Sa Ipcc Group-II Nov. 2009

2
Volume 1
IPCE, Group II, November, 2009
Volume
Suggested Answers
Integrated Professional Competence Examination Group II
Suggested Answers
Integrated Professional
Competence Examination
Group II
November, 2009
ISBN: 978-81-8441-329-8
November, 2009
Board of Studies
The Institute of Chartered Accountants of India
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Board of Studies
(Set up by an Act of Parliament)
March / 2010
New Delhi
SUGGESTED ANSWERS TO QUESTIONS SET AT THE
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION

GROUP II
NOVEMBER, 2009
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
(Set up by an Act of Parliament)
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of the answers, if any errors or omissions are noticed, the same may be brought to the attention of
the Director of Studies. The Council of the Institute is not in anyway responsible for the
correctness or otherwise of the answers published herein.
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March / 2010 / 10,000 Copies
Contents
Page Nos.
Paper 5.
Advanced Accounting ...................................................................................1 24
Paper 6.
Auditing and Assurance ..............................................................................25 38
Paper 7.
Information Technology and Strategic Management...................................39 56
Summary of Examiners comments on the performance of the candidates
PAPER 5 : ADVANCED ACCOUNTING

All questions are compulsory
Working notes should form part of the answer.
Wherever necessary, suitable assumption(s) may be made and disclosed by the candidates.
Question 1
Answer the following questions:
(i)
Goods worth Rs. 5,00,000 were destroyed due to flood in September, 2006. A claim was
lodged with insurance company. But no entry was passed in the books for insurance
claim in the financial year 2006-07.
In March, 2008, the claim was passed and the company received a payment of
Rs.3,50,000 against the claim. Explain the treatment of such receipt in final accounts for
the year ended 31st March, 2008.
(ii) Briefly indicate the items which are included in the expressions Borrowing Cost as per
AS 16.
(iii) Sterling Ltd. purchased a plant for US $ 20,000 on 31st December, 07 payable after 4
months. The company entered into a forward contract for 4 months @ Rs. 48.85 per
dollar. On 31st December, 07, the exchange rate was Rs. 47.50 per dollar.
How will you recognize the profit or loss on forward contract in the books of Sterling
Limited for the year ended 31st March, 2008.
(iv) A company created a provision of Rs. 75,000 for staff welfare while preparing the
financial statements for the year 2007-08. On 31st March, in a meeting with staff welfare
association, it was decided to increase the amount of provision for staff welfare to
Rs. 1,00,000. The accounts were approved by Board of Directors on 15th April, 2008.
Explain the treatment of such revision in financial statements for the year ended
31st March, 2008.
(v) Explain Employees stock option plan.
(vi) A company entered into an agreement to sell its immovable property to another company
for 35 lakhs. The property was shown in the Balance Sheet at Rs.7 lakhs. The agreement
to sell was concluded on 15th February, 2008 and sale deed was registered on 30th April,
2008. The financial statements for the year 2007-08 were approved by the board on
12th May,2008.
You are required to state, how this transaction would be dealt with in the financial
statements for the year ended 31st March, 2008.
INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009

(vii) A Ltd. entered into a binding contract with C Ltd. to buy a machine for Rs. 1,00,000. The
machine is to be delivered on 15th February, 2009. On 1st January, 2009, A Ltd. changed
its process of production. The new process will not require the machine ordered and it
shall have to be scrapped after delivery. The expected scrap value of the machine is nil.
Explain how A Ltd. should recognise the entire transaction in the books of account for the
year ended 31st March, 2009.
(viii) Goods are transferred from Department P to Department Q at a price 50% above cost.
If closing stock of Department Q is Rs. 27,000, compute the amount of stock reserve.
(ix) X Ltd. received a revenue grant of Rs.10 crores during 2006-07 from Government for
welfare activities to be carried on by the company for its employees. The grant
prescribed the conditions for utilization.
However during the year 2008-09, it was found that the prescribed conditions were not
fulfilled and the grant should be refunded to the Government.
State how this matter will have to be dealt with in the financial statements of X Ltd. for
the year ended 2008-09.
(x) Conversion of debt into equity is a non-cash transaction. Comment. (10 2 = 20 Marks)
Answer
(i)
As per the provisions, of AS 5 Net Profit or Loss for the Period, Prior Period Items and
Changes in Accounting Policies, prior period items are income or expenses, which arise
in the current period as a result of error or omissions in the preparation of financial
statements of one or more prior periods. Further, the nature and amount of prior period
items should be separately disclosed in the statement of profit and loss.
In the given situation, it is clearly a case of error in preparation of financial statements for
the financial year 2006-07. Hence claim received in the financial year 2007-08 is a prior
period item and should be separately disclosed in the statement of profit and loss for the
(ii) Borrowing costs are interest and other costs incurred by an enterprise in connection with
the borrowing of funds. Borrowing cost may include:
(a) Interest and commitment charges on bank borrowings and other short term and long
term borrowings.
(b) Amortisation of discounts or premiums relating to borrowings.
(c) Amortisation of ancillary costs incurred in connection with the arrangement of
borrowings.
(d) Finance charges in respect of assets required under finance leases or under other
similar arrangements; and
(e) Exchange differences arising from foreign currency borrowings to the extent that
they are regarded as an adjustment to interest costs.
2

(iii) Calculation of profit or loss to be recognised in the books of Sterling Limited
Forward contract rate
Rs.48.85
Less:
Rs.47.50
Spot rate
Loss
Rs.1.35
Forward Contract Amount
$20,000
Total loss on entering into forward contract = ($20,000 Rs.1.35)

Contract period
Rs.27,000
4 months
Loss for the period 1st January, 2008 to 31st March, 2008 i.e.
3
3 months falling in the year 2007-2008 will be Rs.27,000 =
4
Rs.20,250
Balance loss of Rs.6,750 (i.e. Rs. 27,000 Rs. 20,250) for the month of April, 2008
will be recognised in the financial year 2008-2009.
(iv) As per AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in
Accounting Policies, the change in amount of staff welfare provision amounting
Rs. 25,000 is neither a prior period item nor an extraordinary item. It is a change in
estimate, which has been occurred in the year 2007-2008.
As per the provisions of the standard, normally, all items of income and expense which
are recognised in a period are included in the determination of the net profit or loss for
the period. This includes extraordinary items and the effects of changes in accounting
estimates. However, the effect of such change in accounting estimate should be
classified using the same classification in the statement of profit and loss, as was used
previously, for the estimate.
(v) Employee Stock Option Plan is a plan in which option is given for a specified period, to
employees of a company, which gives such directors, officers or employees the right, but
not the obligation, to purchase or subscribe, the shares of the enterprise at a fixed or
determinable price.
(vi) According to para 13 of AS 4 Contingencies and Events Occurring after the Balance
Sheet Date, 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.
In the given case, sale of immovable property was carried out before the closure of the
books of accounts. This is clearly an event occurring after the balance sheet date but
agreement to sell was effected on 15th February 2009 i.e. before the balance sheet date.
Registration of the sale deed on 30th April, 2009, simply provides additional information
relating to the conditions existing at the balance sheet date. Therefore, adjustment to
assets for sale of immovable property is necessary in the financial statements for the

(vii) A Ltd. entered into a binding contract with C Ltd. and therefore, it should recognise a
liability of Rs.1,00,000. The entire amount of purchase price of the machine should be
recognised in the year ended 31st March, 2009 as loss because future economic benefit
from the machine to the enterprise is improbable.
The accounting entry should be as follows:
Rs.
Profit and Loss A/c
Dr.
Rs.
1,00,000
To C Ltd.
1,00,000
(Being value of machinery fully depreciated

because of change in the process of production
i.e. obsolescence)
(viii) Calculation of Stock Reserve
Rs.
Closing stock of Department Q
27,000
Goods sent by Department P to Department Q at a price 50% above cost

Rs.27,000 50
Hence, profit of Department P included in the stock will be
150
9,000
Amount of stock reserve will be Rs.9,000

(ix) As per para 11 of AS 12 Government Grants, a grant that became refundable should be
treated as an extra-ordinary item as per Accounting Standard 5 Net Profit or Loss for the
Period, Prior Period Items and Changes in Accounting Policies. The amount refundable
in respect of a government grant related to revenue, is applied first against any
unamortised deferred credit remaining in respect of the grant. To the extent that the
amount refundable exceeds any such deferred credit, or where no deferred credit exists,
the amount is charged immediately to profit and loss statement. Therefore, refund of
grant of Rs. 10 crores should be shown in the profit and loss account of the company as
an extra-ordinary item during the financial year 2008-09.
(x) Sometimes debenture holders are offered an option to convert their debts into equity by
issuing equity share capital. In such transactions, debentures are redeemed by issuing
fresh share capital.
Journal Entry will be as follows:
Debentures A/c
Dr.
To Equity share capital A/c

In the above entry, no cash account is opened. Therefore, one can conclude that the
conversion of debt to equity is a non-cash transaction.

Question 2
Sun Ltd. and Moon Ltd. were amalgamated on and from 1st April, 2009. A new company Star
Ltd. was formed to take over the business of the existing companies. The Balance Sheets of
Sun Ltd. and Moon Ltd. as at 31st March, 2009 are given below:
(Rs. in lakhs)
Sun
Ltd.
Liabilities
Moon
Ltd.
Share capital:
Assets
Sun
Ltd.
Moon
Ltd.
Fixed Assets:
Equity shares of Rs.100

each
400
375 Land & Building
275
200
12% Preference shares of

Rs.100 each
150
100 Plant & Machinery

Investments
175
75
125
25
Reserves and surplus:
Current Assets, Loans and

Advances:
Revaluation reserve
75
50 Stock
175
125
General reserve
85
75 Sundry Debtors
125
150
25
25 Bills Receivables
Cash and Bank balances
25
150
25
100
25
15
30
15
135
60
75
35
1,000
750
1,000
750
Investment
reserve
allowance
Profit and Loss Account

Secured loan:
10% Debentures (Rs.100
each)
Current
liabilities
provisions:
Sundry creditors
Acceptance
and
Additional information:
(a) Star Ltd. will issue 5 equity shares for each equity share of Sun Ltd. and 4 equity shares
for each equity share of Moon Ltd. The shares are to be issued @ Rs. 30 each, having a
face value of Rs. 10 per share.
(b) Preference shareholders of the two companies are issued equivalent number of 15%
preference shares of Star Ltd. at a price of Rs. 150 per share (face value Rs. 100).
(c) 10% Debentureholders of Sun Ltd. and Moon Ltd. are discharged by Star Ltd., issuing
such number of its 15% Debentures of Rs.100 each so as to maintain the same amount
of interest.
5

(d) Investment allowance reserve is to be maintained for 4 more years.
(e) Liquidation expenses are:
Sun Ltd. Rs.2,00,000
Moon Ltd. Rs.1,00,000
It was decided that these expenses would be borne by Star Ltd.
(f)
All the assets and liabilities of Sun Ltd. and Moon Ltd. are taken over at book value.
(g) Authorised equity share capital of Star Ltd. is Rs. 5,00,00,000, divided into equity shares
of Rs. 10 each. After issuing required number of shares to the Liquidators of Sun Ltd.
and Moon Ltd., Star Ltd. issued balance shares to Public. The issue was fully subscribed.
Required :
Prepare the Balance Sheet of Star Ltd. as at 1st April, 2009 after amalgamation has been
carried out on the basis of Amalgamation in the nature of purchase.
(16 Marks)
Answer
Balance Sheet of Star Ltd. as at 1st April, 2009
(Rs. in Lakhs)
Liabilities
Amount
Assets
Amount
Share capital:
Fixed assets:
Authorised share capital
Goodwill (10+2+1)
50,00,000 Equity shares of Rs.10 each
building
475
machinery
300
500 Land
and
(275+200)
Issued and subscribed
Plant
and
(175+125)
13
50,00,000 Equity shares of Rs.10 each
500 Investment (75+25)
2,50,000 Preference shares of Rs.100

each
250 Current assets, loans and

advances:
100
(Of the above shares 35,00,000 equity

shares and all preference shares are
allotted as fully paid up for consideration
other than cash)
Stock (175+125)
300
Sundry debtors (125+150)
275
Securities premium (75 + 50 + 400 + 300)
825 Cash and bank (250+150-3)
Investment allowance reserve (25+25)
50 Bills receivables (25+25)
Secured Loans:
Miscellaneous expenditure:
397
50

15% Debentures (20+10)
30 Amalgamation
account
Unsecured loans:
Nil
adjustment
50
Current liabilities and provisions:

Acceptances (75+35)
110
Sundry creditors (135+60)
195
1,960
1,960
Working Notes:
1.
Computation of Purchase Consideration
Rs. in lakhs
Sun Ltd.
Moon Ltd.
(a) Preference shareholders:

1,50,00,000/100 = 1,50,000 shares
Share capital = 1,50,000 shares Rs.100 each
150
Securities premium = 1,50,000 shares Rs.50 each 75
225
1,00,00,000/100 = 1,00,000 shares

Securities premium= 1,00,000 shares Rs.50 each
100
50
150
(b) Equity shareholders:

4,00,00,000/100 5 = 20,00,000 shares
200
Securities premium=20,00,000 shares Rs.20 each 400
600
3,75,00,000/100 4 = 15,00,000 shares

150
Securities premium = 15,00,000 shares Rs.20 each
300
Amount of purchase consideration

2.
450
825
Calculation of number of debentures issued

10% Debentures of Rs.100 each
15% Debentures to be issued to maintain same amount of
interest:
Interest = Rs.30,00,000 x 10% = Rs.3,00,000
600
Rs. in lakhs
Sun Ltd.
Moon Ltd.
30
15
Number of 15% Debentures =
Rs.3,00,000
100
15
20
Interest = Rs.15,00,000 x 10%

Number of 15% Debentures =
3.
Rs.1,50,000
100
15
10
Net assets taken over
Rs. in lakhs
Sun Ltd.
Moon Ltd.
Land and building
275
200
Plant and machinery
175
125
75
25
Stock
175
125
Sundry debtors
125
150
Bills receivable
25
25
Cash and bank
150
100
1,000
750
Assets taken over
Investments
Less:
Liabilities taken over

Debentures
20
10
Sundry Creditors
135
60
Bills payable
75
35
230
105
Net assets taken over
770
645
Purchase consideration
825
600
(Goodwill)/ Capital Reserve
(55)
45
Net goodwill
4.
(10)
Liquidation expenses of Sun Ltd. and Moon Ltd., Rs.2 lakhs and Rs.1 lakhs respectively
will be debited to Goodwill account in the books of Star Ltd.

Question 3
The Balance Sheet of Dee Limited on 31st March, 2009 was as follows:
Balance Sheet as at 31st March, 2009
Liabilities
Amount
Assets
Rs.
Rs.
Share capital:
Authorised capital
50,000, Equity
Rs.10 each
Fixed assets (at cost less

depreciation)
shares
of
Issued and subscribed capital

25,000 Equity shares of Rs.10
each fully paid up
Amount
Debenture redemption fund

investment
5,00,000
Cash balance
Other current assets
8,00,000
2,00,000
2,50,000
10,00,000
2,50,000

General reserve
2,75,000
Profit and loss A/c
1,00,000
Debenture redemption reserve
2,50,000
Secured loans:
12% Convertible debentures
(5,000 Debentures of Rs.100
each)
5,00,000
Other secured loans
2,50,000
Current
provisions
liabilities
Proposed dividend
and
6,00,000
25,000
22,50,000
At the General Meeting it was resolved to:
22,50,000
1.
Pay proposed dividend of 10% in cash.
2.
Give existing shareholders the option to purchase one share of Rs.10 each at Rs.15 for
every five shares held. This option was taken up by all the shareholders.
3.
Redeem the debentures at a premium of 5% and also confer option to the

debentureholders to convert 50% of their holding into equity shares at a predetermined
price of Rs. 15 per share and balance payment to be made in cash.
Holders of 3,000 debentures opted to get their debentures redeemed in cash only while the
rest opted for getting the same converted into equity shares as per the terms of issue.
Debenture redemption fund investment realized Rs. 1,80,000 on sales.

You are required to redraft the Balance Sheet after giving effects to the right issue and
redemption of debentures. Also show the calculations in respect of number of equity shares
issued and cash payment.
(16 Marks)
Answer
(a)
Balance Sheet of Dee Ltd.

as at 31st March, 2009
Liabilities
Authorised Capital
50,000 Equity shares of Rs.10 each
Issued and subscribed capital
37,000 Equity shares of Rs.10
each fully paid up
Amount
(Rs.)
5,00,000
Securities premium (W.N.3)

Profit and loss A/c
Fixed Assets (at cost

less depreciation)
Other current assets
Amount
(Rs.)
8,00,000
10,00,000
3,70,000
Reserves & surplus

General reserve (W.N.2)
Assets
Cash balance (W.N.4)
60,000
4,80,000
60,000
1,00,000
Secured loan
Other secured loan
2,50,000
Current liabilities and provisions
6,00,000
18,60,000
18,60,000
(b)
Calculation of number of equity shares issued:
I. Number of equity shares issued as right issue (25,000 shares 5)
5,000 shares
II. Debentureholders who opted for the scheme of conversion into equity shares
2,000 debentureholders opted for the scheme
Total value (2,000 debentures Rs.100)
Premium on redemption @ 5%
Rs.2,00,000
Rs.10,000
Rs.2,10,000
50% of their holding converted into equity shares
10
Rs.1,05,000

Number of equity shares to be issued to debentureholders
Rs.1,05,000
=
Rs.15
Total number of equity shares issued (5,000 + 7,000) shares
7,000 shares
12,000 shares
(c) Cash payment to debentureholders:

Rs.
I.
3,000 Debentureholders preferred cash

Total cash paid to them
3,00,000
Premium on redemption @ 5%
II.
15,000
3,15,000
2,000 Debentureholders opted for the scheme

Total value
2,00,000
Add: Premium on redemption @ 5%
10,000
2,10,000
50% of their value converted into equity shares
1,05,000
Balance paid to debentureholders in cash
1,05,000
Total cash paid to debentureholders

Working Notes:
1.
4,20,000
Debenture Redemption Reserve Account

Particulars
Rs.
Particulars
To Premium on redemption of
debentures (15,000 + 10,000)
25,000 By Balance b/d
To Loss on sale of Debenture

Redemption Reserve
Investment
20,000
To General Reserve
2,50,000
2,05,000
2,50,000
2.
Rs.
2,50,000
General Reserve Account

Particulars
Rs.
Particulars
Rs.
To Balance c/d 4,80,000 By Balance b/d

By Debenture
(W.N.1)
4,80,000
2,75,000
redemption
reserve
2,05,000
4,80,000
11

3.
Calculation of Securities Premium

Number of equity shares of Rs.10 issued at Rs.15 per share
12,000 shares
Security premium per share
Rs.5
Total securities premium (12,000 shares x Rs.5)

4.
Rs.60,000
Cash Account
Particulars
Amount
(Rs.)
To Balance b/d
Particulars
Amount
(Rs.)
2,50,000 By Proposed dividend
To Equity
shareholders
(5,00015)
To Sale of Debenture
Redemption Reserve
Investment
25,000
75,000 By Debentureholders
(Rs.1,05,000+Rs.3,15,000)
By Balance c/d
4,20,000
60,000
1,80,000
5,05,000
5,05,000
Question 4
DM Ltd., Delhi has a branch in London. London branch is an integral foreign operation of DM
Ltd. At the end of the year 31st March, 2009, the branch furnishes the following trial balance in
U.K. Pound:
Particulars
Fixed assets (Acquired on
1st
April, 2005)
Dr.
Cr.
24,000
Stock as on 1st April, 2008
11,200
Goods from head office
64,000
Expenses
4,800
Debtors
4,800
Creditors
3,200
Cash at bank
1,200
Head office account
22,800
Purchases
12,000
Sales
96,000
1,22,000
12
1,22,000
In head office books, the branch account stood as shown below:

London Branch A/c
Particulars
Amount
Particulars
Amount
Rs.
Rs.
To Balance b/d
20,10,000
By Bank A/c
52,16,000
To Goods sent to branch
49,26,000
By Balance c/d
17,20,000
69,36,000
69,36,000
The following further information are given:

(a) Fixed assets are to be depreciated @ 10% p.a on straight line basis.
(b) On 31st March, 2009 :
Expenses outstanding
Prepaid expenses
Closing stock
(c) Rate of Exchange:
400
200
8,000
1st April, 2005
Rs. 70 to 1
1st April, 2008
Rs. 76 to 1
31st March, 2009
Rs. 77 to 1
Average
You are required to prepare:
Rs. 75 to 1
(i)
Trial balance, incorporating adjustments of outstanding and prepaid expenses,

converting U.K. pound into Indian rupees.
(ii) Trading and profit and loss account for the year ended 31st March, 2009 and the Balance
Sheet as on that date of London branch as would appear in the books of Delhi head
office of DM Ltd.
(16 Marks)
Answer
Trial Balance of London Branch as on 31st March, 2009
(i)
Particulars
U.K.
Pound
Rate per
U.K.
Pound
Dr. (Rs.)
Fixed assets
24,000
70
16,80,000
Stock (as on 1st April, 2008)
11,200
76
8,51,200
64,000
49,26,000
13
Cr. (Rs.)

Sales
96,000
75
Purchases
12,000
75
9,00,000
Expenses (4,800 + 400 200)
5,000
75
3,75,000
Debtors
4,800
77
3,69,600
Creditors
3,200
77
2,46,400
Outstanding expenses
400
77
30,800
Prepaid expenses
200
77
15,400
1,200
77
92,400
Cash at bank
Head office account
72,00,000
17,20,000
Difference in foreign exchange

translation
12,400
92,09,600
92,09,600
Closing stock will be ( 8,000 Rs. 77) = Rs.6,16,000

(ii)
Trading and Profit & Loss Account

for the year ended 31st March, 2009
Particulars
Amount
(Rs.)
Particulars
To
Opening stock
8,51,200 By Sales
To
Purchases
9,00,000 By
To
49,26,000
To
Gross profit
11,38,800
Amount
(Rs.)
72,00,000
Closing stock
6,16,000
78,16,000
78,16,000
To
Expenses
3,75,000 By Gross profit
11,38,800
To
Depreciation
1,68,000 By Profit due to foreign exchange

difference
To
Net profit
6,08,200
11,51,200
(iii)
Liabilities
11,51,200
Balance Sheet as on 31st March, 2008

Rs.
Rs.
Assets
Head office
Balance
Add: Net profit
12,400
Fixed Assets
17,20,000
6,08,200
Less: Depreciation
23,28,200 Debtors
14
Rs.
Rs.
16,80,000
1,68,000
15,12,000
3,69,600

Outstanding
expenses
30,800 Prepaid expenses
Creditors
15,400
2,46,400 Closing stock
6,16,000
Cash at bank
92,400
26,05,400
26,05,400
Question 5
(a) From the following information, you are required to prepare Profit and Loss Account of
Zee Bank Ltd., for the year ending 31st March, 2009:
Rs.
Interest and Discount
Other Income
Income on investments
Additional information:
(a)
Rs.
44,00,000 Interest expended
13,60,000
1,25,000 Operating expenses
13,31,000
5,000 Interest on balance with RBI
25,000
Rebate on bills discounted to be provided for Rs. 15,000
(b) Classification of advances:

Rs.
Standard assets
25,00,000
Sub-standard assets
5,60,000
Doubtful assets not covered by security
2,55,000
Doubtful assets covered by security

For 1 year
25,000
For 2 years
50,000
For 3 years
1,00,000
For 4 years
75,000
Loss assets
(c) Make tax provision @ 35%
1,00,000
(d) Profit and Loss A/c (Cr.) Rs. 40,000.

(b) Dee Limited furnishes the following Balance Sheet as at 31st March, 2008:
Rs.000
Rs.000
Liabilities
Share capital:
Authorised capital
30,00
15

Issued and subscribed capital:
2,50,000 Equity shares of Rs.10 each fully paid up
25,00
2,000, 10% Preference shares of Rs.100 each

(Issued two months back for the purpose of buy back)
2,00
27,00

Capital reserve
10,00
Revenue reserve
30,00
Securities premium
22,00
Profit and loss account
35,00
Current liabilities and provisions:
97,00
14,00
1,38,00
Assets
Fixed assets
93,00
Investments
30,00
Current assets, loans and advances (including cash and bank balance)
15,00
1,38,00
The company passed a resolution to buy back 20% of its equity capital @ Rs.50 per
share. For this purpose, it sold all of its investment for Rs.22,00,000.
You are required to pass necessary journal entries and prepare the Balance Sheet.
(8 + 8 = 16 Marks)
Answer
(a)
Form B
Zee Bank Ltd.
Profit & Loss Account for the year ended 31st March, 2009
Particulars
I.
Schedule No.
Year ended
31st March,
2009
Income:
Interest Earned
13
44,30,000
Other Income
14
1,25,000
Total
45,55,000
16

II.
Expenditure
III.
Interest Expended
15
13,60,000
Operating Expense
16
13,31,000
Provisions and Contingencies (W.N.3)
10,17,050
Total
37,08,050
Profit/Loss
Net profit for the year
8,46,950
Profit brought forward
40,000
Total
IV.
8,86,950
Appropriations:
Transfer to Statutory Reserve (@ 25% on Rs.8,46,950)
2,11,737.50
Balance carried forward to Balance Sheet
6,75,212.50
Total
8,86,950
Schedule 13:
Interest Earned
Particulars
Rs.
Interest and discount
44,00,000
Income on Investment
5,000
Interest on balance with RBI
25,000
Total
44,30,000
Working Notes:
1.
Calculation of provisions on non-performing assets

Amount
Rs.
Particulars
Standard assets
% of
Provisions
Provision
Rs.
25,00,000
0.40
10,000
5,60,000
10
56,000
2,55,000
100
2,55,000
For 1 year
25,000
20
5,000
For 2 years
50,000
30
15,000
For 3 years
1,00,000
30
30,000
Sub-standard assets
Doubtful assets not covered by security

Doubtful assets covered by security
It is assumed that the all sub-standard assets are fully secured.
17

For 4 years
Loss assets
75,000
100
75,000
1,00,000
100
1,00,000
5,46,000
2.
Calculation of provision for tax

Tax = 35% of [Total income Total expenditure (excluding tax)].
Tax = 35% of [Rs.44,30,000+Rs.1,25,000(Rs.13,60,000+Rs.13,31,000+Rs.5,46,000+Rs.15,000)]
Tax = Rs.4,56,050
3.
Total amount of provisions and contingencies

= Provision for non-performing assets + Provision for tax + Rebate on bills discounted
= Rs.5,46,000 + Rs.4,56,050 + Rs.15,000
= Rs.10,17,050
(b)
In the books of Dee Limited

Journal Entries
Particulars
Dr.
Cr.
(Rs. in 000)
(i)
Bank Account
Dr. 22,00
Profit and Loss Account
Dr.
8,00
To Investment Account
30,00
(Being the investments sold at loss for the purpose of buy back)
(ii)
Equity Share Capital Account
Dr.
5,00
Premium payable on buy back Account
Dr. 20,00
To Equity shares buy back Account
25,00
(Being the amount due on buy back)

(iii)
Securities Premium Account
Dr. 20,00
To Premium payable on buy back Account

(Being the premium payable on buy back adjusted against
securities premium account)
18
20,00

(iv)
Revenue Reserve Account
Dr.
3,00
To Capital Redemption Reserve Account
3,00
(Being the amount equal to nominal value of equity shares

bought back out of free reserves transferred to capital
redemption reserve account)
(v)
Equity shares buy-back Account
Dr. 25,00
To Bank Account
25,00
(Being the payment made on buy back)

Balance Sheet of Dee Limited as on 1st April, 2008
(After buy back of shares)
Liabilities
Rs.000
Rs.000
Share capital
Authorised capital:
30,00
Issued and subscribed capital:

2,00,000 Equity shares of Rs.10 each fully paid up
2,000 10% Preference shares of Rs.100 each fully paid up
20,00
2,00
22,00

Capital reserve
10,00
Capital redemption reserve
3,00
Revenue reserve
29,00
Profit and loss A/c (35,00 8,00)
27,00
Current liabilities and provisions
69,00
14,00
10,500
Fixed Assets
93,00
Current assets loans and advances (including cash and

bank balance) (15,00+22,00- 25,00)
12,00
10,500
Alternatively, Securities Premium account may also be used for transfer to Capital
Redemption Reserve Account.
19

Question 6
(a) P, Q and R are partners sharing profits and losses in the ratio of 2 : 2 : 1. Their Balance
Sheet as on 31st March, 2009 is as follows:
Liabilities
Rs.
Capital Accounts:
Assets
Plant & Machinery
1,20,000
48,000
24,000
1,08,000
Fixtures
24,000
Stock
60,000
1,92,000 Sundry debtors
Reserve fund
60,000 Cash
Creditors
48,000
3,00,000
Rs.
48,000
60,000
3,00,000
They decided to dissolve the firm. The following are the amounts realized from the
assets:
Rs.
Plant and Machinery
1,02,000
Fixtures
18,000
Stock
84,000
Sundry debtors
44,400
Creditors allowed a discount of 5% and realization expenses amounted to Rs.1,500. A

bill for Rs.4,200 due for sales tax was received during the course of realization and this
was also paid.
You are required to prepare:
(a) Realization account
(b) Partners capital accounts
(c) Cash account.
(6 Marks)
(b) Answer the following:

(i)
Axe Limited began construction of a new plant on 1st April, 2008 and obtained a
special loan of Rs.4,00,000 to finance the construction of the plant. The rate of
interest on loan was 10%.
20

The expenditure that were made on the project of plant were as follows:
Rs.
1st
April, 2008
1st
August, 2008
5,00,000
12,00,000
1st January, 2009

2,00,000
The companys other outstanding non-specific loan was Rs.23,00,000 at an interest
rate of 12%.
The construction of the plant completed on 31st March, 2009. You are required to:
(a) Calculate the amount of interest to be capitalized as per the provisions of AS
16 Borrowing Cost.
(b) Pass a journal entry for capitalizing the cost and the borrowing cost in respect
of the plant.
(5 Marks)
(ii) Compute Basic Earnings per share from the following information:
Date
Particulars
1st April, 2008
Balance at the beginning of the year
1st August, 2008
Issue of shares for cash
600
31st March, 2009
Buy back of shares
500
Net profit for the year ended
31st
No. of shares
1,500
March, 2009 was Rs.2,75,000.
(5 Marks)
Answer
(a)
Realisation Account
Particulars
Amount
Amount
To Debtors A/c
48,000 By Creditors A/c
To Stock A/c
60,000 By Cash A/c (assets

realised):
To Fixtures A/c
24,000
To Plant and machinery

A/c
1,08,000
To Cash A/c (Creditors)
45,600
To Cash A/c(Sales Tax)
4,200
To Cash A/c (realisation

expenses)
1,500
Plant & Machinery
21
48,000
1,02,000
Fixtures
18,000
Stock
84,000
Debtors
44,400 2,48,400

To Profit on realisation
P
2,040
2,040
1,020
5,100
2,96,400
2,96,400
Partners Capital Accounts

Particulars
To Cash A/c
1,46,040
74,040
(Bal. fig.)
Particulars
74,040
37,020 By Balance
b/d
1,20,000 48,000 24,000
By Reserve
fund
24,000 24,000 12,000
By Realisation
A/c (Profit)
1,46,040
37,020
2,040
2,040
1,020
1,46,040 74,040 37,020
Cash Account
Particulars
To
Balance b/d
To
Realisation A/c (assets

realised)
Amount
(Rs.)
Particulars
Amount
(Rs.)
60,000 By Realisation A/c (Creditors)
45,600
2,48,400 By Realisation A/c (Expenses)
1,500
By Realisation A/c (Sales tax)
4,200
By Partners Capital Accounts
3,08,400
22
1,46,040
74,040
37,020
3,08,400

(b) Total expenses to be capitalised for borrowings as per AS 16 Borrowing Costs:
Rs.
Cost of Plant (5,00,000 + 12,00,000 + 2,00,000)
Add:
19,00,000
Amount of interest to be capitalised (W.N.2)
1,54,000
20,54,000
Journal Entry
Rs.
31st March, 2009
Plant A/c
Dr.
Rs.
20,54,000
To Bank A/c
20,54,000
[Being amount of cost of plant

and borrowing cost thereon
capitalised]
Working Notes:
1.
Computation of average accumulated expenses

Rs.
1st April, 2008
1st August, 2008
1st January, 2009
Rs.5,00,000
12
12
Rs.12,00,000
Rs.2,00,000
8
12
3
12
5,00,000
8,00,000
50,000
13,50,000
2.
Amount of interest capitalised

Rs.
On specific borrowing (Rs. 4,00,000 10%)
40,000
On non-specific borrowings (Rs. 13,50,000 Rs. 4,00,000) 12%
1,14,000
Amount of interest to be capitalised
1,54,000
23

(b) (ii) Computation of weighted average number of shares outstanding during the
period
Date
No. of equity
shares
Period
outstanding
Weights
(months)
Weighted average
number of shares
(1)
(2)
(3)
(4)
(5) = (2) x (4)
1st April,
2008
1,500
(Opening)
12 months
12/12
1,500
1st August,
2008
600 (Additional
issue)
8 months
8/12
400
31st March,
2009
500 (Buy back)
0 months
0/12
Total
Basic Earnings Per Share
1,900
=
Net Profit or Loss for the period attributable to Equity Shareholders

Weighted Average Number of Equity Shares outstanding during the period
Rs. 2,75,000
= Rs.144.74
1,900 shares
24
PAPER 6 : AUDITING AND ASSURANCE
Answer all questions

Question 1
State with reasons (in short) whether the following statements are true or false.
(Answer any ten):
(10 x 2 = 20 Marks)
(i)
While auditing the accounts of a company, it is obligatory that the auditor must adopt
sampling technique.
(ii) Interim dividend is not a part of dividend.

(iii) A casual vacancy caused by resignation of the auditor can be filled by the Board of
Directors.
(iv) The auditor, in the interest of the users, while explaining the nature of his reservation,
can describe the work of the expert with his name, in the audit report without obtaining
prior consent of the expert.
(v) The auditee firm has no right to compel the auditor to provide copies of the working papers.
(vi) Comptroller and Auditor General of India can be removed by the Prime Minister of India
on the recommendation of his Council of Ministers.
(vii) Provisions of Companies (Auditor's Report) order 2003 as amended upto date, apply to
clubs, chambers of commerce, research institutes etc, which have been established
under Section 25 of the Companies Act, 1956.
(viii) Mr. X, a Chartered Accountant, is an employee of M/s M & N Co., a firm of Chartered
Accountants of India. The firm is the Auditors of ABC & Co. Ltd. After auditing the
accounts of the Company the Auditor firm allowed Mr. X, their employee, to sign the audit
report; which he did.
(ix) The Auditor disagreed with the management with regard to the acceptability of the
Accounting Policies and the inadequacy of disclosures in the financial statements and
issued a .disclaimer.
(x) Analytical procedures are unable to help the Auditor in determining the nature, timing and
extent of other audit procedures at the planning stage.
(xi) A Company which has been unable to negotiate borrowings from its bankers claims that
it will be able to continue as a 'going concern'.
(xii) The overall objective of audit changes in Computer Information System (CIS)
environment.

Answer
(i)
False: It is not obligatory that the auditor must adopt sampling technique in auditing the
accounts. But he should ensure that the relevant standards on auditing has been
followed. It is in the interest of the auditor if he decides to form his opinion on the basis
of audit sample using standards and techniques which are widely followed and
recognised.
(ii) False: The definition of dividend has been amended by the Companies (Amendment)
Act, 2000 where the interim dividend has been treated as part of dividend. With an
amendment in Section 205, the interim dividend has been brought at par with dividends
declared in the normal course.
(iii) False: Casual vacancy caused by resignation of an auditor can be filled only in the
General Meeting of the company and not by the Board of Directors.
(iv) False: As per SA 620, Using the Work of an Expert, if the auditor, in the interest of the
users includes the name of the expert in his audit report, he can do so only after
obtaining the prior consent of the expert.
(v) True: Working papers are the property of the auditors. Auditee has no right to compel
the auditors firm to provide it with the copies of working papers. However, the auditors
may at their discretion make portions of or extracts from their working papers available
to the auditee.
(vi) False: The Comptroller and Auditor General of India cannot be removed by the Prime
Minister of India on the recommendation of his Council of Ministers. He can be removed
on the ground of proven misbehaviour or incapacity, when each House of Parliament
decides to do so by majority of not less than 2/3 of the members of the house present
and voting.
(vii) False: Companies (Auditors Report) Order, 2003 provides that it shall not apply to
companies which have been licensed to operate under Section 25 of the Companies Act,
1956 to promote commerce, art, science, religion, charity and which prohibit the
payment of any dividends to their members. Such companies include clubs, chambers of
commerce, research Institutes etc.
(viii) False: An employee Chartered Accountant cannot sign the auditors report on behalf of
the auditing firm. Only a partner in the firm can sign the audit report in compliance with
the provisions of Section 229.
(ix) False: The auditor is wrong in issuing a disclaimer. If the auditor disagrees with the
management in the matters relating to the acceptability of Accounting policies selected
and inadequacy of the disclosures in the financial statements, he should issue a qualified
report or express an adverse opinion.
(x) False: SA 520 Analytical Procedure states that application of analytical procedures
helps the auditor to find the aspects of the business of which he was unaware and it will
also assist him in determining the nature, timing and extent of audit procedures.
26
PAPER 6: AUDITING AND ASSURANCE

(xi) False: In the case of the company which has not been able to negotiate its borrowings
with its bankers, there will be a substantial doubt in its ability to continue as a going
concern without such financial support.
Alternative Answer True: If the company is not able to negotiate borrowings from its
bankers for reasons like delay/failure in the submission of adequate
documents/information or for other reasons other than the companys financial status
then the statement is true.
(xii) False: Overall objective of audit does not change in Computer Information System (CIS)
environment. But the use of computer changes the processing and storage, retrieval and
communication of financial information.
Question 2
Comment on the following situations:
(a) XYZ Ltd. Co. gave a donation of Rs.50,000 each to a Charitable Society running a school
and a trust set up for the service of Blind during financial year ending on 31st March, 2009.
The average net profits of the company for the last three years were 15 lakhs. (8 Marks)
(b) Mr. X, a shareholder of the company pointed out that:
(i)
The goodwill in the Balance Sheet of the company has appeared on same figure
during the past three years.
(ii) Premium received on issue of shares prior to the date of balance sheet has been
transferred to Profit and Loss account for arriving at the figure of commission
payable to the managing director.
(6 Marks)
(c) A, B & C Company Ltd. removed its first Auditor before the expiry of his term without
obtaining approval of the Central Government.
(6 Marks)
Answer
(a) Donation to Charitable Institutions
Section 293 of the Companies Act, 1956 provides that the Board of Directors of a public
listed company can contribute with the approval of the company in General Meeting to a
charitable organisation and other such organizations not directly related to the business
of the company or the welfare of its employees subject to the limit as under:
(i)
Rs.50, 000/- or
(ii) 5% of the average net profits of the last three years, whichever is greater.
Facts of the case: The company has given donation of Rs.50,000/- each to the two
charitable organisations which amounts to 1,00,000. Assuming that the charitable
organisations are not related to the business of the company, the average profits of the
last 3 years is Rs. 15 lakhs and the 5% of this works out to Rs. 75,000. Hence the
maximum of donation could be Rs.75,000 only.
27

Conclusion: By paying donations of Rs.1,00,000 which is more than Rs.75,000, the
Board has contravened the provisions of Section 293 of the Companies Act, 1956.
Hence the auditor should qualify his audit report accordingly.
(b) (i)
As per the provisions of AS 26 Intangible Assets, an intangible assets should be

carried in the books at cost loss accumulated amortization and accumulated
impairment losses. The depreciable amount of an intangible asset should be
allocated on a systematic basis over the best estimate of its useful life. There is a
reputable presumption that the useful life of an intangible asset will not exceed ten
years from the date when the asset is available for use according to Para 63 of AS
26. In the given case, the company has not amortized any value of goodwill since
past three years. The auditor should have indicated this fact in his report that no
amount of goodwill has been written off during the past three years.
(ii) Premium received on issue of shares is capital receipt and should not credited to
profit and loss account. As per the provisions of Section 349 of the Companies
Act, premium on issue of shares should not be considered in computation of net
profit for the purpose of managerial remuneration. The auditor should have
qualified the audit report and qualified the amount by which the profit stands
inflated.
(c) Removal of first auditor
As per provision of Sub-section (7) of Section 224, an auditor may be removed from his
office before the expiry of his term by the company in general meeting after obtaining
prior approval of the Central Government in that behalf, except that such approval is not
required for the removal of first auditor appointed by the directors under the proviso to
sub-section (5) of Section 224. This is a very stringent provision to ensure that any
auditor who is inconvenient to the management cannot be removed so easily. This
provision goes a long way to ensure independence of auditor.
However, the first auditor appointed by the Board of Directors can be removed by merely
passing an ordinarily resolution in General Meeting of the company without the prior
approval of the Central Government.
Therefore, the stand taken by the company in removing the services of an auditor is in order.
Question 3
Discuss the basic principles governing an audit.
(10 Marks)
Answer
3.
Basic principles governing an audit

SA 200 Basic Principals Governing an Audit, describes the basic principles which
govern the auditors professional responsibilities and which should be complied with
wherever an audit is carried. They are described below:
(i)
Integrity objectivity and independence: An auditor should be honest, sincere,

impartial and free from bias. He should be a man of high integrity and objectivity.
28

(ii) Confidentiality: The auditor should respect confidentiality of information acquired
during the course of his work and should not disclose the information without the
prior permission of the client , unless there is a legal duty to disclose.
(iii) Skill and competence: The auditor must acquire adequate training and experience.
He should be competent, skillful and keep himself abreast of the latest
developments including pronouncements of ICAI on accounting and auditing
matters.
(iv) Work performed by others: If the auditor delegates some work to others and uses
work performed by others including that of an expert, he continues to be responsible
for forming and expressing his opinion on the financial information.
(v) Documentation: The auditor should document matters which are important in
providing evidence to ensure that the audit was carried out in accordance with the
basic principles.
(vi) Planning: The auditor should plan his work to enable him to conduct the audit in an
effective, efficient and timely manner. He should acquire knowledge of clients
accounting system, the extent of reliance that could be placed on internal control
and coordinate the work to be performed.
(vii) Audit evidence: The auditor should obtain sufficient appropriate evidences through
the performance of compliance and other substantive procedures to enable him to
draw reasonable conclusions to form an opinion on the financial information.
(viii) Accounting System and Internal Control: The management is responsible for
maintaining an adequate accounting system incorporating various internal controls
appropriate to the size and nature of business. He auditor should assure himself
that the accounting system is adequate and all the information which should be
recorded has been recorded. Internal control system contributes to such
assurance.
(ix) Audit conclusions and reporting: On the basis of the audit evidence, he should
review and assess the audit conclusions. He should ascertain:
(a) As whether accounting policies have been consistently applied;
(b) whether financial information complies with regulations and statutory
requirements; and
(c) there is adequate disclosure of material matters relevant to the presentation of
financial information subject to statutory requirements.
The auditors report should contain a clear written opinion on the financial
information. A clean audit report indicates the auditors satisfaction in all respects
and when a qualified, adverse or a disclaimer of opinion is to be given or
reservation of opinion on any matter is to be made, the audit report should state the
reasons thereof.
29

Question 4
(a) Explain concept of materiality and factors which act as guiding factors to this concept.
(6 Marks)
(b) Describe a set of instructions, which an auditor has to give to his client before the start of
actual audit.
(4 Marks)
Answer
(a) Concept of materiality: SA 320 Materiality in Planning and Performing an Audit,
establishes standards on the concept of materiality and the relationship with audit risk
while conducting an audit. Hence, the auditor requires more reliable evidence in support
of material items. SA 320 defines material items as relatively important and relevant
items, i.e., items the knowledge of which would influence the decision of the user of
financial statements. Financial statements materially affect if such statement is
erroneously stated or omitted to be stated there in and economic decision of the users
taken on the basis of such information is influenced by such misstatements or omissions.
The auditor has to ensure that such items are properly and distinctly disclosed in the
financial statements.
The concept of materiality is fundamental to the process of accounting. It covers all the
stages from recording to classification and presentation. It is very important for the
auditor who has constantly to judge whether a particular item is material or not.
There is an inverse relationship between materiality and the degree of audit risk. The
higher the materiality level, the lower the audit risk and vice versa. For example, the risk
that a particular account balance or class of transactions could be misstated by an
extremely large amount might be very low but the risk that it could be misstated by an
extremely small amount might be very high.
Factors to be considered for determining materiality
(i)
Item of materiality may be determined individually or in aggregate.
(ii) The materiality depends on the regulatory or legal considerations.

(iii) Materiality is not often reckoned with respect to quantitative details above. It has
qualitative dimensions as well.
(iv) Even insignificant items in terms of quality may be material in special
circumstances.
(v) Sometimes the materiality of an item in terms of quantity is described in law itself.
For example, Schedule VI requires disclosure of items of expenditures which are in
excess of one percent or Rs.500, whichever is less.
(vi) An item whose impact is insignificant at present, but in future it may be significant,
may be material item.
30

(b) Following instructions are given by the auditor to the client before the start of
audit:
(i)
The accounts should be totalled up and trial balance and final accounts be kept
ready.
(ii) Vouchers should be serially arranged.

(iii) Schedule of debtors and creditors should be prepared.
(iv) Schedule of outstanding expenses, prepaid expenses and accrued income to be
kept ready.
(v) A list of bad and doubtful debts should be prepared.
(vi) Schedule of investments should be prepared.
(vii) Certified list of goods returned to be prepared.
(viii) Statement of permanent capital expenditure to be prepared.
(ix) Schedule of deferred revenue expenditures to be prepared.
(x) Names and addresses of managers and other officers should be kept ready.
Alternative answer
(1) It is the responsibility of the management to prepare the financial statements, to
select and consistently apply the appropriate accounting policies
(2) Management is responsible for the maintenance of adequate accounting records
and internal controls for safeguarding assets of the company
(3) Unrestricted access to whatever records, documentation and other information
required in connection with the audit.
(4) Managements responsibility for making judgements of estimates that are
reasonable and prudent so as to give a true and fair view of the state of affairs of
the entity.
(5) Managements responsibility for preparation of the financial statements as a going
concern.
Question 5
(a) What are the six important points that will attract your attention in the case of audit of a
Hotel?
(5 Marks)
(b) State the information to be disclosed in the financial statements according to the
requirements of AS 6.
(5 Marks)
Answer
(a) Audit of a hotel
Following important points will attract the attention of the auditor in the case of audit of a
Hotel:
31

(i)
Internal Controls: In view of the problems of pilfering in any hotel, the importance of
internal controls cannot be overstressed. It is the responsibility of the management
to introduce controls which will minimise the leakage as far as possible. If the
internal control in a hotel is weak then there exist serious problems for the auditor.
The hotel must prepare regularly (preferably weekly) its trading accounts for each sale
point and undertake detailed scrutiny of the resulting profit percentages to ensure that is
within the anticipated percentage. If the variation is above the permissible limit, he has
to get the explanation from the concerned persons.
(ii) Room Sales: The charge for room sales is posted to guest bills by the receptionist
and 1 night auditor. The source of these entries is the guest register and test
checks should be carried out to ensure that the correct number of guests is
charged for the current period. Difference, if any, should be investigated to ensure
that they have been properly authorised.
(iii) Stocks: The stocks in the hotels are readily portable and salable such as food and
beverages stocks. All movements and transfers of such stocks should be properly
documented to exercise control over each individual stored areas and sale points.
The auditor should carry out test checks to ensure that all such documentation is
accurately processed.
Areas where large quantities are stored should be kept locked by the manager.
Unauthorised persons should not be permitted to enter the store area.
(iv) Fixed Assets: Accounting policies for fixed aspects are likely to differ. Many hotels
account for quasi-fixed assets such as silver cutlery on stock basis. This may lead
to confusion between each stock items and similar assets. In these cases, it is
important that very detailed definitions of stock items exist and the auditor should
carry out tests to ensure that the definitions have been closely followed.
(v) Casual labour: The hotel trade operates, to a very large extent, on casual labour.
The record maintained of such wage payments is frequently found to be
inadequate. Hence the auditor should ensure that proper internal control system
exists to ensure that defalcation on this account does not take place.
(vi) Booking of hotel for special parties: The auditor should ensure that the adequate
and proper records are being maintained for booking of halls and other premises
for special parties and receipts from guests are made on the basis of the tariff.
(b) Requirements of AS 6: AS 6 requires following information to be disclosed in the
financial statements:
(i)
Historical cost or other amount substituted for historical cost of each class of
depreciating asset;
(ii) Total depreciation for the period for each class of assets.
32

(iii) The related accumulated depreciation.
It also requires following disclosure of information in the financial statements along
with the disclosure of other accounting polices:
(i)
Depreciation method used and
(ii) Depreciation rates or the useful life of the assets, if any, if they are different
from the principal rates specified in the statute governing the enterprise.
Question 6
(a) State clearly provisions of the Companies Act, 1956 with regard to issue of shares at
a discount.
(5 Marks)
(b) As an auditor, comment on the following situation:
(5 Marks)
MNR Co. Ltd. did not provide for depreciation during the financial year 2007-08 due to
inadequacy of profits. The company declared dividend during the financial year 2008-09
without providing for the previous year's depreciation.
Answer
(a) Issue of Shares at a Discount: According to Section 79 of the Companies Act, 1956, a
company can issue shares at a discount on the following conditions:
(i)
The issue should be authorised by an ordinary resolution of the company

sanctioned by the Central Government.
(ii) No such issue of shares at discount can be sanctioned by the Central Government
in case the maximum rate of discount should exceed 10% unless the Central
Government is of the opinion that a higher rate for discount is justified by the
special circumstances of the case
(iii) The issue should be made within two months of the sanction by the Central
Government and not earlier than one year after the date of commencement of
business.
(iv) The issue should be a class already issued by the company.
(v) It is the duty of the auditor to confirm that the conditions given above have been
complied with by the company at the time the allotment was made.
(b) Payment of dividend without providing for arrears of depreciation
Section 205 (1) of the Companies Act, 1956, prescribes that if a company has not made
provision for depreciation for any previous financial year, it should provide for such
depreciation before declaring / paying dividend:
(i)
Either out of the profits of that financial year or

33

(ii) Out of the profits of any other previous years.
In the present case, it would be necessary to make provisions for depreciation in respect
of 2007-08 and 2008-09 in the first instance and the balance of profit after providing
depreciation including the previous year, could be used for distribution as dividend.
Since the company has contravened the provisions of Section 205(1), the auditor should
qualify his audit report.
Question 7
(a) Comment on the following situation:
(5 x 2 = 10 Marks)
XYZ Co. Ltd. reappointed A and B as their joint auditors in the Annual General Meeting.
The AGM authorised the Board for fillup the vacancy on their own in the event of both or
either of auditors declined to accept the assignment. The Board passed a resolution to
appoint C if any of the auditors declined to accept the assignment.
B declined to accept the assignment and Board of Directors appointed C in place of B as
per its resolution.
Note: How would you vouch/verify the following. (Answer anyone) :
(b) Leasehold property.
Or
Goods sent out on Sale or Return Basis.
(c) Bank overdraft.
Answer
(a) Filling up the vacancy of an auditor
In the present case B is one of the joint auditors who was appointed in Annual General
Meeting, but declined to accept the appointment. The Board of Directors as per their
resolution, appointed C as a joint auditor in his place.
In this case, the vacancy created by B is neither caused by resignation of B nor is it a
casual vacancy because Bs appointment had not become effective. Hence, appointment
of C as joint auditor by the Board is not valid. C can only be appointed as joint
shareholders in the General Meeting.
(b) Lease Hold Property: Following are the main steps involved in verification/vouching of
lease hold property:
(i)
Inspect the lease agreement to ascertain the amount of premium, if any, for securing the
lease and terms and conditions. A lease exceeding the period of one year is not valid
unless it has been registered by an instrument. Hence this has to be ensured.
34

(ii) Ascertain that all the conditions, the failure of which may result in cancellation of
the lease have been complied with, e.g. payment of ground rent, insurance
premium, maintenance of lease and property in satisfactory state etc.
(iii) Ensure that due provisions for any claims that might arise under the dilapidation
clause on the expiry of the lease have been made. If such provision has not been
made, the auditor should draw the clients attention to it.
(iv) Ensure that the outlay and legal expenses incurred to acquire lease property have
been capitalised. The property must be written off in such a way that it completely
wipes off the asset at the end of the lease period.
(v) He should ascertain that the clause entitles the lessee to sub let any part of the
leased property and ensure its proper compliance.
OR
Goods sent out on sale or return basis
(i)
A record of goods sent out on sale or return basis should be kept in a specially ruled
day book. In this book, first memoranda entries are made.
(ii) When the goods are sold, entry is made by debiting the party and crediting the
Sales Account.
(iii) The auditor should refer the memoranda record to confirm that on receipt of
acceptance from each party, his account is debited and corresponding sales
account is credited.
(iv) For the goods in respect of which period of approval has expired are either
received back subsequently and customers accounts debited.
(v) He should ensure that for the stock of goods sent out on approval, the period of
approval, in respect of which had not expired till the close the year, are included in
closing stock.
(c) Bank Overdraft
(i)
The auditor should ensure that the facility of overdraft is authorised by the Boards
resolution / partners resolution.
(ii) Persue the agreement with the bank and see whether the overdraft is clean or
against hypothecation or pledge of companys property.
(iii) Verify the register of charges and ensure that the charge has been registered with
Registrar of Companies.
(iv) Verify the rate of interest and other terms and conditions from the agreement.
35

(v) Verify the amount of overdraft from the books of accounts and compare it with the
passbook.
(vi) If the overdraft is against hypothecation of assets like stocks, a certificate from the
bank should be obtained.
(vii) If the overdraft is against hypothecation of assets or pledge of companys property,
see that overdraft is properly shown under secured loans and nature of security
has been property disclosed.
Question 8
(a) X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing their accounts.
He sent his letter of engagement to the Board of Directors, which was accepted by the
Company. In the course of audit of the company, the auditor was unable to obtain
appropriate sufficient audit evidence regarding receivables. The client requested for a
change in the terms of engagement.
(5 x 2 = 10 Marks)
Offer your comments in this regard.
Note: Write short notes on the following. (Answer anyone):
(b) Cut-off arrangements
Or
Audit risk at the account balance level and at the class of transactions level.
(c) Powers of C & AG in connection with the performance of his duties.
Answer
(a) Change in terms of engagement
1.
An auditor who is required to change the engagement which requires lower level of
assurance before the completion of engagement should consider the
appropriateness of doing so.
2.
But when the terms of engagement are changed, both the auditor and the client
should agree on the new terms.
3.
However, the auditor should not agree to a change in terms where there is no
reasonable justification for doing so.
4.
In the instant case, the auditor was unable to obtain sufficient evidence regarding
receivables. The client requested him for a change in the terms of the agreement to
avoid qualified/adverse opinion. Hence there is no reasonable justification for
change in the terms of engagement.
5.
Thus the auditor should not agree for change in the terms of engagement letter.
36

(b) Cut-off arrangements
While doing accounting of financial transactions, it is essential that transactions of one
period should be separated from those of the ensuing period so that the working results
of each period can be correctly ascertained. This type of arrangement is known as Cutoff arrangement. It essentially forms part of the internal check of the organisation.
Accounts other than sales, purchase and stock are not generally affected by the
continuity of the business, and therefore, this arrangement is generally applied only to
the above mentioned accounts. The auditor has to satisfy himself by examination and
test checks that cut-off procedures adequately ensure that:
(i)
Goods purchased, where the property in the goods has been passed to the client,
are included in the inventories and that the liability has been provided for in case
of credit purchases.
(ii) Similarly, goods sold have been excluded from the inventories and credit has been
taken for the sales. If the value of sales is to be received, the concerned party has
been debited.
OR
Audit risk at the account balance level and at the class of transactions level
Majority of audit procedures are directed to and carried out at the account balance level
and the class of transactions level. At these levels, the auditor uses professional
judgment to evaluate numerous factors to assess inherent risk:
(i)
Financial statement of accounts likely to be susceptible to mismanagement.
(ii) The complexity of underlying transactions which might require the use of the work of
an expert.
(iii) The amount of judgment involved in determining account balances.
(iv) Susceptibility of assets to loss or misappropriation.
(v) The completion of unusual and complex transactions, particularly at or near year
end.
(c) Powers of Comptroller and Auditor General in connection with the performance of
his duties:
(i)
To inspect any an office of accounts under the control of the union or a State
Government including office responsible for creation of initial or subsidiary
accounts.
(ii) To require that any accounts, books, papers and other documents which deal with
or are otherwise relevant to the transactions under audit, be sent to specified
places.
37

(iii) To put such questions or make such observations as he may consider necessary to
the person in-charge of the office and to call for such information as he may require
for preparation of any account or report, which is his duty to prepare.
In carrying out the audit, the C&AG has the power to dispense with any part of detailed
audit of any accounts or class of transactions and to apply such limited checks in relation
to such accounts or transaction as he may determine
38
PAPER 7 : INFORMATION TECHNOLOGY AND STRATEGIC MANAGEMENT

Attempt all questions.
Question 1
(a) Describe briefly the following terms:
(i)
LSI Circuit
(ii)
USB Connectors
(iii) Touch Screen

(iv) Layer 3 or Network Layer
(v)
Data Dictionary
(5x1 = 5 Marks)
(b) Explain each of the following:

(i)
BIOS
(ii)
Transaction Log
(iii) Random Access

(iv) FAT
(v)
E-mail
(5x1 = 5 Marks)
Answers
(a) (i)
LSI Circuit : LSI or Large Scale Integrated Circuits led to the development of the
fourth generation computer. The LSI is a microchip containing thousands of small
electronic components which function as a complete system.
(ii) USB Connectors : USB stands for Universal Serial Bus. USB connectors provide
the user with higher data transfer speeds for different USB devices like keyboard,
mouse, scanner or digital camera.
(iii) Touch Screen : Touch Screens are mainly used in Information providing systems
like Railway Reservation counters, stock exchanges, hotels, restaurants etc. When
an invisible infrared beam matrix crisscrossing the screen is pressed by finger over
a function or program displayed on the screen, the infrared beam is broken at that
intersection and the system is activated. The beam emanates from holes along the
bottom and sides of the display unit.
(iv) Layer 3 or Network Layer : Network Layer corresponds to the layer 3 of the OSI
model and enables a choice of the physical route of transmission of a message
packet by
creating a virtual circuit for upper layers to make them independent of data
transmission and switching.
establishing, maintaining, and terminating connections between the nodes.
ensuring proper routing of data.

(v) Data Dictionary : Data Dictionary maintains information pertaining to structure and
usage of data and meta data. Each piece of data and various synonyms of data field
are determined in consultation with database users.
(b) (i)
BIOS : BIOS (stands for Basic Input Output System) is a small chip on the
motherboard that loads the hardware settings required to load various devices like
keyboards, monitors, or disk drives. It is a boot firmware program that controls the
computer from the time we start it up until the operating system takes over. The
BIOS also manages data flow between the computers operating system and
attached devices such as hard disk, video card, keyboard, mouse and printer.
(ii) Transaction Log : Transaction Log is a file that records database modifications that
consist of inserts, updates, deletes, commits, rollbacks, and database schema
changes. The database engine makes use of this log to apply any changes made
between the most recent checkpoint and the system failure.
(iii) Random Access : Random Access pertains to the method of file organization in a
storage device in which the access time of the storage device is not significantly
affected by the location of the data to be accessed. It means that any item of data
which is stored online can be accessed within a relatively short time (usually in part
of a second).
(iv) FAT : File Allocation table (FAT) is a log that records the location of each file and the
status of each sector. When a file is written to a disk, the operating system checks
the FAT for an open area, stores the file, and then identifies the file and its location
in the FAT.
(v) E-mail : E-mail is a method of composing, sending, storing and receiving messages
over electronic communication systems. The term e-mail applies both to the Internet
e-mail system based on the Simple Mail Transfer Protocol (SMTP) and to intranet
systems allowing users within one company to e-mail each other.
Question 2
Answer the following:
(a) Define an Image Processing. Describe the steps involved to document imaging. Also
mention any five advantages of Image Processing.
(5 Marks)
(b) What are Decision Support Systems? Describe various characteristics of a DSS.
(5 Marks)
Answers
(a) Image Processing : Image Processing captures an electronic image of data so that it
can be stored and shared. Imaging systems can capture almost anything, including
keystroked or handwritten documents (such as invoices or tax returns), flowcharts,
drawings, and photographs.
40

There are five steps to document imaging:
1.
Data Capture : The most common means of converting paper documents into
electronic images is to scan them. By using scanner, the text and pictures can be
converted into digitized electronic code.
2.
Indexing : Document images must be stored in a manner that facilitates their

retrieval. Normally they are stored in an index. Great care is needed in designing
the indexing scheme.
3.
Storage : As large amount of space is involved in storing, the images are usually
stored on an optical disk. An appropriate size optical disk should be selected.
4.
Retrieval : Keying in any information stored in an index can retrieve documents.

The index tells the system which optical disk to search and the requested
information can be quickly retrieved.
5.
Output : An exact replica of the original document is easily produced on the

computers monitor or on paper, or is transmitted electronically to another computer.
Some of the advantages of Image Processing are as follows:

(i)
Accessibility : Documents can be accessed and reviewed simultaneously by many

people, even from remote locations.
(ii) Accuracy : Accuracy is much higher because costly and error-prone manual dataentry processes are eliminated.
(iii) Capacity : Vast amounts of data can be stored in very little space, which
significantly reduces storage and office space.
(iv) Cost : When large volumes of data are stored and processed, the cost per
document is quite inexpensive. As a result, the costs to input, file, retrieve, and refile documents are reduced significantly.
(v) Security : Various levels of passwords (network, data base, files, etc.) and
clearances can be assigned to restrict document access.
(b) Decision Support System : Decision Support System (DSS) is a specific class of
computerized information system that supports business and organizational decisionmaking activities. A properly designed DSS is an interactive software-based system
intended to help decision maker to compile useful information from raw data, documents,
personal knowledge, and/or business models to identify and solve problems and make
decisions. A DSS may present information graphically and may include an expert system
or artificial intelligence. DSS have also achieved broad use in accounting and auditing
today.
The common characteristics of Decision Support Systems are as mentioned below :
(i)
DSS support management decision making These enhance decision quality.

While the system might not point to a particular decision, it is the user who
ultimately makes the final choice.
41

(ii) DSS solve relatively unstructured problems The unstructured problems with
lesser well-defined questions do not have easy solution procedures and therefore
need some managerial judgment. Such problems can be handled and addressed
with the help of appropriate DSS.
(iii) DSS are friendly computer interface A friendly computer interface is also a
characteristic of a DSS. As the managers and other decision makers using DSS are
not necessarily good programmers, such systems must be easy to use. The
communication between the user and the DSS is made easy through nonprocedural
modeling languages.
(iv) DSS should be able to respond quickly to the changing needs of the decision
makers As managers must plan for future activities, they rely heavily on
assumptions. Any DSS should address the decision making for a variety of
assumptions. A key characteristic of many systems is that these allow users to ask
what-if questions and examine the results of these questions.
Question 3
(a) Describe the various factors being considered in determining the best file organization for an
application.
(5 Marks)
(b) What is meant by Electronic Data Interchange? State some of its advantages. (5 Marks)
Answers
(a) Factors to be considered for best file organization are briefly discussed below :
(i)
File Volatility : It refers to the number of additions and deletions to the file in a
given period of time. A file that constantly keeps changing is a highly volatile file. An
Indexed-sequential file organization will not be suitable for such files, because
additions have to be placed in the overflow area and constant reorganization of the
file would have to occur. Other direct access methods would be a better choice.
Even the sequential file organization could be appropriate if there are no
interrogation requirements.
(ii) File Activity : It is the proportion of master file records that are actually used or
accessed in a given processing run. At one extreme is the real-time file where each
transaction is processed immediately and hence at a time, only one master record is
accessed. This situation obviously requires a direct access method. At the other
extreme is a file, such as a payroll master file, where almost every record is
accessed when the weekly payroll is processed. In such case, a sequentially
ordered file would be more efficient.
(iii) File Interrogation : It refers to the retrieval of information from a file. When the
retrieval of individual record needs to be fast to support a real-time operation such
as airline reservation, then some direct organization would be required. But if
requirements of data can be delayed, then all the individual requests or information
can be batched and run in a single processing run with a sequential file
organization.
42

(iv). File Size : Large files that require many individual references to records with
immediate response, must be organized for certain direct access method. However,
with small files, it may be more efficient to search sequentially or with more efficient
binary search, to find an individual record.
(b) Electronic Data Interchange (EDI) : EDI is the transmission, in a standard syntax, of
unambiguous information of business or strategic significance between computers of
independent organizations. Or simply, EDI is computer-to-computer communication using
a standard data format to exchange business information electronically between
independent organizations.
Advantages of Electronic Data Interchange (EDI) are as stated below :
(i)
Issue and receive orders faster - Since most purchasing transactions are routine,
they can be handled automatically, utilizing the staff for more demanding and less
routine tasks.
(ii) Make sales more easily - Quotes, estimates, order entry and invoicing will proceed
more smoothly and efficiently. Orders received electronically ensure that information
is available immediately, so that an organization can respond faster and be more
competitive.
(iii) Get paid sooner - Invoices received electronically can be reconciled automatically,
which means they are earmarked for fast payment. In turn, the purchase department
is in a position to negotiate for better terms including faster payments.
(iv) Minimize capital tied up in inventory - For manufacturing organization with a justin-time strategy, the right balance is crucial, but every organization stands to benefit
from reducing order lead times.
(v) Reduce letters and memos - Letters and memos do not follow rigid rules for
formatting. They can be handled by an electronic mail system.
(vi) Decrease enquiries - Customers or suppliers can make direct on-line enquiries on
product availability, or other non-sensitive information instead of consuming the
staffs precious time.
(vii) Make bulk updates of catalogues and parts listings - One can provide updates
of data files, such as catalogues to customers or part listings to franchisees.
Question 4
(a) Write the output sequence (at least first five numbers) for the given flowchart, if N = 0 is
selected as the value for N as input.
(5 Marks)
(b) If the statement N = N * N in the computation box of the flowchart is modified as N = N
* (N -1). Write the output sequence (at least first five numbers) for the flowchart with
N = 0 as the input value for N.
(5 Marks)
43
Start
Input N
N > 1000?
Yes
Stop
No
Print N
N= N+1
N= N * N
Answers
(a) The output sequence will be :
0 1 4 25 676
(b) The output sequence in this case will be :
0 0 0 0 0
Being in loop, the program will continue to write 0 endlessly.
Question 5
(a) Describe the Ring Network. Discuss its advantages and disadvantages.
(5 Marks)
(b) Describe Caching Server and Proxy Server. How are they different from each other?
(5 Marks)
44

Answer
(a) Ring Network : This is one of the structures for local area networks. In this topology, the
network cable passes from one node to another until all nodes are connected in the form
of a loop or ring. There is a direct point-to-point link between two neighboring nodes.
These links are unidirectional which ensures that transmission by a node traverses the
whole ring and comes back to the node, which made the transmission. Ring Network
topology is particularly appropriate for organizations that require a centralized database
or a centralized processing facility.
Advantages:
(i)
Ring networks offer high performance for a small number of workstations.
(ii) These can span longer distances compared to other types of networks.
(iii) Ring networks are easily extendable.
Disadvantages:
(i)
It is relatively expensive and difficult to install.
(ii) Failure of one computer on the network can affect the whole network.
(iii) It is difficult to trouble shoot a ring network. Adding or removing computers can
disrupt the network.
(b) Caching Server : A caching server is used to restrict number of ones own access to the
Internet. Basically, a caching server sits between the client computer and the server that
would normally fulfill a clients request. The caching server intercepts the request sent
and maintains a library of files that have been requested in the recent past by users on
the Internet. If the request is found in the library, the server returns the desired
information without going out to the Internet. Thus, a caching server does not restrict
information flow. Instead, it makes a copy of requested information, so that frequent
requests can be served locally, rather than from the original Internet source. It provides a
good means to reduce overall traffic to and from the Internet. It is also possible to
connect the caching servers in a hierarchy so that if the requested information is not
available locally, it can be passed to the nearby caching servers for possible availability.
Proxy server : A proxy server is designed to restrict access to information on the
Internet. A proxy server can be configured to refuse to pass the request to the intended
Internet server. Such a server operates on a list of rules given to it by a System
Administrator. Some proxy software use list of specific forbidden sites, the others
examine the content of a page pertaining to the request.
45

Difference Between the Two Servers :
Technologically, theres no substantial difference between a caching server and a proxy
server. The difference comes in the desired outcome.
A caching server could be preferred when it is decided to reduce the overall amount of traffic
exchanged between the network and the Internet. On the other hand, a proxy server could be
preferred if we wish to restrict or prohibit the flow of certain types of information on the
network.
Question 6
State with reasons which of the following statements is correct or incorrect:
(a) A business, even if it continually remains passive to the relevant changes in the
environment, would still grow and flourish.
(b) A corporate culture is always identical in all the organisations.
(c) There is both opportunity and challenge in Change.
(3 2 = 6 Marks)
Answer
(a) Incorrect: Businesses function within a whole gamut of relevant environment and have
to negotiate their way through it. A successful business has to identify appraise and
respond to various opportunities and threats in its environment. The extent to which the
business thrives depends upon the manner in which it interacts with environmental
situations or constraints. A business remaining passive to changes in its environment is
destined to gradually fade away into oblivion.
(b) Incorrect: Every company has its own organisational culture. Each has its own business
philosophy and principles, its own ways of approaching to the problems and making
decisions, its own work climate, work ethics, etc. Therefore, corporate culture need not
be identical in all organisations. However, every organisation over a period of time
inherits and percolates down its own specific work ethos and approaches.
(c) Correct: It is said that change is inevitable, especially in the context of business
environment. Changes in the business environment from time to time throw up new
issues before businesses. A right perspective of such new issues is to view them both as
challenges and opportunities - challenge because appropriate action is called for and,
opportunity because it opens up new potentials for the future plans that would lead to
prosperous business.
Question 7
(a) Discuss the relevance of Tows Matrix in strategic planning process.
(2 Marks)
(b) State the points that may be considered while writing a mission statement of a Company.
(2 Marks)
46

Answer
(a) The TOWS matrix illustrates how the external opportunities and threats facing a
particular corporation can be matched with company's internal strengths and weaknesses
to result in possible strategic alternatives to be competitive. It is a good way to use
brainstorming and to create alternative strategies that might not otherwise be considered.
It forces strategic managers to design various growth, stability or retrenchment
strategies. It can be used to generate corporate as well as business strategies.
Moreover, TOWS Matrix is very useful for generating a series of alternatives that the
decision makers of a company or business unit might not otherwise have considered.
Nevertheless, the TOWS Matrix is only one of the many ways to generate alternative
strategies.
In a way TOWS is considered to be an improvement over the SWOT. However, it is not
undermining the SWOT analysis.
(b) A companys mission statement is typically focused on its present business scopewho
we are and what we do; mission statements broadly describe an organizations present
capabilities, customer focus activities and business makeup.
The following points must be considered while writing a mission statement of a company.
(i)
To establish the special identity of the business - one that typically distinct it from
other similarly situated companies.
(ii) Needs which business tries to satisfy, customer groups it wishes to target and the
technologies and competencies it uses and the activities it performs.
(iii) Good mission statements should be unique to the organisation for which they are
developed.
(iv) The mission of a company should not be to make profit surpluses may be required
for survival and growth, but can not be mission of company.
Question 8
What are the five competitive forces in an industry as identified by Michael Porter? (10 Marks)
Answer
Five forces model of Michael Porter is a powerful and widely used tool for systematically
diagnosing the significant competitive pressures in the market and assessing their strength
and importance. The model holds that the state of competition in an industry is a composite of
competitive pressures operating in five areas of the over all market. These five forces are:
1.
Threat of new entrants: New entrants are always a powerful source of competition. The
new capacity and product range they bring in throw up new competitive pressure. And
the bigger the new entrant, the more severe the competitive effect. New entrants also
place a limit on prices and affect the profitability of existing players.
47

2.
Bargaining power of customers: This is another force that influences the competitive
condition of the industry. This force will become heavier depending on the possibilities of
the buyers forming groups or cartels. Mostly, this is a phenomenon seen in industrial
products. Quite often, users of industrial products come together formally or informally
and exert pressure on the producer. The bargaining power of the buyers influences not
only the prices that the producer can charge but also influences in many cases, costs
and investments of the producer because powerful buyers usually bargain for better
services which involve costs and investment on the part of the producer.
3.
Bargaining power of suppliers: Quite often suppliers, too, exercise considerable

bargaining power over companies. The more specialised the offering from the supplier,
greater is his clout. And, if the suppliers are also limited in number they stand a still
better chance to exhibit their bargaining power. The bargaining power of suppliers
determines the cost of raw materials and other inputs of the industry and, therefore,
industry attractiveness and profitability.
4.
Rivalry among current players: The rivalry among existing players is quite obvious.
This is what is normally understood as competition. For any player, the competitors
influence strategic decisions at different strategic levels. The impact is evident more at
functional level in the prices being changed, advertising, and pressures on costs, product
and so on.
5. Threats from substitutes: Substitute products are a latent source of competition in an

industry. In many cases they become a major constituent of competition. Substitute
products offering a price advantage and/or performance improvement to the consumer
can drastically alter the competitive character of an industry. And they can bring it about
all of a sudden. For example, coir suffered at the hands of synthetic fibre. Wherever
substantial investment in R&D is taking place, threats from substitute products can be
expected. Substitutes, too, usually limit the prices and profits in an industry.
The five forces together determine industry attractiveness/profitability. This is so because
these forces influence the causes that underlie industry attractiveness/profitability. For
example, elements such as cost and investment needed for being a player in the industry
decide industry profitability, and all such elements are governed by these forces. The
collective strength of these five competitive forces determines the scope to earn
attractive profits. The strength of the forces may vary from industry to industry.
48
POTENTIAL
NEW
ENTRANTS
Competitive pressures
coming from the threat
of entry of new rivals
Competitive
pressures stemming
from Suppliers
Bargaining Power
INDUSTRY
COMPETITORS
SUPPLIERS
stemming from buyer
Bargaining Power
BUYERS
RIVALRY AMONG
EXISTING FIRMS
coming from substitute
products
FIRMS IN OTHER
INDUSTRIES
OFFERING
SUBSTITUTE
PRODUCTS
Question 9
What is Six Sigma? How is it different from other quality programs? Explain in brief themes of
Six Sigma.
(2 + 2 + 6 = 10 Marks)
Answer
Meaning of Six Sigma
Primarily Six sigma means maintenance of the desired quality in processes and end products.
It means taking systemic and integrated efforts toward improving quality and reducing cost.
49

It is a highly disciplined process that helps in developing and delivering near-perfect products and
services. It strives to meet and improve organizational goals on quality, cost, scheduling,
manpower, new products and so on. It works continuously towards revising the current standards
and establishing higher ones. Six sigma has its base in the concept of probability and normal
distribution in statistics. Six sigma strives that 99.99966% of products manufactured are defect
free.
Six sigma efforts target three main areas:
Improving customer satisfaction
Reducing cycle time
Reducing defects
Six sigma and other quality programs

Six sigma is improvement over other quality programmes:
(i)
Six sigma is customer focused. It strives to provide better satisfaction to the customer
owning the product.
(ii) Six sigma is a total management commitment and philosophy of excellence, process
improvement and the rule of measurement.
(iii) Six sigma induces changes in management operations - new approaches to thinking,
planning and executing to achieve results.
(iv) Six sigma combines both leadership and grassroots energy and involvement for its
success.
Six themes of six sigma
The critical elements of six sigma can be put into six themes as follows:
Theme one genuine focus on the customer: Companies launching six sigma often to find
that how little they really understand about their customers. In six sigma, customer focus
becomes the top priority. For example, the measures of six sigma performance begin with the
customer. Six sigma improvements are defined by their impact on customer satisfaction and
value.
Theme two data and fact-driven management: Six sigma takes the concept 'of
"management by fact" to a new, more powerful level. Despite the attention paid in recent
years to improved information systems, knowledge management, and so on, many business
decisions are still being based on opinions, assumptions and gut feeling. Six sigma discipline
begins by clarifying what measures are key to gauging business performance and then
gathers data and analyzes key variables. Problems are effectively defined, analyzed, and
resolved. Six sigma also helps managers to answer two essential questions to support datadriven decisions and solutions.
50
What data/information is really required?
How to use the data/information for maximum benefit?
Theme three processes are where the action is Designing products and services,
measuring performance, improving efficiency and customer satisfaction and so on. Six sigma
positions the process as the key vehicle of success. One of the most remarkable
breakthroughs in Six Sigma efforts to date has been convincing leaders and managers.
Process may relate to build competitive advantage in delivering value to customers.
Theme four proactive management: In simple terms, being proactive means acting in
advance of events rather than reacting to them. In the real world, though, proactive
management means making habits out of what are, too often, neglected business practices:
defining ambitious goals and reviewing them frequently, setting clear priorities, focusing on
problem prevention rather than fire-fighting, and questioning why we do things instead of
blindly defending them.
Far from being boring or overly analytical, being truly proactive is a starting point for
creativity and effective change. Six sigma, encompasses tools and practices that replace
reactive habits with a dynamic, responsive, proactive style of management.
Theme five boundaryless collaboration: "Boundarylessness" is one of Jack Welch's

mantras for business success. Years before launching six sigma, GE's chairman was working
to break barriers and to improve teamwork up, down, and across organizational lines. The
opportunities available through improved collaboration within companies and with vendors
and customers are huge. Billions of dollars are lost every day because of disconnects and
outright competition between groups that should be working for a common cause: providing
value to customers.
Theme six drive for perfection; tolerate failure: Organizations need to make efforts to
achieve perfection and yet at the same time tolerate failure. In essence, though, the two ideas
are complementary. No company will get even close to six sigma without launching new ideas
and approaches-which always involve some risk. Six sigma cannot be implemented by
individuals who are overly cautious and are scared of making mistakes.
Question 10
Read the following case and answer the questions given at the end :
The ripple efforts of the 2008 Global Economic meltdown had begun to hurt the Rupees 1,268
crore J. K. Paper Ltd. also. Like all other business houses in India, J. K. Paper Ltd. was also
finding the going though. The general trend of soaring prices and contraction in demand had
started affecting the sale of J. K. Paper Ltd. products also. Its customers were focusing on
correcting their inventory positions (using existing stocks of materials to keep production lines
and marketing activities rolling). Consequently, they were not buying much from J. K. Paper
Ltd. Even the investors did not like what they saw J. K. Paper Ltd. stock fell from Rs.57.20
51

on 1 January, 2008 to a low of Rs.14.12 on 12 March, 2009. The company was in the midst of
Economic crisis. Mr. Harshpati Singhania, Managing Director of the Company, realised that
some strong measures must be taken to extricate the Company from its present crisis. To this
end, Mr. Singhania held several brainstorming sessions with the top management team and
finally identified the focus areas : Managing working capital flows, cutting costs and paying
attention to employee productivity.
Moving away from the traditional approach one usually follows during the recessionary
periods, Mr. Singhania instead of shutting down companys plants and cutting production,
decided to continue to operate the Companys two plants at Gujarat and Orrisa at 100%
capacity. To match sales with production, he planned to reach out to newer customers by
widening Companys distribution network. He identified packaging boards to be marketed in
rural areas where the meltdown had minimal effect. As the market conditions were still difficult,
the company also decided to cut the prices by 2 to 3 per cent. Alongwith the price cut, its
marketing thrust in rural areas ensured that the sales were not impacted much. Net sales
remained flat throughout 2008-09, though the profitability of the Company suffered because of
the lower margins it received from its rural thrust.
For raising capital, the Company did not approach banks and investors, rather it intensified it
efforts to recover its debits from its clients. The efforts resulted in fast recovery of crores of
rupees. Disputed debts were also settled expeditiously to raise more cash.
To cut costs further, the Company took steps to improve productivity and reduce its wage bill.
Inefficient employees were asked to leave. No new appointments were made unless they were
critically important. In addition, employees received lower increments for 2008-09; even Mr.
Singhania did not take any increment.
When the global slowdown sent the international prices of the pulp, the main raw material for
the paper industry, crashing from Rs.36,960 per tonne in April, 2008 to Rs.18,240 per tonne in
September, 2008 the company bought enough pulp to last for about 9 months as against its
policy of buying, in the normal course, pulp for about 2-3 months. According to Mr. Singhania,
this decision also resulted in a huge saving.
Mr. Singhania and his senior management team also re-evaluated the organisational structure
to improve efficiency in the organisation.
When all the above strategic decisions had been successfully implemented, Mr. Singhania
knew that the worst for the company was over. This was also reflected in gradual increase in
the quarterly profits of the company, Mr. Singhania however sounded very modest about his
stewardship of the Company while appreciating his Senior management team for the great job
done to ride out the slowdown.
52

Question
(a) Where did the recession hit J. K. Paper Ltd.?
(2 Marks)
(b) Explain with reasoning the corporate strategy the Company had adopted for its survival.
(2 Marks)
(c) What functional strategies were undertaken by the Company to overcome its crisis?
(6 Marks)
(d) State the basic responsibilities of a strategic leader in a business house. Explain whether
or not Mr. Singhania provided strategic leadership to the Company.
(2 + 2 = 4 Marks)
(e) What lessons are learnt from the experience of J. K. Paper Ltd. to ride out the economic
meltdown?
(6 Marks)
Answer
(a) The economic recession of 2008 hit J. K. Paper Ltd. primarily in three areas: (i)
contraction in demand for its products due to general trend of soaring prices all over, (ii)
financial crunch, and (iii) fall in its share prices.
The customers of the company were not buying much and they started focusing on
correcting their inventory. This led to decrease in demand and reduction in funds for their
working capital needs.
(b) The company had followed the stability strategy to tide out the economic crisis. It decided
to maintain its production at pre-melt down period. It reflected in the decision of the top
management to operate its two plants in Gujarat and Orissa at 100% capacity. It also
decided to widen its distribution network to counter the challenge of contraction in
demand. It identified rural sector to market aggressively its packing boards. The company
had rightly decided against divestment or liquidation strategies as it knew that the
meltdown was only a passing phase, so the need of the hour was to' stay afloat and then
to wait for the appropriate time to plan for expansion, if needed.
(c) The top management team of the company under the leadership of Mr. Harshpati
Singhania, Managing Director of the company decided to adopt various functional
'strategies to ride out the slowdown. After several rounds of brainstorming sessions with
the top management Mr. Singhania identified the focus areas and took initiatives on the
following functional strategies:
Production Strategy: In the face of contracting demand, Mr. Singhania took a bold
decision to play a contrarian card. Instead of shutting down plants and cutting production
he decided to operate the company's two plants in Gujarat and Orissa at 100% capacity.
Moreover, he also took another unusual decision to buy pulp - the main raw material for
the paper industry, when its prices crashed substantially, in huge quantity to build up its
53

massive stock pile to last for about 9 months as against the usual practice of buying pulp
stock for about 3 months in the normal course. This resulted in a huge saving for the
company.
Marketing strategy: To maintain the production and subsequent sales, the company
decided to identify new customers and widen its distribution networks to reach out to new
customers. The thrust was laid to push the sales of its packaging boards material to
consumers in the rural areas where the effects of meltdown were minimum. Prices were
reduced by 2-3% to give thrust to sales.
Financial strategy: For managing working capital, the company again took an unusual
step of not approaching banks and investors. Instead the company decided a unique
strategy to intensify its efforts to collect its debits from the clients. The company
succeeded in collecting crores of rupees in a very short period through debt recoveries. It
even decided to settle its disputed debts outside the court very expeditiously. This also
fetched a good amount of cash to the company. The company also took decisions that
led to cost reduction. It reduced its work force and reduces to expenditure on account of
wages. It also made bulk purchase of pulp, main raw material to reduce the costs and
improve
Human Resources Management Strategy: The company took steps to improve
employees productivity and reduction in wage bill. The top management also gave to all
its employees lower increments. Even Mr. Singhania did not accept any increment for
himself. Non performing employees were asked to leave the company. New recruitment
of employees was stopped unless it was critically important.
Review of Organization Structure: For the successful implementation of company's
strategies to ride out the slow down, the organisational structure of the company was reevaluated and reviewed. It was directed towards improving efficiency within the
organisation.
(d) In the company a strategic leadership is provided by its managing director who
discharges his responsibility through the following well thought out strategies
(i)
To manage the employees of all classes for effective and efficient working
(ii) Sustaining high performance over a time

(iii) Willingness to take candid, bold and, at times, unusual and contrarian decisions
(iv) Taking such decision making responsibilities which can not be delegated
(v) Effective feedback through face to face communication
When J. K. Paper Ltd. was in the midst of financial crises due to economic
meltdown its Managing Director realized that it was the time to bury down the
hatchets and prepare for a long haul. Like a truly effective leader, he took some
54

contrarian decisions to put company back on its track. Some of the important
decisions were:
to operate the company's plants in Gujarat and Orissa at their 100% capacity so
that production remains at pre-melt down period levels.
to match sales with production and to overcome the effects of recession on the
company's sales it was decided to widen the distribution network to reach out to
new customers.
he also refrained from easy decision to approach banks and investors for funds
to manage working capital requirements. Instead, he initiated steps for speedy
recovery of debts from its clients including recovery of disputed debts through
negotiated settlements. All this resulted in collecting crores of rupees in a short
period.
he also set an example before employees by refusing to accept any increment

in his own salary. Employees also accepted lower increments for 2008-09.
decision to buy pulp in bulk when its prices crashed so that the stock of pulp
lasts for a much longer period resulting in huge savings in costs.
thus Mr. Singhania provided an effective strategic leadership by taking some

bold, convergent and contrarian decisions which had helped the company to
come out of its crisis.
(e) There are lessons to be learnt from any crisis. The lessons learned from the J. K.
Papers can be summarized as follows:
Do not Panic: There is no need to panic even if the company is facing difficult
times such as contraction in demand or is facing liquidity crunch. On the
contrary, one should look towards the strong points of the organization to
convert threats into opportunities.
Consult others: During recession when the company is facing crisis, Managing
Director of J.K. Paper Ltd. held several brainstorming sessions. The issues
were discussed with the team to identify ways and means to overcome the
situation. Through the process, the company identified focus areas such as
managing working capital flows, cost cutting and improving employees
productivity.
Go to micro level: While analyzing different aspects of the crisis, consider all
relevant aspects of the business. Novel ideas may emerge in the process.
Identify major areas of improvement and then break them into micro plans and
decisions.
55
Take bold decisions: When the situation is not as desired the company should
take bold decisions for its sustainability. Identifying new markets or asking
unproductive employees to leave are some of the bold decisions taken by J.K.
Ltd.
Leaders should set an example: The virtues reflected in the behaviour of the
leaders are often imbibed by the followers. Hard work, dedication and
commitment also trickle down in the organisational hierarchy. Individuals in an
organisation can also accept decisions better if they are uniformly applicable. In
the given case, employees can accept the low increments better as the leader
has also decided to forgo increments.
56
SUMMARY OF EXAMINERS COMMENTS ON THE PERFORMANCE OF CANDIDATES

General Comments
The performance of the candidates was not satisfactory. Questions based on practical
application of Accounting Standards have not been answered well. It is also observed that the
candidates neglect the theoretical aspects of the subject; they should go through the study
material carefully. Adequate practice of solving practical problems is essential to acquire
command over the fundamentals of the subject. The candidates must present their answers in
organized manner and solutions to practical problems should be given in prescribed formats
along with suitable working notes. Answer to the same question were scattered at many
places in answer sheets of the candidates. It is advised that all parts of a particular question
should be attempted at one place. It is suggested that the question paper should be gone
through carefully before writing the answers.
Specific Comments
Question 1 Satisfactory performance was observed in the question except for parts (i),(ii),
(iii), (iv), (vi), (ix). Majority of the candidates did not substantiate their answers with the
relevant provisions of the accounting standards.
Question 2 Few candidates erred in computation of purchase consideration and goodwill and
consequently, were not able to give the correct balance sheet of the amalgamated company.
Question 3 Majority of the candidates failed to compute the correct amounts of general
reserve, securities premium and cash balance of Dee Ltd. as at 31st march, 09 after giving
effect to right issue and redemption of debentures. They could not calculate the number of
shares issued and cash paid and therefore, the correct balance sheet was not prepared.
Question 4 Many candidates did not understand conversion process of UK pound into Indian
rupees for trial balance of a foreign branch. Some candidates also converted H.O. balance
and goods from H.O. at the year end exchange rates instead of considering their balances
from H.O. books. Because of these errors, they could not prepare trading and profit and loss
account and balance sheet of branch in H.O. books.
Question 5.(a) Most of the candidates were not aware of the format of profit and loss account
prescribed for banking companies. They did not classify incomes and expenses under
schedules 13, 14, 15 and 16. Few among them erred in computation of provision for nonperforming assets, tax provision and transfer to statutory reserve.
(b) Majority of candidates failed to give the required journal entries related to premium on
buyback and creation of capital redemption reserve. Consequently, they could not prepare the
balance sheet of Dee Ltd. as on 1st April, 08 after buy back of shares.

Question6.(a) Few candidates erred in calculation of profit on realization and the final
settlement amount paid to the partners.
(b) The answers of the candidates exhibited lack of knowledge of the provisions of AS 16
Borrowing costs and AS 20 Earnings per Share. In sub-part (i), only few candidates
computed the correct amount of interest amount capitalized. For sub-part (ii), most of the
candidates were confused regarding treatment of buy back of shares. They were not able to
compute the weighted average number of shares and thus failed to arrive at the correct
amount of basis earnings per share.
PAPER 6 : AUDITING AND ASSURANCE
General Comments
Many of the candidates failed to understand the question carefully and so, the answers were
not in tune with the questions. Answers to the practical problems in many cases were neither
concise nor logical. Many of the candidates lack a command of English language and
presentation skill. Handwriting of many of the students appeared illegible. Many of the
candidates who answered all the questions within the main answer book have secured better
marks than those who used many additional sheets. Some candidates tend to indulge in
selective studies instead of paying attention to on the entire syllabus; hence, the students
answered some questions extremely well but were left perplexed by other questions , forcing
them into guess work instead of answering to the point.
Specific Comments
Question 1. Most of the students have done this part of the question well.
Question 2.(a) Many students have not answered this question correctly and their answers
were in general.
(b)(i) Many students have been confused over this part of the question and have answered
wrongly referring to AS 10 instead of AS 26.
(ii) Many students answers were correct. However a few students have given vague
answers.
(c) Most of the candidates have performed this part of the question well.
Question 3. Many students have answered well this part of the question, while a few
students have given just the main points and did not elaborate their answers. A few
students were confused, wrongly referring to AS 1.
Question 4(a) Poor performance of the students could be witnessed in this part of the
question.
(b) Majority of the students answers were irrelevant.
58
SUMMARY OF EXAMINERS COMMENTS

Question 4.(a) Many students have discussed income, expenses, assets and liabilities
instead of discussing the audit procedure to be followed while auditing Hotel accounts.
(b) Majority of the students were confused and discussed the method of calculating
depreciation instead of mentioning the disclosure procedure as given in AS 6.
Question 5.(a) The performance of the students was found satisfactory.
(b) Many students have answered well. However, a few students failed to give relevant
provisions and explanations.
Question 7.(a) Many students did not understand the filling up of vacancy in case of joint
auditor, hence their answers were wrong.
(b) Only a few students have answered this part of the question correctly., while majority of
the students have given wrong answers.
(b) Alternative: Many students answers were general while some students wrongly referred
to the method of vouching regular sales.
(c) Majority of the students have performed this question well. A few students have
discussed the routine bank vouching and no specific details relating to overdraft were given.
Question 8.(a) Poor performance of the students could be witnessed in this part of the
question.
(b) Performance of the students was found
understand the cut off arrangement.
satisfactory.
A few students did not
(b) Alternative: Many students have attempted this question. However a few students
answers were found irrelevant.
(c) Most of the students have wrongly gone on discussing appointment, remuneration and
removal instead of duties and powers of C&AG.
SECTION A : INFORMATION TECHNOLOGY
General Comments
The examinees of IPCC are lacking in conceptual understanding was comparatively low and
there is a scope for further improvement of the subject hence, most of the candidates
attempted the paper without adequate preparation. Examinees have to improve the subject
knowledge as well as language skills for better performance. Examinees are advised to study
the prescribed study material in depth. For giving appropriate answer, understanding of the
technical terms with relation to information technology is required.
59

Specific Comments
Question 1.(a) Almost all the examinees answered this question but not given satisfactory
explanation, especially to touch screen, Layer 3 (Network Layer), Data Dictionary. Data
Dictionary was referred as Literary Dictionary and USB (Universal Serial Bus) was
misinterpreted as UPS (Uninterrupted Power Supply).
(b) Most of the examinees answered this question but not up to the expected level.
Specially, in case of transaction log, the explanation was not satisfactory. Random Access
was misinterpreted as RAM (Read Only Memory).
Question 2.(a) The performance of the examinee was not satisfactory. Examinees neglected
the study materials and gave general answer. In some cases, image processing was
misinterpreted as photo printing.
(b) Performance was satisfactory, except that, many of the examinees explained
components of DSS instead of characteristics of DSS.
Question 3.(a) Performance of the examinees was found to be moderate. In most of the
cases the factors to be considered for best file organization were not either listed or explained
properly by the examinees.
(b) Some of the candidates failed to properly explain the meaning of Electronic Data
Interchange.
Question 4.(a) Lack of conceptual clarity and proper presentation was noticed while writing
the output sequence of the given flowchart.
(b) Most of the examinees answered this question, but examinees made mistakes in
calculations within the loop.
Question 5.(a) Majority of the examinees answered this question on ring network quite fairly.
(b) Most of the examinees misunderstood the concept of Caching Server and Proxy Server
and have given vague answers.
SECTION B : STRATEGIC MANAGEMENT
General Comments
In few cases, it was brought to notice that the examinees have not provided proper
question numbers.
Some candidates gave vague answers. It is advisable to be specific and not write
irrelevant answers.
Handwriting of many examinees was illegible.
Analytical and planned presentation was missing in most cases.
60
SUMMARY OF EXAMINERS COMMENTS

Special Comments
Question 6. Although majority of the candidates were able to provide answers in terms of
correctness or incorrectness of the statements, they were not able to substantiate their
answers with adequate and valid reasoning. Problems were more in part (b) related to
corporate culture and part (c) related to opportunity and challenge in change.
Question 7. The answer of the examinees reflected that most of them were not aware about
the relevance of TOWS matrix in strategic planning process. Part (b) was not well attempted
by the examinees which was related to the framing of the mission statement of a company.
Question 8. Majority of the candidates attempted this question but only few of them were
able to explain Porters five forces correctly. The overall performance of the examinees in this
question was average.
Question 9. This question was divided into three parts. Most of the examinees were able to
explain six sigma but for part (b) which was related to differentiate six sigma with other quality
programs and part (c) which was related to six sigma themes were either not attempted by the
candidates or they gave vague answer for them.
Question 10. Being a case study, the answers varied. There were five Questions asked to
the candidates in the case study. The conceptual part was alright but application part was
found wanting. The candidates secured good marks in conceptual part of each question but
they could not obtain good marks in application part. There was a general leave of articulation
on the part of students hence students could obtain average marks. However, some students
attempted this question extremely well and obtained as high as 17-18 marks.
61
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65
Rs.
English Hindi
Rs.
V
Rs.
Postal Charges
by Regd. Parcel
English
Hindi
Rs.
Rs.
REVISION TEST PAPERS (May, 2010 )

Professional Education (Course II) (Group I & II)
80
55
Professional Competence Course(Group I & II)

Final (Old) Course (Group I & II)
80
80
55
55
Integrated Professional Competence Course (Group I & II)
80
55
Accounting Technician Course (ATC)
40
40
Final (New) Course (Group I & II)
80
55
Each Revision Test Papers is priced Rs.40 per volume plus Postal charges for Registered parcel Rs.40.
VI
PROSPECTUS
1.
2.
3.
Common Proficiency Test A Simplified Entry to

the Chartered Accountancy Course
Integrated Professional Competence Course with ICR Forms
Accounting Technician Level with ICR Forms
VII
PROFESSIONAL DEVELOPMENT BOOKLET
1.
100
100
100
40
40
40
Student Guide to Accounting Standard 28:

Impairment of Assets
25
40
2.
Risk Based Audit and Guide to Internal Audit
30
40
VIII
MISCELLANEOUS
1.
2.
Model Test paper Vol. I for CPT (in English/Hindi)

Model Test paper Vol. II for CPT (in English/Hindi)
3.
Model Test Paper Vol. I for PCC
50
36
4.
Supplementary Study Paper-2009

Income tax & Central Sales Tax for PE(Course-II)
30
40
5.
Supplementary Study Paper -2009

Taxation for PCC
30
40
6.
Supplementary Study Paper -2009

Direct taxes and Indirect taxes for Final Course
Direct tax laws and Indirect tax laws for Final (new) Course
60
40
7.
Select cases Direct and Indirect Taxes 2009

For Final Course
40
40
8.
Training Guide
80
40
250
250
(each version)
(each version)
68
68
Those who wish to get the publications of the Board of Studies including CDs by post may send a Demand Draft/
Pay Order in favour of The Secretary, Institute of Chartered Accountants of India, payable at New Delhi towards
the price of publications and postage. The letter may be addressed to the Assistant Secretary, Noida Stores,
ICAI, ICAI BHAWAN, A-94/4, Sector 58 NOIDA 201301.
66
Students may also contact/write to the Decentralised Offices of the Institute for obtaining
Boards' publications including CDs.
(i)
Western India Regional Council of

The Institute of Chartered Accountants of India,
ICAI BHAWAN, Anveshak, 27, Cuffee Parade, Colaba,
Post Box No. 6081,
Mumbai-400 005.
E-Mail: wro@icai.org
022-39893989, Fax :022-39802953
(ii)
Southern India Regional Council of

ICAI BHAWAN, 122, M.G. Road, Nungambakkam,
Post Box No. 3314, Chennai-600 034.
E-Mail: sro@icai.org
044-39893989, Fax : 044-30210355.
(iii)
Eastern India Regional Council of

ICAI BHAWAN, 7, Anandilal Poddar Sarani,
(Russell Street), Kolkata-700 071.
E-Mail: ero@icai.org
033-39893989, Fax : 033-30211145
(iv)
Northern India Regional Council of

ICAI BHAWAN, 52-54, Vishwas Nagar
Delhi 110 032.
E-Mail: nro@icai.org
011-39893990, Fax : 011-30210680.
(v)
Central India Regional Council of

ICAI BHAWAN, 16/77B, Civil Lines,
Post Box No.314,
Kanpur-208 001.
E-Mail: cro@icai.org
0512- 3989398, Fax : 0512-3011173, 3011174
67

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2

Integrated Professional Competence Examination Group II

SUGGESTED ANSWERS TO QUESTIONS SET AT THE

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION

THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA

The Publication Department on behalf of The Institute of Chartered

Sahitya Bhawan Publications, Hospital Road, Agra 282 003

Advanced Accounting ...................................................................................1 24

Auditing and Assurance ..............................................................................25 38

Information Technology and Strategic Management...................................39 56

Summary of Examiners comments on the performance of the candidates

PAPER 5 : ADVANCED ACCOUNTING

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009

PAPER 5 : ADVANCED ACCOUNTING

Forward Contract Amount

Total loss on entering into forward contract = ($20,000 Rs.1.35)

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009

(Being value of machinery fully depreciated

Goods sent by Department P to Department Q at a price 50% above cost

Amount of stock reserve will be Rs.9,000

To Equity share capital A/c

PAPER 5 : ADVANCED ACCOUNTING

Equity shares of Rs.100

375 Land & Building

12% Preference shares of

100 Plant & Machinery

Reserves and surplus:

Current Assets, Loans and

Profit and Loss Account

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009

Authorised share capital

50,00,000 Equity shares of Rs.10 each

Issued and subscribed

50,00,000 Equity shares of Rs.10 each

500 Investment (75+25)

2,50,000 Preference shares of Rs.100

250 Current assets, loans and

(Of the above shares 35,00,000 equity

Reserves and surplus:

Sundry debtors (125+150)

Securities premium (75 + 50 + 400 + 300)

825 Cash and bank (250+150-3)

Investment allowance reserve (25+25)

50 Bills receivables (25+25)

PAPER 5 : ADVANCED ACCOUNTING

Current liabilities and provisions:

Sundry creditors (135+60)

Computation of Purchase Consideration

(a) Preference shareholders:

Securities premium = 1,50,000 shares Rs.50 each 75

1,00,00,000/100 = 1,00,000 shares

(b) Equity shareholders:

Securities premium=20,00,000 shares Rs.20 each 400

3,75,00,000/100 4 = 15,00,000 shares

Securities premium = 15,00,000 shares Rs.20 each

Amount of purchase consideration

Calculation of number of debentures issued

INTEGRATED PROFESSIONAL COMPETENCE EXAMINATION: NOVEMBER, 2009

Number of 15% Debentures =

Interest = Rs.15,00,000 x 10%

Net assets taken over

Land and building

Plant and machinery

Cash and bank