonus shares

17. The rate of interest paid on calls in advance as per Table F is:
(a) 5% p.a.
(b) 6% p.a.
(c) 10% p.a
(d) 12% p.a.
Answer:
(d) 12% p.a.

18. The document inviting offers from public to subscribe for the debentures or shares or deposits of a company is a:
(a) Share Certificate
(b) Articles of Association
(c) Fixed Deposit Receipt
(d) Prospectus.
Answer:
(d) Prospectus.

19. When shares are issued to promoters for their services, the account that will be debited is:
(a) Preliminary Expenses A/c
(b) Goodwill A/c
(c) Promoters A/c
(d) Share Capital A/c.
Answer:
(b) Goodwill A/c

20. The maximum amount beyond which a company is not allowed to raise funds, by issue of shares, is its:
(a) Issued Capital
(b) Reserve Capital
(c) Authorised Capital
(d) Subscribed Capital
Answer:
(c) Authorised Capital

21. Dividends are usually paid on:
(a) Authorised Capital
(b) Issued Capital
(c) Cailed – up Capital
(d) Paid – up Capital
Answer:
(d) Paid – up Capital

22. Which of the following should be deducted from the share capital to find out paid – up capital?
(a) Calls – in – advance
(b) Calls – in arrears
(c) Share forfeiture
(d) Discount on issue of shares.
Answer:
(b) Calls – in arrears

23. Which of the following does not appear under the head ‘share capital’ of a balance sheet?
(a) Preference Share Capital
(b) Share Forfeiture A/c
(c) Equity Share Capital
(d) Capital Reserve A/c.
Answer:
(d) Capital Reserve A/c.

24. Which of the following statements is true regarding calls – in – arrears?
(a) Calls – in – arrears is that part of called up capital which remains unpaid.
(b) It is not shown in the balance sheet until the defaulted shares are forfeited.
(c) The rate of interest on calls – in – arrear is chargeable at 5% p.a. if a company adopts Table F.
(d) Charging of interest on calls – in arrear need not be permitted by the articles of association.
Answer:
(a) Calls – in – arrears is that part of called up capital which remains unpaid.

25. Which one of the following is known as Registered Capital of the Company?
(a) Paid – up Capital
(b) Authorised Capital
(c) Uncalled Capital
(d) Reserve Capital.
Answer:
(b) Authorised Capital

26. The directors of B Ltd. made the final call of ₹ 30 per share on January 15,2004 indicating the last date of payment of call money to be January 31,2004. Mr. C holding 7,500 shares paid the call money on March 15, 2004.
If the company adopts Table F of the Companies Act the amount of interest on calls – in – arrear to be paid by Mr. C is?
(a) ₹ 1937.50
(b) ₹ 1,406.00
(c) ₹ 2812.50
(d) ₹ 1,687.50.
Answer:
(c) ₹ 2812.50

27. O Ltd. issued 10,000 equity shares of ₹ 10 each at a premium of 20% payable ₹ 4 on application (including premium), 15 on allotment and the balance on first and final call. The company received applications for 15,0 shares and allotment was made pro-rata. P, to whom 3,000 shares were allotted failed to pay the amount due on allotment. All his shares were forfeited before the call was made. The forfeited shares were reissued to Q at par. Assuming that no other bank transactions took place, the bank balance of the company after effecting the above transactions is?
(a) ₹ 1,14, 000
(b) ₹ 1,32,000
(c) ₹ 1,20,000
(d) ₹ 1,00,000.
Answer:
(b) ₹ 1,32,000

28. A company forfeited 2,000 shares of ₹ 10 each (which were issued at par) held by Mr. John for non – payment of allotment money of ₹ 4 per share. The called – up value per share was ₹ 9. On forfeiture, the amount debited to share capital A/c is?
(a) ₹ 10,000
(b) ₹ 8,000
(c) ₹ 2,000
(d) ₹ 18,000.
Answer:
(d) ₹ 18,000.

29. G. Ltd. acquired assets worth ₹ 7,50,000 from H. Ltd. by issue of shares of ₹100 at a premium of 25%. The number of shares to be issued by, G. Ltd. to settle the purchase consideration is?
(a) 6,000 Shares
(b) 7,500 Shares
(c) 9,375 Shares
(d) 5,625 Shares
Answer:
(a) 6,000 Shares

30. B. Ltd., a listed company, proposed to issue 1,00,000 equity shares of ₹ 10 each at par by way of private placement. The maximum amount of brokerage that can be paid by the company is?
(a) ₹ 5,000
(b) ₹ 10,000
(c) ₹ 50,000
(d) ₹ 25,000
Answer:
(a) ₹ 5,000

31. UK Ltd. issued 20,000 shares of ₹10 each at a premium of 20% on May 01,2004, payable as follows:
On application ₹ 4.50 (inclusive of premium)
On allotment ₹ 2.50
On first and final call ₹ 5.00
Mrs. M, to whom 1,000 shares were allotted, has paid ₹ 5,000 on June 01, 2004. At the time of remitting the allotment money, she indicated that the excess money should be adjusted towards the call money. The directors of the company made the first and final call on October 31,2004. The company has a policy of paying interest on calls- in-advance.
The amount of interest paid to Mrs. M on calls-in-advance is?
(a) ₹ 62.00
(b) ₹ 52.08
(c) ₹ 250
(d) ₹ 150.00
Answer:
(c) ₹ 250

32. Z Ltd. issued 10,000 shares of ₹ 10 each. The called up value per share was ₹ 8. The company forfeited 200 shares of Mr. A for non- payment of 1st call money of per share. He paid ₹ 6 for application and allotment money. On forfeiture, the share capital account will be _________.
(a) Debited by ₹ 2,000
(b) Debited by ₹ 1,600
(c) Credited by ₹ 1,600
(d) Debited by ₹ 1,200
Answer:
(b) Debited by ₹ 1,600

33. B Ltd. invited applications for 5,000 shares of ₹10 each at a premium of ₹ 2 per share payable as follows:
On application – ₹ 5 (including premium)
On allotment – ₹ 4
On final call – ₹ 3
Allotment was made on pro rate basis to the applicants of 6,000 shares. Mr. C to whom 60 shares were allotted, failed to pay allotment money and call money. Mr. D the holder of 100 shares, failed to pay call money. All these shares were forfeited after proper notice.
(i) On forfeiture, the amount credited to share allotment account is?
(a) ₹ 480
(b) ₹ 640
(c) ₹ 180
(d) ₹ 400
Answer:
(c) ₹ 180

(ii) On forfeiture, the amount credited to share forfeiture account is?
(a) ₹ 300
(b) ₹ 880
(c) ₹ 320
(d) ₹ 940
Answer:
(b) ₹ 880

34. When shares are forfeited, the Share Capital Account Is debited with _________ and the Share Forfeiture Account is credited with _________.
(a) Paid – up capital of shares forfeited; Called up capital of shares forfeited
(b) Called up capital of shares forfeited; Calls in arrear of shares forfeited.
(c) Called up capital of shares forfeited; Amount received on shares forfeited
(d) Calls in arrears of shares forfeited; Amount received on shares forfeited.
Answer:
(c) Called up capital of shares forfeited; Amount received on shares forfeited

35. The following statements apply to equity/preference shareholders. Which one of them applies only to preference shareholders?
(a) Shareholders risk the loss of investment
(b) Shareholders bear the risk of no dividends in the event of losses
(c) Shareholders usually have the right to vote
(d) Dividends are usually given at a set amount in every financial year.
Answer:
(d) Dividends are usually given at a set amount in every financial year.

36. What do you mean by foreign company?
(a) Company that is incorporated outside India but operates in India
(b) Company that is incorporated in India but operates in India
(c) Subsidiary company in India of a foreign holding
(d) None of these
Answer:
(a) Company that is incorporated outside India but operates in India

37. The amount of capital that is mentioned in ‘Capital clause’ Is known as:
(a) Authorised Capital
(b) Registered Capital
(c) Nominal Capital
(d) All of these
Answer:
(d) All of these

38. That portion of called up capital which is not received is known as:
(a) Uncalled capital
(b) Unpaid calls
(c) Reserved capital
(d) None of these
Answer:
(b) Unpaid calls

39. The minimum subscription as prescribed by SEBI against the entire issue is:
(a) 95%
(b) 90%
(c) 5%
(d) None of these
Answer:
(b) 90%

40. The amount called over and above the nominal value of share should be credited to:
(a) Share premium a/c
(b) Share capital a/c
(c) Share allotment a/c
(d) None of these
Answer:
(a) Share premium a/c

41. The excess of the nominal value over the issue price represents:
(a) Premium on share
(b) Discount on share
(c) Forfeiture of share
(d) None of these
Answer:
(b) Discount on share

42. Pro-Rata allotment is done in case of:
(a) Full subscription
(b) Over subscription
(c) Under subscription
(d) Shares issued at premium
Answer:
(b) Over subscription

43. Share application account is of the nature of a _________.
(a) Reala/c
(b) Personal a/c
(c) Nominal a/c
(d) None of the above
Answer:
(b) Personal a/c

44. Profit prior to incorporation is an example of _________.
(a) Revenue reserve
(b) Secret reserve
(c) Capital reserve
(d) General reserve
Answer:
(c) Capital reserve

45. The company charges interest on calls in arrear at rate of:
(a) 6%
(b) 10%
(c) 5%
(d) 14%
Answer:
(b) 10%

46. If the Premium of the forfeited share has already been received, then share Premium a/c should be:
(a) Credited
(b) Debited
(c) Cannot be cancelled
(d) None of these
Answer:
(c) Cannot be cancelled

47. What percentage of shares issued to the public must be subscribed so that the shares can be allotted?
(a) 75%
(b) 50%
(c) 90%
(d) None of these
Answer:
(c) 90%

48. Dividend proposed to be paid is calculated as a percentage of _________.
(a) Net Profits
(b) Authorised Capital
(c) Issued Capital
(d) Paid up Capital
Answer:
(d) Paid up Capital

49. Which account will be credited if the gain on forfeiture is more than the loss on reissue _________.
(a) Capital Reserve
(b) Profit & Loss
(c) General Reserve
(d) Share Forfeiture
Answer:
(a) Capital Reserve

50. The subscribed capital of a company is ₹ 80,00,000 and the nominal value of the share is ₹ 100 each. There were no calls in arrear till the final call was made. The final call made was paid on 77,500 shares only. The balance in the calls in arrear amounted to ₹ 62,500. Calculate the final call on share.
(a) ₹ 7
(b) ₹ 20
(c) ₹ 22
(d) ₹ 25
Answer:
(d) ₹ 25

51. On the forfeiture of shares, the share capital will be debited by _________.
(a) Paid up value
(b) Called up value
(c) Uncalled capital
(d) Nominal value
Answer:
(b) Called up value

52. If the shares are issued at a premium and the amount of premium has been received, then what will be the treatment of the premium amount at the time of forfeiture.
(a) Debit Security Premium A/c
(b) Debit Capital Reserve A/c
(c) Credit Security Premium A/c
(d) No treatment
Answer:
(d) No treatment

53. As per Section 52, the balance standing in the securities premium account cannot be utilized for _________.
(a) Payment of dividend
(b) Writing off discount on issue of shares
(c) Issue of fully paid Bonus Shares
(d) None of these
Answer:
(a) Payment of dividend

54. Voluntary return of shares for cancellation by the shareholders is called _________.
(a) Cancellation of shares
(b) Forfeiture
(c) Surrender of shares
(d) None of these
Answer:
(c) Surrender of shares

55. Balance in the share forfeiture account appears in the balance sheet under the head of _________.
(a) Share Capital
(b) Reserve & Surplus
(c) Current Liabilities
(d) None of these
Answer:
(a) Share Capital

56. The statement issued to the public for issue of shares is called as _________.
(a) Statement in lieu of prospectus
(b) Prospectus
(c) Articles of association
(d) None of the above
Answer:
(b) Prospectus

57. Right shares are issued to _________.
(a) The existing shareholders
(b) Promoters
(c) Employees
(d) Vendor
Answer:
(a) The existing shareholders

58. Share allotment account is _________.
(a) Personal A/c
(b) Nominal A/c
(c) Real A/c
(d) All of the above
Answer:
(a) Personal A/c

59. If the shares are issued to the promoters, then which account will be debited _________.
(a) Promoters A/c
(b) Share Capital A/c
(c) Goodwill A/c
(d) P & L A/c
Answer:
(c) Goodwill A/c

60. A company forfeited 5,000 shares of ₹ 10 each held by A for non payment of allotment money of ₹ 4 per share. The called up value per share is ₹ 8. Calculate the amount to be debited to the share capital A/c at the time of forfeiture of such shares _________.
(a) ₹ 28,000
(b) ₹ 40,000
(c) ₹ 18,000
(d) None of these
Answer:
(b) ₹ 40,000

61. A vender has been allotted shares of ₹ 5,50,000 in consideration of net assets purchased worth ₹ 5,00,000. Then the balance of ₹ 50,000 will be considered as _________.
(a) Goodwill
(b) Capital Reserve
(c) Loss
(d) Profit
Answer:
(a) Goodwill

62. ABC Ltd. acquired the assets worth ₹ 10,00,000 from XYZ Ltd. by issuing shares of ₹ 10 each at a premium of ₹ 10 each. Calculate the number of shares to be issued to settle the liability
(a) ₹ 50,000
(b) ₹ 1,00,000
(c) ₹ 5,000
(d) ₹ 10,000
Answer:
(a) ₹ 50,000

63. ABC Ltd. allotted 20,000 shares to the applicants of 28,000 shares on pro-rata basis. If the application money is ₹ 5 per share, calculate the number of shares allotted to Ram and also the amount to be adjusted from further calls if he has applied for 840 shares.
(a) 800 shares, ₹ 1,200
(b) 600 shares, ₹ 800
(c) 600 shares, ₹ 1,800
(d) 600 shares, ₹ 1,200
Answer:
(d) 600 shares, ₹ 1,200

64. If a share of ₹ 100 on. which ₹ 80 has been paid is forfeited, then calculate the minimum price at which it can be re-issued.
(a) ₹ 80
(b) ₹ 100
(c) ₹ 20
(d) ₹ 50
Answer:
(c) ₹ 20

65. A company has issued 50,000 shares of ₹ 10 each at 20% premium payable as follows Application ₹ 3, Allotment ₹ 5 (including premium) and first & final call of ₹ 4 each. A holder of 2,500 shares failed to pay the first & final call and his shares were forfeited thereafter. Calculate the amount to be credited to the share forfeiture A/c.
(a) ₹ 11,000
(b) ₹ 15,000
(c) ₹ 22,000
(d) None of these
Answer:
(b) ₹ 15,000

66. Which of the following statement is true?
(a) Authorised Capital = Issued Capital
(b) Authorised Capital > Issued Capital
(c) Paid up Capital ≥ Issued Capital
(d) None of the above.
Answer:
(b) Authorised Capital > Issued Capital
Authorised Share Capital means that amount of capital which is mentioned in ‘Capital Clause’ of the ‘Memorandum of Association’ registered with the Register of Company. Issued share capital means that portion of the Authorised Capital which is issued by the company. Paid – up share capital means that capital which is paid up by the shareholders. Thus, authorised capital is always greater than issued capital.

67. Which of the following will define, when appropriation of a certain number of shares is made to an applicant in response to his application?
(a) Share allotment
(b) Share forfeiture
(c) Share trading
(d) Share purchase
Answer:
(a) Share allotment
Allotment means the appropriation of a certain number of shares to an applicant in response to his application. If the number of shares applied for is less than the number of shares offered, the allotment can be only for the shares applied for, provided, minimum subscription is raised.

68. P Ltd. forfeited 150 shares of ₹ 10 each, issued at a premium of ₹ 2, for non – payment of the final call of ₹ 3. Out of these, 100 shares were re-issued @ ₹ 11 per share. How much amount would be transferred to capital reserve?
(a) ₹ 700
(b) ₹ 500
(c) ₹ 1,200
(d) ₹ 300
Answer:
(a) ₹ 700
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 5
₹ 700 would be transferred to Capital Reserve A/c.

69. If the number of shares offered to public for subscription is less than the number of applications received, it is termed as:
(a) Minimum subscription
(b) Over subscription
(c) Under subscription
(d) Maximum subscription
Answer:
(c) Under subscription
When the number of shares applied for less than the number of shares issued, the shares are said to be under – subscribed. In such situation, the directors allot shares on some reasonable basis because the company can allot only that number of shares which are actually offered for subscription.

70. XY Limited issued 2,50,000 equity shares of ₹ 10 each at a premium of ₹ 1 each payable as ₹ 2.5 on application, ₹ 4 on allotment and balance on the first and final call. Applications were received for 5,00,000 equity shares but the company allotted to them only 2,50,000 shares. Excess money was refunded after adjustment for further calls. Last call on 500 shares were not received and shares were forfeited after due notice. This is a case of:
(a) Over subscription
(b) Pro-rata allotment
(c) Forfeiture of shares
(d) All of the above
Answer:
(d) All of the above
Company invited applications for 2,50,000 shares but applications are received for 5,00,000 shares. This is a case of over-subscription. Company allotted 2,50,000 shares to the applicants of 5,00,000 shares. This is a case of Pro-rata allotment. Company could not receive last call on 500 shares and these were subsequently forfeited. This is a case of forfeiture of shares. Hence, all of the above.

71. Z Limited forfeited 200 fully called up shares of ₹ 10 each on which ₹ 1,300 had been received; later on these shares were reissued as fully paid up @ ₹ 9 per share. The amount to be transferred from share forfeited account to capital reserve account will be:
(a) ₹ 1,800
(b) ₹ 2,000
(c) ₹ 1,100
(d) Nil
Answer:
(c) ₹ 1,100
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 6

72. Omega Limited, a listed company acquires assets worth ₹ ₹,50,000 from Alpha Limited and issue shares of ₹ 10 each at a premium of 25%. The number of shares to be issued by Omega Ltd., to settle the purchase consideration will be:
(a) ₹ 60,000
(b) ₹ 75,000
(c) ₹ 1,00,000
(d) ₹ 1,25,000
Answer:
(a) ₹ 60,000
No. of Shares to be issued = \(\frac{7,50,000}{125}\)
= 60,000 shares.

73. E Ltd. had allotted 10,000 shares to the applicants of 14,000 shares on pro-rata basis. The amount payable on application was ₹ 2. F applied for 420 shares. The number of shares allotted and the amount carried forward for adjustment against allotment money due from F will be:
(a) 60 shares; ₹ 120
(b) 340 shares; ₹ 160
(c) 320 shares; ₹ 200
(d) 300 shares; ₹ 240
Answer:
(d) 300 shares; ₹ 240
No. of shares allotted to F = 420 x \(\frac { 10 }{ 14 }\) = 300 shares.
F sent 420 x 2 = ₹ 840 on application money adjusted against
application (300 x 2)     600
Excess money               240
to be adjusted against allotment.

74. A company forfeited 1,000 shares of ₹ 10 each (which were issued at par) held by Saurabh for non-payment of allotment money of ₹ 4 per share. The called-up value per share was ₹ 8. On forfeiture, the amount debited to share capital account will be _________.
(a) ₹ 10,000
(b) ₹ 8,000
(c) ₹ 2,000
(d) ₹ 18,000
Answer:
(b) ₹ 8,000
On forfeiture, following entry will be made :
Share Capital A/c    Dr.
(with the amount of called up value of share forfeited)
To Share Forfeiture A/c (With the amount paid up by share-holder)
To Share Allotment A/c (With the amount of unpaid calls)
So, Share Capital A/c will be debited by (1,000 x 8) = ₹ 8,000

75. The maximum amount beyond which a company is not allowed to raise funds by issue of its shares, is called _________.
(a) Subscribed capital
(b) Called-up capital
(c) Paid-up capital
(d) Authorised capital.
Answer:
(d) Authorised capital.
According to Companies Act, 2013, a joint stock company is not allowed to raise funds by issue of shares beyond the limit of Authorised Capital.

76. Pious Limited purchases a machine worth ₹ 1,15,000 from Indigo Traders. Payment was made as ₹ 10,000 by cheque and the remaining by issue of equity shares of the face value of ₹ 10 each fully paid-up at an issue price of ₹ 10.50 each. Amount of share premium would be _________.
(a) ₹ 6,000
(b) ₹ 5,000
(c) ₹ 7,000
(d) ₹ 4,000
Answer:
(b) ₹ 5,000
Machinery A/c Dr. 1,15,000
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 7
(Being payment made to Indigo Traders)
Thus, share premium A/c would be ₹ 5,000.

77. A company invited share application of 5,000 shares, it received application of 6,000 shares and were allotted shares on prorata basis, 200 shares were forfeited. To which of the following does this case belong :
(a) Prorata
(b) Oversubscription.
(c) Forfeiture
(d) All of the above
Answer:
(d) All of the above
When number of shares offered for subscription ‘is less than’ no. of shares actually subscribed, it is said to be the case of over subscription. Under this situation, excess applications are rejected and allotment to the applicants may be made on pro-rata basis (i.e. proportionately) when shares are allotted, a condition is imposed to pay calls on their due date, failure of which results in forfeiture of shares. In the given question, since all these conditions are present, it belongs to all of these, i.e. prorata, over subscription and forfeiture.

78. X failed to pay final call on 24,000 shares ₹ 20 per share on 15.12.2013 and paid the same on 15.03.2014. What is the interest of calls in arrears.
(a) 12,000
(b) 6,000
(c) 6150
(c) 6,250
Answer:
(a) 12,000
Final call paid was delayed by 3 months [i.e. 15.02.2013 – 15.03.2014]. Hence interest on calls in arrears will be.
= 24,000 x 20 x \(\frac { 10 }{ 100 }\) x \(\frac { 3 }{ 2 }\) = ₹ 12,000

79. Company cannot issue shares more than _________.
(a) Authorised Capital
(b) Subscribed Capital
(c) Issued Capital
(d) Paid up Capital
Answer:
(a) Authorised Capital
Authorised or nominal capital refers to that maximum amount to which the company is authorised, beyond which company can not issue shares.

80. Premium received on re-issue of forfeited share should be _________.
(a) Debit to share forfeited A/c
(b) Credit to share forfeited A/c
(c) Credit to securities premium A/c
(d) None
Answer:
(c) Credit to securities premium A/c
As per the provisions of Companies Act 2013, the amount of premium on fresh issue after redemption, should be credited to securities premium a/c and face value to share capital account.

81. X Ltd. forfeited 700 shares of ₹ 10 each (9 called up) on which he paid up ₹ per share. Out of these 200 shares were re-issued at ₹ 9. Calculate the amount credited to Share Capital A/c at time of re-issued?
(a) ₹ 6,300
(b) ₹ 4,300
(c) ₹ 1,800
(d) ₹ 2,000
Answer:
(d) ₹ 2,000
Entry for reissue of forfeited shares will be :

Bank A/c (200 x 9) Dr. 1,800
Share Forfeiture. A/c (200 x 1) Dr. 200
To Share Capital A/c (200 x 10) 2,000

Hence, option (d) will be correct

82. Y Ltd. forfeited 300 shares of ₹ 10/- each for non-payment of allotment money of ₹ 4/-, first call and second call of ₹ 2/- each. All the shares were re-issued @₹ 10 paid up. Calculate the amount transferred to capital reserve.
capital reserve.
(a) ₹ 800
(b) ₹ 900
(c) ₹ 1,800
(d) ₹ 600
Answer:
(d) ₹ 600
Entry for share forfeiture:

Share Capital A/c (3,00 x 10) Dr. 3,000
To Share forfeiture (300 x 2) 600
To Share Allotment (300 x 4) 1,200
To Share Calls A/c (300 x 4) 1,200

Entry for reissue of forfeited shares:

Bank A/c Dr. 3,000
To Share Capital A/c (300 x 10) 3,000

Entry for transfer of share forfeiture balance:

Share forfeiture A/c Dr. 600
To Capital Reserve A/c 600

83. Gas Ltd. issued 1,00,000 equity shares of ₹ 10 each payable as follows: ₹ 3 on application, ₹ 3 on allotment, ₹ 2 on first call and ₹ 2 on second and final call. The Company received application for 1,50,000 shares. The allotment was made as under:
Applicants for 50,000 shares were allotted in full. Applicants for 80,000 shares were allotted 50,000 shares on pro-rata basis and applicants for 20,000 shares were rejected. The amount of excess application money available for adjustment against allotment is:
(a) ₹ 50,000
(b) ₹ 90,000
(c) ₹ 60,000
(d) ₹ 40,000
Answer:
(b) Journal Entries:
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 8
[Being the transfer of surplus application money received on 1,00,000 shares.]
So, the amount of excess application money available for adjustment against allotment is ₹ 90,000.

84. Dabur Ltd. forfeited 400 shares of ₹ 10 each fully called up on which the holder has paid only application money at ₹ 4 per share. Out of these 250 shares were re – issued at ₹ 12 per share fully paid up. Capital reserve will be credited by:
(a) ₹ 3,000
(b) ₹ 1,600
(c) ₹ 4,800
(d) ₹ 1,000
Answer:
(d) ₹ 1,000
Journal Entries
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 9
W.N:
400 shares = ₹ 1,600
1 Share = ₹ \(\frac { 1,600 }{ 400 }\)
250 Shares = ₹ \(\frac { 1,600 }{ 400 }\) x 250 = ₹ 1,000

85. A new company wants to issue share at premium. The maximum rate of premium will be?
(a) No limit
(b) 10%
(c) 30%
(d) 15%
Answer:
(a) No limit
The Companies Act requires that when a company issues shares at a premium whether for cash or otherwise, a sum equal to the aggregate amount of the premium collected on shares must be credited to a separate account called “Securities Premium Account”. There are no restrictions in the Companies Act on the issue of shares at a premium, but there are restrictions on its disposal.
So, the maximum rate of premium will be having no limit.

86. Forfeited shares account (not yet re-issued) shown under the heading _________.
(a) Current liabilities
(b) Reserves and surplus
(c) Share capital
(d) Long- term borrowings
Answer:
(c) Share capital
Forfeited shares account (not yet re-issued) shown under the heading Share Capital by way of addition to the paid-up share capital on the liabilities side, until the concerned shares are re-issued.

87. Pious Limited purchases a machine worth ₹ 1,15,000 from Indigo Traders. Payment was made as ₹ 10,000 by cheque and the remaining by issue of equity shares of the face value of ₹ 10 each fully paid – up at an issue price of ₹ 10.50 each. Amount of share premium would be:
(a) ₹ 5,000
(b) ₹ 6,000
(c) ₹ 7,000
(d) ₹ 4,000
Answer:
(a) ₹ 5,000
The following entry will be passed:

Machinery A/c Dr. 1,15,000
To Bank A/c 10,000
To Equity Share Capital A/c 1,00,000
To Securities Premium A/c 5,000

[Being machinery purchased by cheque of ₹ 10,000 and the remaining by issuing 10,000 equity shares @ ₹ 10 face value and ₹ 0.50 as a premium.]

88. As per Section 52 of the Companies Act, 2013, the securities premium reserve can be utilised for the purpose of:
(a) Redemption of preference shares
(b) Transfer of amount to capital redemption reserve
(c) Payment of dividend on preference shares
(d) Payment of premium on redemption of preference shares.
Answer:
(d) Payment of premium on redemption of preference shares.
Securities premium can be utilised only for:

  • issuing fully paid shares to members.
  • writing off the balance of preliminary expenses of the company.
  • writing off commission paid/discount allowed/expenses incurred on issue of shares or debentures of the company.
  • for providing for the premium payable on redemption of preference shares.
  • for purchase of its own shares.

89. Which of the following statement is not correct?
(a) Equity shares are convertible
(b) Equity shares have voting rights
(c) Equity shares are also known as ordinary shares
(d) Equity shareholders get dividend.
Answer:
(a) Equity shares are convertible
Equity shares are not convertible shares where as preference shares are convertible, they can be converted into equity shares but equity cannot be converted into preference shares.

90. XYZ limited issued 20,000 shares of ₹ 10 each. It received applications for 24,000 shares. Shares were allotted to all shareholders proportionately. The application money was ₹ 6 and allotment and call money was ₹ 4 per share. Ram who was allotted 300 shares could not pay the allotment money. The money due to Ram would be:
(a) ₹ 1,800
(b) ₹ 1,200
(c) ₹ 1,440
(d) ₹ 840
Answer:
(d) ₹ 840
20000 shares allotted ⇒ 24,000 application
if: 300 shares allotted ⇒ \(\frac{24,000}{20,000}\) x 300
= 360 applied
x 6
1.800
⇒ ₹ 360 excess x 6 = 2,160
Amount not paid by Ram on allotted
300 x 4 = 1,200
Excess money given on application by Ram is ₹ 360 will be subtracted Ram ₹ 1,200.
1,200 – 360 = 840.
Amount due by Ram is ₹ 840.

91. Star Ltd. issued 80,000 equity shares of ₹ 10 each. The money was payable as ₹ 3 on application, ₹ 4 on allotment, ₹ 2 on first call and ₹ 1 on final call. The applications were received for 1,20,000 shares. Applicants of 20,000 shares were allotted in full. Applicants of 80,000 shares were allotted 60,000 shares on prorata basis and applications for 20,0 shares were rejected. Amount to be refunded by the company is:
(a) NIL
(b) ₹ 1,80,000
(c) ₹ 60,000
(d) ₹ 1,20,000
Answer:
(c) ₹ 60,000
20,000 shares were rejected, ₹ 3 on application
20,0 x 3 = ₹ 60,000
Amount of refund is ₹ 60,000/-

92. Large Ltd. issued 25,000 equity shares of ₹ 100 each at a premium of ₹ 15 each payable as ₹ 25 on application, ₹ 40 on allotment and balance in the first call. The applications were received for 75,000 equity shares. The above is the case of:
(a) Forfeiture of shares
(b) Pro-rata allotment
(c) Over-subscription
(d) Under-subscription.
Answer:
(c) Over-subscription
When no. of applications received by company is more than no. of share issued by company it is case of over subscription, where large no. of applicants subscribe for no. of shares issued by company.

93. Which of the following statement is not true:
(a) When the shares are forfeited securities premium is debited along with share capital where premium has not been received
(b) Where all the forfeited shares are not re-issued the share forfeited
(c) Loss on re-issue of shares cannot be more than the gain on forfeiture of those shares
(d) Where forfeited shares are re-issued at premium, the amount of such premium is credited to capital reserve account.
Answer:
(d) Where forfeited shares are re-issued at premium, the amount of such premium is credited to capital reserve account.
When forfeited shares are re-issued at a premium, then such premium amount should be credited to securities premium account and not to capital reserve account.

94. The amount paid in advance by a shareholder is called:
(a) Called up capital
(b) Prepaid capital
(c) Calls in advance
(d) Unpaid capital
Answer:
(c) Calls in advance
If authorised by the articles, a company may receive from a shareholder the amount remaining unpaid on shares, even though the amount has not been called-up. This is known as calls-in- advance.

95. Nominal capital is also known as _________.
(a) Authorized capital
(b) Issued capital
(c) Preference capital
(d) None of the above
Answer
(a) Authorized capital
Nominal capital refers to that amount which is stated in the memorandum of association as the Share Capital of the company. The company is registered with this amount of capital. This is the maximum limit of capital which the company is authorised to issue and beyond which company can not issue share. This is also known as authorised capital.

96. A company forfeitured 100 equity shares of ₹ 100 each issue at premium of 50% on which first call of ₹ 30 per share was not received, final call of ₹ 20 is yet to be made. These shares were subsequently reissued @ ₹ 70 per share @ ₹ 80 paid up. The amount credited to capital reserve:
(a) ₹ 4,000
(b) ₹ 2,000
(c) ₹ 3,000
(d) None
Answer:
(a) ₹ 4,000
Following entries will be required:
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 10

97. A company issued 5000 shares. Application were received for 6000 shares and company made pro-rata allotment. D a shareholder was allotted 600 shares. Find the applied no. of shares by him:
(a) 820
(b) 720
(c) 900
(d) 800
Answer:
(b) 720
5,000 shares allotted = 6,000 Application
If, 600 Shares allotted = \(\frac{6,000}{5,000}\) x 600
= 720 Applied

98. A company issued ₹ 9,00,000 shares. Offer came for ₹ 8,50,000 shares. Face value is ₹ 10.per share. Application ₹ 2, allotment is ₹ 4 balance in 2 equal calls. Amount transferred to share capital:
(a) ₹ 90,00,000
(b) ₹ 85,00,000
(c) ₹ 80,00,000
(d) ₹ 1,00,00,000
Answer:
(b) ₹ 85,00,000
The Share Capital Account will be credited by number of shares issued multiplied by face value. Excess price over face value will be credited to Security Premium Account. Thus, amount transferred to share capital should be ₹ 85,00,000.

99. If a company issued ₹ 10,000, the application is received for ₹ 12,000 shares, company made pro-rata allotment for applicants of ₹ 6,000 and allotted them ₹ 5,000 shares. Rest applicants were allotted in full. Amount adjusted against allotment is it application is for ₹ 2.
(a) ₹ 2,000
(b) ₹ 1,000
(c) ₹ 3,000
(d) ₹ 1,500
Answer:
(a) ₹ 2,000
Journal Entries:
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 11
So, the amount adjusted against allotment is ₹ 2,000.

100. D/P limited issued 10,000 equity shares of ₹ 10 each at a premium of 20%. The share amount was payable as ₹ 2 on application ₹ 5, on allotment (including premium) ₹ 3 on first call and ₹ 2 on second and final call. Application were received for 14,000 shares and shares were allotted to applicants on pro-rata basis. “E” who was allotted 3,000 shares failed to pay the first call. On his subsequent failure to pay the second and final call, all his shares were forfeited. Out of the forfeited shares 200 shares were reissued at the rate of ₹ 9 share. The amount transferred to capital reserve is:
(a) ₹ 200
(b) ₹ 1,100
(c) ₹ 800
(d) 1,300
Answer:
(c) ₹ 800
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 12

101. A Co. issues shares of f 10 each at a premium of ₹ 2. The amount was payable as on application of ₹ 3, on allotment ₹ 4 (including premium), on 1st call ₹ 3 and on second and final call ₹ 2. Mr. E who holds 100 shares failed to pay first call money. The Co. has forfeited 100 shares after the first call on forfeiture, the amount debited to share capital account will be:
(a) ₹ 700
(b) ₹ 1,200
(c) ₹ 1,000
(d) ₹ 800
Answer:
(d) ₹ 800
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 13
Therefore, amount debited to Share Capital A/c at the time of forfeiture will be ₹ 800.

102. A Co. invited application for 20,000 shares and it received 60,000 application. The shares were allotted as per details given below. Category A – shares applied 40,000 shares allotted 10,000. Category B – shares applied 15,000 shares allotted 10,000. Category C – shares applied 5,000 shares allotted nil. Ram lies in category B and has been allotted 300 shares. The no. of shares applied by him would be:
(a) 100
(b) 450
(c) 300
(d) 200
Answer:
(b) 450
In Category B 10,000 shares have been allotted to the applicants of 15,0 shares. Mr. Ram in this category has been allotted 300 share therefore he must have applied for:
300 x \(\frac { 15 }{ 10 }\) = 450 shares

103. Which of the following statement in false about calls in advance?
(a) According to Table F, maximum interest on calls in advance is paid @12%p.a.
(b) Payment of interest on calls in advance is at the discretion of the company
(c) Interest on calls in advance is paid from the date of receipt of call upto the date of relevant call
(d) Calls in advance are not entitled for any dividend.
Answer:
(b) Payment of interest on calls in advance is at the discretion of the company
The amount received as calls-in-advance is a debt of the company, the company is liable to pay interest on the amount of calls-in- advance from the date of receipt till the date when the call is due. Generally, Articles of the company specify the rate at which interest is payable. If articles do not contain such rates. Table F will be applicable which leaves the matter to the Board of Director.

104. Which of the following statement is true?
(a) Reserve capital can’t be called when required
(b) in case of under subscription pro-rata allotment can be made
(c) A Co. can’t issue shares at a discount
(d) Authorized capital can never be less than subscribed capital.
Answer:
(d) Authorized capital can never be less than subscribed capital.
Authorized capital refers to that amount which is stated in the MOA as share capital of the company. This is the maximum limit of capital which the company is authorized to issue and beyond which the company cannot issue shares unless capital clause is amended. Thus, it can never be less than a subscribed capital.

105. A Ltd. Company forfeited 1000 equity shares of ₹ 10/- each, issued at a premium of 10% for non-payment of first call of ₹ 2/- and second call of ₹ 31- share. For recording this forfeiture, Calls-in-Arrear A/c will be Credited by:
(a) ₹ 10,000
(b) ₹ 4,000
(c) ₹ 5,000
(d) ₹ 7,000
Answer:
(c) ₹ 5,000
When calls are made share allotted, the share holders are bound to pay the call money within date fixed. If shareholder make a default then the amount is transferred to Call in Arrears.
Calls in Arrears = No. of Share x Amt. of Non Payment per share
= 1,000 x (2 + 3)
= 1,000 x 5
= 5,000

106. As per Companies Act, 2013 the interest on calls-in-advance is paid for the period from the:
(a) Date of receipt of allotment money to the date of appropriation.
(b) Date of receipt of calls-in-advance to the date of appropriation of the call.
(c) Date of receipt of application money to the date of appropriation.
(d) Date of appropriation to the date of dividend payment.
Answer:
(b) Date of receipt of calls-in-advance to the date of appropriation of the call.
As per Companies Act, 2013, the interest on call in advance is paid for the period from the date of receipt of call In advance to the date of appropriation of the call.
The call received in advance is a debt of the company and the company is liable to pay interest on the amount.

107. The maximum amount beyond which a company is not allowed to raise funds by issue of its shares (on face value) is called:
(a) Authorized Capital
(b) Called-up Capital
(c) Paid-up Capital
(d) Subscribe Capital
Answer:
(a) Authorized Capital
This is the maximum limit of capital which the company is authorise to issue and beyond which a company cannot issue shares to raise funds. Thus, Maximum limit is called Authorised Capital.

108. Biscuits Limited invited applications for 5000 shares of ₹ 10/- each at a premium of ₹ 21- share. The amount was payable as ₹ 5/- (including premium) on applicants, ₹ 41- on allotment and ₹ 3/- on final Call Allotment was made on prorata bases to the application of 6000 shares. Mr. C to whom. 60 shares were allotted, failed to pay allotment money and call money. Mr. D the holder of 100 share, failed to pay the call money. All these shares were forfeited after proper notice of forfeiture, the amount credited to share forfeiture account will be:
(a) ₹ 300
(b) ₹ 880
(c) ₹ 940
(d) ₹ 320
Answer:
(c) ₹ 940
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 14
Amount of money received from Mr. C holder of 60 shares = ₹ 240
Mr. C applied for 72 shares for which he paid ₹ 360
Excess money adjusted against allotment = ₹ 60
Mr. D a holder of 100 shares paid Application and Allotment money i.e. ₹ 7 per share excluding premium = ₹ 7 x 100 = 700

109. When there is an increase in the minimum capital with which the company is registered is to be altered.
(a) Memorandum of association
(b) Article of association
(c) Paid up capital
(d) Subscribed capital.
Answer:
(a) Memorandum of association
When there is any change in the minimum capital with which the company is registered then there is a need to alter the MOA. The company shall file a notice in the prescribed form with the registrar within a period of 30 days of such increase along with a copy of altered MOA.

110. Star Ltd. issued 80,000 equity shares of ₹ 10 each. The money was payable as ₹ 3 on application, ₹ 4 on allotment, ₹ 2 on first call and ₹ 1 on final call. The applications were received for 1,20,000 shares, Applicants of 20,000 Shares were allotted in full. Applicants of 80,000 were allotted 60,000 shares on pro-rata basis and applications for 20,000 Shares were rejected. Amount to be refunded by the company is:
(a) ₹ 1,80,000
(b) ₹ 60,000
(c) Nil
(d) ₹ 1,20,000
Answer:
(b) ₹ 60,000
Refund
20000 share x 3 = ₹ 60,000

111. A Shareholder does not pay his dues on allotment. For the amount due, there will be a _________.
(a) Debit balance in the share allotment account
(b) Credit balance in the share allotment account
(c) Credit balance in the share forfeiture account
(d) Debit balance in the share forfeiture account
Answer:
(a) Debit balance in the share allotment account
In case a share holder does not pay his dues on allotment, there will be a debit Balance in Share Allotment Account.

112. Oil Ltd. issued 1,00,000 equity shares of ₹ 100 each. The money was payable as follows:
On application ₹ 20 on allotment ₹ 30. On first call ₹ 20 and on second and final call ₹ 30. Applications were received for 2,00,000 shares and pro-rata allotment was made to applicants of 1,50,000 shares. Excess money received on application was utilized towards allotment money. The amount adjusted towards allotment is:
(a) ₹ 10,00,000
(b) ₹ 20,00,000
(c) ₹ 18,00,000
(d) ₹ 15,00,000
Answer:
(a) ₹ 10,00,000
Amount Adjusted towards allotment
= Excess Application x Application Money
= (2,00,000 – 1,50,000) x 20
= 50,000 x 20
= ₹ 10,00,000

113. Which of the following statement is true?:
(a) A company cannot reissue shares at discount
(b) Reserved capital cannot be called when required
(c) Authorized capital can never be less than issued capital
(d) In case of under subscription pro-rata allotment can be made.
Answer:
(c) Authorized capital can never be less than issued capital
Point c is true.
Authorised capital can be equal to issued capital but it can never to less than issued capital.

114. The discount allowed on re-issue of forfeited shares is debited to _________.
(a) General reserve account
(b) Share forfeiture account
(c) Capital reserve account
(d) Revaluation reserve account
Answer:
(b) Share forfeiture account
The Discount allowed on reissue of forfeited shares is debited to share forfeiture Accounts.

115. XY Limited issued 2,50,000 equity shares of ₹ 10 each at a premium of ₹ 1 each payable as ₹ 2.5 on Application ₹ 4 on allotment and balance on the first and final call. Application will received for 5,00,000 equity shares but the company allotted to them only 2,50,000 shares. Excess money was refunded after adjustment for further calls. Last call on 500 shares were not received and share were forfeited after due notice. This is a case of:
(a) Over subscription
(b) Pro-rata Allotment
(c) Forfeiture of shares
(d) All of the above
Answer:
(d) All of the above
When application of shares is more than the shares issued then it is said to be our subscription. Pro-rata allotment means reject more applications after adjustment to allotment and further calls. Forfeiture of shares means to take back the shares from the shareholders by a company if he unable to pay calls of shares in a reasonable time.
In this question, all cases are shown
(a) Over – Subscription (2,50,000 shares issued, 5,00,000 received by company)
(b) Pro-rata Allotment (2,50,000 issued and excess money refunded)
(c) Forfeiture of shares (500 shares forfeited)

116. Z Limited forfeited 200 fully called up shares of ₹ 10 each on which ₹ 1,300 had been received later on these shares were reissued as fully paid up @ ₹ 9 per share. The amount to be transferred from share forfeited account to capital reserve account will be:
(a) ₹ 1,800
(b) ₹ 2,000
(c) ₹ 1,100
(d) Nil
Answer:
(c) ₹ 1,100
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 15

117. Omega Limited, a listed company acquires assets worth ₹ 7,50,000 from Alpha Limited and issue shares of ₹ 10 each at a premium of 25%. The number of shares to be issued by Omega Ltd. to settle the purchase consideration will be:
(a) 60,000
(b) 75,000
(c) 1,00,000
(d) 1,25,000
Answer:
(a) 60,000
Assets worth ₹ 7,50,000 acquired by Omega Ltd., listed company from Alpha Limited.
Omega Ltd., issued Shares of ₹ 10 each at 25% premium.
No. of Shares issued by Omega Limited to settle purchase consideration
= \(\frac{7,50,000}{12.5}\)
= 60,000 Shares.

118. E Ltd. had allotted 10,000 shares to the applicants of 14,000 shares on pro-rata basis. The amount payable on application was ₹ 2. F applied for 420 shares. The number of shares allotted and the amount carried forward for adjustment against allotment money due from F will be:
(a) 60 shares ₹ 120
(b) 340 shares ₹ 160
(c) 320 shares ₹ 200
(d) 300 shares ₹ 240
Answer:
(d) 300 shares ₹ 240
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 16
Excess Shares = 420 – 300
= 120 Shares.
Application was of ₹ 2
Amount carried forward for 300 Shares after adjustment against allotment is 120 x 2 = ₹ 240
300 shares – ₹ 240

119. A company forfeited 1,000 shares of ₹ 10 each (which were issued at par) held by Saurabh for non-payment of allotment money of ₹ 4 per share. The called-up value per share was ₹ 8. On forfeiture, the amount debited to Share Capital account will be:
(a) ₹ 10,000
(b) ₹ 8,000
(c) ₹ 2,000
(d) ₹ 18,000
Answer:
(b) ₹ 8,000
At the time of forfeiture of shares, the share capital account is debited with the value called-up on the shares upto the forfeiture.
Thus, share capital will be debited by 1000 shares @ 8/- 8,000/-
Share Capital A/c Dr. 8,000
(1000 x 8)
To Share Forfeiture a/c 4,000
(1000 x 4)
To Calls-in-arrear a/c 4000

120. The maximum amount beyond which is company is not allowed to raise funds by issue of its shares, is called:
(a) Subscribed capital
(b) Called-up capital
(c) Paid-up capital
(d) Authorised capital
Answer:
(d) Authorised capital
Authorized Capital refers to that capital which is mentioned in Memorandum of Association. This is maximum capital limit which the company is authorized to issue and beyond which the company cannot issue shares.

121. Pious Limited purchases a machine worth ₹ 1,15,000 from Indigo Traders. Payment was made ₹ 10,000 by cheque and the remaining by issue of equity shares of the face value of ₹ 10 each fully paid-up at an issue price of ₹ 10.50 each. Amount of share premium would be:
(a) ₹ 6,000
(b) ₹ 5,000
(c) ₹ 7,000
(d) ₹ 4,000
Answer:
(b) ₹ 5,000
Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes 17

122. Calls-in advance is _________ Calls in Arrears A/c _________.
(a) 10%; 6%
(b) 6%; 5%
(c) 4%; 5%
(d) 10%; 12%
Answer:
(d) 10%; 12%
According to Companies Act, 2013, a company pay interest @ 12% p.a for calls in-advances and charge interests @ 10% in Calls-in-Arrear A/c.

Partnership Accounts-Dissolution of a Firm – CS Foundation Fundamentals of Accounting Notes

Go through this Partnership Accounts-Dissolution of a Firm – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Partnership Accounts-Dissolution of a Firm – CS Foundation Fundamentals of Accounting Notes

Topic:
Important highlight:
1. Dissolution of a firm means putting an end to the partnership i.e. closing down the firm as a whole.

2. When the firm is dissolved, all assets are disposed off and all liabilities are paid off.

3. Dissolution of partnership is different from dissolution of a firm.

Dissolution of Partnership Dissolution of Firm
(1) The partnership dissolves but the business of the firm is continued. The business of the firm comes to an- end.
(2) Partnership among partners does not exist. The partnership does not comes to an end but the business comes to an end.
(3) Dissolution of partnership may occur because of expiry of the term, death, retirement or insolvency of the partner. Dissolution of firm may occur due to the following reasons – mutual agreement, insolvency of all partners except one, business of firm become illegal, etc.

Note : Dissolution of a partnership does not necessarily means dissolution of a firm whereas dissolution of a firm necessarily implies dissolution of partnership. However if, after dissolution of partnership the partners are not willing to carry on the business then, the firm automatically dissolves.

Types of dissolution:

  • Voluntary dissolution
  • Forced dissolution

(i) Voluntary dissolution:

  • This occurs when the partners mutually decide to dissolve the firm.
  • In case the partnership is at will then any partner can give notice of dissolution and the firm will be dissolved there after.

(ii) Forced dissolution:
(a) When the court orders dissolution, it is known as forced dissolution.
The court may order dissolution based on following reasons:

  • Where a partner has become of unsound mind
  • Where partner suffers from permanent incapacity
  • Where a partner is guilty of misconduct affecting business.
  • Where the court thinks that the dissolution is just and equitable.
  • Where the partners disregard the partnership agreement
  • Where any of the partner transfers his share to a third person
  • Where the business cannot be carried on except for loss i.e. there is no profit.

(b) Where all the partners except one become illegal

(c) Where the business of the firm is declared as illegal.

Settlement of Accounts:
According to Section 48, in setting the accounts of a firm after dissolution. The accounts will be settled as follows:
1. All assets will be disposed off and liabilities paid off.

2. From the amount realized from the sale of assets the payment to the third parties will be made.

3. Any surplus remaining after settling the claims of the third parties, the remaining amount will be distributed among the partners.

Revaluation Account Realisation Account
It records the effect of assets and liabilities. It records the sale of assets and liabilities.
It is prepared at the time of reconstitution of the firm. It is prepared at the time of dissolution of the firm.
It contains only those assets and liabilities which are revalued. It generally contains all the assets and liabilities.
On revaluation, the accounts of the assets and liabilities are not closed. On preparing the realisation account the accounts of assets and liabilities are closed.
It is prepared to find out the profit or loss on revaluation of the assets. It is prepared to calculate the profit or loss on sale of assets and settlement of liabilities.
The balance of this A/c is transferred to the old partner’s Capital A/c. Accounting entries are made at the book values of asset and liabilities.

Some General Principles Regarding Settlement of Accounts:
(a) Losses or any deficiencies of capital shall be first paid out of profits, then out of capital and lastly, by the partners individually.

(b) The amount realized from sale of assets shall be applied in the following order-

  • for paying debts of the firm due to third parties.
  • for paying any loans or advances which the firm has taken from partners
  • for paying partner’s capital.
  • any surplus remaining after that shall be distributed among partners in their profit sharing ratio.

(c) The private property of the partners shall be first used for paying private debts first and remaining amount can be used for paying firm’s liabilities.
Similarly, firm’s asset should first be used for paying firm’s liabilities.

(d) The liabilities of the partners are joint and several.

Accounting Treatment on Dissolution:

  • Preparation of Realization Account for settling assets and liabilities.
  • Transfer of’profit/loss on realization to Partner’s Capital A/c.
  • Repayment of loans of the partners.
  • Transfer of accumulated reserves and profit or loss to the capital account of partners.
  • Closing the books of account by paying the balances to the partners.

After all above treatments, the books of account will close.
1. Preparation of Realization Account:
(a) For transfer of assets to Realization A/c:
Realization A/c Dr. (at book values)
To Asset A/c

Note:

  • Cash and bank balances should not be transferred as they are realized assets.
  • Debit balance of P/L A/c should not be transferred.

(b) For sale or disposal of assets:
Cash A/c Dr. (actual sale proceeds)
To Realization A/c

(c) For assets taken over by the partner:
Partner’s Capital A/c Dr. (at agreed value)
To Realization A/c

(d) For transfer of liabilities to realization:
Liability A/c Dr.
To Realization A/c

Note : Only outside liabilities are transferred. Partners Capital A/c and Loan A/c are not transferred.

(e) For payment of liabilities:
Realization A/c Dr.
To Cash A/c

(f) For payment of unrecorded liabilities:
Realization A/c Dr.
To Cash A/c

(g) For sale of unrecorded assets:
Cash A/c Dr. (actual sale proceeds)
To Realization A/c

(h) For any liability assumed by a partner:
Realization A/c Dr.
To Partner’s capital A/c

(i) For payment of realization expenses:
Realization A/c Dr.
To Cash A/c

(2)
(1) For profit on realization:
Realization A/c Dr.
To Partners Capital A/c

(2) For loss on realization:
Partners Capital A/c Dr.
To Realization A/c

(3) Repayment of partner’s loan A/c:
Partners Loan A/c Dr.
To Cash A/c

(4) For transfer of undistributed profits and reserves:
Profit/Loss/Reserve A/c Dr.
To Partners Capital A/c

(5) Settlement of partner’s capital A/c:
(i) If the capital A/c is showing a credit balance
Partner’s Capital A/c Dr.
To Cash A/c

(ii) When the capital A/c shows a debit balance – the partners will be asked to bring sufficient cash to make up the deficiency.
Cash A/c Dr.
To Partner’s Capital A/c

Return of premium on dissolution:
1. Sometimes, an incoming partner pays goodwill to another partner on the assurance that firm will be carried on for a fixed time period.

2. If the firm dissolves before that fixed period then that partner is entitled to claim refund for the goodwill paid by him.

3. If a partner on his admission pays to the other partner an amount for goodwill (also known as premium) and it is agreed that the partnership would be for a fixed term.

4. This refund cannot be claimed:

  • When firm is dissolved due to death of a partner.
  • When dissolution takes place because of misconduct of the partner making the claim.
  • Where dissolution is in pursuance of an agreement that no such refund will be made.

Insolvency of Partner:
1. Insolvency means when nothing can be recovered from a partner.

2. Insolvency can be:

  • of a single partner
  • of all the partners

(a) Insolvency of a partner

  • When dissolution occurs, any amount is due from a partner and he becomes insolvent then, this will be treated as a loss which will be borne by the remaining solvent partners in the Profit sharing ratio.
  • The above treatment was changed after the decision of famous case of “Garner Vs Murray”.

Decision of the case: Garner Vs. Murray –

  • Loss on realization will be borne by all the partners including the insolvent partner in their profit sharing ratio.
  • The solvent partners should then bring in cash equal to their share of realization.
  • The deficiency of the insolvent partner must be shared by solvent partners in their capital ratio.

Capital Ratio will be determined based on their capital appearing before dissolution.

In India Garner Vs. Murray Rule is applicable with some modifications:

  • Here the loss on realization will not be brought by the solvent partners in cash.
  • The deficiency of insolvent partners will be debited to solvent partners in the capital ratio.
  • When capital accounts are fluctuating then the balances for determining capital ratio will be taken after necessary adjustments.
  • If any partner is having debit balance but is not insolvent, then he will not bear the deficiency of insolvent partner.

Procedure for settlement of account:

  • Preparation of Realization Account
  • Transfer profit/loss on realization to capital accounts
  • Prepare insolvent partners Capital A/c
  • The debit balance of insolvent partners capital A/c shall be transferred to solvent partners capital A/c in capital ratio.
  • Settle the accounts of solvent partners.

(b) Insolvency of all the partners:

  • When all the partners become insolvent, the claims of the creditors will not be satisfied in full.
  • Accounting treatment will be done in the following manner
  • Prepare Realization A/c (only assets realized and expenses shall be shown in Realization A/c).
  • The profit/loss from realization shall be transferred to partner’s capital A/c in profit sharing ratio.
  • Prepare Cash A/c and also include the amount which can be recovered from partner’s estate.
  • The total cash available shall be distributed to the creditors.
  • The balance remaining in the Creditors A/c and Capital A/c of partners shall be transferred to the Deficiency A/c.
  • After this, all accounts will be closed.

Steps to be taken for Accounting in case of insolvency:

  • Step 1 : Realisation Account is prepared in the usual manner
  • Step 2 : Profit/ Loss on realization is transferred to the capital accounts of partners in the profit sharing ratio.
  • Step 3 : Insolvent Partner’s Capital A/c is prepared and any thing realised from his personal property is credited to his account. Step 4 : The debit balance of the insolvent partners capital account is transferred to the Capital A/c of other solvent partners in the ratio of their respective capitals before dissolution.
  • Step 5 : Claims of the solvent partners are settled there after.

Limited Liability Partnership (LLP):
Limited Liability Partnership entities, the world wide recognized form of business organization has been introduced in India by way of Limited Liability Partnership Act, 2008. A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization. In all LLP, one partner is not responsible or liable for another partner’s misconduct or negligence; this is an important difference from that of an unlimited partnership.

In an LLP, all partners have a form of limited liability for each individual’s protection within the partnership, similar to that of the shareholders of a corporation. However, unlike corporate shareholders, the partners have the right to manage the business directly. An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the LLP’s employees or other agents.

Limited Liability Partnership is managed as per the LLP Agreement, however in the absence of such agreement the LLP would be governed by the framework provided in Schedule 1 of Limited Liability Partnership Act, 2008 which describes the matters relating to mutual rights and duties of partners of the LLP and of the limited liability partnership and its partners.

LLP has a separate legal entity, liable to the full extent to its assets; the liability of the partners would be limited to their agreed contribution in the LLP. Further no partner would be liable on account of the independent or
un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

Difference Between Limited Liability Partnership and Partnership Firm:

Basis Limited Liability Partnership Partnership Firm
Governing Law The Limited Liability Partnership Act, 2008 and various Rules made thereunder The Indian Partnership Act, 1932 and various Rules made thereunder
Registration Compulsory Optional
Creation Created by law Created by contract
Separate Legal Entity It is separate legal entity, separate from its partners/designated partners. It is not separate legal entity from
Perpetual Succession It has perpetual succession. Partners are collectively referred as firm.
Common Seal It denotes the signature of the Company and LLP may have its own common seal, if it besides to have one. It does not have perpetual succession.
Legal Proceeding LLP can also sue and be sued Not required
Liability Liability of partners is limited up to their capital contribution however in case a partner acts with an intention to conduct fraud, they are personally liable. Only registered partnership can sue.
Transferability of Interest Rights/interest of partners are transferable as per the provisions of LLP agreement. Transferability of Interest subject to the mutual consent of all the members.
Maximum number of Member No cap of maximum number of its partners. Maximum 10 for banking business and 20 for other business.

Partnership Accounts-Retirement and Death of a Partner MCQ Questions

1. Retirement or death of a partner.
(a) Is dissolution of partnership agreement
(b) Is dissolution of a firm
(c) May or may not be a dissolution of partnership agreement
(d) None of the above
Answer:
(a) Is dissolution of partnership agreement

2. If all the partners, but one are insolvent it is:
(a) Dissolution of an agreement
(b) Dissolution of firm
(c) May or may not cause dissolution
(d) None of the above
Answer:
(b) Dissolution of firm

3. If all the partners, but one, are solvent it is:
(a) Dissolution of partnership agreement
(b) Dissolution of firm
(c) May or may not cause dissolution
(d) None of the above
Answer:
(b) Dissolution of firm

4. At the time of dissolution:
(a) All the assets are transferred to realization A/c
(b) Only current assets are transferred to realization A/c
(c) Non cash assets are transferred to realization A/c
(d) Only liquid and current asset are transferred to realization A/c
Answer:
(c) Non cash assets are transferred to realization A/c

5. At the time of dissolution non-cash assets are credited with:
(a) Market value
(b) Book value
(c) As the agreed amount among the partners
(d) Cost or market which ever is low
Answer:
(b) Book value

6. If a partner takes over an asset of the firm, his capital account:
(a) Will be debited with the amount as agreed
(b) Will be credited with the market value of the asset
(c) Will be debited with book value of the asset
(d) None of the above
Answer:
(a) Will be debited with the amount as agreed

7. Loss on realization is distributed among partners:
(a) According to profit and loss ratio
(b) According to capital ratio
(c) As decided among them
(d) None of the above
Answer:
(a) According to profit and loss ratio

8. Loss on realization is:
(a) Debited to partners capital A/c
(b) Credited to partners capital A/c
(c) Debited to realization A/c
(d) Credited to realization A/c
Answer:
(a) Debited to partners capital A/c

9. When all partners are insolvent creditors will be:
(a) Paid fully
(b) Paid from private estate
(c) Taken over by the partners
(d) Paid by government
Answer:
(a) Paid fully

10. The persons who have entered into a partnership business are individually called:
(a) Realization A/c
(b) Partners capital A/c
(c) Sundry debtors
(d) Provision for bad debts A/c
Answer:

11. The persons who have entered into a partnership business are individually called:
(a) Vendor
(b) Agents
(c) Partners
(d) A firm
Answer:
(c) Partners

12. If no provision is made in agreement regarding the duration of the partnership:
(a) Limited partnership
(b) Partnership at-will
(c) None
(d) Particular partnership
Answer:
(b) Partnership at-will

13. A person who declares by word of mouth as partner of the firm is called:
(a) Active partner
(b) Estopple partner
(c) Dormant partner
(d) Nominal partner
Answer:
(b) Estopple partner

14. At the time of dissolution all the assets of firm are transferred to the realization A/c:
(a) Market value
(b) Book value
(c) Cost value
(d) Bale value
Answer:
(b) Book value

15. Balance of realization A/c is transferred to the capital A/c of the partners in:
(a) Capital ratio
(b) Profit sharing ratio
(c) Interest Ratio
(d) Equally
Answer:
(b) Profit sharing ratio

16. The decision is Garner Vs. Murray was given in:
(a) 1904
(b) 1905
(c) 1933
(d) 1804
Answer:
(a) 1904

17. The profit/loss revealed by realisation account is transferred to the capital accounts of the partners in:
(a) Profit sharing ratio
(b) Capital ratio
(c) Gaining ratio
(d) Sacrificing ratio
Answer:
(a) Profit sharing ratio

18. What entry will be passed if a partner takes over a liability of a firm?
(a) Debit realisation A/c and credit liability A/c
(b) Debit liability A/c and credit realisation A/c
(c) Debit realisation A/c and credit partner’s capital A/c
(d) Debit partners capital A/c and credit liabilities A/c
Answer:
(c) Debit realisation A/c and credit partner’s capital A/c

19. At the time of realisation, balance standing in the accumulated reserve is transferred to _________.
(a) Balance sheet
(b) P & L A/c
(c) Realisation A/c
(d) Partners capital A/c
Answer:
(d) Partners capital A/c

20. Return of premium on dissolution cannot be allowed if _________.
(a) Firm is dissolved due to the death of a partner
(b) Where the dissolution takes place due to the misconduct of the partner making the claim
(c) Where the dissolution takes place in pursuance of an agreement
(d) All of the above
Answer:
(d) All of the above

21. As per Garner v/s. Murray rule, the loss due to the insolvency of a partner is to be borne by the other partner is _________.
(a) Sacrificing ratio
(b) Capital ratio
(c) Profit sharing ratio
(d) Gaining ratio
Answer:
(b) Capital ratio

22. Which of the following statement is true?
(a) If all the partners are insolvent, then the assets are not transferred to the realisation account
(b) If all the partners are insolvent, then the liabilities are not transferred to the realisation account
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(b) If all the partners are insolvent, then the liabilities are not transferred to the realisation account

23. If all the partners become insolvent, then the balance in the capital accounts should be transferred to
(a) Deficiency account
(b) Realisation account
(c) Balance sheet
(d) General reserve
Answer:
(a) Deficiency account

24. Which of the following is true about a partnership –
(a) All partners invest an equal amount of capital in the partnership’s business
(b) All partners are personally liable for the debts of the Partnership business
(c) Partnerships get favourable tax treatment compared to corporations
(d) A partnership requires at least three persons.
Answer:
(b) All partners are personally liable for the debts of the Partnership business
Since contribution to Capital A/c is decided by partner’s in partnership deed so statement. ‘All partners invest an equal amount of capital in the business’ is not correct. Similarly, the statement ‘partnerships get favourable tax treatment compared to corporations’ and ‘A partnership requires atleast three persons’ is not correct because tax levied on firm according to Acts and maximum or minimum numbers of partner in a firm is defined in the Companies Act, 2013.
Thus, option (b) All partners are personally liable for the debts of the partnership business is right.

25. When firm dissolves, then Goodwill is transferred to which A/c?
(a) Realisation A/c
(b) Goodwill A/c
(c) Both (a) and (b)
(d) None of the above.
Answer:
(a) Realisation A/c
When the firm is dissolved, all the assets and liabilities are transferred to Realisation A/c which includes goodwill.

26. When is premium of dissolution is not allowed to partners?
(a) If firm is dissolved due to death of partner
(b) If dissolution takes place due to misconduct of partner making claim
(c) Both (a) and (b)
(d) None of the above.
Answer:
(c) Both (a) and (b)
Premium on dissolution cannot be allowed in the following cases as per Partnership Act:
(a) Firm is dissolved due to death of partner.
(b) When dissolution takes place due to the misconduct of partner’s making claim.
Hence, option (c) is correct.

27. If a partner goes insolvent & is not able to bring his share of deficiency in cash, then his deficiency shall be borne by the remaining solvent partners:
(a) Equally
(b) On the basis of profit sharing ratio
(c) On the basis of their adjusted capital ratio
(d) On the basis of their original investment
Answer:
(c) On the basis of their adjusted capital ratio
In India, it is mentioned in the Partnership deed, that on the insolvency of a partner deficiency of his Capital A/c will be borne in particular ratio, it will be borne accordingly in the case of insolvency of the partner. But if nothing is mentioned about ratio in the partnership deed, the deficiency of the insolvent partner’s capital A/c will be shared by the solvent partners in their capital ratio.

28. When is the realisation A/c made in partnership?
(a) At the time of admission of partner
(b) At the time of death of partner
(c) At the time of retirement
(d) At the time of dissolution of firm.
Answer:
(d) At the time of dissolution of firm.
Realisation A/c is the nominal account prepaid at the time of dissolution of partnership firm showing the realisation of assets and settlement of liabilities. Hence, it is made at the time of dissolution of the firm.

29. Loss on Realisation is:
(a) Debited to Partner’s Capital A/c
(b) Credited to Partner’s Capital A/c
(c) Debited to Partner’s Current A/c
(d) Credited to Partner’s Current A/c
Answer:
(a) Debited to Partner’s Capital A/c
Loss on Realisation is the revenue loss to be debited to Partner’s Capital A/c arising from the realisation of assets & settlement of liabilities.
Hence, option (a) is correct.

30. On dissolution of partnership firm, X one of the partners was to receive ₹ 3,000 as remuneration for the dissolution work, the entry in the books of partnership will be:
(a) Debit x’s Capital A/c ₹ 3,000
Credit Realisation A/c ₹ 3,000
(b) Debit Realisation A/c ₹ 3,000
Credit x’s Capital A/c ₹ 3,000
(c) Debit Revaluation A/c ₹ 3,000
Credit x’s Capital A/c ₹ 3,000
(d) Debit x’s Capital A/c ₹ 3,000
Credit Revaluation A/c ₹ 3,000
Answer:
(b) Debit Realisation A/c ₹ 3,000
Credit x’s Capital A/c ₹ 3,000
The following entry will be passed.
Realisation A/c Dr. 3,000
To X’s Capital A/c 3,000
(Being ₹ 3,000 received as remuneration by X)

31. A Court may dissolve the partnership firm on the grounds of – (i) insanity of a partner (ii) permanent incapacity of partner (iii) misconduct by a partner. The options are:
(a) All (i), (ii) and (iii)
(b) (i) and (iii) only
(c) (ii) and (iii) only
(d) (i) and (ii) only.
Answer:
(a) All (i), (ii) and (iil)
Partnership is dissolved by mutual agreement but in case of insanity of partner, incapacity of partner and misconduct by a partner, court can dissolve partnership.

32. According to Garner vs. Murray rule, realisation loss should be divided among solvent partners _________.
(a) On the basis of their original investments
(b) In profit and loss sharing ratio
(c) In capital ratio
(d) On the basis of their income ratios
Answer:
(b) In profit and loss sharing ratio
Decision of case Garner Vs. Murray –

Loss on realisation will be borne by partners in their Profit Sharing Ratio
The solvent partner should then bring cash equal to their share of realisation
The deficiency must be shared by solvent partner in their Capital Ratio.

33. Realization A/c of partners at the time of dissolution is closed by _________.
(a) Bank A/c
(b) Loan A/c
(c) Partner’s capital A/c
(d) Partner’s loan A/c
Answer:
(c) Partner’s capital A/c
On dissolution, the books of accounts of the partnership firm are closed. “Realisation Account” is opened and transfer to it all the assets except cash in hand and at bank. Sundry Debtors will be transferred at gross amount. Profit or loss revealed by Realisation Account is transferred to all the partners’ capital accounts in their profit sharing ratio. Realisation Account is thus closed.

34. At the time of dissolution all the assets of a firm are transferred to realization A/c _________.
(a) Market value
(b) Cost value
(c) Book value
(d) None of these
Answer:
(c) Book value
Realisation account is prepared to find out the profit (loss) on the realization of assets and settlement of liabilities. Accounting entries are made at the book values of assets and liabilities. The accounts of assets and liabilities are closed on preparation of realization account. Hence, option C is correct.

35. Profit on sale will be debited to?
(a) Depreciation A/c
(b) Fixed asset A/c
(c) Realization A/c
(d) None applicable.
Answer:
(c) Realization A/c
Profit or loss revealed by Realisation Account is transferred to all the partners’ capital accounts in their profit sharing ratio. Realisation Account is thus closed. Thus Transfer profit or loss on realization to all the partners in profit sharing ratio.

36. A partner gave loan of ₹ 20,000 to the firm of dissolution of the firm the net losses of the firm were ₹ 30,000. How much money will the partner get on dissolution?
(a) Nil
(b) 20,000
(c) 20,000 + 6% interest
(d) None of above.
Answer:
(c) 20,000 + 6% interest
Losses shall be paid, first out of profits then out of partner’s capital.
In this question partner gave loan of ₹ 20,000 where firm makes a loss of ₹ 30,000. The money partner get on dissolution will be ₹ 20,000 + 6% of interest.

37. X, Y and Z are partners sharing profits and losses equally. Their capital balances on 31st March, 2013 are ₹ 80,000, ₹ 60,000 and ₹ 40,000 respectively. Their personal assets are worth as follows: X- ₹ 20,000, Y- ₹ 15,000 and Z-₹ 10,000. In case of dissolution, the extent of their maximum liability in the firm would be (assuming no personal liability)
(a) X – ₹ 1,00,000, Y – ₹ 5,000, Z – ₹ 50,000
(b) X – ₹ 60,000, Y – ₹ 35,000, Z – ₹ 30,000
(c) X – ₹ 20,000, Y – ₹ 15,000, Z – ₹ 10,000
(d) X – ₹ 80,000, Y – ₹ 60,000, Z – ₹ 40,000
Answer:
(c) Maximum liability assuming no personal liability would be:
X ₹ 20,000
Y ₹ 15,000
Z ₹ 10,000

38. X, Y, and Z, are partners sharing profits and losses equality. Their capital balances on March 31.2012 are ₹ 80,000, ₹ 60,000 and ₹ 40,000 respectively. Their personal assets are worth as follows:
X – ₹ 20,000, Y – ₹ 15,000 and Z – ₹ 10,000
The extent of their liability in the firm would be:
(a) X – ₹ 80,000, Y – ₹ 60,000 and Z – ₹ 40,000
(b) X – ₹ 20,000, Y – ₹ 15,000 and Z – ₹ 10,000
(c) X – ₹ 1,00,000, Y – ₹ 75,000 and Z – ₹ 50,000
(d) Equal
Answer:
(d) Equal
Partners profit sharing is equally divided. So, they will share equally in the liability of firm as PSR is equal.

39. The capital for LLP should be _________.
(a) ₹ 1 lakh
(b) ₹ 5 lakhs
(c) No limit
(d) ₹ 15 lakhs
Answer:
(c) No limit
The capital for LLP:
The minimum capital required for limited liability partnership is omitted (No such amount is required; no limit); in latest amendment in LLP Act, 2008. Thus, option (c) is correct.

40. A/c to Garner vs Murray rule. Any deficiency would be shared below partners in _________.
(a) Capital ratio
(b) Profit sharing ratio
(c) Both (a) and (b)
(d) None of the above
Answer:
(a) Capital ratio
Garner v/s Murray rule any deficiency would be shared between partners in:
The Garner vs. Murray rule is applicable in case of dissolution of a firm; the rule says that the loss an account of insolvency of a partner is capital loss which should be borne by solvent partners in the ratio of their capitals. Hence, option (a) is correct.

41. According to Garner Vs. Murray rule, realisation loss should be divided among solvent partner _________.
(a) On the basis of their original investment
(b) In profit and loss sharing ratio
(c) In capital ratio
(d) On the basis of their income ratio
Answer:
(b) In profit and loss sharing ratio
According to Garner vs. Murray Rule: The loss on account of insolvency of a partner is a capital loss which should be borne by the solvent partners in the ratio of their capital standing in the balance sheet on the date of dissolution of the firm.

42. Dissolution of partnership is in which section?
(a) Sec. 39
(b) Sec. 49
(c) Sec. 32
(d) Sec. 31
Answer:
(a) Sec. 39
Section 39 of the Indian Partnership Act, provided that “the dissolution of the partnership between all the partners of the firm is called dissolution of a firm”. It implies the complete break down of the relation of partnership between all the partners.

Partnership Accounts-Admission of a Partner – CS Foundation Fundamentals of Accounting Notes

Go through this Partnership Accounts-Admission of a Partner – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Partnership Accounts-Admission of a Partner – CS Foundation Fundamentals of Accounting Notes

1. Any change in partnership agreement is known as the reconstitution of partnership.

2. As a result of reconstitution, the existing agreement comes to an end and a new agreement is formed.

Reconstitution may take place because of the following reasons:

  • Admission of a new partner
  • Retirement of a partner
  • Death of a partner
  • Change in profit sharing ratio

Admission of a Partner:
Admission means when a new partner enters into the business.

A new partner is needed in the business because of any of the following reasons

  • When firm needs‘more capital.
  • When an experienced and knowledgeable person is needed in the business.
  • For increasing goodwill of the firm by taking any reputed person as partner.
  • Any other reason.

Admission of a new partner requires the following adjustments:

  • Calculation of new profit sharing ratio
  • Transfer of profits and reserves to existing partners
  • Revaluation of assets and liabilities
  • Treatment of goodwill

Calculation of New Profit Sharing Ratio:

  • When a new partner is admitted into the partnership, he acquires his share of profit from the existing partners.
  • Due to this, the old partner’s share is reduced, hence a new profit sharing ratio should be calculated.
  • After admission, the future Profits/Losses shall be distributed in this new ratio.
  • Revaluation of assets and liabilities.
  • Treatment of goodwill.

Note: Sacrificing Ratio:
For giving a share of profit to new partner, the old partners have to sacrifice a portion of their share. Therefore, the ratio in which the old partners sacrifice their part is known as the sacrificing ratio.
Sacrificing Ratio = Old Ratio – New Ratio

Example: A, B, C are partners sharing profits in the ratio of 5 : 3 : 2. They admit D into partnership. The new profit sharing ratio of partners is 3 : 2 : 2 : 3. Calculate sacrificing ratio.
Solution:
Sacrificing Ratio = Old Ratio – New Ratio
Sacrifice made by A = \(\frac { 5 }{ 10 }\) – \(\frac { 3 }{ 10 }\) = \(\frac { 2 }{ 10 }\)
Sacrifice made by B = \(\frac { 3 }{ 10 }\) – \(\frac { 2 }{ 10 }\) = \(\frac { 1 }{ 10 }\)
Sacrifice made by C = \(\frac { 2 }{ 10 }\) – \(\frac { 2 }{ 10 }\) = 0.
So sacrificing ratio of A and B is 2 : 1 since C has not sacrificed.

Need for Calculation of Sacrificing Ratio:
→ For distribution of goodwill to old partners.
→ For calculation of new ratio if sacrificing ratio is given.

Calculation of New Profit Sharing Ratio:
Case – 1
When ratio of new partner is given, then in absence of any other agreement, it is presumed that all partners will continue to share remaining profit in the old profit sharing ratio.

Case – 2
When the new partner purchases his share of profit from the old partners in equal ratio.

Case – 3
When the new partner purchases his share from the old partners in a particular ratio.

Case – 4
When the old partners surrender a particular fraction of their share in favour of new partner.

Transfer of accumulated profits and reserves to existing partners:

  • At the time of admission of a partner, if there are any accumulated profits or reserves, then they must be transferred to the existing partners’ capital A/c.
  • A new partner is not entitled to any such benefit or bear any such liability which occurred before his admission.
  • Transfer of reserves is done even when no new partner is admitted but the partner change their profit sharing ratio.

Note: Reason for this is that the reserves and profits were created because of the efforts of the old partners. So, they should be fully utilized by the old partners only. Hence, before a new partner gets admitted, such reserves are distributed among old partners.

(iv) Journal entries effecting such transfer:
(a) For distributing reserves and accumulated profits:
General Reserve A/c Dr.
Reserve Fund A/c Dr.
Profit / Loss (Cr. balance) A/c Dr.
To Old partners’ capital A/c

(b) For transferring accumulated losses:
Old partners’ capital A/c Dr.
To Profit / Loss (Dr. bal.)

(c) For distributing surplus of specific funds:
Workmen compensation fund A/c Dr.
Investment fluctuation fund A/c Dr.
To Old partners’ capital A/c

Revaluation of assets and liabilities:
(i) On admission of a new partner, the assets and liabilities of the firm are revalued to their true and fair figures.

(ii) The value of assets and liabilities may have changed over a period of time.

(iii) The new partner is not to bear any part of profit/loss due to change in value of asset and liability.

(iv) For this purpose, the assets and liabilities are revalued on the admission of the partner and the difference or change in value in form of profit/loss shall be distributed among old partners in the old ratio.
Note:
For this, Revaluation Account is Prepared.

(v) Accounting entries:
(i) For decrease in value of asset:
Revaluation A/c Dr.
To Asset A/c

(ii) For increase in value of asset:
Asset A/c Dr.
To Revaluation A/c

(iii) For increase in value of liability:
Revaluation A/c Dr.
To Liabilities A/c

(iv) For decrease in value of liability:
Liabilities A/c Dr.
To Revaluation A/c

(v) When revaluation A/c shows profit:
Revaluation A/c Dr.
To Old Partners’ Capital A/c [In the old ratio]

(vi) When revaluation A/c shows loss:
Old Partners’ Capital A/c Dr.
To Revaluation A/c
[In the old ratio]

Proforma Revaluation Account

Particulars Particulars
To Decrease in value of assets.

To Increase in value of liabilities.

To Unrecorded Liabilities.

To Profit on Revaluation transferred to old partners’ capital accounts (in old ratio)

 

By Increase in value of assets.

By Decrease in value of liabilities.

By Unrecorded assets.

By Loss on Revaluation transferred to old partners’ capital accounts (in old ratio)

Difference between Revaluation A/c and Memorandum Revaluation:

Revaluation A/c Memorandum Revaluation A/c
Revaluation A/c is prepared to find out the profit and loss on revaluation of assets and liabilities which appear in the new balance sheet at the revalued figures. It is prepared to record the effect of revaluation of assets and liabilities but they are recorded at their old figures in the new balance sheet.
Revaluation A/c is not divided in parts. The profit or loss of goes to old partners only. It has two parts. The profit or loss of first part goes to old partners while profit or loss of the second part goes to all the partners including the new partner.

Treatment of Goodwill:
In case of admission of partner-there can be following situations relating to the treatment of goodwill:
(a) When goodwill does not appear in books –

  • When the amount of goodwill is paid privately.
  • When the new partner brings his share of goodwill in cash.
  • When the new partner does not bring his goodwill in cash.

(b) When goodwill already appears in book –
(a) When goodwill does not appears in books
1. When amount of goodwill is paid privately:

  • Payment of goodwill privately means that the new partner pays goodwill in cash to the old partners outside the business.
  • Since the amount is paid privately outside the business, hence there will be no entry for this in the books of business.

2. When the new partner brings his share of goodwill in cash:
Partnership Accounts-Admission of a Partner – CS Foundation Fundamentals of Accounting Notes 1
When new partner brings goodwill in cash there can be the following situations
(a) Retained in business –
(i) When new partner brings goodwill in cash
Cash/Bank A/c Dr.
To Goodwill A/c

(ii) Transfer of goodwill to partners’capital A/c
Goodwill A/c Dr.
To Old partners’ A/c
(In sacrificing ratio)

Effect of above two entries:
1. Old partners will be getting goodwill for the share of profit sacrificed by them, from the new partner.

2. Goodwill is transferred to old partners’ account; hence it will be retained in the business.
(b) Withdrawn by old partners:
(i) When goodwill is brought in cash
Cash/Bank A/c Dr.
To Goodwill A/c

(ii) Transfer of goodwill to old partners’ capital A/c
Goodwill A/c Dr.
To Old partners’ capital A/c (In sacrificing ratio)

(iii) When goodwill is withdrawn by old partners
Old partners’ capital A/c Dr.
To Cash/bank A/c

Effect of above entries:

  • Old partners will be getting goodwill for the share of profit sacrificed by them for the new partner.
  • Since the partners have withdrawn goodwill, hence goodwill is no longer retained in business.

Note :
If some amount is withdrawn, the remaining amount will be retained in business.

Hidden Goodwill:

  • Sometimes the value of goodwill is not clearly given in question but is to be inferred from the question.
  • In such cases, goodwill is calculated on the basis of total capital of the firm and profit.

Example: A and B are partners with capitals of ₹ 50,000 and ₹ 30,000 respectively. They admit C as partner with share and bring 40,000 as his capital. Calculate goodwill.
Solution :
If C brings ₹ 40,000 for \(\frac { 1 }{ 4 }\)th share,
So, based on this total capital of firm
= \(\frac { 1 }{ 4 }\) – 40,000
= 1 – 40,000 x 4
= ₹ 1,60,000.
Whereas, total capital of firm after C’s admission = 50,000 + 30,000 + 40,000 = ₹ 1,20,000
Goodwill = ₹ 1,60,000 – ₹ 1,20,000
= ₹ 40,000

Adjustment of old partners’ capital A/c on the basis of new partner:
1. This adjustment is done when it is decided that on admission of new partner, the capital of old partners’ be adjusted on the basis of new partner’s capital to make them proportionate to their share of profit.

2. For this adjustment, there are following steps:

  • Step – 1 : Determine the entire capital of the new firm based on new partner’s capital.
  • Step – 2 : Determine the capital of each partner by dividing the total capital according to his profit sharing ratio.
  • Step – 3 : Ascertain the difference between the old and new capital of old partners.

(i) If old capital is more than the new, the excess amount will be paid off to the partner or credited to his current account.
Old partner’s Capital A/c Dr.
To Bank or partner’s current A/c

(ii) If the old capital is less than the new capital, the capital account of the partner will be increased (either by bringing cash or through current A/c)
Bank A/c or partner’s current A/c Dr.
To Partner’s capital A/c

Partnership Accounts-Admission of a Partner MCQ Questions

1. A new partner may be admitted to partnership:
(a) with the consent of all the old partners
(b) with the consent of any one partner
(c) with the consent of two thirds of the old partners
(d) with the consent of three fourth of the old partners.
Answer:
(a) with the consent of all the old partners

2. The balance of general reserve is to be transferred to the capital accounts of the partners in:
(a) Old profit sharing ratio
(b) New profit sharing ratio
(c) Capital ratio
(d) Sacrificing ratio.
Answer:
(a) Old profit sharing ratio

3. General reserve at the time of admission of a partner is transferred to:
(a) Revaluation account
(b) Partner’s capital accounts
(c) Neither of the two
(d) Profit and Loss Account.
Answer:
(b) Partner’s capital accounts

4. C is admitted in firm for a 1/4 share in the profits for which he brings ₹ 3,000 for goodwill. It will be taken by the old partners in:
(a) Old profit sharing ratio
(b) New profit sharing ratio
(c) Sacrificing ratio
(d) Capital ratio.
Answer:
(c) Sacrificing ratio

5. Goodwill raised by the partners at the time of admission of a partner will be written off in:
(a) Old profit sharing ratio
(b) New profit sharing ratio
(c) Sacrificing ratio
(d) Capital ratio
Answer:
(b) New profit sharing ratio

6. The balance of Memorandum Revaluation Account (second part), is transferred to the capital accounts of the partners in:
(a) Capital ratio
(b) Old profit sharing ratio
(c) New profit sharing ratio
(d) Equal ratio.
Answer:
(c) New profit sharing ratio

7. If the incoming partner is to bring his share of goodwill in cash, and there exists any balance in goodwill account, then this goodwill account is to be written off among old partners in:
(a) New profit sharing ratio
(b) Old profit sharing ratio
(c) Sacrificing ratio
(d) Equal ratio.
Answer:
(b) Old profit sharing ratio

8. A and B share profit and losses equally. They admit C as an equal partner and goodwill was valued as ₹ 30,000. C is to bring in ₹ 30,000 as his capital and necessary cash towards his share of goodwill. What will be the final effect of goodwill in the partner’s capital account?
(a) A and B’s accounts credited with ₹ 5,000 each
(b) All partner’s account credited with ₹ 10,000 each
(c) Only C’s account credited with ₹ 10,000 as cash bought in for goodwill
(d) None of the above.
Answer:
(a) A and B’s accounts credited with ₹ 5,000 each

9. C was admitted in a firm with 1 /4th share of the profit of the firm. C contributes ₹ 30,000 as his capital. A and B are other partners with the profit sharing ratio as 3:2. Find the required capital of A and B, if capital should be in profit sharing ratio taking C’s capital as base capital:
(a) ₹ 54,000 and ₹ 32,000 for A and B respectively
(b) ₹ 54,000 and ₹ 36,000 for A and B respectively
(c) ₹ 64,000 and ₹ 42,000 for A and B respectively
(d) ₹ 62,000 and ₹ 52,000 for A and B respectively.
Answer:
(b) ₹ 54,000 and ₹ 36,000 for A and B respectively

10. X and Y are partners sharing profits in the ratio of 3 : 1. They admit Z as a partner who paid ₹ 40,000 as goodwill, the new profit sharing ratio being 2:1:1 among X, Y and Z respectively. The amount of goodwill will be credited to :
(a) X and Y as ₹ 30,000 and ₹ 10,000 respectively
(b) X only
(c) Y only
(d) None of the above.
Answer:
(b) X only

11. X and Y are partners sharing profit in the ratio of 1 : 1. They admit Z for 1/5th share who contributed ₹ 25,000 for his share of goodwill. The total value of the goodwill of the firm will be:
(a) ₹ 25,000
(b) ₹ 50,000
(c) ₹ 1,00,000
(d) ₹ 1,25,000.
Answer:
(d) ₹ 1,25,000.

12. ‘A’ and ‘B’ are partners in a business sharing profits in the ratio of 5 : 3. They admit ‘C’ as a partner with 1/4 share in the profits which he acquires 3/4 from ‘A’ and 1/4 from ‘B’. He pays ₹ 4,000 as his share of goodwill. ‘A’ and ‘B’ will be credited by
(a) ₹ 2,500 and ₹ 1,500 respectively:
(b) ₹ 2,000 each
(c) ₹ 1,000 and ₹ 3,000 respectively
(d) ₹ 3,000 and ₹ 1,000 respectively.
Answer:
(a) ₹ 2,500 and ₹ 1,500 respectively:

13. A, B and C are equal partners in a firm with capital of ₹ 16,800, ₹ 12,600 and ₹ 6,000 respectively with bills payable ₹ 3,300; creditors ₹ 6,000; cash ₹ 600; debtors ₹ 10,800; stock ₹ 11,400; furniture ₹ 2,400 and building ₹ 19,500. E is admitted to the firm and brings ₹ 9,000 as goodwill and ₹ 15,000 as capital. Half the goodwill is withdrawn by old partners, and stock and furniture is depreciated by 10%. A provision of 5% on debtors is created and value of building is taken at ₹ 27,000. The profit on revaluation will be ________.
(a) ₹ 5,500
(b) ₹ 5,580
(c) ₹ 5,400
(d) ₹ 5,680.
Answer:
(b) ₹ 5,580

14. X and Y are sharing profits in the ratio of 2 : 1. They admit Z into the firm for 1/4 share in profits for which he brings ₹ 12,000 as his share of capital. Hence, the adjusted capital of Y will be –
(a) ₹ 12,000
(b) ₹ 16,000
(c) ₹ 24,000
(d) ₹ 20,000.
Answer:
(a) ₹ 12,000

15. A and B are partners sharing the profits in the ratio 2 : 3. They take C as the new partner who is supposed to bring ₹ 50,000 against capital and 20,000 against goodwill. New profit sharing ratio is 1 : 1 : 1. C is able to bring ₹ 60,000 only. How will this be treated in the books of the firm.
(a) A and B will share goodwill brought by c in the ratio 1 : 4
(b) Goodwill will be raised to ₹ 30,000 in old profit sharing ratio
(c) Both (a) and (b)
(d) None.
Answer:
(c) Both (a) and (b)

16. A and B are partners sharing the profit in the ratio of 3 : 2. They take C as the new partner who is supposed to bring ₹ 25,000 as capital and ₹ 20,000 against goodwill. New profit sharing ratio is 1 : 1 :1. C is able to bring only his share of capital. How will this be treated in the books of the firm.
(a) A and B will be credited by 8,000 and 2,000 for goodwill
(b) Goodwill will be raised to ₹ 30,000 by crediting A and B in old profit sharing ratio
(c) Both (a) and (b)
(d) None.
Answer:
(b) Goodwill will be raised to ₹ 30,000 by crediting A and B in old profit sharing ratio

17. A and B are partners in the ratio of 2 : 1. They admitted C for 1/4 share who contributes ₹ 3,000 for his share of goodwill. The total value of goodwill of the firm is :
(a) ₹ 3,000
(b) ₹ 9,000
(c) ₹ 12,000
(d) ₹ 15,000
Answer:
(c) ₹ 12,000

18. P and Q are partners sharing profits in the ratio of 2 : 1. R is admitted to the partnership with effect from 1st April on the term that he will bring ₹ 30,000 as his capital for 1/5 share and pays ₹ 18,000 for goodwill half of which is to be withdrawn by P and Q. Profit on revaluation is ₹ 6,000 and opening capital of P is ₹ 40,000 and Q 30,000, find the closing balance of each partner’s capital.
(a) ₹ 50,000 : 35,000 : 30,000
(b) ₹ 50,000 : 35,000 : 20,000
(c) ₹ 40,000 : 30,000 : 30,000
(d) ₹ 41,000 : 30,500 : 29,000.
Answer:
(b) 2 : 2 : 3

19. X and Y share profits and losses in the ratio of 4 : 3. They admit Z in the firm with 3/7 share which he gets 2/7 from X and 1/7 from Y. The new profit sharing ratio will be –
(a) 7 : 3 : 3
(b) 2 : 2 : 3
(c) 5 : 2 : 3
(d) 2 : 3 : 3
Answer:
(b) 2 : 2 : 3

20. X and Y are sharing profits and losses in the ratio of 3 : 2. Z is admitted with 1/5th share in profits of the firm which he gets from X. Now, the new profits sharing ratio between X, Y and Z will be ________.
(a) 12 : 8 : 5
(b) 8 : 12 : 5
(c) 2 : 2 : 1
(d) 2 : 2 : 2
Answer:
(c) 2 : 2 : 1

21. A and B are partners in a firm sharing profits in the ratio of 3 : 1. They have agreed to admit C into the partnership firm. C is given 1/4th share of future profits which he acquires in the ratio of 2 : 1 from A and B. The new profit sharing ratio would be:
(a) 4 : 3 : 1
(b) 7 : 2 : 3
(c) 3 : 1 : 7
(d) 7 : 3 : 2
Answer:
(c) 3 : 1 : 7

22. X and Y are partners sharing profits in the ratio 5:3. They admitted Z for 1 /5th profits, for which he paid ₹ 60,000 against capital and ₹ 30,000 against goodwill. Find the capital balance for each partner taking Z’s capital as base capital.
(a) ₹ 1,50,000; 60,000 and 60,000
(b) ₹ 1,50,000; 60,000 and 90,000
(c) ₹ 1,50,000; 90,000 and 60,000
(d) ₹ 1,50,000; 90,000 and 90,000.
Answer:
(c) ₹ 1,50,000; 90,000 and 60,000

23. A and B are partners sharing the profits in the ratio of 3 : 2. They take C as the new partner who brings in ₹ 50,000 against capital and ₹ 20,000 against goodwill. New profit sharing ratio is 1 : 1 : 1. In what ratio will this amount of goodwill be shared among the old partners.
(a) ₹ 16,000, 4,000
(b) ₹ 10,000, 10,000
(c) Old partners will not get any share in the goodwill bought in by C
(d) ₹ 12,000, 8,000.
Answer:
(a) ₹ 16,000, 4,000

24. A and B are partners of a partnership firm sharing profit in the ratio 3 : 2 respectively. C was admitted for 1/5,h share of profit. Machinery would be appreciated by 10% (book value ₹ 80,000) and building would be depreciated by 20% (₹ 2,00,000). Unrecorded debtors of ₹ 1,250 would be bought into books. Profits/Loss on revaluation is :
(a) Loss – ₹ 30,750
(b) loss 40,000
(c) Profits – ₹ 28,000
(d) profits – ₹ 40,000.
Answer:
(a) Loss – ₹ 30,750

25. A and B are equal partners in a firm. They admitted C as one – sixth partner who bought in ₹ 60,000 as goodwill. The new profit sharing ratio is 3 : 2 :1. If goodwill of ₹ 60,000 is to be paid to the old partners as per sacrificing ratio, B will receive:
(a) ₹ 30,000
(b) ₹ 60,000
(c) ₹ 45,000
(d) Nil.
Answer:
(b) ₹ 60,000

26. Goodwill of a firm of A and B is valued at ₹ 30,000. It is appearing in the books at ₹ 12,000, C is admitted for 1/4 share. What amount he is supposed to bring for goodwill?
(a) ₹ 3,000
(b) ₹ 4,500
(c) ₹ 7,500
(d) ₹ 10,500.
Answer:
(b) ₹ 4,500

27. P and Q are partners sharing profits in the ratio of 2 :1. R is admitted to the partnership with effect from 1st April on the terms that he will bring ₹ 30,000 as his capital for 114 share and pays ₹ 18,000 for goodwill, half of which is to be withdrawn by P and Q. How much cash can P & Q withdraw from the firm, if any,?
(a) ₹ 6,000, 3,000
(b) ₹ 12,000, 6,000
(c) Nil
(d) None of the above.
Answer:
(a) ₹ 6,000, 3,000

28. A and B share profits and losses equally. They have ₹ 20,000 each as capital. They admit C as equal partner and goodwill was valued as ₹ 30,000. C is to bring in ₹ 30,000 as his capital and necessary cash towards his share of goodwill. Goodwill Account will not remain open in books. If profit on revaluation is ₹ 13,000, find the closing balance of the capital accounts.
(a) ₹ 31,500; 31,500; 30,000
(b) ₹ 31,500; 31,500; 20,000
(c) ₹ 26,500; 26,500; 30,000
(d) ₹ 20,000; 20,000; 30,000.
Answer:
(a) ₹ 31,500; 31,500; 30,000

29. If A and B who are sharing profits in the ratio of 3 : 1 and they admit C to one – fourth share in the future profits, the new profit sharing ratio shall be .
(a) A : 9/16; B : 3/16; C : 4/16
(b) A : 10/16; B : 2/16; C : 4/16
(c) A : 8/16; B : 4/16; C : 4/16
(d) A : 7/16; B : 5/16; C : 4/16.
Answer:
(a) A : 9/16; B : 3/16; C : 4/16

30. ‘A’ and ‘B’ who are partners, share profits in the ratio of 7 : 3. ‘C’ is admitted as a new partner, ‘A’ Surrenders 1/7 of his share and ‘B’ Surrenders 1/3 of his share in favour of ‘C’, the new profit sharing ratio will be :
(a) 6 : 2 : 2
(b) 4 : 1 : 1
(c) 3 : 2 : 2
(d) None of the above.
Answer:
(a) 6 : 2 : 2

31. Amit and Anil are partners of a partnership firm sharing profits in the ratio of 5 : 3 with capital of ₹ 2,50,000 and ₹ 2,00,000 respectively. Atul was admitted on the following terms. Atul would pay ₹ 50,000 as capital and ₹ 16,000 as goodwill for 1 /5th profit. Find the balance of capital accounts after admission of Atul.
(a) ₹ 2,60,000; 2,06,000; 50,000
(b) ₹ 2,20,000; 1,82,000; 66,000
(c) ₹ 2,92,500; 2,25,500; 50,000
(d) ₹ 2,82,000; 2,10,500; 66,000.
Answer:
(a) ₹ 2,60,000; 2,06,000; 50,000

32. A and B are partners of a partnership firm sharing profits in the ratio of 3 : 2 respectively. C was admitted for 1/5th share of profit. Machinery would be appreciated by 10% (book value ₹ 8,000) and building would be depreciated by 20% (₹ 2,00,000). Unrecorded debtors of ₹ 1,250 would be bought into books now and creditors amounting to ₹ 2,750 died and need not pay anything to its estate. What will be profit/ loss on revaluation?
(a) Loss – ₹ 28,000
(b) Loss – ₹ 40,000
(c) Profits – ₹ 28,000
(d) Profits – 40,000
Answer:
(a) Loss – ₹ 28,000

33. The opening balance of partner’s capital account is credited with:
(a) Interest on capital
(b) Interest on drawings
(c) Profit
(d) All of the above
Answer:
(a) Interest on capital

34. Reserves appearing in the balance sheet will be divided among the partners during admission in:
(a) Gaining ratio
(b) New ratio
(c) Sacrificing ratio
(d) Old ratio
Answer:
(d) Old ratio

35. The balance of memorandum revaluation account is transferred to the capital accounts of the partners in ________.
(a) New profit sharing ratio
(b) Old profit sharing ratio
(c) Capital ratio
(d) Sacrificing ratio
Answer:
(a) New profit sharing ratio

36. The entry for unrecorded investments will be:
(a) Debit partners capital A/c and credit investments A/c
(b) Debit revaluation A/c and credit investment A/c
(c) Debit unrecorded investment A/c and credit revaluation A/c
(d) None of the above
Answer:
(c) Debit unrecorded investment A/c and credit revaluation A/c

37. A, B, C share profit & losses in the ratio of 3:2:1. Z is admitted for 1 /6th share which he gets entirely from A. Find out the new profit sharing ratio.
(a) 2 : 2 : 1 : 1
(b) 3 : 1 : 1 : 1
(c) 2 : 2 : 2 : 1
(d) 2 : 1 : 2 : 1
Answer:
(a) 2 : 2 : 1 : 1

38. A and B are partners sharing profits and losses in the ratio of 3:2. A’s capital is ₹ 1,60,000 and B’s capital is ₹ 1,30,000. They admit C for 1 /5th share. How much capital should C bring?
(a) ₹ 40,000
(b) ₹ 62,500
(c) ₹ 22,500
(d) ₹ 72,500
Answer:
(d) ₹ 72,500

39. A and B are partners having profit sharing ratio of 1:2. The new profit sharing ratio is 1 : 2 : 3.
Calculate the sacrificing ratio
(a) 1 : 3
(b) 1 : 4
(c) 1 : 2
(d) 2 : 3
Answer:
(c) 1 : 2

40. When the balance sheet is prepared after the new partnership agreement, the assets and liabilities are recorded at:
(a) Historical cost
(b) Current cost
(c) Realisable value
(d) Revalued figures
Answer:
(d) Revalued figures

41. A and B are partners and they admit C with 1 /5th share and C brings ₹ 1,00,000 as his share towards capital. The total net worth of the firm is:
(a) ₹ 5,00,000
(b) ₹ 4,00,000
(c) ₹ 25,000
(d) ₹ 10,00,000
Answer:
(a) ₹ 5,00,000

42. P and Q share profit/loss in the ratio of 5:3. Z, is admitted as a partner for 1/5th share, which he takes from the old partners equally. New profit sharing ratio will be:
(a) 21 : 11 : 8
(b) 21 : 8 : 7
(c) 15 : 10 : 5
(d) None of the above
Answer:
(a) 21 : 11 : 8

43. A and B are partners. C is admitted with a guaranteed profits of ₹ 10,000 from A and the new profit sharing ratio is 3 : 2 : 1. The net profit for the year is ₹ 1,80,000. How much profit will A & C get respectively:
(a) 40,000 & 30,000
(b) 70,000 & 60,000
(c) 90,000 & 30,000
(d) None of the above
Answer:
(c) 90,000 & 30,000

44. A and B share profits & losses in the ratio of 5:3. P is admitted as the new partner equally. Calculate the new profit sharing ratio:
(a) 20 : 8 : 7
(b) 21 : 11 : 8
(c) 20 : 12 : 18
(d) None of these
Answer:
(b) 21 : 11 : 8

45. P and Q share profits and losses in the ratio of 3 : 2 and their respective capitals are ₹ 1,20,000 and ₹ 54,000. C is admitted for 1 /5th share and brings ₹ 1,20,000 as his share of capital. Calculate the amount to be refunded to A
(a) ₹ 45,000
(b) ₹ 1,68,000
(c) ₹ 1,00,000
(d) ₹ 1,20,000
Answer:
(b) ₹ 1,68,000

46. A and B share profits/losses equally. They admit C with 1 /5th share. The new profit sharing ratio will be:
(a) 2:2:1
(b) 2:2:2
(c) 1:2:1
(d) 2:3:1
Answer:
(a) 2:2:1

47. A, B and C are partners sharing profits in the ratio of 3:2:1. They agree to take C in the firm. A, B and C agree to take 1/3rd, 1 /6th and 1/9th share respectively. Calculate the share of D in profits.
(a) 1/10
(b) 11/54
(c) 13/54
(d) 26/54
Answer:
(c) 13/54

48. A and B are partners sharing profits in the ratio of 3 : 2 respectively. C is admitted in the firm for 1 /3rd share in profits. The new profit sharing ratio amongst A, B and C will be:
(a) 12 : 08 : 05
(b) 08 : 12 : 05
(c) 05 : 05 : 12
(d) None of the above.
Answer:
(d) None of the above.
Old profit sharing ratio of A = \(\frac { 3 }{ 5 }\)
Old profit sharing ratio of B = \(\frac { 2 }{ 5 }\)
New partner C’s profit = \(\frac { 1 }{ 3 }\)
Hence, remaining profit = 1 – \(\frac { 1 }{ 3 }\) = \(\frac { 2 }{ 3 }\)
New Profit sharing ratio of A = \(\frac { 2 }{ 3 }\) x \(\frac { 3 }{ 5 }\) = \(\frac { 6 }{ 15 }\)
New Profit sharing ratio of B = \(\frac { 1 }{ 3 }\) x \(\frac { 5 }{ 5 }\) = \(\frac { 5 }{ 15 }\)
New Profit sharing ratio of C = \(\frac { 1 }{ 3 }\) x \(\frac { 5 }{ 5 }\) = \(\frac { 5 }{ 15 }\)
So, A : B : C = \(\frac { 6 }{ 15 }\) x \(\frac { 4 }{ 15 }\) = \(\frac { 5 }{ 15 }\) = 6 : 4 : 5

49. A’s capital in a business is ₹ 20,000 and B’s capital is ₹ 25,000. Their profit sharing ratio is 4 : 5. They admit C in the firm as a new partner and ask him to contribute ₹ 40,000 for 1/3rd share of profit. Find the premium paid by C on account of goodwill:
(a) ₹ 17,500
(b) ₹ 20,000
(c) ₹ 15,000
(d) None of the above
Answer:
(a) ₹ 17,500
Remaining share of A and B = 1 – \(\frac { 1 }{ 3 }\)
Total capital (after admission of C) = (20,000 + 25,000) x \(\frac { 2 }{ 3 }\)
= 67,500
Capital of C = 67,500 – (20,000 + 25,000) = 22,500
Total contribution of cash by C = 40,000
So, Premium paid by C = 40,000 – 22,500 = ₹ 17,500

50. A and B are partners in a firm having capital balances of ₹ 54,000 and ₹ 36,000 respectively. They admit C in partnership for 1 /3rd share and C is to bring proportionate amount of capital. The capital amount of C would be:
(a) ₹ 90,000
(b) ₹ 45,000
(c) ₹ 5,400
(d) ₹ 36,000
Answer:
(b) ₹ 45,000
Total capital (before the admission of C)
= 54,000 + 36,000
= ₹ 90,000
Remaining share of A and B = 1 – \(\frac { 1 }{ 3 }\)
= \(\frac { 2 }{ 3 }\) shares
Total capital of the firm (after admission of C) will be = 90,000 x \(\frac { 3 }{ 2 }\)
= ₹ 1,35,000
So, Capital amount of C would be = ₹ 1,35,000 – ₹ 90,000
= ₹ 45,000

51. A and B are partners in a business sharing profits and losses in the ratio of 7 : 3 respectively. They admit C as a new partner A sacrificed Ml’h share of his profit and B sacrificed 1 /3rd of his share in favour of C. The new profit sharing ratio of A, B, and C will be:
(a) 3 : 1 : 1
(b) 2 : 1 : 1
(c) 2 : 2 : 1
(d) None of the above
Answer:
(a) A : B = 7 : 3
A Sacrificing 1/7th of his share
\(\frac { 7 }{ 10 }\) x \(\frac { 1 }{ 7 }\) = \(\frac { 1 }{ 10 }\)
B Sacrificing 1/3th of his share
\(\frac { 3 }{ 10 }\) x \(\frac { 1 }{ 3 }\) = \(\frac { 1 }{ 10 }\)
Total Share of C = \(\frac { 1 }{ 10 }\) + \(\frac { 1 }{ 10 }\) = \(\frac { 2 }{ 10 }\)
New share of A = \(\frac { 7 }{ 10 }\) – \(\frac { 1 }{ 10 }\)
= \(\frac { 6 }{ 10 }\)
New share of B = \(\frac { 3 }{ 10 }\) – \(\frac { 1 }{ 10 }\) = \(\frac { 2 }{ 10 }\)
New profit sharing ratio of
A : B : C = \(\frac { 6 }{ 10 }\) : \(\frac { 2 }{ 10 }\) : \(\frac { 2 }{ 10 }\)
= 3 : 1 : 1

52. Ramesh and Suresh are partners sharing profits in the ratio of 2 : 1 respectively. (Ramesh Capital is ₹ 1,02,000 and Suresh Capital is ₹ 73,000). They admit Mahesh and agree to give him 1/5th share in future profit. Mahesh brings ₹ 14,000 as his share of goodwill. He agrees to contribute capital in the new profit share ratio. How much capital will be brought by Mahesh?
(a) ₹ 43,750
(b) ₹ 45,000
(c) ₹ 47,250
(d) ₹ 48,000.
Answer:
(c) ₹ 47,250

Capital of A ₹ 1,02,000
Capital of B ₹ 73,000
Goodwill ₹ 14,000
Total capital for 4/5<sup>th</sup> Share ₹ 1,89,000

∴ Overall capital of firm will be 1,89,000 x \(\frac { 5 }{ 4 }\) = 2,36,250
Mahesh brings in 1/5th of ₹ 2,36,250 = ₹ 47,250

53. M and N are partners sharing profit and loss in equal ratio. Their capital balances stood at ₹ 23,000 and ₹ 27,000 respectively. They wanted to grow their business and admitted P as a working partner for 1/3rd share. P is to bring capital in the proportion of his share of profit and besides capital, he is to bring ₹ 9,000 as goodwill. What will be the amount of capital to be brought in by P _______.
(a) ₹ 27,000
(b) ₹ 23,000
(c) ₹ 36,000
(d) ₹ 29,500
Answer:
(d) Sacrifice Ratio of M and N = 1 : 1
M’s capital A/c and N’s capital A/c will be credited by the amount of goodwill in sacrifice ratio.
After distribution of goodwill capital balance will be:
M’s Capital = 23,000 + 4,500 = ₹ 27,500
N’s Capital = 27,000 + 4,500 = ₹ 31,500
Remaining share of old partner’s = 1 – \(\frac { 1 }{ 3 }\) = \(\frac { 2 }{ 3 }\)
Total capital of the firm would be = (27,500 + 31,500) x \(\frac { 3 }{ 2 }\) = ₹ 88,500
Capital will be bought by P = 88,500 x \(\frac { 1 }{ 3 }\) = ₹ 29,500

54. A & B are sharing profits and loss in ratio of 3 : 2. C was admitted for 1 /5th share, which he takes equally from A & B, i.e. 1/10th from A and 1/10lh from B. New profit sharing ratio will be ________.
(a) 5 : 3 : 2
(b) 29 : 19 : 10
(c) 9 : 6 : 5
(d) None of these
Answer:
(a) 5 : 3 : 2
Old profit sharing ratio of A and B = 3 : 2
∴ C is admitted for 1/5th share which he takes equally from A & B i.e. \(\frac { 1 }{ 10 }\) from A and \(\frac { 1 }{ 10 }\) from B.
Net profit sharing ratio A : B : C
A = \(\frac { 3 }{ 5 }\) – \(\frac { 1 }{ 10 }\) = \(\frac { 6 – 1 }{ 10 }\) = \(\frac { 5 }{ 10 }\)
B = \(\frac { 2 }{ 5 }\) – \(\frac { 1 }{ 10 }\) = \(\frac { 4 – 1 }{ 10 }\) = \(\frac { 3 }{ 10 }\)
C = \(\frac { 1 }{ 10 }\) + \(\frac { 1 }{ 10 }\) = \(\frac { 2 }{ 10 }\)
Hence, new profit sharing ratio is 5 : 3 : 2.

52. A & B are partners sharing profits in the ratio of 2:1 respectively (A’s capital is ₹ 1,02,000 & B’s capital is ₹ 73,000). They admit C & agreed to give him 1 /5th share in future profit. C brings ₹ 14,000 and share of goodwill. He agreed to contribute capital in the new profit sharing ratio. How much capital will be brought by C.
(a) ₹ 43,750
(b) ₹ 45,000
(c) ₹ 47,250
(d) ₹ 48,000
Answer:
(a) ₹ 43,750

Capital of Ramesh 1,02,000
Capital of Suresh 73,000
Goodwill 14,000
Total capital for 1,89,000

Overall capital of firm will be = 1,89,000 x \(\frac { 5 }{ 4 }\) = \(\frac { 5 }{ 4 }\) = ₹ 2,36,250/
C brings in 1/5,h of ₹ 2,36,250 – ₹ 47,250/-

53. At the time of admission of partner, amount of general reserve, revaluation a/c will be transferred to _______.
(a) Old Partners Capital A/c
(b) New Partners Capital A/c
(c) All Partners Capital A/c
(d) None of the above.
Answer:
(a) Old Partners Capital A/c
At the time of admission of partners, all the reserves and profits of existing partners are transferred to existing partners i.e. to old partners capital a/c.

54. If A and B are sharing profits in the ratio of 5 : 3 and on admission of C, the new profit sharing ratio becomes 7 : 5 : 4. Calculate the sacrificing ratio.
(a) 3 : 1
(b) 1 : 3
(c) 5 : 4
(d) 7 : 5
Answer:
(a) 3 : 1
Old Ratio of A & B = 5 : 3
New Profit Sharing Ratio for A, B and C = 7 : 5 : 4
→ Sacrificing Ratio = Old share – New share
→ A’s new share = \(\frac { 7 }{ 16 }\)
→ A’s old share = \(\frac { 5 }{ 8 }\)
→ A’s sacrifice = \(\frac { 5 }{ 8 }\) – \(\frac { 7 }{ 16 }\) = \(\frac { 10 – 7 }{ 16 }\) = \(\frac { 3 }{ 16 }\)
→ B’s new share = \(\frac { 5 }{ 16 }\)
→ B’s old share = \(\frac { 3 }{ 8 }\)
→ B’s sacrifice = \(\frac { 3 }{ 8 }\) – \(\frac { 5 }{ 16 }\) = \(\frac { 6-5 }{ 16 }\) = \(\frac { 1 }{ 16 }\)
→ Sacrificing ratio = 3 : 1
→ Hence, option (a) is correct.

55. A started a business with ₹ 18,000 after 4 months B joins with ₹ 24,000. After 2 more months C joins with ₹ 30,000. At the end of 10 months from A started the business. C received ₹ 1,850 as his share. They decided to share profit or losses in the ratio of capital. The total profit of the firm would be:
(a) ₹ 7,955
(b) ₹ 8,510
(c) ₹ 7,030
(d) ₹ 6,845
Answer:
(d) ₹ 6,845
Total profit for 10 months = 1850
A’s capital = 18000, duration = 10 months
B’s capital = 24000, duration = 6 months
C’s capital = 3000C, duration = 4 months
Total weighted capital ratio = (18000 x 10) : (24000 x 6) : (30000 x 4)
= 180000 : 144000 : 120000 = 180 : 144 : 120 (or)
(1 1 1) = 45 : 36 : 30.
Total profit of the firm = C’s share in profits x \(\frac { Total Capital }{ Cs Capital }\)
= 1,850 x \(\frac{4,44,000}{1,20,000}\) = 6,845
Alternatively, = 1,850 x \(\frac{111}{30}\) = 6,845

56. The balance of Revaluation account created at the time of admission of a new partner is:
(a) Transferred to old partners capital account
(b) Transferred to all partners capital account
(c) Transferred to profit and loss account
(d) Transferred to new partners capital account
Answer:
The balance of Revaluation account created at the time of admission of a new partner is transferred to old partners capital account because before a new partner is admitted, the assets and liabilities of the firm are revalued and any profit or loss resulting from such a revaluation is transferred to old partner’ capital accounts in the old profit sharing ratio.

57. A and B are partners sharing profit losses in ratio 2 : 3. C is admitted for 1/4 share in profit find new profit share ratio :
(a) 2 : 4 : 5
(b) 3 : 2 : 6
(c) 6 : 9 : 5
(d) 1 : 2 : 3
Answer:
(c) 6 : 9 : 5
Old Ratio = 2 : 3
C, admitted for = \(\frac{1}{4}\) share
Remaining share = 1 – \(\frac{1}{4}\)
= \(\frac{3}{4}\)
New Profit sharing ratio of A = \(\frac{2}{5}\) x \(\frac{3}{4}\) = \(\frac{6}{20}\)
New Profit sharing ratio of B = \(\frac{3}{5}\) x \(\frac{3}{4}\) = \(\frac{9}{20}\)
New Profit sharing ratio of C = \(\frac{1}{4}\) x \(\frac{5}{5}\) = \(\frac{5}{20}\)
New Profit Ratio = \(\frac{6}{20}\) : \(\frac{9}{20}\) = \(\frac{5}{20}\)
= 6 : 9 : 5

58. A and B are partner in a business sharing profit and losses in the ratio of 7 : 3 respectively. They admit “C” as a partner. “A” sacrifices 1/7th share of his profit and “B” sacrifices 1 /3rd share of his profit in favour “C”. The new profit sharing ratio of A, B, C will be :
(a) {3 : 2 : 1}
(b) {3 : 1 : 1}
(c) {2 : 2 : 1}
(d) {3 : 2 : 2}
Answer:
(b) {3 : 1 : 1}
Share sacrificed by A → \(\frac{7}{10}\) x \(\frac{1}{7}\) = \(\frac{1}{10}\)
Share sacrificed by B → \(\frac{3}{10}\) x \(\frac{1}{3}\) = \(\frac{1}{10}\)
Share of C → \(\frac{1}{10}\) + \(\frac{1}{10}\) = \(\frac{2}{10}\) = \(\frac{1}{5}\)
A = \(\frac{7}{10}\) – \(\frac{1}{10}\) = \(\frac{6}{10}\)
B = \(\frac{3}{10}\) – \(\frac{1}{10}\) = \(\frac{2}{10}\)
New ratio = \(\frac{6}{10}\),\(\frac{2}{10}\),\(\frac{2}{10}\) i.e 3 : 1 : 1

59. At the time of admission of a new partner, if the value of goodwill recorded is overstated in the books, it is written back by ________.
(a) Old partners in old profit/loss sharing ratio
(b) All the partners including the new partner in new profit/loss sharing ratio
(c) Old partners in sacrificing ratio
(d) New partners in gaining ratio
Answer:
(a) Old partners in old profit/loss sharing ratio
The Goodwill overstated will be written back in the old partners account in the old Profit Sharing Ratio.

60. A & B are partners sharing profits and losses in the Ratio of 5 : 3. C was admitted as a new partner and bring capital ₹ 70,000 and goodwill ₹ 48,000. The new profit ratio between A : B : C is 7 : 5 : 4. The sacrificing ratio A & B is ________.
(a) 3 : 1
(b) 5 : 4
(c) 2 : 1
(d) 3 : 5
Answer:
(a) 3 : 1
Old profit Sharing Ratio = 5 : 3
New profit Sharing Ratio = 7 : 5 : 4
Sacrificing Ratio = Old Ratio – New Ratio
A = \(\frac{5}{8}\) – \(\frac{7}{16}\) = \(\frac{10-7}{16}\) = \(\frac{3}{16}\)
B = \(\frac{3}{8}\) – \(\frac{5}{16}\) = \(\frac{6-5}{16}\) = \(\frac{1}{16}\)
Sacrificing Ratio = 3 : 1

61. A and B are Partners is a business sharing profit and losses in the ratio of 7 : 3 respectively. They admit C as a new partners. A sacrificed 1/7th share of his profit and B sacrificed 1/3th of his share in favour of C. The new profit sharing ratio of A, B, and C will be :
(a) 3 : 1 : 1
(b) 2 : 1 : 1
(c) 2 : 2 : 1
(d) None of the above
Answer:
(a) 3 : 1 : 1
A’s sacrifice = \(\frac{1}{7}\) x \(\frac{7}{10}\) = \(\frac{1}{10}\)
B’s sacrifice = \(\frac{1}{3}\) x \(\frac{3}{10}\) = \(\frac{1}{10}\)
A’s new share = \(\frac{7}{10}\) – \(\frac{1}{10}\) = \(\frac{6}{10}\)
B’s new share = \(\frac{3}{10}\) – \(\frac{1}{10}\) = \(\frac{2}{10}\)
C’s new share = \(\frac{1}{10}\) + \(\frac{1}{10}\) = \(\frac{2}{10}\)
A : B : C = 6 : 2 : 2 = 3 : 1 : 1

62. Ramesh and Suresh are partners sharing profits in the ratio of 2 : 1 respectively. (Ramesh capital is ₹ 1,02,000 and Suresh capital is ₹ 73,000). They admit Mahesh and Agree to give him 1/5th share in future profit. Mahesh brings ₹ 14,000 as his share of goodwill the agrees to contribute capital in the new profit share ratio. How much capital will be brought by Mahesh?
(a) ₹ 43,750
(b) ₹ 45,000
(c) ₹ 47,250
(d) ₹ 48,000
Answer:
(a) ₹ 43,750
Combined capital of Suresh and Ramesh is ₹ 1,75,000 (73,000 + 1,02,000).
When \(\frac{4}{5}\)th share of profit then Mukesh’s capital is ₹ 1,75,000
When 1 ___________________ is ₹ \(\frac{1,75,000 \times 5}{4}\)
When \(\frac{1}{5}\)th share of profit then Mukesh’s capital is
= \(\frac{1,75,000}{4}\) x 5 x \(\frac{1}{5}\)
= ₹ 43, 750

63. A, B sharing profits and losses in the ratio of 3 : 5. C is admitted in the partnership and new ratio below them is 3 : 5 : 2. Sacrificing ratio below A and B is
(a) 3 : 1
(b) 3 : 5
(c) 5 : 3
(d) None
Answer:
(b) 3 : 5
Sacrifice Ratio: A and B sharing profit ratio 3 : 5, new partner entered and new ratio of profit sharing is 3 : 5 : 2
Sacrifice by A = A’s old share – A’s new share
= \(\frac{3}{8}\) – \(\frac{3}{10}\) = \(\frac{30-24}{80}\) = \(\frac{6}{10}\)
Sacrifice by B = B’s old share – Bs new share
= \(\frac{5}{8}\) – \(\frac{5}{10}\) = \(\frac{50-40}{80}\) = \(\frac{10}{80}\)
Hence. Ratio of sacrifice between A & B = \(\frac{6}{80}\) : \(\frac{10}{80}\)
= 6 : 10 or 3 : 5
Hence, option (b) is correct.

64. M and N are partners sharing profit and loss in equal ratio. Their capital balances stood at ₹ 23,000 and ₹ 27,000 respectively. They wanted to grow their business and admitted P as a working partner for 1/3 share. P is to bring capital in the proportion of his share of profit and besides capital, he is to bring ₹ 9,000 as goodwill. What will be the amount of capital to be brought in by P:
(a) ₹ 27,000
(b) ₹ 23,000
(c) ₹ 36,000
(d) ₹ 29,500
Answer:
(d) ₹ 29,500
Total Capital of M&N = 23,000 + 27,000 + 9,000
= 59,000
This represents 2/3rd Share of firm
full Value of Capital = 59,000 x \(\frac{3}{2}\)
= 88,500
P share of capital in above = 88,500 x \(\frac{1}{3}\)
= ₹ 29,500

65. A, B & C started a business by investing ₹ 45,000, ₹ 55,000 and ₹ 60,000 respectively and sharing profit or losses in the ratio of capital. At the end of a year they got a total of ₹ 11,200. How much ‘B’ get more than ‘A’ in the profit.
(a) 780
(b) 700
(c) 710
(d) 750
Answer:
(b) 700
To A : B : C share profit and losses in
Ratio 45 : 55 : 60
Profit of the years = 11,200
A’s share = 11,200 x \(\frac{45}{160}\)
= 3,150
B’s share = 11,200 x \(\frac{55}{160}\)
= 3,850
B get more than A = 3,850 – 3,150 = 700

Computerized Accounting Environment – CS Foundation Fundamentals of Accounting Notes

Go through this Computerized Accounting Environment – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Computerized Accounting Environment – CS Foundation Fundamentals of Accounting Notes

Introduction:

  • Computerized Accounting System and its awareness among professional has become a necessity in the globalised environment.
  • The manual process is more time-consuming cumbersome and exposed to human error.
  • The shift to computerised accounting systems has revolutionized the way businesses are managed.
  • They have empowered organizations to project accurate information of financial performance.

Important features of Computerized Accounting System.

  • Simple and integrated
  • Accuracy and speed
  • Scalability
  • Instant Reporting
  • Security
  • Quick Decision Making
  • Reliability

Introduction to TALLY:
Tally is most popular software for accounts and inventory management. Latest version of Tally has lets of advanced features like better data migrating, fast data speed, payroll management, TDS, TCS, Job costing and point of sale invoicing etc.

Function Key Combination:

Key Functionality Available Screen
F1 To select a Company At all masters menu screen
F1 To select the Accounts Button At the Accounting voucher creation and alteration screen.
F1 (Alt + F1) To select the Inventory At the inventory/payroll/ voucher creation and alteration screen.
F1 (Ctrl + F1) To open payroll vouchers to after At the Accounting/ inventory/ voucher creation or alteration screen.
F2 To change the current date At almost all screen in TALLY- ERP9.
F3 To select the company At almost all screens in TALLY. ERP9.
F4 To open contra voucher At Accounting/Inventory voucher creation and alteration screen.
F5 To open payment voucher At Accounting/ Inventory voucher creation and alteration screen
F6 To open receipt voucher At Accounting/ inventory voucher creation and Alteration screen.
F7 To open journal Voucher At Accounting/inventory voucher creation and alteration screen.
F8 To open sales voucher At Accounting/ inventory voucher creation and alteration screen.
F9 To open purchase voucher At Accounting/ inventory voucher creation and alteration screen.
F10 To open reversing journal voucher At Accounting/inventory/payroll voucher creation and Alteration screen.
F11 To select the functions and features screen At almost all screen in Tally ERP9.
F12 To open configure screen At almost all screen in TALLY ERP9.

TALLY ERP 9 shortcut special keys combination:

  • These are most important short cut keys to speed up the work in Tally.
  • Duplication of a voucher is one of the most used short cut key in this section.
  • ALT + C is used to create secondary ledger creation while you are working with TALLY.

Special Keys Combination:

Key Functionality
ALT + D 1. To delete a voucher /
2. To delete a master /
3. To delete a column in any columnar report.
ALT + E To export the report in ASCII, HTML or XML format
ALT + I 1. To insert a voucher/
2. To toggle between item and accounting invoice
ALT + L To select the language configuration
ALT + K To select the keyboard configuration.
ALT + 0 To upload the report at your website.
ALT + L To select language for TALLY ERP9 interface.
ALT + M To E- mail the Report
ALT + N To view the report in automatic columns.
ALT + P To print the report
ALT + R To remove a line in a report
ALT + S To bring back a line you removed using ALT + R
ALT + U To retrieve the last line which is deleted using ALT + R
ALT + V From invoice screen to bring stock journal screen
ALT + X To cancel a voucher is Day Book/list of vouchers.
ALT + R To register Tally
CTRL + A To accept a form / whenever you use this key combination that screen or report gets accepted as it is.
CTRL + B To select the Budget
CTRL+ALT+B To check the company statutory Details
CTRL + C To select the cost centre.
CTRL + E To select the currencies.
CTRL + G To select the Group
CTRL + H To view the support centre.
CTRL + I To select the stock Items.
CTRL + ALT+I To import statuary masters.
CTRL + K To login as Remote TALLY. NET USER.
CTRL + L To select the Ledger
CTRL + 0 To select the Godowns.
CTRL + Q To abandon a form
CTRL + R To repeat narration in the same voucher type.
CTRL + ALT + R Rewrite data for a Company.

Key Combination Used For Navigation:

Windows Functionality Availability
Page up Display previous voucher during voucher entry /alter At voucher entry and alteration screen
Page Down Display next voucher during voucher entry/ alter At voucher entry and alteration screen
ENTER To accept anything you type into a field. You have to use this key at most asseas in TALLY.
At the receivables report.
ESC To accept or voucher or master At almost all screens in TALLY.
SHIFT To get a report with further details of an item in a report. At voucher Register screen and trial balance report.
ENTER To remove what you typed into a field. In almost all Reports.
SHIFT + ENTER To come out of a screen. To indicate you do not want to accept a voucher or master. At voucher entry.

At all reports.

ERP:
1. Enterprise resource planning (ERP) software deals with accounting transactions such as payroll, accounts receivable, accounts payable, and trial Balances.

2. ERP software is a resource management system, tracking tangible and intangible assets, materials, human resources and financial resources.

3. It also covers intangible like human work hours, product life cycles, performance units and customer relations.

4. Some of the popular ERP accounting package are being mentioned here.

  • Sage 300
  • Microsoft Dynamic NAV
  • SAP Business one
  • Epicor 9 (formerly vantage)
  • Microsoft Dynamics G.P.
  • Macola ES (Exact software)
  • Sage 100
  • Net suite
  • Sys Pro
  • Sage X3

SAP Business One
1. It is one of the most widely used and popular accounting package.

2. ‘SAP Business One’ offers fully integrated financial and banking functionality for complete, across the board tracking, management, reporting, and control of all key financial and accounting processes.

3. Important functions of SAP Business one are being mentioned here.

  • Accounting.
  • Journal entries.
  • Journal Vouchers.
  • Posting templates.
  • Recurring Postings.
  • Reversing Journals.
  • Exchange rate differences.
  • Financial report templates.
  • Budgets.
  • Profit center definition.
  • Distribution rule definitions.
  • Profit centre report.

Computerized Accounting Environment MCQ Questions

In each of the following one of them is correct. Indicate the correct answer:

1. Which is not the feature of computerized Accounting System.
(a) Simple and integrated
(b) Non-secure
(c) Accuracy and speed
(d) Instant Reporting.
Answer:
(b) Non-secure

2. Quality Report is real time can be generated because of:
(a) Speed and accuracy
(b) Security
(c) Quick Decision Making
(d) Reliability
Answer:
(a) Speed and accuracy

3. Which is the most popular software for accounts and inventory management.
(a) MICRO Soft
(b) TALLY
(c) Windows XP
(d) Windows 8
Answer:
(b) TALLY

4. _______ process is more time -consuming, cumbersome and exposed to human error.
(a) Mechanical Process
(b) Technical Process
(c) Computerised Process
(d) Manual Process
Answer:
(d) Manual Process

5. Full form of ERP:
(a) Entrepreneurship resource planning
(b) Enterprise research planning
(c) Enterprise resource planning
(d) Entrepreneurship research planning.
Answer:
(c) Enterprise resource planning

6. Functions of SAP are:
(a) Accounting
(b) Journal Entries,
(c) Journal Vouchers
(d) All of these
Answer:
(d) All of these

7. Which shortcut Keys are used to enter a stock journal in tally?
(a) F7
(b) Control + F7
(c) Alt + F7
(d) Shift + F7
Answer:
(c) Alt + F7

8. How many types of uses are present in tally?
(a) 1
(b) 2
(c) 3
(d) 4
Answer:
(c) 3

9. We can create multiple users in TALLY activating.
(a) Tally Audit
(b) Use security control
(c) Both (a) and (b)
(d) None
Answer:
(b) Use security control

10. TALLY package is developed by _______.
(a) Peutronics Co.
(b) Coral software
(c) Tally solutions
(d) Vedalia software
Answer:
(c) Tally solutions

11. Which shortcut key is used in TALLY to print any repon.
(a) Ctrl + P
(b) Shift + P
(c) Alt + P
(d) Alt + ctrl + P
Answer:
(c) Alt + P

12. Which shortcut key is used to shut opened company in Tally?
(a) Fi
(b) Alt + Fi
(c) F3
(d) Alt + F3_______
Answer:
(b) Alt + Fi

13. Which shortcut key is used to change current period in Tally.
(a) F2
(b) Alt + F2
(c) F3
(d) Alt + F3
Answer:
(b) Alt + F2

14. ‘Inventory books’ is used to view.
(a) Stock items
(b) Both A and B above
(c) Group summary
(d) None.
Answer:
(b) Both A and B above

15. To change current Data from Gateway of Tally press the key _______.
(a) F1
(b) F5
(c) F2
(d) F9
Answer:
(c) F2

16. Which reports are prepared monthly in Tally?
(a) Profit & Loss A/c
(b) Balance sheet
(c) Trial Balance
(d) Cash flow of fund flows
Answer:
(c) Trial Balance

17. Which is not a ERP accounting package?
(a) Sys Pro
(b) Sage 300
(c) Sage 100
(d) Sage X4
Answer:
(d) Sage X4

18. _______ is one of the most widely used popular accounting package.
(a) SAP Business one.
(b) ERP
(c) PDF
(d) None of these.
Answer:
(a) SAP Business one.

19. Which key is pressed to post entries in double entry accounting system intended of single entry system in Tally ERP of?
(a) F11
(b) F12
(c) Alt + F11
(d) Alt + F12
Answer:
(b) F12

20. Which of the following file is usually used a master file?
(a) Inventory subsidiary
(b) Cash Receipts
(c) Cash disbursement
(d) Payroll transactions
Answer:
(a) Inventory subsidiary

21. What is the advantage of computer based transaction processing system?
(a) Does not require as stringent a set of internal controls.
(b) Will produce a more accurate set of financial statements.
(c) Eliminates the need to reconcile control accounts and subsidiary ledgers.
(d) Will be more efficient at producing financial statements.
Answer:
(d) Will be more efficient at producing financial statements.

22. To create purchase order press _______.
(a) Alt + F4
(b) Ctrl + F4
(c) F4
(d) None of these
Answer:
(a) Alt + F4

23. Which of the following user type can view audit list?
(a) Tally vault
(b) Owner
(c) Data Entry
(d) Administrator
Answer:
(d) Administrator

24. For selecting purchase voucher which function key is selected?
(a) f 2
(b) f 4
(c) f 9
(d) f 7
Answer:
(c) f 9
Shortcut key for selecting purchase voucher is f9 in Tally.

25. Which short cut key is used to change current period in Tally.
(a) f 1
(b) Alt + f 2
(c) f 2
(d) Alt + f 3
Answer:
(b) Alt + f 2
To change current period in tally, shortcut key Alt + f 2.

26. ERP not contain all accounting software:
(a) True
(b) False
(c) Partly true
(d) Partly false
Answer:
(b) False
ERP: Enterprise Resource Planning contains all accounting software relating to operation of an enterprise. Thus, the statement is false.

27. Functions of SAP:
(a) Accounting
(b) Journal Entries
(c) Journal Vouchers
(d) All of these
Answer:
(d) All of these
SAP: Systems Applications and products in data processing comprises all accounting activities (journal entries, vouchers, sale proceeding etc.) hence, option (d) is correct.

28. ERP stands for:
(a) Entrepreneurship Resource Planning
(b) Enterprise Resource Planning
(c) Electronic Resource Planner
(d) None of the above.
Answer:
(b) Enterprise Resource Planning
ERP stands for Enterprise Resource Planning

29. Which shortcut key is used to change current period in Tally _______.?
(a) F1
(b) Alt + F2
(c) F2
(d) Alt + F3
Answer:
(b) Alt + F2
To change current period in Tally, shortcut key Alt +F2

30. _______ key helps to select a company in Tally.
(a) F2
(b) F3
(c) F4
(d) F5
Answer:
(b) F3
The key ’F3′ is help to select the company and is available at almost all screen in Tally ERP9.

31. Which of key combination is used for receipt voucher _______.
(a) F9
(b) F6
(c) F3
(d) None of the above
Answer:
(b) F6
F6 is the key combination is used for receipt voucher.

32. _______ is most popular software for accounts & inventory.
(a) SAP business one
(b) Tally
(c) Both ‘a’ and ‘b’
(d) None of these
Answer:
(b) Tally
Tally is the most popular software for accounts and inventory management. Latest version of tally has lots of advanced features like better data migrating, fast data speed, payroll, management etc.

33. Display previous voucher during voucher entry/alter.
(a) Pg. Up
(b) Pg. Down
(c) Pg. Next
(d) Pg. Previous
Answer:
(a) Pg. Up
Key combination used for navigation in which ‘Page UP’ is used to display previous voucher during voucher entry/ alter.

34. What is the use of ERP?
(a) Tracking tangible and intangible assets
(b) Resource management system
(c) Factoring human work hours
(d) All of the above
Answer:
(d) All of the above
ERP software is a resource management system, tracking tangible and intangible assets, materials, human resources, and financial resources. ERP software covers a range of functionality not generally offered by accounting software, often factoring in intangibles like human work hours, product life cycles, performance units, and customer relations.

35. ERP and Tally are save _______.
(a) Yes
(b) No
(c) Can’t say
(d) Partly yes
Answer:
(b) No
Tally is not a full scale ERP System, it is called ERP because the company named it ERP. ERP system are huge business management software with function defined for virtually everything a business needs.

36. Which key is used for memorandum of voucher _______?
(a) F5
(b) F6
(c) F10
(d) F8
Answer:
(c) F10
F10 is the key used for memorandum of vouchers.

37. Which key is used for Selecting Bale Voucher _______
(a) F2
(b) F8
(c) F7
(d) F4
Answer:
(b) F8
‘F8’ is a key which is used for selecting sale voucher.