Answers S10FTP5A

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Answers To S10FTP5A
Answer to Question 1.
(a)
(b)
Objectives of Corporate Financial Reporting:
1. Financial reporting should provide information that is useful to investors and creditors and other users in making rational
investment, credit and similar decisions.
2. Financial reporting should provide information about the economic resources of an enterprise the claims to those
resources.
3. Financial reporting should provide information about the enterprise's financial performance during a period.
4. Financial reporting should provide information about how management of an enterprise obtains and spends cash, its
borrowing and repayment of borrowing, capital transactions.
5. Financial reporting should provide information that is useful to management and directors in making decisions
in the interest of owners.
(c) The meaning of the term 'Corporate Restructuring' is quite wide and varied. Depending upon the requirements of a
company, it is possible to restructure, its business, financial and organizational transactions in different forms.
Restructuring is a method of changing the organizational structure in order to achieve the strategic goals of the
organization or to sharpen the focus on achieving them. The essentials of Corporate Restructuring are efficient and
competitive business operations by increasing the market share, brand power and synergies.
Why corporate structuring exercise is carried but ?
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The various needs for undertaking a Corporate Restructuring exercise are as follows:
(i) to focus on core strengths, operational synergy and efficient allocation of managerial, capabilities and
infrastructure.
(ii) consolidation and economies of scale by expansion and diversion to exploit extended domestic and global
markets.
(iii) revival and rehabilitation of a sick unit by adjusting losses of the sick unit with profits of a healthy
company.
(iv) acquiring constant supply of raw materials and access to scientific research and technological deVelopments..
(v) capital restructuring by appropriate mix of loan and equity funds to reduce the cost of servicing and
improve return on capital employed.
(vi) Improve corporate performance to bring it at par with competitors by adopting the radical changes brought out
by information technology.
(d) As-9- RevenueRecognition:

This standard deals with the baSis for recognition of revenue in the statement of profit and loss of an. enterprise:
It lays down the conditions to recognise; revenue by sale of goods, rendering of services, resources yielding
interest, royalties and dividends. Revenue should be recognised for sale of goods or Services only when the
collection is reasonably assured and (i) the property in goods is transferred from seller to buyer (ii) there is no
uncertainty regarding the amount of consideration that Will be realised from sale of goods. In the case of
services rendered either completed service contract method or proportionate service, contract method may be
adopted foil revenue recognition. In the case of revenue by way of interest, the credit is taken on a time proportiOn
basis taking into account the amount outstanding and the rate applicable. In the case of royalties, revenue is
recognised on approval basis in accordance with the terms of the relevant agreement. The revenue is recognised for
dividend once the right to receive dividend is established.
(e) Buy-BackofSharesSection 68(1)ofCompaniesAct,2013:

Section 68(1) of the Companies Act, 2013 state that not withstanding any thing containing in this Act, a
company can buy-back its own shares or other specified securities from -
(i) its free reserves,
(ii) its securities premium A/c;
(iii) proceeds of any shares or other specified securities.
ConditionsforBuy-BackofShares68(2):
Under section 68(2) of the Companies Act, 2013 the following conditions must be satisfied in order to buy -
back of shares are:-
1. The buy-back is authorized by its articles.
2. The buy-back does not exceed twenty-five percent of the total paid-up capital and free reserves of the
company.
3. The ratio of the debt owned bythe company is not more than twice the capital and its free reserves after such buy-back.
4. All the shares or Other specified securities for buy-back are fullypaid-up.
5. The buy-back of the, shares or other specified securities listed on any recognised stock exchange should be in accordance
with theregulations made, by the SEBI.
6. Every buy-back must be completed within 12 months from the date of passing of special resolution or a resolution passed
by the Board.
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(a) Now a days there is a growing trend for outsourcing of the accounting functions to a third Party. The Purpose for doing this
outsourcing accounting function is to save cost 'and to utilize the expertise of the party to whom the outsourcing has been
given. The third party maintains the accounting software and the client data does the processingandhands over the report
from time totime the concerned Party.
(i) Advantages of outsourcing the accounting functions
(i) The organisation is able to utilize the expertise of the outside Party in undertaking the accounting work. ,
(ii) Storage and maintenance pf the data in the hands of professional people who are undertaking the outsourcing work.
(ii)Disadvantagesofoutsourcingtheaccountingfunction:-
(i) The data of the organization is handed over to a third Party and this may raise the issues of security and
confidentiality.
(ii) The cost may ultimatelybe higher than initially envisaged and third party may delay in delivering the services.
(b) 'B list Contributories': The shareholderswho transferred partly paid shares (otherwise than by operation of law or by death)
within one year, before the date of winding up may be called upon to pay an amount (not exceeding the amount not called up
when the shares were transferred) to pay off such creditors as existed on the date of transfer of shares.
Their liability will become definite only
(I) when the existing assets available-with the liquidator are not sufficient to cover the liabilities.
(ii) when the existing shareholders fail to pay the amount due on the shares to the liquidator.
(c) The valuation of shares may arise under circumstances:

1. Assessment under various direct tax laws.
2. Purchase of a block of shares generally involving acquisition of controlling interest in the company.
PurChase of shares by employees of the company.
4. Formulation of sChemes of amalgamation, absorption etc.
5. Acquisition of interest of dissenting shareholder under a scheme of reconstruction.
6. Advancing loans on the security of shareS.
7. COnversion of shares say preference into equity.
8. Resolving a deadlock in the management of a private limited company` on the basis of the controlling block of
shards being given to either of the parties.
(d) The Poooling of interests Method: The Pooling of Interests Method is for an amalgamation An the nature of merger.
Following are the three salient features of this method:
(i) Under the Pooling of. Interests Method, the assets, liabilities an reserves of the transferor company are recorded by
the transfer company at their existing carrying amounts and in the same form a at the date of amalgamation.
For example, the machinery of the transferor company should clubbed with the machinery of the transferee company and
shown a combined figure. Similarly, general reserve of the transfer company should be clubbed with the general reserve
of the transfer company. This reflects the facts that the entries are 'simply merg together.
(ii) If at the time of the amalgamation, the transferor and the transferee companies have conflicting accounting policies, a
uniform set of accounting policies is adopted following the amalgamation.The effects on.the financial statements of any changes in
accounting, policies are reported in accordance with Accounting Standard (AS) 5, Net Profit or Less for the Period, Prior Period
Items and Changes in Accotinting Policies.
(iii) The difference between the amount recorded as share capital issued (Plus any additional consideration in the form of
cash or other assets) and the amount of share capital of the transferor companyshould be adjusted in the reserves of the transferee
company. Accordingly no -goodwill or capital reserve will arise out of amalgamation by way of merger.
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(e)
Answer to Question 2A.
(i) Issue of Shares at Premium:

When shares are issued at a price higher than the face value, they are said to be issued at a premium. Thus,
the excess of issue price over the face value is the amount of premium. For example-, if a share of 10 is
issued at Rs. 12, (12-10) = Rs. 2 is the premium.
The premium on issue of shares should be regarded as capital receipt., The Companies Act requires that
when a company issues shares at a premium whether for cash or otherwise, a sum equal to the aggregate
amount of the premium collected on shares must be credited to a separate account called "Securities Premium
Account."
Under Section 52 of the Companies Act, 2013 the Securities Premium Account may be used wholly or in part
for
(i) issuing fully paid bonus shares to the members;
(ii) writing off preliminary expenses of the company;
(iii) writing off the expenses of or the commission paid or discount allowed on any issue of shares or
debentures of the company; or
(iv) providing for the premium payable on the redemption of any redeemable preference shares or of
any debentures of the company;
(v) purchase of its own shares i.e. buy back of shares.
(ii)
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(iii)
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(a)
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(b)
(c)
Calculation of ROOC
(a)
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In the given problem, no separate market expectation rate is given for preference shares. Since
preference shares are fixed-dividend bearing shares, they have a slightly lesser capitalization rate say 13% in this
case. Further, Chelsi Ltd., has better preference dividend coverage of 8.83 (10,00,000/1,20,000) as
compared to Nensi Ltd., coverage of 4.17 (10,00,000/2,40,000). Accordingly, market expectation rate for
Nensi Ltd.,should be slightly more say by 0.50%. Thus market expectation rate for Chelsi Ltd. and Nensi Ltd. have
been taken as 13% and 13.5% respectively. (This rate is subjective).
(b) Consolidated Balance Sheet of Morning Ltd. with its subsidiaries

Evening Ltd. and Night Ltd.(As on 31st March, 2017)
Working Notes:
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A. Morning Ltd.'s holding in Evening Ltd. is 1,60,000 shares out of 2,00,000 shares, i.e., 4/5th or 80%; Minority holding
1/5th or 20%.
B. Morning Ltd.'s holding in Night Ltd. is 75,000 shares out of 1, 00,000 shares, i.e., 3/4th or 75%; Minority holding 1/4th or
25%.
Analysis of Reserves and Profits of Subsidiary Companies
Evening Night Ltd. Minority Minority
Ltd. interest interest in
in Evening Night
1. Capital Reserve (pre-acquisition reserves
and profits)
Reserveson1.04.2016 800 750
Profiton1.04.2016 2,000 800
2,800 1,550
Less: Minorityinterest 560 387.5 560 387.5
2,240 1.162.5
2. General Reserve
Reserves as per Balance Sheet 1,000 900
Less: Capital Reserve [See Note A] 800 750
200 150
Less: Minorityinterest 40 37.5 40 37.5
160 112.5
Evening Night Minority Minority

Ltd. Ltd. interest in Evening interest in
Night
3. Profit and Loss Account
Profit for the year as per Balance Sheet 3,800 1,800
Less: InterestonLoan(5,000x8%) 400
3,400
Less: MinorityInterest 680 450 680 450
2,720 1,350
Less: Unrealised profit on stock transfer 3000
2,720 1,050
4. Share Capital
As per Balance sheet 20,000 10,000
Less: Minorityinterest 4,000 2,500 4,000 2,500
Transferred for computation of
Goodwill/Capital Reserve 16,000 7,500 5,280 3,375
Less: Proposed dividend shown separately 400 250
Transferred to Consolidated Balance Sheet 4,880 3,125
5. Computation of Cost of Control i.e. Goodwill/Capital Reserve on consolidation

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(Rs. in thousand)
Evening. Night
Cost of Investments 18,000 8,000
Less: Paid up value of shares [Refer Note 4] 16,000 7,500
2,000 500
Less: Capital Reserve [Refer Note 1] 2,240 1,162.5
-240 -662.5
Total Capital Reserve (Rs. 240 + Rs.662.5) 902.5
PART B
(a) As per Section 143 of Companies Act, 2013 it is auditor's duty to state whether, in his opinion and to the best of his
informationandaccordingtotheexplanations given to him, the Balance Sheet and P&L A/c gives:.
(a) The information required by the Act; and
(b) a true and fair view of state of affairs of the company.
In order to show a true and fair view the auditor should ensure that:
(i) The final accounts (Statement of Profit and Loss and Balance Sheet) agre0with" the books of accounts.
(ii) The closing stock is physically verified and valued properly.
(iii) Intangible assets like goodwill, patents, preliminaryexpenses or other deferred revenue expenses are valued and written
of properly.
(iv) Expenses/income of capital nature is not treated as revenue and vice versa.
(v) Contingent liabilities are not treated as actual liabilities and vice versa.
(vi) Provision,is made for all known losses and liabilities.
(vii) Transactions are recorded on accrual basis, i.e. outstandingexpenses, prepaid expenses, income accrued and advance
income is recorded properly.
(viii) The exceptional or non-recurring transactions are disclosed separately intheaccounts.
(ix) In case of company, the auditor has to check whether the applicable accounting standards are followed or not and in
case of material, departure, its impact on, profit or loss of the company.
(b) It basically implies pooling together the resources and expertise Of more than one firm of auditors to render an
expert job in a given time period which may be difficult to accomplish acting individually.
Where joint auditors are appointed, they should by mutual discussion, divide the audit work among
themselves. The division of work among joint auditors as well as the areas of work to be covered by all of them
should be adequately documented and preferably communicated to the entity. Each joint auditor is responsible
only for the work allocated to him, whether or not he has prepared a separate report on the work performed by
him.
On the other hand, alt the joint auditors are jointly and severally responsible
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(c) Casual Vacancy in the Office of Auditor [Sec. 139(8) of Companies Act, 20131: The provisions for filling of casual
vacancy in the office of auditor are a s f o l l o w s : -
(a) The Board of the company, shall have power to fill the casual vacancy in the office of auditor within 30 days in any case
except where-
(i) the casual vacancy occurred due to resignation of the auditor; or
(ii) the company accounts are not subject to audit by an auditor appointed by the Comptroller and Auditor
General of India.
(b) In case casual vacancy has occurred due to resignation of auditor such appointment should be approved by the company in
general meeting convened within 3 months of the recommendation of the Board and auditor shall hold the office till the
conclusion of the next annual general meeting.
(c) in case of a company whose accounts are subject to audit by an auditor appointed by the Comptroller and
Auditor General of India, such vacancy should believed by the Comptroller and Auditor General of India within
30 days. In case the Comptroller and Auditor-General of India does not fill the vacancy within the said period,
the Board of Directors shall fill the Vacancy within next 30 days.
Appointment of auditors to fill casual vacancy shall be made after taking into, account the recommendation of
the audit committee.
(a) (a) The objective of an audit of financial statement is to enable an auditor to determine true and fair
view of the financial position and operating results and to express an opinion thereon. 'Objective and scope of
the audit of financial statements' scope will be determined having regard to the terms of engagement,
requirement of relevant statute and pronouncement of the Institute.
(b) The terms of engagement cannot, however, restrict the scope of an audit in-relation to matters that
are prescribed by the legislation or by the pronouncement of the Institute. .
(c) The report of the auditor is based on his examination of financial statement and the underlying
documents and evidences. It is for the auditor to decide based on his evaluation of the internal control as to
its existence and effectiveness.
(d) The nature, timing and extent of audit procedure are based on such evaluation.
In the instant case, management has no right to guide and place any restriction on the work of the auditor as it
would amount to restriction of the scope of the audit. The auditor should ask the management not to Impose
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such restriction on his scope of the audit that impairs his ability to examine and express an opinion and if
the management does not agrees, he should issue a qualified opinion or disclaimer, as appropriate.
(b) Audit in Depth:

Audit in depth as the name implies means checking a transaction
extensively from origin to end. It is an audit technique which is used to
evaluate the effectiveness of internal control system in an organization.
It is used in investigation exercises whereby the objective is to thorough examination of transactions or records. In this technique
all aspects relating to the transaction are checked such as sanctity of transaction, validity of transaction, adherence of prescribed
procedures, arithmetical accuracy of transaction, accounting treatment of transaction etc. It is also called vertical
vouching as against horizontal vouching. - For example, a purchase of pods may commence when a
predetermined re-order level -has beenreached. The ensuing stages may be summarized as given below:
1. Authorization of purChase requisition: Check whether the requisitions are pre-printed, pre-numbered and
authorized. See whether the purchase requisition have been authorized by competent official.
2. Issue of request for quotation: Check whether request for quotation have been issued or not. if not find the
reasons of not issuing request for quotation. Check whether the requests for quotation have been issued to approved
vendors.
3. Issue of purchase order: Check whether purchase order have been issued or not if purchase order have been
issued check whether it has been issued from the competent authority. Check whether the purchase order have been issued
to the approved vendorwhohasgivenlowestquote_.Ifnottheckthereasons.Checkwhether thereasons ofissuingthe purchaseorder
toa vendor otherthan the lowest bidder have been approved by the competent, authority.
4. Receipt goods and entry of goods in store ledger Check whether the goods receipt is as per specification
given in the purchase order. If not check whether the deviations have been recorded and the communication has been made
to the supplier or not. Check whether the goods receipt have been properly recorded in store ledger or not.
5. Approval of payment of supplier invoice: Check whether the amount has been approved by the competent
authority.
6. Payment of supplier invoice: Check whether the supplier bill have been paid correctly. Check whether all deduction
fixshort receipt of goods, late delivery of goods, inferior quality of goods, advance payment for the goods have been done, or
not.
7. AccOunting of Transaction: Check whether accounting made js correct or not. Check 'whether correct expenses
code have been debited or not. Check whether the applicable accounting standard have been complied with or not. .-
(c) Points for Consideration in Audit Planning: Audit planning requires a high degree of discipline on the part
of the auditor. In order tosiake the planning more meaningful, the auditor should take into consideration the
following matters in relation to the audit engagement:
(a) Preliminary Work to be thine in addition to the real audit work: This will include such matters as stocktaking,
cash count, debtors' circularisation and review of previous year's working papers. This will remind the auditor of
those matters brought forward from the previous year and any other points to be resolved in the current year or
problems anticipated.
(b)Changesinlegislation,accounting oranyauditingstandards or guidelines:
The auditor should acquaint himself with all the changes that took
place during the year in applicable legislation, accounting and
auditing standard. This will help an auditor in carrying out the
auditing assignment in away that meets the legislative requirement.
(c) Analytical review of available management accounts and other management information that
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relate to the accounts: This will assist in establishing valuable ratios and indicators that will guide the auditor. For
instance, the computation of the gross profit percentage compared with that of the previous year will provide a good
indicator to the auditor of the accuracy and reliability of sales and cost of sales.
(d) Changes in the business or management:
The appointment of a new finance controller and the establishment
 of a new business line or the creation of a new branch are significant changes in the circumstances of the company
which will necessitate changes in the existing audit plans. There may be similarly changes for which change may be
required in audit plan.
(e) Changes in the accounting system:
The introduction of computers such that when a company introduces significant changes in its operating procedures will
require a review and evaluation of the system -of internal control.
(f) Deadlines established for the submission of audit report: Where a client has set deadlines for its
statutory activities such as the annual general meeting, it is an important for the auditor to work in line with such
programmes.
(g) Use of, rotational testing and verification:
In practice, the auditor may not carry out a hundred percent testing or verification of the client's transactions or
segments of the business.
Answer to Question 6A.

(i)
(a) Yes, the company is subject to CAG audit. Every company of which 51% or more of the equity is held
by the Government are to be audited by CAG. In the current case 80% of the equity share is held by the
Central Govt.
(b) Yes, the company is required to appoint internal auditor. As per section 138 of the Companies Act, 2013
read with rule 13 of the Companies (Accounts) Rules, 2014, an unlisted public company having turnover of
two hundred crores rupees or more during the preceding financial year shall be required to appoint internal
auditor. In the present case turnover is 1,750 crores.
(c) Yes, the company is required to appoint secretarial auditor. As per section 204 of Companies Act, 2013
read with rule 9 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014' a
public company having a turnover of rupees two hundred fifty crores or more is required to conduct
secretarial audit. In the present case the turnover is Z 1,750 crores.
(d) No. since it is a Govt. Company, it can't appoint a statutory auditor of its own. The statutory auditory is
to be only appointed by CAG.
(e) Yes, it is compulsory for the company to appoint cost auditor. As per rule 4 of Companies (Cost Records
and Audit) Rules, 2014, cost audit is applicable where the overall turnover of a company from regulated
sector is Z 100 cores or more. Here the turnover is Z 1,750 Crores. (As the question is silent it is assumed that
the operation of the company is covered under Companies (Cost Records and Audit) Rules, 2014.
(ii) Current Audit. Files : In the current audit files those audit working papers are kept which contains the
information relating to audit of a single period. It records nature, timing and event of audit procedure
performed & result of such procellures.
The Current Audit File normally includes:
(i) Correspondence relating to acceptance of annual reappointment.
(ii) Analysis of transactions and balances.
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(iii) Evidence of planning process of the audit and audit programme.

(iv) Evidence that assistant's work are supervised and reviewed.
(v) Extracts of important matters related to minutes of Board Meetings and General Meetings which are
relevant to audit.
(vi) Copies of communication with other auditors, expects and other third parties.
(vii) Letters of representation or confirmation received from the client.
(viii) Auditor's conclusions on significant aspects of audit, including how exceptions and unusual matters,
if any, disclosed by the auditor's procedures were resolved or treated.
(ix) Copies of financial information being reported on and the related audit reports.
(x) Record of ,the nature, timing and extent of auditing procedures performed and the result
thereof.
(xi) Management representations on material matters.
(xii) Working paper acts as evidence in the court/Tribunal of law when a charge of negligence is brought
against the auditor.
(iii) ManagementinformationSystemsReviewObjectives
1. To determine whether review procedures are necessary to achieve stated objectives.
2. To determine whether MIS policies or practices, processes, objectives and internal controls are
adequate.
3. To evaluate whether MIS applications provide users with timely, accurate, consistent, complete and
relevant information.
4. To assess the types and level of ripk associated with MIS and the quality of controls over those risks,
5. To determine whether MIS applications and enhancements to existing systems adequately support
corporate goals,
6. Td determine whether MIS is being developed in compliance with an approved corporate MIS policy or
practice statement.
7. To determine whether management is committed to providing the resources needed to develop the
required MIS.
8. To determine if officers are operating according to established guidelines.
9. To evaluate the scope and adequacy of audit activities.
10. To initiate corrective action when policies or practices, processes, objectives or internal controls are
deficient.
11. To determine if any additional work is needed to fulfill the examination strategy of the institution.

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EDU EX….

………CRACK IT IN FIRST ATTEMPT!!!…

(d) As-9- RevenueRecognition:

(e) Buy-BackofSharesSection 68(1)ofCompaniesAct,2013:

(c) The valuation of shares may arise under circumstances:

Answer to Question 2A.

(i) Issue of Shares at Premium:

(b) Consolidated Balance Sheet of Morning Ltd. with its subsidiaries

Evening Night Minority Minority

5. Computation of Cost of Control i.e. Goodwill/Capital Reserve on consolidation

(b) Audit in Depth:

Answer to Question 6A.

(iii) Evidence of planning process of the audit and audit programme.

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