SUGGESTED ANSWERS TO QUESTIONS
SECTION-A
1. (a)
(i) (A)
(ii) (A)
(iii) (D)
(iv) (D)
(v) (B)
(vi) (A)
1. (b)
(i) False
(ii) False
(iii) True
(iv) True
1. (c)
(i) Premium
(ii) Inventories
(iii) Present
(iv) Reversionary Bonus
2. (a)
Particulars A B C D
Net Liabilities 0 11,250 0 13,750
2. (b)
Journal of N. Limited:
Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)
Bank A/c Dr. 1,32,000
To Equity Share Capital A/c 1,20,000
1 To Securities Premium A/c 12,000
(Being raising of funds through issue of
equity shares)
Bank A/c Dr. 1,08,000
Profit and Loss A/c Dr. 12,000
2
To Investment A/c 1,20,000
(Being Sale of Investment at a loss)
14% Preference Share Capital A/c Dr. 2,50,000
Premium on Redemption A/c Dr. 20,000
3 To Preference Shareholders A/c 2,70,000
(Being Redemption of Pref. shares at
premium)
Securities Premium A/c Dr. 20,000
To Premium on Redemption A/c 20,000
4
(Being Premium on redemption met out
of Security Premium)
General Reserve A/c Dr. 75,000
Profit and Loss A/c Dr. 55,000
5
To Capital Redemption Reserve A/c 1,30,000
(Being amount transferred to CRR A/c)
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Preference Shareholders A/c Dr. 2,70,000
To Bank A/c 2,70,000
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(Being Redemption amount paid to
Preference Shareholders)
3. (a)
Cash Flow Statement for the year ended 31st March, 2023:
Particulars Rs.
A. Cash Flow from Operating Activities: 1,80,000
B: Cash Flow from Investing Activities: 4,40,000
C: Cash Flow from Financing Activities: (2,25,000)
Cash Flow during the year (A+ B+C) 3,95,000
Add: Opening Balance of Cash & Cash Equivalents 1,00,000
Closing balance of Cash & Cash Equivalents 4,95,000
3. (b)
Income to be Recognised D 2,114 (Rs. in Crore)
4.
Balance Sheet Total C 94,78,500
5. (a)
Actual return on plan assets C 95,000
5. (b)
(i) In the Books of Prakash Life Insurance Co. Ltd.
Valuation Balance Sheet as on 31st March, 2023
Liabilities ₹ Assets ₹
Net Liability 28,80,000 Life Assurance Fund 34,00,000
Net Profit 5,20,000
34,00,000 34,00,000
(ii) & (iii)
₹
Net Profit for the Two Years Period 5,60,000
Distribution of the Profits:
Net Profit 5,60,000
Less: Amount proposed to be carried forward 1,10,000
Balance 4,50,000
Share of policyholders 4,27,500
Less: Interim bonus paid 40,000
Amount due to policy holders 3,87,500
Share of Shareholders 22,500
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SECTION B
6. (a)
(i) (B)
(ii) (C)
(iii) (B)
(iv) (C)
(v) (C)
(vi) (B)
6. (b)
(i) True
(ii) False
(iii) True
(iv) True
6. (c)
(i) CRA-1
(ii) shareholders
(iii) 25%
(iv) trading
7. (a)
The basic principles governing an Audit are stated below:
(i) Integrity, Objectivity and Independence: The auditor has to be straightforward, fair, impartial,
honest and sincere in his approach to professional work.
(ii) Confidentiality: The auditor should uphold the privacy of the information and should not disclose
any such information to a third party, including the employees of the entity, without the explicit
authority of the management or client or unless there is a lawful or a professional responsibility to
do so.
(iii) Professional Care, Skill and Competence: The auditor should exercise due professional care,
competence and diligence expected of him while carrying out the audit work.
(iv) Responsibility of Work Performed by Others: The auditor should carefully direct, oversee and
review the work delegated to staff. Likewise, the auditor may also use the work done by other
auditors or experts.
(v) Documentation: The auditor should document matters, which are essential in providing evidence
that the audit was carried out in accordance with the standards.
(vi) Planning: The auditor should plan his work in such a way as to enable him to conduct an audit in a
timely and efficient manner. The audit plan should be based on the knowledge of the business of
the entity. The plan should be continuously reviewed and modifications should be incorporated if
required.
(vii) Audit Evidence: The auditor should get hold of enough suitable evidence to enable him to draw
reasonable conclusions there from.
(viii) Accounting System and Internal Control: The auditor should have an understanding of the internal
control and risk management framework established by the management. He has to judge the
adequacy of such framework as well.
(ix) Audit Conclusions and Audit Report: The auditor should review and measure the conclusions
drawn from the audit evidence obtained, as the basis for his findings contained in his report.
Nevertheless, in case the auditor comes across any actual or suspected fraud, it would be more apt
for him to bring the same instantaneously to the notice of the management
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7. (b)
According to SA-520, Analytical Procedure means evaluation of financial information through analysis of
plausible relationships among both financial and non-financial data. Analytical procedure also encompasses
such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with
other relevant information or that differ from expected values by a significant amount.
Tools and Techniques of Analytical Procedures
As per SA-520, analytical procedures include application of the following tools and techniques:
a. Trend Analysis: Under this method, analysis is done for to assess fluctuation of the amount of any item
over the year or years.
b. Testing of Reasonableness: This is done by comparing certain items or account balances with other
accounts or balances. Some examples are as follows;
(i) Raw material consumption to production (quantity)
(ii) Percentage of wastage and scrap against production and raw material consumption
(iii)Work-in-progress based on material issued
c. Ratio Analysis: This technique calculates different ratios between various items of financial statements
in order to study their relationships. Some common ratios include:
(i) Gross Profit Ratio
(ii) Receivable Turnover Ratio
(iii)Inventory Turnover Ratio
d. Sources of Information: Analytical procedures also require analysing the following sources of
information.
(i) Interim financial information
(ii) Budgets
(iii)Management Accounts
(iv) Non-financial information, etc.
8. (a)
Manner of rotation of Auditors by the Companies on Expiry of Their Term As per Section 139(4), the
Central Government may, by rules, prescribe the manner in which the companies shall rotate their auditors
in pursuance of Section 139(2). Accordingly, the Central Government has prescribed the following
provisions under Rule 6 of the Company (Audit and Auditor) Rules 2014.
i. Where a company is required to constitute an Audit Committee u/s 177 of the Act, the Audit
Committee shall recommend to the Board, the name of an individual auditor or of an audit firm
whomayre place the incumbent auditor on expiry of the term of such incumbent.
ii. Where a company is not required to constitute an Audit Committee u/s 177 of the Act, the Board shall
consider the matter of rotation of auditors and make its recommendation for appointment of the next
auditor by the members in annual general meeting.
For the purpose of the rotation of auditors–
(i) The period for which the individual or the firm has held office as auditor prior to the commencement
of the Act shall be taken in to account for calculating the period of five consecutive years or ten
consecutive years, as the case may be;
(ii) The incoming auditor or audit firm shall not be eligible if such auditor or audit firm is associated
with the outgoing auditor or audit firm under the same network of audit firms.
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The term “same network” shall include the firms operating or functioning, hitherto or in future,
under the same brand name, trade name or common control.
For the purpose of rotation,
(i) A break in the term for a continuous period of five years shall be considered as fulfilling the
requirement of rotation;
(ii) If a partner, who is in-charge of an audit firm and also certifies the financial statements of the
company, retires from the said firm and joins another firm of chartered accountants, such other firm
shall also be ineligible to be appointed for a period of five years.
8. (b)
As per the provision of Section 204(1)of the Companies Act, 2013 read with Rule 9 of the Companies
(Appointment and Remuneration of Managerial Personnel) Rules, 2014:
Every listed company;
Every public company having a paid-up share capital of 50 crore rupees or more; or
Every public company having a turnover of 250crore rupees or more; or
Every company having outstanding loans or borrowings from banks or public financial institutions of
Rs.100 crore rupees or more.
In the given case, the company is an unlisted public company with paid up capital of Rs. 45 crore (less
than Rs. 50 crore) and its turnover of Rs. 225 crore is also lower than the threshold of Rs. 250 crore.
However, the company has an outstanding bank loan of Rs.110 crore which is higher than the threshold of
Rs. 100 crore. Thus, the company will need to conduct secretarial audit.
9. (a)
The duties of an auditor in relation to the audit of debentures are discussed below:
(i) The auditor should verify that the prospectus had been duly filed with the registrar before the date
of allotment of debentures.
(ii) He should check the amount collected in the cash book with the counterfoils of receipts issued to
the applicants and also cross check the amount into the application and allotment book.
(iii) He should examine the debenture trust deed and note the conditions contained therein as to issue
and repayment.
(iv) If the debentures are covered by a mortgage of a charge, it should be verified that the charge has
been correctly recorded in the register of mortgage and charges and it has also been registered with
the registrar of the companies.
(v) Compliance with SEBI guidelines should also be ensured.
(vi) Where debentures have been issued as fully paid up to vendors as a part of the purchase
consideration, the contract in this regard should be checked
9. (b)
An Auditor may not be able to express an Unqualified Opinion when any of the following circumstances
exist and in the auditor’s judgement, the effect of the matter is or may be material to the Financial
Statements.
[SA 700].
i. Limitation on Scope: Limitation on scope of Auditor’s work may be imposed by the clients or
imposed by circumstances. It may lead to situations where the Auditor may have to issue a
Qualified Opinion or a Disclaimer of Opinion.
ii. Disagreement with management: The Auditor may disagree with the Management as to
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(a)
The acceptability of the accounting policies selected, or the method of their application,
(b)
The adequacy of disclosure in the Financial Statements, or (c) the compliance of the Financial
Statements with relevant regulations and statutory requirements. In such cases, he may have to give
an Adverse Opinion or a Qualified Opinion.
iii. Significant Uncertainty: If there is a significant uncertainty affecting the Financial Statements
(other than Going Concern problem), for example, litigation involving legal claims, etc. the result
of which is dependent upon the resolution of the future events, the Auditor may have to quality his
opinion or disclaim an opinion.
However, where such significant uncertainty is not material, the Auditor may issue an Unqualified
Opinion, by adding an “Emphasis of Matter” paragraph, without qualifying his opinion.
10. (a)
(i) Check the letter of appointment to ascertain the scope of responsibilities.
(ii) Study the Charter or Trust Deed under which the hospital has been set up and take a special note of
the provisions affecting the accounts.
(iii) Examine, evaluate and verify the system of internal check, internal control and determine the
nature, timing and the extent of the audit procedures.
(iv) Vouch the entries in the Patient’s Bill Register with a copies of bill issued. Test check the selected
bills to see that these have been correctly prepared taking into consideration the period of stay of
each patient as recorded in the Attendance Schedule.
(v) Vouch the collection from patients with copies of bills and entries in Bills Register. Arrears of dues
should be properly carried forward and where these are deemed to be irrecoverable, they should be
written off under due authorizations.
(vi) Interest and/ or dividend income should be vouched with reference to the Investment Register and
Interest and Dividend warrants.
(vii) In case of legacies and donations which are received for specific purposes, it should be ensured that
any income there from is not utilized for any other purposes.
(viii) Where receipts of subscription show a significant deviation from budgeted figures, it should be
thoroughly inquired into and the matter be brought to the notice of the trustees or the Managing
Committee.
(ix) Government grants or grants from local bodies should be verifies with the reference to the
correspondence with the concerned authorities.
(x) Clear distinction should be made between the items of capital and revenue nature.
(xi) The capital expenditure should be incurred under proper authorization by a valid resolution of the
trustees or the Managing Committee.
(xii) Verify the system of internal check as regards purchases and issue of stores, medicines etc.
(xiii) Examine that the appointment of the staff, payment of salaries etc. are duly authorized.
(xiv) Physically verify the investments, fixed assets and inventories.
(xv) Check that adequate depreciation has been provided on all the depreciable assets.
10. (b)
The auditor may perceive the following risks:
i. Inherent Risk: It is possible that the employees might have misappropriated the inventory by
manipulating the inventory records. So, inventory records may not be accurate. This leads to a risk of
material misstatement.
ii. Control Risk: Here each item of inventory carries a price tag with bar code as well as a security code
(which is removed only after the billing). Additionally, physical verification of inventory is done on a
fortnightly basis. Thus, the internal control appears to be quite satisfactory. However, collusion among
employees at multiple layers can evade the control implemented at any time. Hence, an element of
control risk is present.
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iii. Detection Risk: It is expected that the auditor will apply appropriate procedures to judge the efficiency
of the control system before deciding on the extent of test checking. However, there may still be
possibilities of material misstatements and the same may not be detected due to adoption of test
checking. Hence, an element of detection risk can also exist.
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