{"id":18491,"date":"2023-03-24T11:08:36","date_gmt":"2023-03-24T05:38:36","guid":{"rendered":"https:\/\/gstguntur.com\/?p=18491"},"modified":"2023-05-10T15:21:06","modified_gmt":"2023-05-10T09:51:06","slug":"accounting-standards-ca-final-audit-question-bank","status":"publish","type":"post","link":"https:\/\/gstguntur.com\/accounting-standards-ca-final-audit-question-bank\/","title":{"rendered":"Accounting Standards \u2013 CA Final Audit Question Bank"},"content":{"rendered":"<p>Accounting Standards \u2013 <a href=\"https:\/\/gstguntur.com\/ca-final-audit-question-bank\/\">CA Final Audit Question Bank<\/a> is designed strictly as per the latest syllabus and exam pattern.<\/p>\n<h2>Accounting Standards \u2013 CA Final Audit Question Bank<\/h2>\n<p>Question 1.<br \/>\nWrite short notes on the following: Normal Capacity for the purpose of Inventory valuation.<br \/>\nAnswer:<br \/>\nNormal Capacity for the purpose of Inventory Valuation:<\/p>\n<ul>\n<li>As per AS-2 &#8220;Valuation of Inventories\u201d the cost of inventories should comprise all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition.<\/li>\n<li>While computing cost of conversion a systematic allocation of fixed and variable production overheads that are incurred in converting materials into finished goods is also included.<\/li>\n<li>The allocation of fixed production overheads for the purpose of their inclusion in the costs of conversion is based on the normal capacity of the production facilities.<\/li>\n<li>Normal capacity is the production expected to be achieved on an average over a number of periods or seasons under normal circumstances, taking into account the loss of capacity resulting from planned maintenance.<\/li>\n<li>The actual level of production may be used if it approximates normal capacity.<\/li>\n<li>Unallocated overheads are recognised as an expense in the period in which they are incurred.<\/li>\n<li>In periods of abnormally high production, the amount of fixed production overheads allocated to each unit of production is decreased so that inventories are not measured above cost. Variable production overheads are assigned to each unit of production on the basis of the actual use of the production facilities.<\/li>\n<\/ul>\n<p>Question 2.<br \/>\nT. Ltd. Commenced its manufacturing activities from 1st April, 2019. in the course of production, the company generated certain by-products. As at 31st March 20 the company did not value the by-products considering the value as insignificant. The auditor of the company is of the opinion that the by-products are inventory of the company and it should be valued and brought into books of account. Comment. [May 13 (5 Marks)]<br \/>\nAnswer:<br \/>\nValuation of By-Products:<br \/>\nAs per Para 10 ofAS-2 &#8220;Valuation of Inventories&#8221; a production process may result in more than one product being produced simultaneously. This is the case when joint products are produced or when there is a main product and a by-product. Most of the by-products as well as scrap or waste materials, by their nature, are immaterial. In such a case, they are often measured at net realisable value and this value is deducted from the cost of the main product. As a result, the carrying amount of the main product is not materially different from its cost.<\/p>\n<p>In the case of T Ltd. management did not valued the by-products considering the value as insignificant. But as per requirement ofAS-2 the realizable value of by products should be ascertained and needs to be deducted from the cost of the main product.<\/p>\n<p>Conclusion: T Ltd. should ascertain the value of by-product and deduct the realizable value of by products from the cost of production of main product.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 3.<br \/>\nDuring the course of audit of D Co. Ltd. you as an auditor have observed that Inter corporate deposit of \u20b9 50 lakhs have been overdue. The D Co. Ltd. has disclosed this in the notes to accounts note No. 15 in schedule No. 21 stating that \u20b9 50 lakhs are overdue from XYZ Co. Ltd. and the said company is in the process of liquidation. The management is taking steps to appoint the liquidator. [Nov. 10 (5 Marks)]<br \/>\nAnswer:<br \/>\nProvision for expected losses:<br \/>\nAs per AS 4 &#8220;Contingencies and Events occurring after the Balance Sheet Date\u201d, adjustments to assets and liabilities are required for events occurring after the balance sheet date that provide additional information materially affecting the determination of the amounts relating to conditions existing at the balance sheet date.<\/p>\n<p>In the instant case, it appears from the note no. 15 that the overdue of outstanding inter corporate deposit may not be realisable in full. The company is in the process of liquidation, makes it clear that on the balance sheet date, the amount of deposit is not safe and is not likely to be realised.<\/p>\n<p>Conclusion: Company was required to provide the loss in the accounts. Accordingly auditor should qualify the Audit Report.<\/p>\n<p>Question 4.<br \/>\nAs a statutory auditor of a company, comment on the following: A fire broke out on 15th May, 2020, in which material worth \u20b9 50 lakhs which was lying in stock since 1st March, 2020 was totally destroyed. The financial statements of the company have not been adopted till the date of fire. The management of the company argues that since the loss occurred in the year 2020-2021, no provision for the loss needs to be made in the financial statements for 2019-20. [Nov. 12 (5 Marks)]<br \/>\nAnswer:<br \/>\nEvent Occurring after the Balance Sheet Date:<\/p>\n<p>As per AS-4 on &#8216;Contingencies and Events Occurring After the Balance Sheet Date\u2019, assets and liabilities should be adjusted for events occurring after the balance sheet date that provide additional evidence to assist the estimation of amounts relating to conditions existing at the balance sheet date or that indicate that the fundamental accounting assumption of going concern is not appropriate.<\/p>\n<ul>\n<li>AS-4 also requires disclosure of the non-adjusting event, in the report of approving authority.<\/li>\n<li>Further as per SA 560 &#8220;Subsequent Events\u201d the auditor should ensure that all events occurring subsequent to the date of financial statements and for which applicable financial reporting framework requires adjustment or disclosure have been adjusted or disclosed.<\/li>\n<li>In the instant case, fire took place after the close of the accounting year and does not relate to conditions existing at the balance sheet date.<\/li>\n<\/ul>\n<p>Conclusion: The event will have no impact on items appearing at the Balance Sheet date and hence not required any adjustment, subject to satisfaction in respect of non-violation of going concern concept. Hence management is correct by not providing provision. However, auditor is required to ensure the proper disclosure in report of approving authority.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 5.<br \/>\nState your views as an auditor on the following: Y Ltd. provided \u20b9 25 lakhs for inventory obsolescence in 2019-2020. In the subsequent years, it was determined that 50% of such stock was usable. The company wants to adjust the same through prior period adjustment account as the provision was made in the earlier year. [Nov. 11 (5 Marks)]<br \/>\nAnswer:<br \/>\nPrior Period Adjustment:<\/p>\n<p>As per AS 5 on &#8220;Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies&#8221;, prior period items are income or expenses which arise in the current period as a result of errors or omissions in the preparation of the F.S. of one or more prior periods.<\/p>\n<p>The write-back of provision made in respect of inventories in the earlier year does not constitute prior period adjustment since it neither constitutes error nor omission.<\/p>\n<p>An estimate may have to be revised if changes occur regarding the circumstances on which the estimate was based, or as a result of new information, more experience or subsequent developments.<\/p>\n<p>The revision of the estimate, by its nature, does not bring the adjustment within the definitions of an extraordinary item or a prior period item.<\/p>\n<p>Conclusion: Revision of the estimate does not bring the resulting amount of \u20b9 12.5 lakhs within the definition either of a prior period item or of an extraordinary item. The amount, however, involved is material and requires separate disclosure to understand the financial position and performance of an enterprise. Accordingly, adjustment in the value of the inventory through prior period item would not be proper.<\/p>\n<p>Question 6.<br \/>\nComment: B Co. Ltd. is engaged in the business of developing mass scale housing projects including development of small commercial complexes. The flats\/commercial spaces arc booked by the public and are allotted by way of allotments letter to each allottee. Major construction activities pertaining to buildings are undertaken of flats\/commercial spaces is given to allottees by executing legal document. The CEO of the B Co. says that AS 7 is not applicable to the company. [Nov. 10 (5 Marks)]<br \/>\nAnswer:<br \/>\nApplicability of AS-7:<\/p>\n<p>AS 7 (Revised) &#8220;Accounting for Construction contracts\u201d states that, &#8220;This Statement should be applied in accounting for construction contracts in the F.S. of contractors. The revised AS 7 is silent about its applicability to construction activities undertaken by enterprises on their own account and not as contractors.<\/p>\n<p>The matter was considered by Expert Advisory committee of the Institute and they are of the view that the revised AS 7 is not applicable to such enterprises.<\/p>\n<p>Conclusion: The activity of developing housing projects on its own account can be considered as a commercial venture by the company in the nature of production activity and, therefore, should be construed as such. Accordingly, the flats\/commercial spaces should be identified as inventories in accordance with AS 2 and revenue should be recognition in accordance with AS 9.<\/p>\n<p>Question 7.<br \/>\nComment: LM Ltd. has 2 divisions L and M. The finished products of division L are transferred to division M where further processing is carried out before sale to customers. To achieve transparency and accountability between the divisions, division L raises an invoice on division M at cost plus normal margins. At the year end the unrealized profits on inter-division stocks are eliminated. However, the transfers are recorded at the invoice value as sales and purchases in the respective divisions for the purpose of preparing the Profit and Loss Account. Suitable disclosures, for this are given in then \u2018Notes to Accounts&#8217;.<br \/>\nAnswer:<br \/>\nRevenue recognition in case of inter division transfers:<\/p>\n<ul>\n<li>The recognition of inter-divisional transfers as sales is an inappropriate accounting \u201e treatment and is inconsistent with AS 9.<\/li>\n<li>In case of inter-divisional transfers, risks and rewards remain within the enterprise and also there is no consideration from the point of view of the enterprise as a whole. Thus, the recognition criteria for revenue recognition has not been fulfilled in respect of inter-divisional transfers.<\/li>\n<\/ul>\n<p>Conclusion: In the instant case, LM Ltd. cannot recognise inter-division transfers from L to M as sales and the same will have to be eliminated during finalisation. If not so done, the statutory auditor will have to qualify his report.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 8.<br \/>\nIn the course of audit of T Ltd., you observed that export incentives are not accounted on accrual basis. The company&#8217;s management contended that these would be accounted on cash basis citing the uncertainty about its receipts as they are not admitted as due by the customs authorities. Comment. [May 11 (4 Marks)]<br \/>\nAnswer:<br \/>\nRevenue recognition in case of export incentives:<\/p>\n<p>As per Para 9 of AS-9 &#8220;Revenue Recognition\u201d where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., export incentives., revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made.<\/p>\n<p>When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised.<\/p>\n<p>Conclusion: Contention of management of T Ltd. to record the export incentive on cash basis is correct.<\/p>\n<p>Alternative Ans: Export incentives are considered due as and when the exports have been made from India, though customs authorities does not acknowledge them as due. It cannot be considered that an uncertainty arises about its receipt. If there was any objection, that might have been raised at the time of clearance of the goods for export. Hence, the only uncertainty is the timing of the receipt of such incentives, but not the incentive itself. Accordingly, T Ltd. has to account the export incentives on Accrual basis.<\/p>\n<p>Question 9.<br \/>\nA infrastructure company has constructed a mall and entered into agreement with tenants towards licence fees (monthly rental) and variable licence fees, a percentage on the turnover of the tenant (on an annual basis). Chief Finance Officer wants to account\/recognize fee as income for 12 months during current year under audit and variable licence fees as income during next year, since invoice is raised in the subsequent year. As an auditor, how would you deal and state in the statement of Accounting policies? [Nov. 11 (6 Marks)]<br \/>\nAnswer:<br \/>\nRevenue Recognition:<\/p>\n<p>AS 9 on Revenue Recognition, is mainly concerned with the timing of recognition of revenue in the statement of profit and loss of an enterprise. The amount of revenue arising on a transaction is usually determined by agreement between the parties involved in the transaction. However, when uncertainties exist regarding the determination of the amount, or its associated costs, these uncertainties may influence the timing of revenue recognition.<\/p>\n<p>Further, as per accrual concept of fundamental accounting assumptions given in AS 1 &#8220;Disclosure of Accounting Policies&#8221;, revenue should be recognised as and when it is accrued i.e. recorded in the financial statements of the periods to which they relate.<\/p>\n<p>In the present case, monthly rental towards licence fees and variable licence fees as a percentage on the turnover of the tenant though on annual basis is the income related to common financial year. Therefore, recognising the fees as revenue cannot be deferred simply because the invoice is raised in subsequent period. Hence it should be recognised in the financial year of accrual.<\/p>\n<p>Conclusion: The contention of the Chief Financial Officer is not in accordance with AS 9 and hence the auditor may qualify the report indicating the understatement of income\/profit and that the profit and loss account does not exhibit a true and fair view of the profit or loss.<\/p>\n<p>Question 10.<br \/>\nA Ltd. is a manufacturer of readymade garments. It sells its products to franchisees located across the country. Readymade garment industry is subject to change in trends of fashion and as such, some of the goods are returned and A Ltd. accepts them back as sales returns. On the basis of past trends such returns ate estimated to be at 20% of the sales of any year. For the financial year 2019-20, A Ltd. had accounted for the actual sales return made upto 31st March 2020 but has not reversed the possible expected return that are likely to happen after 31st March 2020, in respect of the sale made for the FY19-20.<\/p>\n<p>Mr. X the auditor of A Ltd. wants this to be considered in the accounts of for the year ended on 31st March 2020 but the company is of the opinion that although there is a probability of some goods being returned by the franchisees, there is no significant uncertainty regarding the amount of consideration that will be derived from the sale of goods, since the goods are not in the possession of the company and risk and rewards of ownership still lie with the franchisees and the company cannot record sales returns in its books of account if respect of goods that are likely to be received after the date of balance sheet. Comment. [May 12 (5 Marks)]<br \/>\nAnswer:<br \/>\nRecognition of Revenue:<br \/>\n(a) AS-9 on &#8220;Revenue Recognition\u201d states that revenue from sale of goods should be recognised at the time of sale of goods subject to following conditions:<\/p>\n<ul>\n<li>The seller has transferred to the buyer the property in the goods for a price<\/li>\n<li>Risks and Rewards of ownership have been transferred to the buyer.<\/li>\n<li>Seller retains no effective control of the goods transferred associated with ownership.<\/li>\n<li>No significant uncertainty exists regarding the amount of consideration.<\/li>\n<\/ul>\n<p>(b) In the present case, A Ltd. is bearing a risk of sales return and therefore, the company should not recognise the revenue to the extent of 20% of its sales. The company is required to make suitable disclosure of revenue recognition policy in the financial statements.<\/p>\n<p>(c) In the absence of the above, the auditor must qualify the report.<\/p>\n<p>Note: Alternatively, the answer may be given with reference to AS-29, requiring a provision.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 11.<br \/>\nAs a statutory auditor of a company, comment on the following: The accounting policy on Revenue Recognition for a company engaged in manufacture and sale of chemical products was stated as &#8220;Revenue is recognized only when it can be reliably measured and it is reasonable to expect ultimate collection\u201d. [Nov. 12 (5 Marks), MTP-April 18]<br \/>\nAnswer:<br \/>\nRevenue Recognition:<br \/>\n(a) AS-9 on &#8220;Revenue Recognition&#8221; states that revenue from sale of goods should be recognised at the time of sale of goods subject to following conditions:<\/p>\n<ul>\n<li>The seller has transferred to the buyer the property in the goods for a price<\/li>\n<li>Risks and Rewards of ownership have been transferred to the buyer.<\/li>\n<li>Seller retains no effective control of the goods transferred associated with ownership.<\/li>\n<li>No significant uncertainty exists regarding the amount of consideration.<\/li>\n<\/ul>\n<p>[b] If conditions mentioned above not satisfied, then revenue recognition should be postponed.<br \/>\nIn the instant case, the company is engaged in manufacturing and sale of chemical products and made disclosure that &#8220;Revenue is recognized only when it can be reliably<br \/>\nmeasured and it is reasonable to expect ultimate collection&#8221; is in line with AS-1 and AS-9.<\/p>\n<p>Question 12.<br \/>\nWrite a short note on Effect of uncertainties on revenue recognition. &#8221;<br \/>\nAnswer:<br \/>\nEffect of Uncertainties on Revenue Recognition:<br \/>\nAS-9 &#8220;Revenue Recognition\u201d provides the following:<\/p>\n<p>Recognition of revenue requires that revenue is measurable and that at the time of sale or the rendering of the service it would not be unreasonable to expect ultimate collection.<\/p>\n<p>Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, e.g., for escalation of price, export incentives, interest etc., revenue recognition is postponed to the extent of uncertainty involved.<\/p>\n<p>In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognised at the time of sale or rendering of service even though payments are made by instalments.<\/p>\n<p>When the uncertainty relating to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded.<\/p>\n<p>An essential criterion for the recognition of revenue is that the consideration receivable for the sale of goods, the rendering of services or from the use by others of enterprise resources is reasonably determinable. When such consideration is not determinable within reasonable limits, the recognition of revenue is postponed.<\/p>\n<p>When recognition of revenue is postponed due to the effect of uncertainties, it is considered as revenue of the period in which it is properly recognised.<\/p>\n<p>Question 13.<br \/>\nIn the notes to accounts of Z Co. Ltd. as on 31 -3-2020 Note No. 11 states that \u2018Certain machinery items are lying at customs warehouses and company has paid \u20b9 500 lakhs up to 30-6-2019 as detention charges, out of which a sum of \u20b9 220 lakhs are written back during the year 2019-20 based on settlement with the concerned authorities in respect of a major spares of machinery. For the remaining machinery item negotiations are pending and a provision of \u20b9 48 lakhs are made.<\/p>\n<p>As such total amount of \u20b9 328 lakhs paid\/provided on account of detention charges have been capitalized and included in the fixed assets\/capital work in progress. The management is of the view that these expenses are directly attributable to the acquisition of the related Fixed Asset.\u2019 As the auditor, how would you respond to this? [Nov. 10, Nov. 14 (5 Marks)]<br \/>\nAnswer:<br \/>\nCapitalisation of Detention Charges:<br \/>\nAs per AS-10 &#8220;Accounting for Fixed Assets&#8221; the cost of an item of fixed assets comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use; any trade discounts and rebates are deducted in arriving at the purchase price. Examples of directly attributable costs are:<\/p>\n<ol>\n<li>site preparation;<\/li>\n<li>initial delivery and handling costs;<\/li>\n<li>installation cost, such as special foundations for plant; and<\/li>\n<li>professional fees, for example fees of architects and engineers.<\/li>\n<\/ol>\n<p>Conclusion: Detention charges, being in the nature of penalty levied by Customs for not removing the articles within specified period from custom port cannot be considered as directly attributable cost. Treatment done by the company is incorrect. The auditor should qualify the report appropriately mentioning the effect on Balance sheet and Profit and Loss Account.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 14.<br \/>\nF Limited includes in the Schedule of Inventory, those items of Fixed Assets which have pot been in active use and held for disposal, as inventory item. [May 10(5 Marks)]<br \/>\nAnswer:<br \/>\nTreatment of assets held for Disposal<\/p>\n<p>AS-10 &#8220;Accounting for Fixed Assets&#8221; requires that the items of fixed assets that have been retired from active use and are held for disposal be stated at the lower of their net book value and NRV and are shown separately in the financial statements.<\/p>\n<p>As per AS-2 &#8220;Valuation of Inventories&#8221;, &#8220;inventories&#8221; are assets \u201cheld for sale in the ordinary course of business, in the process of production for such sale; or in the form of materials or supplies to be consumed in the production process or in the rendering of service&#8221;.<\/p>\n<p>Conclusion: Inclusion of fixed assets, not in active use and held for disposal, as inventory item in the schedule of inventory is not in line with the requirements of AS-10 and AS-2. Such fixed assets should be stated at lower of net book value and NRV and are shown separately in F.S.<\/p>\n<p>Question 15.<br \/>\nX Limited, a newly incorporated company in India commenced its business form April 1, 2019. The company purchased fixed assets costing \u20b9 4,000 lakhs on 01-04-2019 and the same was fully financed by foreign currency loan (IJ.S. Dollars) payable in three annual equal instalments. Exchange rates were 1 Dollar = \u20b9 40.00 and \u20b9 42.50 as on 01-04-2019 and 31-03-2020 respectively.<\/p>\n<p>The company worked out foreign exchange loss as per AS 11 at \u20b9 250 Lakhs and expensed the entire amount in the profit and loss account. The managing director of the company was worried about this heavy revenue loss and asked the accountant not to follow AS 11 issued by the ICAI for this particular transaction.<\/p>\n<p>The accountant of the company, followed the instruction of the managing director and removed exchange loss from the profit and loss account but then he added the entire exchange loss to the value of fixed asset and computed the depreciation thereon. As an Auditor of X Limited how you would deal with this particular transaction? [Nov. 13 (5 Marks)]<br \/>\nAnswer:<br \/>\nTreatment of Exchange Difference:<\/p>\n<p>As per Para 46A(1) of AS 11 &#8220;The Effects of Changes in Foreign Exchange Rates&#8221; the exchange differences arising on reporting of long- term foreign currency monetary items insofar as they relate to the acquisition of a depreciable capital asset in respect of accounting periods commencing on or after the 1st April, 2011 can be added to or deducted from the cost of the asset and shall be depreciated over the balance life of the asset.<\/p>\n<p>So, X Ltd. has the choice to avail this option. However, the company should disclose the fact of such option and of the amount remaining to be amortized in the financial statements of the period in which such option is exercised and in every subsequent period so long as any exchange difference remains unamortized.<\/p>\n<p>Conclusion: Treatment done by the accountant is correct and auditor need to check the disclosures made in the financial statement.<\/p>\n<p>Question 16.<br \/>\nComment on the following: XYZ Limited received a grant of \u20b9 25 lakhs under the Government&#8217;s Subsidy Scheme, for acquiring an imported machinery for setting up new plant. The entire grant received is credited to Profit and Loss Account. [Nov. 09 (5 Marks)]<br \/>\nAnswer:<br \/>\nTreatment of Capital Grant:<br \/>\nAs per AS 12, &#8220;Accounting for Government Grants&#8221; grants received for acquisition of specific fixed asset maybe treated in following ways:<br \/>\n(a) Deduction from the gross value of the asset; or<br \/>\n(b) Treating it as deferred income which should be recognised in the P &amp; L account on a systematic and rational basis over the useful life of the asset.<br \/>\nBy crediting the entire amount of grant to P &amp; L account, the company has treated it as a revenue income which is not in accordance with the requirements of the AS 12.<\/p>\n<p>Conclusion: Auditor needs to qualify the report stating the fact that the income has been overstated to the extent of the amount of grant net of proportionate credit that would have been worked out.<\/p>\n<p>Question 17.<br \/>\nXYZ Ltd. had received a grant of \u20b9 50 lacs in 2015 from a State Government towards installation of pollution control machinery on fulfilment of certain conditions. The company, however, failed to comply with the said conditions and consequently was required fa refund the said amount in 2019.<\/p>\n<p>The company debited the said amount to its machinery in 2020 on payment of the same. It also reworked the depreciation for the said machinery from the date of its purchase and passed necessary adjusting entries in the year 2020 to incorporate the retrospective impact of the same.<br \/>\nAnswer:<br \/>\nAccounting Treatment of Refund of Government Grant:<\/p>\n<p>As per AS 12, &#8220;Accounting for Government Grants&#8221;, the amount refundable in respect of a government grant related to a specific fixed asset is recorded by increasing the book value of the asset or by reducing the capital reserve or the deferred income balance, as appropriate, by the amount refundable.<\/p>\n<p>In case of first alternative, i.e., where the book value of the asset is increased, depreciation on the revised book value should be provided prospectively over the residual useful life of the asset.<\/p>\n<p>In the present case, XYZ Ltd. had received a grant of \u20b9 50 lacs in 2010 from a State Government towards installation of pollution control machinery on fulfilment of certain conditions. However, the amount of grant has to be refunded since it failed to comply with the prescribed conditions.<\/p>\n<p>The accounting treatment given by XYZ Ltd. of increasing the value of the plant and machinery is quite proper, but accounting treatment in respect of depreciation given by the company of adjustment of depreciation with retrospective effect is improper and constitutes violation of AS 10, &#8220;Property, Plant &amp; Equipment&#8221; and AS 12, &#8220;Accounting for Government Grants\u201d.<\/p>\n<p>Conclusion: The auditor should discuss with the management to make necessary changes in respect of same and if management not agrees for the changes, auditor should qualify the report quantifying the impact of the same on profit as well as assets of the company.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 18.<br \/>\nBig Ltd. has borrowed \u20b9 30 lakhs from State Bank of India during the financial year 2019-20. The borrowings are used to invest in shares of Small Ltd., a subsidiary company of Big Ltd., which is implementing a new project estimated to cost \u20b9 50 lakhs. As on 31st March, 2020, since the said project was not complete, the directors of Big Ltd. resolved to capitalize the interest accruing on borrowings amounting to \u20b9 4 lakhs and add it to the cost of investments.<br \/>\nAnswer:<br \/>\nCapitalisation of Interest on Borrowings in respect of Investments<\/p>\n<ul>\n<li>As per AS-13 &#8220;Accounting for Investments\u201d cost of investments includes acquisition charges such as brokerage, fees and duties.<\/li>\n<li>AS-16 &#8220;Borrowing Costs\u201d does not consider investment in shares as qualifying assets that can enable a company to add the borrowing costs to investments.<\/li>\n<li>&#8216;In the instant case, X Ltd. has used borrowed funds for making investment in shares of a subsidiary company. For acquiring shares of a subsidiary company, apart from any fees, duties etc., there are no cost incurred for investing in shares.<\/li>\n<li>Any borrowing costs incurred cannot be treated as part of cost of investments and cannot be added to the cost of investments.<\/li>\n<\/ul>\n<p>Conclusion: Auditor should qualify his report by stating that the borrowing costs have been wrongly added to the cost of investments rather than charging them to Profit and Loss Account. The effect of the same on the profits for the year would also have to be mentioned.<\/p>\n<p>Question 19.<br \/>\nK Ltd. had 5 subsidiaries as at 31st March 2020 and the investments in-subsidiaries are considered as long term and valued at cost. Two of the subsidiaries networth eroded as at 31st March 20 and the prospects of their recovery are very bleak and the other three subsidiaries are doing exceptionally well. The company did hot provide for the decline in the value of investments in two subsidiaries because the overall investment portfolio in subsidiaries did not suffer any decline as the other three subsidiaries are doing exceptionally well. Comment. [May 13 (5 Marks)]<br \/>\nAnswer:<br \/>\nValuation of Long term investments:<\/p>\n<p>As per Para 17 of AS-13 &#8220;Accounting for Investments&#8221; Long-term investments are usually carried at cost. However, when there is a decline, other than temporary, in the value of a long-term investment, the carrying amount is reduced to recognise the decline.<\/p>\n<p>As per Para 18 Long-term investments are usually of individual importance to the investing enterprise. The carrying amount of long-term investments is therefore determined on an individual investment basis.<\/p>\n<p>Conclusion: Considering the above, K Ltd. should provide for the decline in the value of investments in two subsidiaries despite the fact that the overall investment portfolio in subsidiaries did not suffer any decline.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 20.<br \/>\nAs a Statutory Auditor, how would you deal with the following: P Pvt. Ltd. was amalgamated with PQR Ltd. with effect from 1st April, 2019. As per the scheme of amalgamation approved by the High Court, the amalgamation was to be accounted by the &#8220;Pooling of Interests Method\u201d. The scheme further provided that the balance in Revaluation Reserve of P Pvt. Ltd. as on 31st March, 2019 was to be treated as a General Reserve on amalgamation. During the financial year 2019-20, PQR Ltd. issued bonus shares out of General Reserves (which included the amount of revaluation reserve of P Pvt. Ltd.).<br \/>\nAnswer:<br \/>\nDeclaration of Bonus out of General Reserves created at the time of amalgamation:<\/p>\n<p>As per AS 14, &#8220;Accounting for Amalgamations\u201d in case of amalgamation in the nature of merger and the &#8216;Pooling of Interest Method\u2019, the reserves appears in the financial statements of the transferee company in the same form in which they appeared in the financial statements of the transferor company.<\/p>\n<p>In the present case, P Pvt. Ltd. is amalgamated with PQR Ltd. and the amalgamation is in the nature of merger. Accordingly, Revaluation Reserves of P Pvt. Ltd. would have normally continued to remain so in PQR Ltd. However, since the scheme mentions that Revaluation Reserve is to be treated as General Reserves, the scheme will override AS 14.<\/p>\n<p>As per AS 14, &#8220;Accounting for Amalgamations\u201d, in case of any approved scheme of amalgamation if the treatment in accounting is not as per the AS, a specific disclosure of the same will have to be made along with the financial effect on the financial statements due to such deviation.<\/p>\n<p>Conclusion: Auditor is required to ensure that the company complies with the requirements regarding treatment of reserves and other related disclosure requirements. In case of any non-compliance, he need to modify his report.<\/p>\n<p>Question 21.<br \/>\nExcellent Limited, a Company incorporated in India and Listed with SEBI, has a scheme for payment of settlement allowance to retiring employees. Under the scheme, retiring employees are entitled to reimbursement of certain travel expenses for class they are entitled to as per company rules and regulations. Employees are also entitled to claim a lump-sum payment to cover expenses on food and stay during the travel. The Company also gives option to employees that they can claim a lump-sum amount equal to three months\u2019 pay last drawn.<\/p>\n<p>Excellent Limited have following accounting policies to record these travel expenses:<\/p>\n<p>(i) Settlement allowance does not depend upon the length of service of employee. It is restricted to employee\u2019s eligibility under the travel rule of the company therefore all travel expenses fall under the category of defined contribution plans.<br \/>\n(ii) Since it is not related to the length of service of the employees, it is difficult to estimate reliably and there is no present obligation to pay employees as per AS 29 &#8220;Provisions&#8217; Contingent Liabilities and Contingent Assets&#8221;, hence it is accounted for on claim basis.<br \/>\nYou are statutory auditor of Excellent Limited. What would be your guidance to audit team? [Nov. 13 (4 Marks), RTP-May 18]<br \/>\nAnswer:<br \/>\nAccounting Treatment of Settlement Allowance:<\/p>\n<ul>\n<li>AS 15 &#8220;Employee Benefits\u201d covers the cases where payment promised to be made to an employee at or near retirement presents significant difficulties in the determination of periodic charge to the statement of profit and loss.<\/li>\n<li>The present case falls under the category of Defined Benefit Scheme. The contention of the Company that the settlement allowance will be accounted for on claim basis is not correct even if company\u2019s obligation under the scheme is uncertain and requires estimation.<\/li>\n<li>In estimating the obligation, assumptions may need to be made regarding future conditions and events, which are largely outside the company\u2019s control.<\/li>\n<li>So Accounting Treatment of the settlement allowance in this case as per AS 15 will be following points:<\/li>\n<\/ul>\n<p>(1) Settlement allowance payable by the company is a defined retirement benefit, covered by AS 15.<br \/>\n(2) A provision should be made every year in the accounts for the accruing liability on account of settlement allowance. The amount of provision should be calculated according to actuarial valuation.<br \/>\n(3) Where, however, the amount of provision so determined is not material, the company can follow some other method of accounting for settlement allowances.<\/p>\n<p>Question 22.<br \/>\nZ Ltd. changed its employee remuneration policy from 1st of April 2019 to provide for 12% contribution to provident fund on leave encashment also. As per the leave encashment policy the employees can either utilize or encash it. As at 31st March 20 the company obtained an actuarial valuation for leave encashment liability.<\/p>\n<p>However, it did not provide for 12% PF contribution on it. The auditor of the company wants it to be provided but the management replied that as and when the employees availed leave encashment, the provident fund contribution was made. The company further contends that this is the correct treatment as it is not sure whether the employees will avail leave encashment or utilize it. Comment. [May 13 (5 Marks), May 16 [4 Marks), MTP-Aug. 18]<br \/>\nAnswer:<br \/>\nTreatment of short term compensated absences:<\/p>\n<p>As per AS-15 &#8220;Employee Benefits\u201d, an enterprise should recognise the expected cost of short-term employee benefits in the form of compensated absences as follows:<br \/>\n(a) in the case of accumulating compensated absences, when the employees render service that increases their entitlement to future compensated absences; and<br \/>\n(b) in the case of non-accumulating compensated absences, when the absences occur.<\/p>\n<p>An enterprise should measure the expected cost of accumulating compensated absences as the additional amount that the enterprise expects to pay as a result of the unused entitlement that has accumulated at the balance sheet date.<\/p>\n<p>In the given case, company obtained actuarial valuation for leave encashment, it is obvious that the compensated absences are accumulating in nature. Z Ltd. will accumulate the amount of leave encashment benefits as it is the liability of the company to provide 12% PF on amount of leave encashment.<\/p>\n<p>Conclusion: Contention of the auditor that full provision should be provided by the company is correct.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 23.<br \/>\nAs a statutory auditor for the year ended 31st March 2020, how would you deal with the Following: X Ltd., has borrowed \u20b9 25 crores from financial institutions during the financial year 2019-20. These borrowings are used to invest in shares of Y Ltd., a subsidiary company which is implementing a new project estimated to cost \u20b9 50 crores. As on 31st March 2020, since the said project was not yet complete, the directors of X Ltd. resolved to capitalize the interest on the borrowings amounting to \u20b9 3 Crores and add it to the cost of investments.<br \/>\nAnswer:<br \/>\nCapitalisation of Interest on Borrowings in respect of Investments<\/p>\n<ul>\n<li>AS-16 &#8220;Borrowing Costs\u201d does not consider investment in shares as qualifying assets that can enable a company to add the borrowing costs to investments.<\/li>\n<li>In the instant case, X Ltd. has used borrowed funds for making investment in shares of a subsidiary company. For acquiring shares of a subsidiary company, apart from any fees, duties etc., there are no cost incurred for investing in shares.<\/li>\n<li>Any borrowing costs incurred cannot be treated as part of cost of investments and cannot be added to the cost of investments.<\/li>\n<\/ul>\n<p>Conclusion: The statutory auditor is required to qualify his report by stating that the borrowing costs have been wrongly added to the cost of investments. It is required to Charge the borrowing cost to the profit and loss account. The effect of the same on the Profit for the year would also have to be mentioned in the audit report.<\/p>\n<p>Question 24.<br \/>\nAs a Statutory Auditor, how would you deal with: ABC Ltd. commenced construction of a flyover in Mumbai in January, 2018 under BOLT scheme. The same was completed in February, 2020. Due to seasonal heavy rains in July, 2019 in the area, the work on the flyover had to be suspended for 1 month. The company accordingly suspended borrowing costs of \u20b9 12.50 lakhs for that month from capitalisation.<br \/>\nAnswer:<br \/>\nCapitalization of borrowing costs:<\/p>\n<p>As per AS 16, &#8220;Borrowing Costs&#8221;, capitalization of borrowing costs should be suspended in respect of periods in which active development is interrupted, except for the situation when temporary delay is necessary as a part of the process or substantial technical and administrative work is being carried out.<\/p>\n<p>Thus, the test as to whether or not to capitalize the borrowing costs depends primarily upon the nature of interruption of activities during &#8220;extended periods\u201d.<\/p>\n<p>In the instant case, it has been mentioned that the construction activity was interrupted due to seasonal rain and hence being regular feature.<\/p>\n<p>Conclusion: Borrowing cost of \u20b9 12.50 lakhs incurred by ABC Ltd. should be capitalized. Suspension of capitalization by the company is not a correct treatment and statutory auditor should report accordingly.<\/p>\n<p>Question 25.<br \/>\nA firm of a father and a son is receiving \u20b9 2 lakhs towards job work done for XYZ Ltd. during the year ended on 31.03.20. The total job work charges paid by XYZ Ltd. during the year are over \u20b9 50 lakhs. The father is a Managing Director of XYZ Ltd. having substantial holding.<\/p>\n<p>The Managing Director told the auditor that since he is not involved in the activities of the firm and since the amount paid to it is insignificant; there is no need to disclose the transaction. He further contended that such a payment made in the last year was not disclosed. Is Managing Director right in his approach? [MTP-Aug. 18]<br \/>\nAnswer:<br \/>\nRelated party Disclosures:<\/p>\n<p>AS 18 &#8220;Related Party Disclosures\u201d requires disclosure of related party relationship and transactions between a reporting enterprise and its related parties.<\/p>\n<p>According to AS-18, in the case of related party transactions, the reporting enterprise should disclose the following:<\/p>\n<ol>\n<li>the name of the transacting related party;<\/li>\n<li>a description of the relationship between the parties;<\/li>\n<li>a description of the nature of transactions;<\/li>\n<li>volume of the transactions either as an amount or as an appropriate proportion;<\/li>\n<li>any other elements of the related party transactions necessary for an understanding of the financial statements;<\/li>\n<li>the amounts or appropriate proportions of outstanding items pertaining to related parties at the balance sheet date and provisions for doubtful debts due from such parties at that date; and<\/li>\n<li>amounts written off or written back in the period in respect of debts due from or to related parties.<\/li>\n<\/ol>\n<p>In the instant case, the managing director of XYZ Ltd. is a partner in the firm with his son, which has been paid Rs. 2 lakhs as job work charges. The managing director constitutes a substantial holding in the firm. And hence the transaction is covered by AS 18.<\/p>\n<p>Conclusion: The approach of the managing director is not tenable under the law and accordingly all disclosure requirements have to be complied. Accordingly, the approach followed by the Managing Director is not right. Under the circumstances, auditor shall apply the procedures as stated in SA 550 and modify his report accordingly.<br \/>\nAS-20<\/p>\n<p>Question 26.<br \/>\nG Ltd. Has paid up capital of \u20b9 20 crores divided into equity shares of \u20b9 10 each on 31st March, 2019. During the financial year 2019-20, the company issued bonus shares in the ratio of 1:1. The net profit of the company for the financial years 2018-19 and 2019-20 was \u20b9 10 Crores and \u20b9 15 Crores respectively. The EPS as disclosed by the company for two years was \u20b9 5 and \u20b9 3.75 respectively. As the statutory auditor of G Ltd., comment on the above.<br \/>\n[Nov. 17 (5 Marks]]<br \/>\nAnswer:<br \/>\nDisclosure of Earnings Per Share:<\/p>\n<p>As per AS 20, in the case of a bonus issue, the number of equity shares outstanding before the event of a bonus issue have to be adjusted for the proportionate change in the number of equity shares outstanding as if the event had occurred at the beginning of the earliest period reported.<\/p>\n<p>In view of the above, the EPS. for both the years will have to be calculated taking the equity share capital after the bonus issue as the denominator.<\/p>\n<p>If the same is done the EPS for 31.3,2019 will be \u20b9 2.50 and that for 31.3.2020 will be \u20b9 3.75. Since the above figures of EPS have not been disclosed, the company has not complied with the provisions of the AS 20.<\/p>\n<p>Conclusion: As EPS reported is not in compliance with AS 20, auditor is required to qualify his report in terms of Sec. 143(3)(e) of the Companies Act, 2013.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 27.<br \/>\nT Pvt. Ltd. is an unlisted closely held company with turnover less than \u20b9 50 crores. While finalizing the accounts, Mr. M the Director (finance) disputed the applicability of AS 20 to the company.<br \/>\nAnswer:<br \/>\nApplicability of AS-20:<\/p>\n<p>AS 20 &#8220;Earning Per Share&#8221;, is mandatory in respect of enterprises whose equity shares or potential equity shares are listed on a recognised stock exchange in India. However, every company is required under Schedule III to the Companies Act, 2013, to disclose EPS.<\/p>\n<p>Accordingly, every company, which is required to give information under Schedule III to the Companies Act, 2013, should calculate and disclose EPS in accordance with AS 20, whether or not its equity shares or potential equity shares are listed on a recognised stock exchange in India.<\/p>\n<p>Conclusion: The contention of Director (Finance) is incorrect. The auditor will have to ensure that EPS is disclosed as per AS 20 or else the auditor should appropriately modify the audit report.<\/p>\n<p>Question 28.<br \/>\nX Ltd. did not follow the applicable Accounting Standard for disclosing Earnings Per Share (EPS) in the financial statements. The fact of such non-disclosure was however, mentioned in the notes forming part of accounts. As the statutory auditor of X Ltd., how would you report in the above case? [May 09 (5 Marks)]<br \/>\nAnswer:<br \/>\nNon-compliance of AS 20:<\/p>\n<p>Section 133 of Companies Act, 2013 empowers the Central Government to prescribes the accounting Standards to be complied with by the companies. Ministry of Corporate Affairs (MCA) vide General Circular clarified that the existing Accounting Standards notified under the Companies Act, 1956 shall continue to apply till they are prescribed by Central Government. AS 20 is also one of the AS notified by Section 133 of the Companies Act, 2013.<\/p>\n<p>AS 20 &#8220;Earnings per Share\u201d requires every company to disclose the EPS. If the disclosures required by AS 20 are not made, the auditor is required to state the fact in his report as per the requirements of Section 143(3) which requires the auditor to comment on &#8220;Whether Accounting Standards notified u\/s 133 have been followed?\u201d<\/p>\n<p>This cannot be considered as a qualification to affect the &#8220;True &amp; Fair\u201d position of financial results of the company.<\/p>\n<p>Question 29.<br \/>\nWrite &#8220;short note on: Deferred Taxation. [May 16 (4 Marks)]<br \/>\nAnswer:<br \/>\nDeferred Taxation:<\/p>\n<p>AS 22 &#8220;Accounting for Taxes on Income&#8221; deferred tax may be defined as the effect of timing difference.<\/p>\n<p>Taxable income is calculated in accordance with tax laws. In some circumstances, the requirements of these laws to compute taxable income differ from the accounting policies applied to determine accounting income. The effect of this difference is that the taxable income and accounting income may not be the same.<\/p>\n<p>The differences between taxable income and accounting income can be classified into permanent differences and timing differences. Permanent differences are those differences between taxable income and accounting income which originate in one period and do not reverse subsequently.<\/p>\n<p>Timing differences are those differences between taxable income and accounting income for a period that originate in one period and are capable of reversal in one or more subsequent periods.<\/p>\n<p>Timing differences arise because the period in which some items of revenue and expenses are included in taxable income do not coincide with the period in which such items of revenue and expenses are included or considered in arriving at accounting income. For example, machinery purchased for scientific research related to business is fully allowed as deduction in the first year for tax purposes whereas the same would be charged to the statement of profit and loss as depreciation over its useful life.<\/p>\n<p>AS 22 requires that deferred tax should be recognized for all the timing differences, subject to the consideration of prudence in respect of deferred tax assets.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 30.<br \/>\nAs a statutory auditor for the year ended 31st March 2020, how would you deal with the following: X Ltd., a listed company, was incurring heavy losses since the last several years and the industry in which it was functioning was not expected to perform better in the next few years. While finalising the accounts for the year ended 31st March 2020, the CFO of the company decided to create a Deferred Tax Asset for the tax benefits that would arise in future years from the earlier years losses that had remained unabsorbed in Income tax.<br \/>\nOr<br \/>\nDo you approve of the following: Shakti Pan Masala (P.) Ltd. was incurring heavy losses in the last several years since it could not withstand the competition in the market. The State in which the company had its registered office and also its major sales had moved a bill in the State Assembly to ban manufacture and sale of all kinds of Pan Masalas in the State. While finalizing the accounts for the year ended 31-03-2020, the CFO of the company created a Deferred Tax Asset for the tax benefits that would arise in future years from the earlier years losses that had remained unabsorbed in Income Tax.<br \/>\nAnswer:<br \/>\nRecognition of Deferred Tax Assets:<\/p>\n<p>AS 22 on &#8220;Accounting for Taxes on Income\u201d, requires that deferred tax should be recognised for all timing differences, subject to the considerations of prudence in respect of deferred tax assets.<\/p>\n<p>The standard further states that where an enterprise has unabsorbed depreciation or carry forward of losses under the tax laws, deferred tax assets should be recognised only to the extent that there is virtual certainty supported by convincing evidence that sufficient future taxable income will be available against which such deferred tax assets can be realised.<\/p>\n<p>This implies that there is a reasonable certainty that the carry forward losses would be recouped in the future years.<\/p>\n<p>In the instant case, looking to the fact that the industry in which the company was functioning was not expected to perform well in the next few years, getting virtual certainty and convincing evidence for the same would be almost impossible.<\/p>\n<p>Hence, in the absence of virtual certainty for offset of the losses in future years, creating a deferred tax asset would not be possible for the company.<\/p>\n<p>Conclusion: The statutory auditor would therefore have to qualify his report by stating that deferred tax assets have been created though there is no virtual certainty for getting the said benefit in income tax. He would also have to mention the amount by which the loss for the year has been understated and the amount by-which the reserves are overstated.<\/p>\n<p>Question 31.<br \/>\nComment: T Ltd. an Indian company, subject to Income Tax Act, 1961, discloses advance Income-tax paid (Current tax asset) and provision for Income-tax (Current tax liability), separately in Balance Sheet for the year ended 31.03.2020, i.e., it does not offset the amount. [May 10 (5 Marks)]<br \/>\nAnswer:<br \/>\nSet off of Advance tax against Provision for tax:<br \/>\nAs per AS 2 2 &#8211; Accounting for Taxes in Income, an enterprise should offset assets and liabilities representing current tax if the enterprise:<\/p>\n<ol>\n<li>has a legally enforceable right to set off the recognized amounts and<\/li>\n<li>intends to settle the asset and liability on a net basis.<\/li>\n<\/ol>\n<p>An enterprise will normally have a legally enforceable right to set off an asset and liability representing current tax when they relate to income taxes levied under the same governing taxation laws and the taxation laws permit the enterprise to make or receive a single net payment.<\/p>\n<p>Conclusion: T Ltd. is entitled to set off the advance tax against provision for tax, and can show only the net amount in the balance sheet.<\/p>\n<p>Question 32.<br \/>\nSRS Ltd. has drawn the financial statement as on 31.03.20 and presented to you along with additional information:<br \/>\n<img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-18497\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Accounting-Standards-\u2013-CA-Final-Audit-Question-Bank-1.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank 1\" width=\"599\" height=\"215\" srcset=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Accounting-Standards-\u2013-CA-Final-Audit-Question-Bank-1.png 599w, https:\/\/gstguntur.com\/wp-content\/uploads\/2023\/03\/Accounting-Standards-\u2013-CA-Final-Audit-Question-Bank-1-300x108.png 300w\" sizes=\"(max-width: 599px) 100vw, 599px\" \/><\/p>\n<p>Additional Information:<br \/>\n(a) Entire pre-operative expenses of \u20b9 7,00,000 was charged to Profit and Loss Account whereas for the purpose of Income Tax, only what is allowable is claimed.<br \/>\n(b) Depreciation as per Books \u20b9 35,00,000 Depreciation as per Income Tax \u20b9 50,00,000<br \/>\n(c) Losses to be carried forward as per Income Tax Act &#8211; \u20b9 16,00,000<br \/>\n(d) Donation disallowed while computing tax &#8211; \u20b9 50,000<br \/>\nConsidering the additional information, Can you certify that the company has complied with the Accounting Standards and issue an unqualified report? [Nov. 11 (6 Marks)]<br \/>\nAnswer:<br \/>\nCompliance of Accounting Standards:<\/p>\n<p>(a) Based on the Additional Information provided in the question, it appears that the company had not complied with the provisions of AS 6, AS 10, AS 22.<br \/>\n(b) As per Para 2 8 of AS 6 &#8220;Depreciation Accounting\u201d historical cost of each assets is required to be disclosed, which is not shown in the balance sheet.<br \/>\n(c) As per Para 39 of AS 10 &#8220;Accounting for Fixed Assets&#8221; Gross Book Value of the fixed assets should be disclosed, which is not shown in the balance sheet.<br \/>\n(d) As per requirement of AS 22 &#8220;Accounting for Taxes on income\u201d company was required to recognise the effect of timing difference as below:<\/p>\n<ul>\n<li>Recognise Deferred Tax Asset for Pre-operative Expenses<\/li>\n<li>Recognise Deferred Tax Liability for Depreciation.<\/li>\n<\/ul>\n<p>Conclusion: As the company had not complied with the requirements of various Accounting Standards, an Unqualified report cannot be issued.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 33.<br \/>\nX Ltd. is engaged in the business of newspaper and radio broadcasting. It operates through different brand names. During FY 19-20 it incurred substantial amounts on external trade, business communication and branding expenses by participation in various corporate social responsibility initiatives. The company expects to benefits by this expenditure by attracting new customers over a period of time and accordingly it has capitalized the same under brand development expenses and intends to amortize the same over the period in which it expects the benefits to flow. As the statutory auditor of the company do you concur? Give reasons. [Nov, 13 (4 Marks)]<br \/>\nAnswer:<br \/>\nRecognition of Intangible Assets:<\/p>\n<p>As per AS-26 on &#8220;Intangible Assets&#8221;, expenditure on an intangible item should be recognised as an expense when it is incurred unless it forms part of the cost of an intangible asset that meets the recognition criteria.<\/p>\n<p>In the given case, X Ltd. incurred substantial amounts on external trade, business communication and branding expenses by participation in various corporate social responsibility initiatives. The company expects to benefits by this expenditure by attracting new customers over a period of time and accordingly it has capitalized the same under brand development expenses. Here, no intangible assets or other asset is acquired or created that can be recognized.<\/p>\n<p>Conclusion: The accounting treatment by the company to amortize the entire expenditure over the period in which it expects the benefits to flow is not correct and the same should be debited to the statement of Profit &amp; Loss.<\/p>\n<p>Question 34.<br \/>\nB Pvt. Ltd. started stock broking activities in 2019 and for which it acquired membership of a stock exchange for \u20b9 150 lakhs. While finalizing the accounts, the company disclosed the above amount under fixed assets scheduled as &#8220;Stock Exchange membership Rights&#8221;.<\/p>\n<p>The company also did not write off any amount since the rights would enable the company to perpetually carry on its business. As a statutory auditor how would you deal with the above situation? [May 16 (4 Marks)]<br \/>\nAnswer:<br \/>\nAmortization of Intangible Assets:<br \/>\nAs per AS 26 &#8220;Intangible Assets\u201d an intangible asset should be recognised if, and only if:<\/p>\n<p>(a) it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and,<br \/>\n(b) the cost of the asset can be measured reliably.<\/p>\n<p>In the given case, B Pvt. Ltd. has paid \u20b9 110 lacs for acquiring membership of stock exchange. Such membership rights provide exclusive right to B Pvt. Ltd. for carrying out stock broking activities. Such membership rights acquired by B Pvt. Ltd. meet the criteria of recognition and therefore recognizing the membership rights as Fixed Assets is proper.<\/p>\n<ul>\n<li>AS 2 6 also requires that all Intangible Assets to be amortised. For this purpose, a rebuttable presumption of 10 years is to be considered.<\/li>\n<li>In the given case, the company did not write-off any amount stating that such rights would enable the company to perpetually carry on its business.<\/li>\n<\/ul>\n<p>Conclusion: Contention of the company for not writing off the intangible assets is not proper and the auditor needs to qualify his report and state the fact of non-compliance with AS 26.<\/p>\n<p>Question 35.<br \/>\nWrite short note on: Intangible Asset vs. Intangible Item. [Nov. 14 (4 Marks)]<br \/>\nAnswer:<br \/>\nIntangible Asset vs. intangible Item:<br \/>\nAs per AS 26 on &#8220;Intangible Assets\u201d, an intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes.<\/p>\n<p>An intangible asset should be recognised if, and only if:<br \/>\n(a) it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise; and<br \/>\n(b) the cost of the asset can be measured reliably<\/p>\n<p>An enterprise frequently expends resources, or incur liabilities, on the acquisition, development, maintenance or enhancement of intangible resources such as scientific or technical knowledge, design and implementation of new processes or systems, licences, intellectual property, market knowledge and trademarks (including brand names and publishing titles). Common examples of items encompassed by these broad headings are computer software, patents, copyrights, motion picture films, etc. These expenses are known as intangible items<\/p>\n<p>If intangible items fulfil the conditions given in the definition of an intangible asset, then only they will be recognized as intangible asset. But if any of such discussed items does not satisfy these conditions then it will not constitute intangible asset.<\/p>\n<p>Intangible assets are shown in Balance Sheet whereas intangible items which are not intangible assets are provided as expenditure in Statement of Profit and Loss.<\/p>\n<p>Question 36.<br \/>\nV Ltd. sold 1 lakh vacuum pumps during the year 2019-20 with a condition to make good by repair\/replacement any manufacturing defects reported within 6 months from the date of sale. Past experience in this regard showed that there were no replacements carried out, but minor\/major repairs were necessitated to the extent of 10%\/5% respectively of the units sold. The cost of such minor\/major repairs would amount to \u20b9 1,000\/\u20b9 6,000 respectively. While Finalizing the accounts for the year, the company does not reflect any provision, in this regard.<br \/>\nAnswer:<br \/>\nRecognition of Provision in the Accounts:<\/p>\n<p>As per AS-29, \u2018Provisions, Contingent Liabilities and Contingent Assets\u2019, a provision is a liability which can be measured, only by using a substantial degree of estimation and should be recognised when following conditions are satisfied:<br \/>\n(a) An enterprise has a present obligation as a result of a past event;<br \/>\n(b) It is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and<br \/>\n(c) A reliable estimate can be made of the amount of the obligation.<\/p>\n<p>In the given case, V Ltd. fulfils all the above conditions. The sale of pumps with a warranty obligation constitutes the present obligation as a result of past event. It is probable that some outflow will be involved in setting the warranty obligation, satisfy the second condition.<\/p>\n<p>As per the details given in the question, reliable estimate can be made as under:<br \/>\n= 6000 \u00d7 (5% of 100000) + 1000 \u00d7 (10% of 100000)]<br \/>\n= \u20b9 400 lakhs<\/p>\n<p>Conclusion: V Ltd. should make a provision for warranty obligation against sale of vacuum pumps to the extent of \u20b9 400 lakhs. The auditor should insist on such provision, in the absence thereof, he should qualify his audit report.<\/p>\n<p>Question 37.<br \/>\nAs a Statutory Auditor, how would you deal with the following: B Pvt. Ltd., implements a Voluntary Retirement Scheme (VRS) for its employees. It follows a policy of amortising the expenditure over 10 years. As at 1st April, 2019, the unamortised VRS expenditure was \u20b9 15 lakhs. During the year 2019-20, it incurred further \u20b9 12 lakhs as VRS. For the year ended 31st March, 2020, the company proposes to revise the period of amortisation to 5 years. It also proposes to follow the revised period for the opening balance.<br \/>\nAnswer:<br \/>\nRevision of Amortisation period of Expenditure on Voluntary Retirement:<\/p>\n<ul>\n<li>Voluntary Retirement Scheme (VRS) is one form of termination benefit and it is treated as per general accepted accounting practices.<\/li>\n<li>Accordingly, VRS expenditure would have to be amortised over a reasonable period.<\/li>\n<li>In the present case, company proposes to revise the period of amortisation to 5 years from 10 years. It amounts to change in accounting policy and based on the facts of the case, appears appropriate and reasonable.<\/li>\n<\/ul>\n<p>Conclusion: The auditor is required to examine that the requirements of AS 5, &#8220;Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies\u201d and impact of change in accounting policy is disclosed as per AS 1, &#8220;Disclosure of Accounting Policies\u201d.<\/p>\n<p>Question 38.<br \/>\nAs a Statutory Auditor, how would you deal with the following: X Ltd. is engaged in manufacture of Cement. In the Statement of Profit and Loss for the year ended 31st March, 2020, it discloses its revenue from sales transactions (turnover) net of excise duty. The excise duty collected and paid on sales transactions and that related to difference between Closing inventory and Opening inventory is, however, disclosed in the &#8220;Notes to Accounts&#8221;.<br \/>\nAnswer:<br \/>\nDisclosure requirement of Excise Duty:<br \/>\n\u2018As per Accounting Standard Interpretation &#8211; ASI 14 \u2018Disclosure of Revenue from Sales Transactions&#8217; (Revised) issued by ICAI, the amount of turnover should be disclosed as follows on the face of the Statement of Profit and Loss:<br \/>\nTurnover (Gross) XX<br \/>\nLess: Excise duty XX<br \/>\nTurnover (Net) XX<\/p>\n<p>Further, the excise duty shown above should be the total duty except the duty related to the difference between closing inventory &amp; opening inventory which should be recognized separately in the Statement of Profit and Loss, with an explanatory note in the notes to accounts to explain the nature of the two amounts of excise duty.<\/p>\n<p>As per Schedule II of Companies Act, 2013, in respect of a company other than a finance company revenue from operations shall disclose separately in the notes revenue from-<br \/>\n(a) Sale of products;<br \/>\n(b) Sale of services;<br \/>\n(c) Other operating revenues; Less:<br \/>\n(d) Excise duty.<\/p>\n<p>Conclusion: X Ltd. has not followed the correct accounting treatment, the auditor needs to qualify his report accordingly.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p><strong>Indian Accounting Standards (Ind-AS)<\/strong><\/p>\n<p>Question 39.<br \/>\nWhat is &#8216;Other Comprehensive Income\u2019 as per Ind-As? What are its components? [Nov. 17 (5 Marks)]<br \/>\nAnswer:<br \/>\nOther Comprehensive Income as per Ind-AS:<br \/>\nAs per Ind-AS 1 &#8220;Presentation of Financial Statements other comprehensive income comprises items of income and expense (including reclassification adjustments) that are not recognised in profit or loss as required or permitted by other Ind ASs.<\/p>\n<p>The components of other comprehensive income include:<\/p>\n<ol>\n<li>changes in revaluation surplus (Ind AS 16, Property, Plant and Equipment and Ind AS 38, Intangible Asset);<\/li>\n<li>re-measurements of defined benefit plans (Ind AS 19 &#8211; Employee Benefits);<\/li>\n<li>gains and losses arising from translating the financial statements of a foreign operation (Ind AS 21, The Effects of Changes in Foreign Exchange Rates);<\/li>\n<li>gains and losses from investments in equity instruments designated at fair value;<\/li>\n<li>gains and losses on financial assets measured at fair value.<\/li>\n<li>the effective portion of gains and losses on hedging instruments in a cash flow hedge and the gains and losses on hedging instruments that hedge investments in equity instruments measured at fair value;<\/li>\n<li>for particular liabilities designated as at fair value through profit or loss, the amount of the change in fair value that is attributable to changes in the liability&#8217;s credit risk;<\/li>\n<li>changes in the value of the time value of options when separating the intrinsic value and time value of an option contract and designating as the hedging instrument only the changes in the intrinsic value;<\/li>\n<li>changes in the value of the forward elements of forward contracts when separating the forward element and spot element of a forward contract and designating as the hedging instrument only the changes in the spot element, and changes in the value of the foreign currency basis spread of a financial instrument when excluding it from the designation of that financial instrument as the hedging instrument.<\/li>\n<\/ol>\n<p>&#8220;ICAI Examiner Comments&#8221; .<br \/>\nExaminees were lacking knowledge on the topic. Examinees were neither aware of the 1 meaning of \u201cOther Comprehensive Income&#8221; as per Ind-AS nor its Components&#8221;. Many : examinees mixed up \u201cOther Comprehensive Income&#8221; with income from other sources Viz., interest, dividend and capital gains etc. It seems that examinees have made poor v preparation on Ind-AS.<\/p>\n<p>Question 40.<br \/>\nAs an Auditor give your comments for the following disclosures made by a company which adopted Ind-AS for compilation of financial Statements:<br \/>\n(a) In the Balance Sheet, the sub-head inventories contained an item &#8220;goods in transit&#8221; in which a consolidated amount aggregating the cost of raw materials in transit and loose tools billed on company but delivery not made to company had been specified.<br \/>\n(h) Provision for doubtful debts of trade debtors was grouped in \u201cProvisions&#8221; under current liabilities.<br \/>\n(c) In statement of profit and loss, prior period income was shown under &#8220;Other Income&#8221;.<br \/>\n(d) Sale proceeds of scrap incidental to manufacture were included in &#8220;Other income&#8221;.<br \/>\n(e) Payment towards a one time voluntary retirement scheme introduced during the year was included in \u201cEmployee Benefit Expense\u201d. [May 18 &#8211; New Syllabus (5 Marks), MTP-Oct 20]<br \/>\nAnswer:<br \/>\nAppropriateness of Disclosures made in financial statements:<br \/>\n(a) Disclosure of cost of raw material in transit and loose tools in aggregate in the financial statements is not correct. As per Division II of Schedule III of the Companies Act, 2013, cost of raw material in transit shall be disclosed as sub-head of raw material and loose tools billed on the company would be shown as separate sub-head of Loose tools under heading of Inventories i.e. part of Current Asset.<\/p>\n<p>(b) Disclosure is not appropriate because as per Ind-AS 3 7 \u201cProvisions, Contingent Liabilities and Contingent Assets\u201d the term \u2018doubtful debts\u2019 is an adjustment to the carrying amounts of assets. Hence, provision should be shown net in trade receivable.<\/p>\n<p>(c) Disclosure is not appropriate. As per Ind-AS 8 &#8220;Accounting Policies, Changes in Accounting Estimates and Errors\u201d, Prior Period Income should not be shown in statement of profit and loss. The entity shall adjust the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy had always been applied.<\/p>\n<p>(d) Disclosure is not proper. As per Ind-AS 2 &#8220;Inventories&#8221;, sale proceeds of scrap incidental to manufacture should be deducted from the cost of the main product.<\/p>\n<p>(e) Disclosure is not proper. As per Ind-AS 19 &#8220;Employee Benefits&#8221;, if the termination benefits are expected to be settled wholly before 12 months after the end of the annual reporting period in which the termination benefit is recognized, the entity shall apply the requirements for short-term employee benefits, in case it is not expected to be settled before 12 months the entity shall apply the requirements for long term employee<br \/>\nbenefits. In the instant case, it should be shown as short-term employee benefits in place of Employee Benefit Expenses.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"https:\/\/gstguntur.com\/wp-content\/uploads\/2021\/10\/GST-Guntur.png\" alt=\"Accounting Standards \u2013 CA Final Audit Question Bank\" width=\"123\" height=\"13\" \/><\/p>\n<p>Question 41.<br \/>\nYou are the Auditor of Power Supply Corporation Limited, a Government Company for the year ended on 31st March 2020. The turnover of the Company for the period was Rs. 12,000 crores from sale of power. During your audit, you found that the Company had procured Spares for Transmitters for Rs. 850 crores from abroad through a Corporation by name Procurement and Supply India Limited which is also owned and controlled by Government of India.<\/p>\n<p>The Financial Statements of the Power Supply Corporation Limited, prepared in compliance with Ind AS for the year ended on 31\/03\/2020 did not contain any additional disclosure regarding the procurement of spares as referred to above. To your query as to whether any disclosure regarding Related Party Transaction would be required, the Management of the Corporation replied that no such disclosure would be necessary for transactions between State Controlled Enterprises. Analyse this issue in finalizing the Audit Report. [Nov. 18-New Syllabus (5 Marks)]<br \/>\nAnswer:<br \/>\nRelated Party Disclosures in case of Government related Entities:<\/p>\n<p>Para 25 and Para 26 of Ind-AS 24 \u201cRelated Party Disclosures\u201d provides the reporting requirements of related party transactions in case of government related entities.<\/p>\n<p>As per para 2 5, a reporting entity (Govt, entity) is exempt from the disclosure requirements in relation to related party transactions and outstanding balances, including commitments, with:<br \/>\n(a) a government that has control or joint control of, or significant influence over, the reporting entity; and<br \/>\n(b) another entity that is a related party because the same government has control or joint control of, or significant influence over, both the reporting entity and the other entity.<\/p>\n<p>As per Para 26, if a reporting entity applies the exemption as stated in Para 25, it shall disclose the following about the transactions and related outstanding balances referred to in Para 25:<\/p>\n<p>(a) the name of the government and the nature of its relationship with the reporting entity (i.e. control, joint control or significant influence);<br \/>\n(b) the following information in sufficient detail to enable users of the entity\u2019s financial statements to understand the effect of related party transactions on its financial statements:<\/p>\n<ol>\n<li>the nature and amount of each individually significant transaction; and<\/li>\n<li>for other transactions that are collectively, but not individually, significant, a qualitative or quantitative indication of their extent.<\/li>\n<\/ol>\n<p>Conclusion: Management is required to ensure disclosure requirements of Para 25 of Ind- AS 24. Under the circumstances, auditor shall apply the procedures as stated in SA 550 and modify his report as necessary disclosures required under Ind AS 24 not provided in the financial statements.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Accounting Standards \u2013 CA Final Audit Question Bank is designed strictly as per the latest syllabus and exam pattern. Accounting Standards \u2013 CA Final Audit Question Bank Question 1. Write short notes on the following: Normal Capacity for the purpose of Inventory valuation. Answer: Normal Capacity for the purpose of Inventory Valuation: As per AS-2 &hellip;<\/p>\n<p class=\"read-more\"> <a class=\"\" href=\"https:\/\/gstguntur.com\/accounting-standards-ca-final-audit-question-bank\/\"> <span class=\"screen-reader-text\">Accounting Standards \u2013 CA Final Audit Question Bank<\/span> Read More &raquo;<\/a><\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"spay_email":"","footnotes":""},"categories":[169],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/18491"}],"collection":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/comments?post=18491"}],"version-history":[{"count":5,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/18491\/revisions"}],"predecessor-version":[{"id":24571,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/posts\/18491\/revisions\/24571"}],"wp:attachment":[{"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/media?parent=18491"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/categories?post=18491"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/gstguntur.com\/wp-json\/wp\/v2\/tags?post=18491"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}