sap v - answer key (both) session i part a- accounting
TRANSCRIPT
SAP V - Answer Key (Both)
Session I
Part A- Accounting
1.
Profit and Loss Account of the year ended 31st March of Sai Deep ltd.
Dr.
Cr.
Particulars Notes Total Pre Post Particulars Notes Total Pre Post
To Office salaries 2 21000 7000 14000 By Gross Profit 1 80000 20000 60000
To Partner's salaries 3 6000 6000 -
By Share Transfer
Fees 17 1000 1000
To Advertisement 4 4400 1100 3300 By Goodwill 2800 2800
To Printing & Stationery 5 1500 500 1000
To Travelling Expenses 6 2400 800 1600
To Sales Promotion 6a 1600 400 1200
To Office Rent 7 9600 2800 6800
To Electricity Charges 8 900 300 600
To Auditor's Charges 9 600 200 400
To Directors Charges 10 1000 1000
To Bad Debts 11 1200 400 800
To Commison on Sales 12 4000 1000 3000
To Preliminary Expenses 13 700 700
To Debenture Interest 14 1800 1800
To Interest on Capital 15 1600 1600
To Depreciation 16 2100 700 1400
To P&L appropriation
A\c 23400 23400
TOTAL 83800 22800 61000 TOTAL 83800 22800 61000
Working notes:
1. Let the average monthly sales= x. The sales of different months can be shown as follows:
Mo
nth
Ap
ril
M
ay
Ju
ne
Ju
ly
Aug
ust
Septem
ber
Octo
ber
Novem
ber
Decem
ber
Janu
ary
Febru
ary
Mar
ch
Sale
s 1x 1x 1x 1x 1x 1x
1 x 1 x 1 x 1 x 1 x 1 x
Ratio of sales = 4x:12x or 1:3
Gross profit is apportioned in the ratio of sales:
Pre- Rs.80,000/4 x 1 = Rs.20,000;
Post – Rs. 80,000 / 4 x 3 = Rs. 60,000.
2. Pre incorporation period consist of 4 months post-incorporation period consist of 8 months.
Therefore, the ratio of time= 4:8 or 1:2.It should be noted that at the time calculating ratio of
time, the date of issue of certificate of commencement is to be ignored. The date of
incorporation is take in to consideration.
Office salary are apportioned in the ratio of time.
Pre- Rs 21,000/3 x 1 =Rs 7,000; Post- Rs21,000/3 x 2 = Rs 14,000
3. Partner’s salary is exclusively related to pre-acquisition period.
4. Advertisement is apportioned in the ratio of sales.
Pre-Rs 4400/4 x 1=Rs 1,100 ; post-Rs 4,400/4x3=Rs3,300
5. Printing and stationery is apportioned in the ratio time ,i.e. 1:2.
Pre-Rs 1500/3 x 1 = Rs 500; post-Rs 1,500/3x2 = Rs 1,000
6. Travelling expenses are apportioned in the ratio of time, i.e., 1 : 2.
Pre-Rs 2,400/3 x 1 = Rs 800 ; Post-Rs 2,400/3 x 2 =Rs 1,600
6a. Promotion expenses are apportioned in the ratio of sales , i.e., 1:3.
Pre-Rs 1,600/4 x 1 = Rs 400 ; Post-Rs 1,600/4 x 3 = RS 1,200
7. Office rent is apportioned on actual basics.
Pre-Rs 8,400/12 x 4 = Rs 2,800 ;
Post-Rs 8,400/12 x 2 + Rs 10,800/12 x 6 = Rs 5,400 + Rs 1,400 = Rs 6,800
8. Electricity charges are apportioned in the ratio of time, i.e., 1:2.
Pre-Rs 900/3 x 1 = Rs 300 ; Post-Rs 900/3 x 2 = Rs 600
9. Auditor’s charges are apportioned in the ratio of time, i.e., 1:2.
Pre-Rs 600/3 x 1 = Rs 200 ; Post-Rs 600/3 x 2 = Rs 400
10. Directors charges are paid in case of of company only. These must naturally be shown in the
post-incorporation period.
11. Bad debts are to be apportioned on actual basics :
Pre-Rs 400; Post-Rs 800.
12. Commission on sales is apportioned in the ratio of sales, i.e., 1 : 3.
Pre-Rs 4000/4 x 1 = Rs 1,000 ; Post-Rs 4000/4 x 3 = Rs 3,000
13. Preliminary expenses are related to post-incorporation period.
14. Debentures interest is related to post-incorporation period.
15. Interest on capital is related to pre-acquisition period.
16. Depreciation is apportioned in the ratio time, i.e., 1:2.
Pre-Rs 2,100/3 x 1 = Rs 700 ; Post- Rs 2,100/3 x 2 = Rs 1,400.
17. Share transfer fees are related to post-incorporation period 10
2. Section 198 and 309 of the Companies act, 1956 prescribe the maximum percentage of
profit that can be paid as managerial remuneration.
For this purpose, profit is to be calculated in the manner as specified in section 349.
Computation of Net profit u/s 349 of the Companies act,1956
Net profit before provision for income tax and managerial
remuneration, but after depreciation& provision for Repairs
8,70,410
Add back: Depreciation provided in the book 3,10,000
Provision for repairs of machinery 25,000 3,35,000
12,05,410
Less : Depreciation allowable under schedule XIV 2,60,000
Actual expenditure incurred on repairs 15,000 2,75,000
Profit as per Section 349 9,30,410
Computation of Managerial remuneration
(i) If there is only one whole time director
Managerial remuneration = 5% of 9,30,410 =Rs. 46,520.50
(ii) If there are two whole time directors:
Managerial remuneration= 10% of 9,30,410= Rs.93,041
(iii) If there are two whole time directors, a part time director and a manager:
Managerial remuneration = 11% of 9,30,410= Rs.1,02,345.10 5
3. Journal Entries
S.no Particulars
Debit
(Rs)
Credit
(Rs)
1 Insurance company A/c Dr 10000
To Life policy A/c 10000
(Being the policy of the life of amrish
matured in his death)
2 Life Policy A/c Dr 9000
To Amitabh's capital A/c 3000
To Abishek's capital A/c 3000
To Amrish's Capital A/c 3000
(Being the transfer of balance in life policy
account to all partners’ capital accounts)
3 Amitabh’s Capital A/c Dr 12600
Abhishek’s Capital A/c Dr 12600
Amrish’s Capital A/c 12600
To Advertisement suspense A/c 37800
(Being Advertisement suspense standing
in the books written off fully)
4 Land & Buildings A/c Dr 37000
To Revaluation A/c 37000
5 Investment fluctutaion reserve A/c Dr 600
To Investment A/c 600
(Being reduction in the cost of investment
adjusted through Investment Fluctuation
Reserve)
6 Revaluation A/c Dr 3600
To Stock A/c 1200
To Provision for Doubtful Debts A/c 2400
(Being the fall in value of assets recorded)
7 Amitabh's capital A/c Dr 3500
Abhishek's Capital A/c Dr 3500
To Amrish Capital A/c 7000
8 Profit and Loss Suspense A/c 1500
To Amrish's capital A/c 1500
(Being Amrish’s Share of profit to date of death credited to his account)
9 Revaluation A/c 33400
To Amitabh’s Capital A/c 11133
To Abhishek’s Capital A/c 11133
To Amrish’s Capital A/c 11,134*
(Being the transfer of profit on
revaluation)
10 General Reserve A/c 8000
Investment Fluctuation Reserve A/c
(2400-600) 1800
To Amitabh’s Capital A/c 3267
To Abhishek’s Capital A/c 3267
To Amrish’s Capital A/c 3266
11 Amrish’s Capital A/c 53300
To Amrish's Executor A/c 53300
(Being the transfer of Amrish’s Capital A/c to his Executor’s A/c)
Balance Sheet as at March, 2009
Liabilities Rs Assets Rs
Amithabh's Capital
A/c 61,300 Land and Bulding 1,11,000
Abhishek's Capital
A/c 41,300 Life Policy:
Amrish's Executor A/c 53,300 Amitabh 2500
Sundry Creditors 25,800 Abhishek 2500 5,000
Investments 9,400
Stock 18,800
Debtors 20,000
Less: Provisions -4,000 16,000
Insurance company 10,000
Cash & Bank balance 10,000
Profit and Loss Suspense
A/c 1,500
Total 1,81,700 Total 1,81,700
Working notes:
1. Calculation of Share of Profit:
Total Profit for last three years = Rs.18,000 + Rs.16,000 + Rs.24,000 = Rs. 54,000
Average Profit = Rs.54,000 / 3 = Rs.18,000
Profit for 3 years = Rs.18,000 x 3/12 = Rs.4,500
Amrish’s share of profit = Rs. 4,500 x 1/3 = Rs.1,500
2. Calculation of Goodwill:
Total Profits for last five years = Rs.1,05,000.
Average Profit = Rs.1,05,000 / 5 = Rs.21,000.
Goodwill at one year’s purchase = Rs. 21,000 x 1 = Rs. 21,000. 20
Part B – Law, Ethics & Communication
1. a) Claim of Interest: Section 24 of the Negotiable Instruments Act, 1881 states that where a bill
or note is payable after date or after sight or after happening of a specified event, the time of
payment is determined by excluding the day from which the time begins to run.
Therefore, in the given case, Bal will succeed in objecting to Kul’s claim. Bharat paid rightly “three
days after sight”. Since the bill was presented on 1st January, Bal was required to pay only on the
4th and not on 3rd January, as contended by Bal.
5
b) Section 36 of the Negotiable Instruments Act, 1881 describes the liabilities of prior parties to the
holder in due course. This section says that a holder in due course has privilege to hold every prior
party to a negotiable instrument liable on it until the instrument is duly satisfied. Here the holder in
due course can hold all the prior parties liable jointly and severally. Prior parties includes the maker
or drawer, the acceptor and endorsers. Accordingly in the given problem, E, a holder in due course
can recover the amount from all the prior parties i.e., D & C (the endorsers), B (an acceptor) and A
(the drawer).
Privileges of a “Holder in Due Course”: According to the provisions of the Negotiable Instruments Act, 1881, a holder in due course has the following privileges:-
i. A person signing and delivering to another a stamped but otherwise inchoate
instrument is debarred from asserting, as against a holder in due course, that the
instrument has not been filled in accordance with the authority given by him, the
stamp being sufficient to cover the amount (Section 20).
ii. In case a bill of exchange is drawn payable to drawer’s order in a fictitious name and is endorsed by the same hand as the drawer’s signature, it is not permissible for acceptor to allege as against the holder in due course that such name is fictitious
(Section 42).
iii. In case a bill or note is negotiated to a holder in due course, the other parties to the
bill or note cannot avoid liability on the ground that the delivery of the instrument
was conditional or for a special purpose only (Sections 42 and 47).
iv. The person liable in a negotiable instrument cannot set up against the holder in due
course the defences that the instrument had been lost or obtained from the former by
means of an offence or fraud or for an unlawful consideration (Section 58).
v. No maker of a promissory note, and no drawer of a bill or cheque and no acceptor
of a bill for the honour of the drawer shall, in a suit thereon by a holder in due
course be permitted to deny the validity of the instrument as originally made or
drawn (Section 120).
No maker of a promissory note and no acceptor of a bill payable to order shall, in a suit thereon
by a holder in due course, be permitted to deny the payee’s capacity to endorse the same
(Section 121). 5
c) No. The consumer does not purchase goods and health services for personal purposes only,
because on certain occasions various items are purchased for public welfare and development of the
society as a whole. Further, under the Competition Act, 2002, a consumer is also one who may
purchase goods for commercial purposes also
2
2. a) The term E-filing indicates the process of getting services electronically with a comprehensive
on-line portal. The advantages are:
1. Instant registration of companies;
2. Simplified and more facile method of filing documents;
3. Total transparency;
4. Easier and better compliance of regulations;
5. Utmost customer care
6. Authentic and reliable filling of forms / returns through professionals;
7. Centralised database management;
8. Better service availability;
9. Filing of and inspection of documents anywhere and anytime.
10. Quick redressal of investor grievances
11. Supervisor and monitoring of compliance made easier. 3
b) Bearer and Order instruments: An instrument may be made payable: (1) to bearer; or (2)
to a specified person or to his order.
An instrument is said to be payable to bearer when it is expressed to be so payable to its
bearer or when the only or last endorsement on it is an endorsement in blank.( Explanation 2 to
section13)
An instrument is payable to order, (1) when it is payable to the order of a specified person or
(2) when it is payable to a specified person or his order or, (3) when it is payable to a specified
person without the addition of the words “or his order” and does not contain words prohibiting transfer or indicating an intention that it should not be transferable.
When an instrument, either originally or by endorsement, is made payable to the order of a
specified person and not to him or his order, it is payable to him or his order, at his option. When an
instrument is not payable to bearer(i.e., in case of order instrument), the payee must be indicated
with reasonable certainty.
Sight and time bills etc (Sections 21 to 25) 3
c) The UN Guidelines call upon governments to develop, strengthen and maintain a strong consumer
policy, and provide for enhanced protection of consumers by enunciating various steps and measures
around eight themes (UNCTAD, 2001). These eight themes are:
1. Physical safety
2. Economic interests
3. Standards
4. Essential goods and services
5. Redress
6. Education and information
7. Specific areas concerning health
8. Sustainable consumption
The Guidelines have implicitly recognised eight consumer rights, which were made explicit in the
Charter of Consumer International as follows:
• Right to basic needs
• Right to choice
• Right to redress
• Right to information
• Right to consumer education
• Right to representation
• Right to healthy environment
• Right to safety
These eight consumer rights can be used as the touchstones for assessing the consumer welfare
implications of competition policy and law, and to see how they help or hinder the promotion of
these rights 5
3. a) Quorum means the minimum number of members that must be present in order to constitute a
meeting and transact business thereat. Thus quorum represents the number of members on whose
presence the meeting of a company can commence its deliberations. Under the articles provide for a
larger number, 5 members personally present in the case of a public company (other than a public
company which became public by virtue of Section 43A, now deleted) and 2 members in case of a
private company constitute the quorum for a general meeting as given in Section 174 of the
Companies Act, 1956. The words ‘personally present’ excludes proxies. However, the representative of a body corporate appointed under Section 187 or the representative of the President or Governor
of a State appointed under Section 187A is a member personally present for the purpose of counting
quorum. If all the members are present, it is immaterial that the quorum required is more than the
total number of members. If for example, the articles of a private company provide that 4 members
personally present shall be a quorum and the number of members is reduced to 3, the question of
quorum will not arise when all the 3 members attend the meeting. 5
b) Section 173 of the Companies Act, 1956 requires a company to annex an explanatory statement to
every notice for a meeting of the company at which some special business is to be transacted. This
explanatory statement is to bring to the notice of members all material facts relating to each item of
special business. Section 173 further specifies that all business in case of any meeting other than
(i) Consideration and approval of the annual accounts of the company
(ii) Declaration of dividend
(iii) Appointment of directors in place of those retiring and
(iv) Appointment of auditors including the fixing of their remuneration is regarded as
special business.
Therefore, the complaint of Mr. A, the shareholder is valid, since the details on the item
regarding issue of sweat equity shares to be considered is lacking. The information about the issue of
sweat equity shares is a material fact. The notice given by M. H. Ltd. of the General Meeting of the
shareholders is not a valid notice under Section 173 of the Companies Act, 1956. 5
c) No, the ethics are necessary in marketing not only to build image, but ethics are necessary
for sustainable development of business, and ultimately for transparency and good corporate
governance in the country. 1
4. a) Dishonour of Cheque – Grounds: A banker will be justified or bound to dishonor a cheque in
the following cases, viz;
• If a cheque is undated, if it is stale, that is if it has not been presented within reasonable period, which may vary three months to a year after its issue dependent on the circumstances of the
case
• If the instrument is inchoate or not free from reasonable doubt
• If the cheque is post-dated and presented for payment before its ostensible date
• If the customer’s funds in the banker’s hands are not ‘properly applicable’ to the payment of cheque drawn by the former. Thus, should the funds in the banker’s hands be subject to a lien or should the banker be entitled to a set-off in respect of them, the funds cannot be said to be “properly applicable” to the payment of the customer’s cheque, and the banker would be justified in refusing payment
• If the customer has credit with one branch of a bank and he draws a cheque upon another branch of the same bank in which either he has account or his account is overdrawn.
• If the bankers receive notice of customer’s insolvency or lunacy
• If the customer countermands the payment of cheque for the banker’s duty and authority to pay on a cheque ceases
• If a garnishee or other legal order from the Court attaching or otherwise dealing with the
money in the hand of the banker, is served on the banker
• If the authority of the banker to honour a cheque of his customer is undermined by the notice of the latter’s death. However, any payment made prior to the receipt of the notice of death is valid.
• If notice in respect of closure of the account is served by either party on the other.
• If it contains material alterations, irregular signature or irregular endorsement 6
b) 1. Select a category to download an eForm from the My MCA portal (with or with out the
instruction kit.
2. At any time, you can read the related instruction kit to familiarise yourself with the
procedures (you can download the instruction kit with eform or view it under Help menu).
3. You have to fill the downloaded e-Form.
4. You have to attach the necessary documents as attachments.
5. You can use the Prefill button in eForm to populate the greyed out portion by connecting
to the Internet.
6. The applicant or a representative of the applicant needs to sign the document using a
digital signature.
7. You need to click the Check Form button available in the eForm. System will check the
mandatory fields, mandatory attachment(s) and digital signature(s).
8. You need to upload the eForm for pre-scrutiny. The pre-scrutiny service is available
under the Services tab or under the eForms tab by clicking the Upload eForm button. The system
will verify (pre-scrutinise) the documents. In case of any inadequacies, the user will be asked to
rectify the mistakes before getting the document ready for execution (signature).
9. The system will calculate the fee, including late payment fees based on the due date of
filing, if applicable.
10. Payments will have to be made through appropriate mechanisms - electronic (credit
card, Internet banking) or traditional means (at the bank counter through challan).
(a) Electronic payments can be made at the Virtual Front Office (VFO)or at PFO
(b) If the user selects the traditional payment option, the system will generate 3 copies of pre-
filled challan in the prescribed format. Traditional payments through cash, cheques can be
done at the designated network of banks using the system generated challan. There will be five
banks with estimated 200 branches authorised for accepting challan payments.
11. The payment will be exclusively confirmed for all online (Internet) payment transactions
using payment gateways.
12. Acceptance or rejection of any transaction will be explicitly communicated to the
applicant (including facility to print a receipt for successful transactions).
13. MCA 21 will provide a unique transaction number, the Service Request Number (SRN)
which can be used by the applicant for enquiring the status pertaining to that transaction.
14. Filing will be complete only when the necessary payments are made.
15. In case of a rejection, helpful remedial tips will be provided to the applicant.
16. The applicants will be provided an acknowledgement through e-mail or alternatively
they can check the MCA portal. 6
c) Pragmatic reasons for maintaining ethical behaviour: Marketing executives should practice ethical
bahaviour because it is morally correct. To maintain ethical behaviour in marketing, the following
positive reasons may be useful to the marketing executives:
1. To reverse declining public confidence in marketing: Sometime misleading package
labels, false claim in advertisement, phony list prices, infringement of trademarks pervert the market
trends and such behaviour damages the marketers’ reputation. To reverse this situation, business
leaders must demonstrate convincingly that they are aware of their ethical responsibility and will
fulfill it. Companies must set high ethical standards and enforce them. Moreover, it is in
management’s interest to be concerned with the well being of consumers, since they are the
lifeblood of a business.
2. To avoid increase in government regulation: Business apathy, resistance, or token
responses to unethical behaviour increase the probability of more governmental regulation. The
governmental limitations may also result from management’s failure to live up to its ethical
responsibilities. Moreover, once the government control is introduced, it is rarely removed.
3. To retain power granted by society: Marketing executives wield a great deal of social
power as they influence markets and speak out on economic issues. However, there is a
responsibility tied to that power. If marketers do not use their power in a socially acceptable manner,
that power will be lost in the long run.
4. To protect the image of the organisation: Buyers often form an impression of an entire
organisation based on their contact with one person. That person represents the marketing function.
Sometimes a single sales clerk may pervert the market opinion in relation to that company which he
represents.
Therefore, the ethical behaviour in marketing may be strengthened only through the behaviour of the
marketing executives. 4
Part – C Advanced Accounting
1. a)
Particulars Amount
Increase in liability towards principal amt 37.50
Interest on foreign currency borrowing 30.00
Exchange difference on the amount of principal of the foreign currency
borrowing
67.50
Interest on local currency borrowing 61.875
Total borrowing cost( As per AS16) 61.875
Exchange difference to be treated as per AS11 5.625
b)
particulars Amt Amt
Machinery A/C Dr
To bank A/C
2500000
2500000
Bank A/C Dr
To deferred government grants
500000
500000
Depreciation A/c Dr
To machinery A/c
200000
200000
P&L A/c Dr
To depreciation A/c
200000
200000
Deferred government grants A/c Dr
To P&L A/c
50000
50000
2 X 3 =6
2. a) Adjusting events are the events that require adjustment to assets and liabilities. These are the
events occurring after the balance sheet date that provide additional information materially
affecting the determination of the amounts relating to conditions existing at the balance sheet date.
Eg: an adjustment may be made for the loss trade receivables account which is confirmed by the
insolvency of a consumer which occurs after the balance sheet date.
Adjusting events also include such events that include such events that require to be disclosed
because of statutory requirements or because of their special nature.
Eg: dividend proposed by an enterprise after the balance sheet date.
b) Change in accounting estimate should be treated in the following manner:
i. The effect of a change in an accounting estimate should be classified using the same
classification in the statement of profit and loss as was used previously for the estimate.
ii. The effect of a change in an accounting estimate should be included in the determination
of the net profit or loss:
a) The period of change if the change affects the period only
b) The period of change and the future if it affects both
c) As per AS5 when the items of income and expenses within a P&L from ordinary activities are of
such size, nature or incidence that their disclosure is relevant to explain the performance of
enterprise for the period, the nature and amount of such items should be disclosed separately.
Yes, it is necessary to make separate disclosure in respect of writing down inventories to its NRV.
Accordingly, the nature and amount of this item should be disclosed separately As per AS 5.
d)
i. The useful lives or the amortization rates used
ii. The amortization method
iii. The gross carrying amount and accumulated amortization
iv. A reconciliation of the carrying amount at the beginning and end
v. Reasons for amortization of intangible assets over more than 10 years.
e) Present obligation as a result of past obligation event: the obligating events the sale of the
product, which gives rise to an obligation because obligation also arise from normal business
practice custom and a desire to maintain good business relations or act in equitable manner. A
provision is recognized for the best estimate of the cost of refund.
5 X 1 = 5
3. a) As per AS 19 the lease should recognize the lease as an asset and a liability at an amount
equal to the fair value of the leased asset at the inception of the finance lease. However, if the fair
value of the leased asset exceeds the present value if the minimum lease payments from the
standpoint of the lessee, the amount recorded as asset and the liability should be the present value
of the minimum lease payment from the standpoint of the lessee.
Year Minimum lease
payment
IRR Present value
1 625000 .8696 543500
2 625000 .7561 472563
3 625000 .6575 410937
4 750000 .5718 428850
Total 2625000 1855850
Or
b) Diluted EPS= Adjusted net profit for the current year
Weighted average number of equity shares
Adjusted net profit for the current year
particulars Amount
Net profit for the current year 8550000
Add: interest expense for the current year 600000
Less: tax relating to interest expenses (180000)
Adjusted net profit for the current year 8970000
1 X 4 = 4
Part D – Information Technology
1. a) A Business Process consists of a set of activities that are performed in coordination in an
organizational and technical environment. These activities jointly realize a business goal. Each
business process is enacted by a single organization, but it may interact with business processes
performed by other organizations.
Process Management is based on a view of an organization as a system of interlinked processes,
which involves concerted efforts to map, improve and adhere to organizational processes. It is the
ensemble of activities of planning and monitoring the performance of a process.
b) Value chain is defined as a chain of activities that a firm operating in a specific industry performs
in order to deliver a valuable product or service for the market. Research and development; Design
of products, services, or processes; Production; Marketing and sales; Distribution and Customer
service are some of the business functions of the value chain.
c) Total Quality Management (TQM) is a management mechanism designed to improve a product or
process by engaging every stakeholder and all members of an organization as well as the customers
and aims at improving the quality of the products produced and the process utilized. TQM ultimately
aims at complete customer satisfaction through ongoing improvements.
3 x 1 = 3
2. a)
Or
b) Six Sigma – Six Sigma employs quality management and statistical analysis of process outputs
by identifying and removing the causes of defects (errors) and minimizing variability in
manufacturing and business processes. Each Six Sigma project carried out within an organization
follows a defined sequence of steps and has quantified value targets, for example: reduce process
cycle time, reduce pollution, reduce costs, increase customer satisfaction, and increase profits. It
follows a life-cycle having phases: Define, Measure, Analyze, Improve and Control (or DMAIC)
which are described as follows.
(i) Define: Customers are identified and their requirements are gathered. Measurements that
are critical to customer satisfaction [Critical to Quality, (CTQ)] are identified for further project
improvement.
(ii) Measure: Process output measures that are attributes of CTQs are determined and
variables that affect these output measures are identified. Data on current process are gathered and
current baseline performance for process output measures are established. Variances of output
measures are graphed and process sigma are calculated.
(iii) Analyze: Using statistical methods and graphical displays, possible causes of process
output variations are identified. These possible causes are analyzed statistical y to determine root
cause of variation.
(iv) Improve: Solution alternatives are generated to fix the root cause. The most appropriate
solution is identified using solution prioritization matrix and validated using pilot testing. Cost and
benefit analysis is performed to validate the financial benefit of the solution. Implementation plan is
drafted and executed.
(v) Control: Process is standardized and documented. Before and after analysis is performed
on the new process to validate expected results, monitoring system is implemented to ensure process
is performing as designed. Project is evaluated and lessons learned are shared with others.
4
c)
Or
d) First we will identify entities which are - Department, Course, Module, Student, and Lecturer.
Further, following are the relationships:
(a) Each department offers several courses;
(b) A number of modules make up each course;
(c) Students enroll in a particular course;
(d) Students take modules;
(e) Each module is taught by a lecturer;
(f) A lecturer from the appropriate department; and
(g) Each lecturer tutors a group of students.
4
3. a) BPM Life Cycle (BPM-L) - Business Process Management-Life cycle establishes a sustainable
process management capability that empowers organizations to embrace and manage process
changes successfully. Because it incorporates both human resources and technology—culture, roles
and responsibilities, as well as data content, applications and infrastructure—the approach enables
fully informed decision-making right across an organization. Phases are Analysis, Design,
Implementation, Run & Monitor and Optimize.
(i) Analysis phase: This involves analysis of the current environment and current
processes, identification of needs and definition of requirements.
(ii) Design phase: This involves evaluation of potential solutions to meet the identified
needs, business process designing and business process modeling.
(iii) Implementation phase: This involves project preparation, blue printing, realization,
final preparation, go live and support.
(iv) Run and Monitor phase: This involves business process execution or deployment and
business process monitoring.
b) A Decision Table is a table which may accompany a flowchart defining the possible
contingencies that may be considered within the program and the appropriate course of action for
each contingency. A Decision Table is divided into four quadrants –
Condition Stub, Condition Entries, Action Stub and Action Entries.
c) These are the basis for developing implemented business processes that contain information on
the execution of the process activities and the technical and organizational environment in which
they will be executed. 2 x 2 = 4
Session II
Part A – Costing and Financial Management
1. a)
Comparative Statement of procuring material from two sources
Material source
I
Material source
II
Defective (in %) 2
(Future estimate)
2.8
(Past experience)
Units supplied (in one lot) 1,000 1,000
Total defective units in a lot 20
(1,000 units × 2%)
28
(1,000 units ×2.8%)
Additional price paid per lot (`) (A) 100 –
Rectification cost of defect (`) (B) 100
(20 units × ̀ 5)
140
(28 units × ̀ 5)
Total additional cost per lot (`): [(A) + (B)] 200 140
On comparing the total additional cost incurred per lot of 1,000 units, we observe that it is more economical,
if the required material units are procured from material source II. 6
b)
(i) Halsey Scheme = 1
2
= 1 2
× Time saved × Wage rate per hour
× 800 hours × ̀ 10 = ̀ 4,000
(ii) Rowan Scheme =
Time saved
Time allowed
× Time taken × Wage rate per hour
= 800 hours
3,200 hours
Statement showing the effect on the Company’s Weekly Present Profit × 2,400 hours × ̀ 10 = ̀ 6,000
1. Total available hours per week
(60 workers × 40 hours)
2,400
2. Total standard hours required to produce 19,200 units
(19,200 units ÷ 6 units per hour)
3,200
3. Total labour hours required after the
introduction of bonus scheme to produce 19,200 units
(19,200 units ÷ 8 units per man hour)
2,400
4. Time saved in hours
(3,200 hours – 2,400 hours)
800
5. Wage rate per hour (` ) 10
(` 400 ÷ 40 hours)
6. Bonus:
Present (`) Halsey (`) Rowan (`)
Sales revenue: (A)
(19,200 units × ̀ 11)
2,11,200 2,11,200 2,11,200
Direct material cost (19,200 units × ̀
8) 1,53,600 1,53,600 1,53,600
Direct wages
(Refer to working notes 2 & 3)
32,000
(3,200 hrs. × ̀ 10)
24,000
(2,400 hrs. × ̀ 10)
24,000
(2,400 hrs. × ̀ 10)
Overtime premium 4,000
(800 hrs.× ̀ 5)
- -
Bonus
(Refer to working notes 6 (i) & (ii))
- 4,000 6,000
Variable overheads 1,600
(3,200 hr.×`0.50)
1,200
(2,400 hr.×`0.50)
1,200
(2,400 hr.×`0.50)
Fixed overheads 9,000 9,000 9,000
Total cost : (B) 2,00,200 1,91,800 1,93,800
Profit: {(A)- (B)} 11,000 19,400 17,400
2. a)
1. Kd = Interest x (100% - Tax) = 15%x(100%-35%) = 9.75% Kp = 18% Ke =� � . = ¼ =
25%.
2. Let Debt be D% of Total Capital. Hence, Equity = (100% - 30% - D%) = (70% - D%)
3. Ko = (kd x Wd)+(Kp x Wp)+(Ke x We) = [9.75% x D]+[18% x 30%] + [25%x(70%-D)]
= 20% (Ko Given)
So, 9.75%D = 5.40% = 17.5% - 25.00%D = 20.00% Hence, -15.25%D= -2.90%
On Solving, we get, D = . %5. 5% = 0.19 or 19%. Hence, Debt = 19% & Equity = 70% - 19%
= 51%.
So, Ratio between Debt and Equity Capital = 19 : 51
4
b)
1. Ke = Rick Free Rate + Rick Premium = Risk Free Rate + (Beta x Average Market Risk
Premium)
= 5.5% + (1.1875 x 8%) = 5.5 + 9.5% = 15.00%
2. � (Cost of Prefernce Share Capital) is computed using 2 alternative approaches as under
–
a) Irredeemable Preference Capital; Kp = � � �� � � =
. .5. . 5 = 10.70%
b) Redeemable preference Capital:
98.15 = .5+ +
.5+ + .5+ +
.5+ + .5+
Where YTM = Yield to Maturity. On Solving, we get YTM = 11% (appx). So, Kp =
11%.
3. Kd (Cost of Debenture ) :
a) Irredeemable Debt Kd = � %− � =
.5 . , .5% ∗ % 5%. 5 .5 =
6.29%.
b) Redeemable Debt: (Note: YTM = Yield to Maturity)
981.05 = 5+ +
5+ + 5+
On solving, we get YTM = 10% (appx.). so, � = YTM x(100%-tax) = 10% x 65% =
6.5%
4. � (Cost of Long Loans) = � %− � =
5 ∗ .5% ∗ % 5%5 = 5.525%
5.
(a) � � � � � �� �� � � � �� � � � � ����.
Type of Capital
Market Value in RS.
Millions Ratio
Indl.
Cost
WAC
C
Equity Share Of Capital 150*60 = 9,000
81.30
% 15%
12.20
%
10.5% Preference Share Capital 1*98.15 = 98.150 0.89% 10.70% 0.09%
9.5% Debentures
1.5 * 981.05 =
1471.575
13.30
% 6.29% 0.84%
8.5% Term loan from Financial given 500 4.51% 5.53% 0.25%
Instiution
Total 11,069.73 100%
13.38
%
Note: Reserve &Surplus are included in Market Value of Equity Share Capital, hence not applicable
for WACC Computation.
b. � � � � � �� �� � � � �� � � � � ����. (using YTM calculations.)
Type of Capital
Market Value in RS.
Millions Ratio
Indl.
Cost
WAC
C
Equity Share Of Capital 150*60 = 9,000
81.30
% 15%
12.20
%
10.5% Preference Share Capital 1*98.15 = 98.150 0.89% 10.70% 0.09%
9.5% Debentures
1.5 * 981.05 =
1471.575
13.30
% 6.50% 0.86%
8.5% Term loan from Financial
Instiution given 500 4.51% 5.53% 0.25%
Total 11,069.73 100%
13.40
%
Note: Reserve &Surplus are included in Market Value of Equity Share Capital, hence not applicable
for WACC Computation.
6. Marginal WACC:
Total Amount to be raised = Rs. 750 Million, of Which Debt should be 20%, i.e Rs. 150 Million and
Equity 80%, being Rs. 600 Millions, since cost of debt after Rs. 100 Million, the Marginal WACC is
Computed in the following segments –
10
3. a) Bin Cards are quantitative records of the stores receipt, issue and balance. It is kept for each and
every item of stores by the store keeper. Here, the balance is taken out after each receipt or issue
transaction
Stock Control Cards are also similar to Bin Cards. Stock control cards contain further information as
regards stock on order. These cards are kept in cabinets or trays or loose binders.
Particular Debt Equity Individual Cost
Marginal WACC Ko
=
First
Rs. 500
Million
100
Million
400
Million
Ke = 5.5% + (8% * 1.4375) = 17% (6.175% * 20%) +
(17% * 80%) =
12.365%
Kd = 9.5% x (100% - 35%) = 6.175%
Next
Rs. 250
Million
50
Million
200
Million
Kd = 10% x (100% - 35%) = 6.75% (6.5% * 20%) + (17%
* 80%) = 14.90%
Ke = 5.5% + (8% * 1.4375) = 17%
b) The Modigliani and Miller hypothesis is identical with the net operating income approach. At its
heart, the theorem is an irrelevance proposition, but the Modigliani-Miller Theorem provides
conditions under which a firm’s financial decisions do not affect its value. They argue that in the absence of taxes, a firm’s market value and the cost of capital remain invariant to the capital structure
changes. In their 1958 articles, they provide analytically and logically consistent behavioural
justification in favour of their hypothesis and reject any other capital structure theory as incorrect. The
Modigliani–Miller theorem states that, in the absence of taxes, bankruptcy costs, and asymmetric
information, and in an efficient market, a company’s value is unaffected by how it is financed, regardless of whether the company’s capital consists of equities or debt, or a combination of these, or
what the dividend policy is.
5
Part – B Taxation
Direct Taxes
1. a)
Case (i)
Computuation of total income
Particulars Rs Rs
Income from house property
House-
1
72,000
House-2 (Loss) (Note 1) {30000}
Net income from house property 42,000
profits and gains of business or profession
Leather business - Income
1,00,000
Less: current year loss-textile business
{40000}
Less:
B/fd Business loss of AY 2011-2012-Textile
business
{60,000} NIL
Chemical business - Bad depts recovered deemed
35,000
as business income u\s 41(4)
Less: B/fd business losses of discontinued chemical (Note2) {35000} NIL
business AY 2013-2014
Share of profit in the firm
16,550
Less: Exempt u\s 10(2A)
{16,550} NIL
Profits and gains of business NIL
capital gains
Short term capital gains
60,000
Long term capital loss - Rs 35,000 can be set - off
NIL
carried forward for 8 successive assessment years
and set-off only against
LTCG
Income under the head "capital gains" 60,000
Gross total income
1,02,000
Less: Deduction under chapter vi-A
{10,000}
Total income 92,000
Case(ii):
Computation of losses to be carried forward
Particulars Rs
Textile business-Discounted (Rs 95,000- Rs 60,000) - to be c/fd
35,000
Chemical business-Discounted (Rs 50,000- Rs 35,000)- to be c/fd
15,000
Long term capital losses (Rs 35,000 - NIL) - to be c/fd
35,000
Total 85,000
Notes:
1. Losses under the head income from one house property can set-off against the income from
another house property u/s 70 (inter source adjustment).
2. U/s 41(5), the unabsorbed business loss pertaining to the year in which the business was
discounted is permitted to be set-off against deemed business income u/s 41(1),(3),(4),(4A).
10
b) Computation of Income of Mr. D for the AY 15 – 16
Particulars Amount
Professional Income 230000
Royalty (42000 – 8000) 34000
Gross Total Income
Less: Deduction U/S 80 C
264000
(24000)
Total Income 240000
Tax Liability = 4000 – 2000 (87A) + 60 (3% Cess) = Rs. 2060
4
c)
Assessee: Mr. Singh Previous Year: 2014-15
Assessment Year: 2015-16.
Computation of Total Income
Particulars Rs. Rs.
Profit and Gains of Business or profession 90,000
(+) Income of Minor Children: (Note1)
a) Interest on company Deposits of master Deep Singh 12,000
(-) Exemption u/s 10(32) (1,500) 10,500
b) Lottery winning of master dipendar Singh 6,000
(-) Exemption u/s 10(32) (1,500) 4,500
Total Income 1,05,000
Notes:
U/s 641(A), income of a minor shall be clubbed in the hands of the parent whose total income
is greater before such clubbing. Exemption of Rs.1500 per child shall be allowed in respect of
such income.
If the minor receivers income by exercise of labour, hard work, skill, knowledge or
experience then such income shall not be clubbed. Hence, Income of dipali Singh, Minor
Daughter of Mr. Singh is not clubbed in his hands.
Since Mr. Singh does not have substantial interest in the interest in the educational institution
employing Mr. Singh, provisions of Sec. 64(1)(ii) is not attracted. 4
d)
General Obligation: TDS Obligation under Sec. 194A, 194C, 194-I, & 194H are applicable to
individuals and HUF who are subject to tax audit u/s 44AB during the Preceding financial year. Since
the Turnover of Aswin for the preceding financial year, exceeding the threshold limit of Rs. 1 Crore,
he would have been subject to tax audit for that period. So, TDS Obligation are attracted in this case,
Generally.
Special Treatment:
Item Analysis and Conclusion
Interest Paid to UCO Bank TDS u/s 194A is not attracted in respect of interest paid to a
Banking Company. There is a specific exclusion u/s 194A, hence no
TDS
Contract payment to Raj (2
contracts of Rs. 12,000 each.)
Since value of each contract <Rs. 30,000, and aggregate < Rs. 75,000,
TDS u/s 194C would not be attracted in this case.
Shop rent paid (One Payee) Since payment to a Single Payee > Rs. 1,80,000, TDS u/s 194-I is
required to be deducted at 10%
Commission paid to Balu Since payment > Rs. 50,000, TDS u/s 194-H is required to be
deducted at 10%.
2
e) Computation of Total Income of Mr. Gunram for the AY 2015-16
Particulars Amount
Profits and Gains of Business or Profession 55000
Income from Other Sources 14500
Gross Total Income 564500
Less: 80 C -37500
80 D -20000
80 E -6500
80 TTA -10000
Total Income 490500
Notes:
Particulars Rs.
a) Life insurance on Dependent Parents: Deduction is not available u/s 80 C in
respect of premium paid for Life Insurance of Parents whether they are dependent
or not.
b) Life Insurance on Major Son: For Policy taken on or after 1.04.2013, the limit is
maximum 10 % of sum assured. Hence, the amount paid Rs.25000 is restricted to
10% of Rs.175000.
c) Life Insurance on Self: For Policy taken on or after 1.04.2013, the limit is
maximum 10% of sum assured. Hence, the amount paid Rs.22500 is restricted to
10% of Rs.200000.
d) Health Insurance premium on Self and Spouse: Assessee being senior citizen, the
deduction permissible is amount paid by cheque or Rs.20000 whichever is less.
So, permissible deduction is
e) Health Check up of Self, Spouse , Children and Parents: Any mode of payment is
permissible. Maximum deduction is Rs.5000 within the overall limit Rs.20000 u/s
80D. Eligible Payment is Rs.1500 + Rs.4500 = Rs. 6000 but restricted to balance
deduction permissible u/s 80 D = 20000 – 16000
f) Education Loan: Conditions u/s 80E satisfied. Permissible Deduction is towards
Interest.
g) Donation for Family Planning: Not permissible u/s 80 G , since payment is in
cash.
h) Contribution to Electoral Trust: Not Permissible u/s 80 GGC , since payment is in
cash.
i) Interest on Savings Bank A/C: Deduction u/s 80 TTA = Amount of such interest
Rs.14500 or specified amount Rs.10000, whichever is less.
Nil
17500
20000
16000
4000
6500
Nil
Nil
10000
10Indirect Taxes
1. a) Examine with reference to the provisions of Customs Duty.
i. Determination of rate of duty and tariff valuation for imported goods.
Answer:
Situation/ type of goods Relevant date for rate and tariff valuation
Goods entered for home consumption Date on which bill of entry Is presented
Goods cleared from warehouse Date on which the bill of entry for home
consumption
In case of any other goods Date of payment of duty
ii. Situations where there is reduction of Customs Liability.
Answer:
i. Pilferage of goods u/s 13
ii. Damage or deterioration of goods u/s 22
iii. Remission of duty on goods lost, destroyed u/s 23
iv. Mutilation of goods u/s 24
v. Exemption of duty on goods notified u/s 25
2 x 1 = 2
b)
Answer:
(1)When the vessel/aircraft carrying imported goods arrives in India, the person-in-charge of
such vessel/aircraft [master/pilot of the vessel/aircraft respectively] entering into India from
outside India shall allow calling /landing of the vessel/aircraft only at the customs port/customs
airport unless otherwise permitted by CBEC.
(2) Delivery of import manifest/report: The person-in-charge of a vessel/aircraft shall deliver to
the proper officer an import manifest [detailed information about goods in vessel/aircraft] by
presenting the same electronically before the arrival of the vessel/aircraft at the customs
port/customs airport. In case of import by land, the personin-charge of the vehicle shall deliver to
the proper officer an import report [detailed information about goods in vehicle] within 12 hours
of the arrival of vehicle at the customs station.
(3) Grant of Entry Inwards to the master of the vessel/permission to unload the goods: On
receiving import manifest from the master of a vessel, the proper officer shall grant Entry Inwards
to the master. The master of the vessel shall not permit the goods to be unloaded until the order
of Entry Inwards has been granted by the proper officer to such vessel. Date of Entry Inwards is
the date on which the vessel finds a berth place for discharge of cargo.
(4) Unloading of goods: Imported goods shall be unloaded:-
(a) only if mentioned in the import manifest/import report.
(b) only at the approved places in any customs port/customs airport.
(c) under the supervision of the proper officer.
(d) during working hours and shall not be unloaded on Sunday/on any holiday.
(5) Unloaded goods to be in the custody of the Custodian until their clearance: Once the imported
goods have entered the customs area, they shall remain in the custody of the Custodian [a person
approved by the Commissioner of Customs for this purpose]. If the imported goods are pilfered
after unloading in a customs area, while in the custody of the Custodian, then the Custodian shall
be liable to pay duty on such goods.
(6) Filing of entry for import, i.e. Bill of Entry: The importer of any goods, other than goods
intended for transit or transhipment [provisions of goods in transit/transhipment are discussed
below in point (11)], shall file a Bill of Entry electronically for clearance of goods from the
custom station port/airport. . In case the goods are to be cleared for home consumption, importer
would file Bill of Entry for home consumption. However, if the importer does not need the goods
immediately, he may request the goods to be warehoused. In that case, an Into-Bond Bill of Entry
(for warehousing) would be filed. When subsequently, the goods are clearance from warehouse
for home consumption, an Ex-Bond Bill of Entry is required to be filed
(7) Timing of filing of Bill of Entry: A Bill of Entry may be presented at any time after the
delivery of the Import Manifest/Import Report. However, in case of import by a vessel/aircraft, a
bill of entry may be presented even before the delivery of such Import manifest if the vessel or the
aircraft by which the goods have been shipped for importation into India is expected to arrive
within 30 days from the date of such presentation.
(8) Assessment of duty on the imported goods: Assessment is the procedure of quantifying the
amount of liability. The importer will self-assess the duty considering the applicable rate of
exchange and rate of import duty. This self-assessment is subject to verification by the proper
officer of the Customs and may lead to reassessment by such officer if the assessment made by
the importer is found to be incorrect. The proper officer shall return the Bill of Entry to the
importer after determination of the duty amount.
(9) Payment of duty: If the goods are cleared to be stored in a warehouse, payment of duty is
deferred till the time of clearance from such warehouse. However, in case the goods are cleared
for home consumption, customs duty has to be paid. The importer has to pay the duty within 2
days (excluding holidays) of the determination of such duty amount. In case he fails to do so, he
is required to pay interest on the duty till the time he actually pays the duty and clears the goods.
(10) Clearance of imported goods from the custom station: The goods lying under the custody of
the custodian have to cleared either for home consumption or for warehousing or for transhipment
within 30 days (or such extended time as the proper officer may allow) from the date of unloading
of goods at the customs station. The importer may exercise any of the following options:- (a)
Clearance for home consumption: In case the importer files the Bill of Entry for home
consumption and the proper officer is satisfied that the imported goods are not prohibited goods
and duty on the same has been paid, he may make an order permitting clearance of the goods for
home consumption. (b) Warehousing of imported goods: The importer may not clear the goods
for home consumption and request the goods to be warehoused. In such a case, he shall file an
Into-Bond Bill of Entry for warehousing and is assessed to duty. Thereafter, he shall execute a
bond binding himself in a sum equal to twice the amount of the duty assessed on such goods. The
proper officer after satisfying himself that all the requirements have been fulfilled shall make an
order permitting the deposit of the goods in a warehouse. Subsequently, the importer of any
warehoused goods may clear them for home consumption provided:-
(i) an ex-Bond Bill of Entry has been presented to the proper officer and duty is assessed and
paid by him
(ii) rent and warehousing charges along with any penalty on warehoused goods, if any, have
been paid by importer, and
(iii) an order for clearance of such goods for home consumption has been made by the proper
officer.
(11) Imported goods in transit or transhipment: Transit of goods: Where any goods (not being
prohibited goods) which are imported in a conveyance are mentioned, in the import
manifest/import report, as for transit in the same conveyance to any place outside India or any
customs station, they may be allowed to be so transited without payment of duty. Transhipment of
goods: Where any goods (not being prohibited goods) which are imported in a conveyance are
mentioned, in the import manifest/import report, as for transhipment to any place outside India or
to any major port/other port as notified /any other customs station, they may be allowed to be so
transhipped without payment of duty. The importer shall present the Bill of Entry for
transhipment to the proper officer. Unlike transit under transhipment, goods are transferred from
one conveyance to another.
Or
c) Safeguard duty: is levied if the Central Government is satisfied that: (a) any article is imported into
India in increased quantities; and (b) such increased importation is causing or threatening to cause
serious injury to domestic industry. Safeguard duty is product specific i.e. it is applicable only for
certain articles in respect of which it is imposed. This duty is in addition to any other duty levied
under this Act or any other law in force. Education cess and secondary and higher education cess is
not payable on safeguard duty. The duty imposed under this section shall be in force for a period of 4
years from the date of its imposition and can be extended with the total period of levy not exceeding
10 years. Safeguard duty shall not apply to articles imported by a 100% EOU undertaking or a unit in
a FTZ or in a SEZ unless specifically made applicable [Sections 8B]. In case the goods are imported
in increased quantities from People’s Republic of China, a specific safeguard duty is imposed under
section 8C.
Anti-dumping duty: where any article is exported by an exporter to India at less than normal value,
the upon the importation of such article into India, the Central Govt may impose anti-dumping duty
not exceeding the margin of dumping in relation to such article.
3. a )Case 1: Port’s liability for payment of import duty:
i. As per sec 45 of the Customs Act 1962, the following persons can act as a custodian of
imported goods:
a. Persons approved by the commissioner of Customs Act 1962
b. Persons authorized under any law
ii. The liability of payment of duty for pilfered goods shall arise only for the Custodian
approved by the Commissioner, and not foe the person authorized by law.
iii. Hence the port trusts appointed under the major Port Trust Act 1963 shall not be liable to
pay the duty.
Case 2: port’s liability towards the importer for compensation: the Port Trust holding the goods on
behalf of the importer shall be treated as bailee and hence shall be liable to compensate the importer
loss of such goods. In the given case the Port Trust shall compensate Pipli Imports Ltd, and in such a
case the importer shall be liable to pay the duty.
b) Computation of Customs Duty Payable
Particulars Amount Amount
Assessable value 100000
BCD 10000 10000
Sub-total for calculating CVD 110000
CVD x ED rate 13200 13200
Sub-total for calculation for e-cess 23200
Educational cess 464 464
SHEC 232 232
Sub-total for calculating CVD 123896
Special CVD 4956 4856
Total of customs duty payable 28852
Since importer is a service provider, he can avail CENVAT credit of only CVD i.e. Rs. 13200 and not
of special CVD. 5
Part C – Auditing & Assurance
1. a) AS per SA-220 “ Quality Control for an Audit of Financial Statements” the firm’s review
responsibility policies and procedures are determined on the basis that work of less experienced team
members is reviewed by more experienced team members. However, it has placed the final
responsibility of review of audit engagement on engagement partner. Engagement partner is the
partner or other person in the firm who is a member of the Institute of Chartered Accountants of India
and is in full time practice and is responsible for its engagement and its performance, and for the
report that is issued on behalf of the firm, and whom where required , has the appropriate authority
from a professional legal or regulatory body. Reviews at appropriate stages during the audit
engagement allow significant matters to be resolved on a timely basis, to the engagement partner’s
satisfaction on or before the date of the auditor’s report. The engagement partner shall ensure that
reviews being performed are in accordance with the firm’s review policies and procedures.
b) The Preface to Standards on Auditing gives the scope of the Standards on Auditing. As per the
Preface, the SAs will apply whenever an independent audit is carried out; that is, in the
independent examination of financial statements/information of any entity; whether profit
oriented or not and irrespective of its size, or legal form (unless specified otherwise) when such
an examination is conducted with a view to expressing an opinion thereon.
Also while discharging their attest function; it is the duty of the Chartered Accountant to ensure
that SAs are followed in the audit of financial information covered by their audit reports.
In the given case, even though the client is a non-profit oriented entity the SAs shall apply and the
auditor shall be guilty of professional misconduct for failing to discharge his duty in case of non-
compliance with SAs.
c) Audit Working Papers: Working papers are papers prepared and obtained by the auditor and
retained by him, in connection with the performance of his audit. Working papers are the property
of the auditor. As per SA 230 “Audit Documentation” refers to the record of audit procedures
performed, relevant audit evidence obtained, and conclusions the auditor reached (terms such as
“working papers” or “work papers” are also sometimes used).
Working papers should record the audit plan, the nature, timing and extent of auditing procedures
performed, and the conclusions drawn from the evidence obtained. In case of recurring audits,
auditors generally prepare two types of audit files.
(1) Permanent Audit file: It includes –
(i) Information concerning the legal and organisational structure of the entity. In the case of a
company, this includes the Memorandum and Articles of Association. In the case of a statutory
corporation, this includes the Act and Regulations under which the corporation functions
(ii) Extracts or copies of important legal documents, agreements and minutes relevant to the
audit.
(iii) A record of the study and evaluation of the internal controls related to the accounting
system. This might be in the form of narrative descriptions, questionnaires or flow charts, or some
combination thereof.
(iv) Copies of audited financial statements for previous years.
(v) Analysis of significant ratios and trends.
(vi) Copies of management letters issued by the auditor, if any.
(vii) Record of communication with the retiring auditor, if any, before acceptance of the
appointment as auditor.
(viii) Notes regarding significant accounting policies.
(ix) Significant audit observations of earlier years.
(2) Current Audit file: The current file normally includes:
(i) Correspondence relating to acceptance of annual reappointment.
(ii) Extracts of important matters in the minutes of Board Meetings and General Meetings, as
are relevant to the audit.
(iii) Evidence of the planning process of the audit and audit programme.
(iv) Analysis of transactions and balances.
(v) A record of the nature, timing and extent of auditing procedures performed and the results
of such procedures.
(vi) Evidence that the work performed by assistants was supervised and reviewed.
(vii) Copies of communications with other auditors, experts and other third parties.
(viii) Copies of letters or notes concerning audit matters communicated to or discussed with
the client, including the terms of the engagement and material weaknesses in relevant internal
controls.
(ix) Letters of representation or confirmation received from the client.
(x) Conclusions reached by the auditor concerning significant aspects of the audit.
(xi) Copies of the financial information being reported on and the related audit reports.
2 x 3 = 6
2. a) As per SA-240 , the primary responsibility for the prevention and detection of fraud rests with
TCWG of the entity and management. An auditor conducting an audit in accordance with SAs is
responsible for obtaining reasonable assurance that the financial statements taken as a whole are free
from material misstatement, when caused by fraud or error. The subsequent discovery of material
misstatement resulting from fraud or error existing during the period covered by the auditor’s report
does not, in itself indicate that whether the auditor has adhered to the basic principles governing an
audit.
b) SA-210 “Agreeing the terms of Audit Engagements” , if management imposes a limitation on
scope of auditor’s work in terms of a proposed audit engagement and if auditor is of view that the
limitation imposed will result in disclaimer of opinion then the auditor should not accept the
engagement. Hence, in the above case auditor should not accept the case. 2 X 1 = 2
3. a) Auditing versus Investigation: As Per SA 200 “Overall Objectives of the Independent Auditor
and the conduct of an audit in accordance with standards on auditing”, The purpose of an audit is
to enhance the degree of confidence of intended users in the financial statements. This is achieved
by the expression of an opinion by the auditor on whether the financial statements are prepared, in
all material respects, in accordance with an applicable financial reporting framework.
Audit is generally objected to find out whether the accounts show true & fair view. It is a critical
examination of books of accounts.
Investigation on the other hand is critical examination of the accounts with a special purpose. For
example if fraud is suspected and an accountant is called upon to check the accounts to whether
fraud really exists and if so, the amount involved, the character of the enquiry changes into
investigation. Investigation may be undertaken in numerous areas of accounts, e.g., the extent of
waste and loss, profitability, cost of production etc. It extends scope beyond books of accounts.
For auditing on the other hand, the general objective is to find out whether the accounts show a true
and fair view. The auditor seeks to report what he finds in the normal course of examination of
the accounts adopting generally followed techniques unless circumstances call for a special probe.
Fraud, error, irregularity, whatever comes to the auditor’s notice in the usual course of checking,
are all looked into in depth and sometimes investigation results from the prima facie findings of
the auditor. 3
b) Operational Audit: Operational Audit involves examination of all operations and activities of the
entity. The objects of operational audit include the examination of the control structure and of the
relation of department controls to general policies. It provides an appraisal of whether the department
is operating in conformity with prescribed standards and procedures and whether standards of
efficiency and economy are maintained. It is concerned with formulation of plans, their
implementation and control in respect of production and marketing activities. Traditionally, internal
audit focused on accounting operations of the entity. However, operational audit covers all other
operation such as marketing, manufacturing, etc. Thus, operational audit in its initial stages
developed as an extension of internal auditing. The need for operational auditing has arisen due to the
inadequacy of traditional sources of information for an effective management of the company where
the management is at a distance from actual operations due to layers of delegation of responsibility,
separating it from actualities in the organisation. Specifically, operational auditing arose from the
need of managers responsible for areas beyond their direct observation to be fully, objectively and
currently informed about conditions in the units under control. Operational audit is considered as a
specialised management information tool to fill the void that conventional information sources fail to
fill. Conventional sources of management information are departmental managers, routine
performance report, internal audit reports, and periodic special investigation and survey.
Or
c) Surprise Checks Surprise checks are a part of normal audit procedures. An element of surprise can
significantly improve the audit effectiveness. Wherever practical, an element of surprise should be
incorporated in the audit procedures. The element of surprise in an audit may be, both in regard to the
time of audit, i.e. selection of date, when the auditor will visit the client’s office for audit and
selection of areas of audit. Surprise checks are mainly intended to ascertain whether the internal
control system is working effectively and whether the accounting and other records are kept up to date
as per the statutory regulations. Surprise checks can exercise good moral check on the client’s staff.
It helps in determining whether errors or frauds exist and if they exist, brings the matter promptly to
the management’s attention, so that corrective action can be taken at the earliest. Surprise checks are
very effective in verification of cash and investments, test checking of stock, verification of
accounting records, statutory registers and internal control system. The frequency of surprise checks
may be determined by the auditor in the circumstances of each audit but should normally be at least
once in the course of an audit. 4
Part D – Strategic Management
1. The changes in the environmental forces often require businesses to make modifications in their
existing strategies and bring out new strategies. Strategic change is a complex process and it involves
a corporate strategy focused on new markets, products, services and new ways of doing business.
To make the change lasting, Kurt Lewin proposed three phases of the change process for moving the
organization from the present to the future. These stages are unfreezing, changing and refreezing.
(a) Unfreezing the situation: The process of unfreezing simply makes the individuals or organizations
aware of the necessity for change and prepares them for such a change. Lewin proposes that the changes
should not come as a surprise to the members of the organization. Sudden and unannounced change would be
socially destructive and morale lowering. The management must pave the way for the change by first
“unfreezing the situation”, so that members would be willing and ready to accept the change. Unfreezing is
the process of breaking down the old attitudes and behaviours, customs and traditions so that they start with a
clean slate. This can be achieved by making announcements, holding meetings and promoting the ideas
throughout the organization.
(b) Changing to New situation: Once the unfreezing process has been completed and the members of
the organization recognise the need for change and have been fully prepared to accept such change, their
behaviour patterns need to be redefined. H.C. Kellman has proposed three methods for reassigning new
patterns of behaviour. These are compliance, identification and internalisation.
Compliance: It is achieved by strictly enforcing the reward and punishment strategy for good or
bad behaviour. Fear of punishment, actual punishment or actual reward seems to change
behaviour for the better.
Identification: Identification occurs when members are psychologically impressed upon to
identify themselves with some given role models whose behaviour they would like to adopt and
try to become like them.
Internalization: Internalization involves some internal changing of the individual’s thought
processes in order to adjust to a new environment. They have given freedom to learn and adopt
new behaviour in order to succeed in the new set of circumstances.
(c) Refreezing: Refreezing occurs when the new behaviour becomes a normal way of life. The
new behaviour must replace the former behaviour completely for successful and permanent change to
take place. In order for the new behaviour to become permanent, it must be continuously reinforced so
that this new acquired behaviour does not diminish or extinguish. Change process is not a one time
application but a continuous process due to dynamism and ever changing environment. The process of
unfreezing, changing and refreezing is a cyclical one and remains continuously in action.
3
2. i) Incorrect: Structures are designed to facilitate the strategic pursuit of a firm and, therefore,
follows strategy. Without a strategy or reasons for being, it will be difficult to design an effective
structure. Strategic developments may require allocation of resources and there may be a need for
adapting the organization’s structure to handle new activities as well as training personnel and
devising appropriate systems.
ii) Correct: Strong cultures promote good strategy execution when there’s fit and hurt execution
when there’s negligible fit. A culture grounded in values, practices, and behavioral norms that match
what is needed for good strategy execution helps energize people throughout the organization to do
their jobs in a strategysupportive manner. A culture built around such business principles as listening
to customers, encouraging employees to take pride in their work, and giving employees a high degree
of decision-making responsibility
iii) 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.
b) i) Competitive advantage is position of a firm to maintain and sustain a favourable market position
when compared to the competitors. Competitive advantage is ability to offer buyers something
different and thereby providing more value for the money. It is the result of a successful strategy. This
position gets translated into higher market share, higher profits when compared to those that are
obtained by competitors operating in the same industry. Competitive advantage may also be in the
form of low cost relationship in the industry or being unique in the industry along dimensions that are
widely valued by the customers in particular and the society at large.
ii) Backward linkages can be defined as "the growth of an industry leads to the growth of the
industries that supply inputs to it". As in the case of cotton industry, growth of the textile industry
may support the growth of the cotton industry, which will lead to higher incomes for cotton farmers
and will create a greater demand for goods and services in the countryside
Forward linkages exist when the growth of an industry leads to the growth of other industries that
uses
its output as input. The final product of cotton goes to consumers either through retailers or through
manufacturers who open up their own shops to directly sell to consumer, thereby minimising the role
of retailers in the channel process. A company can minimize cost of production and can maximize
revenue when both backward and forward linkages work together in effective way.
3. A strategic leader has several responsibilities, including the following:
♦ Environment Scanning.
♦ Dealing with the diverse and cognitively competitive situations.
♦ Managing human capital.
♦ Effectively managing the company's operations.
♦ Sustaining high performance over time.
♦ Willing to make candid, courageous, and yet pragmatic decisions.
♦ Decision-making responsibilities that cannot be delegated.
♦ Seeking feedback through face-to-face communications.
♦ Being spokesman of the organisation.
Difference between Transformational and Traditional leadership style:
1. Traditional leadership borrowed its concept from formal Top-down type of leadership such
as in the military. The style is based on the belief that power is bestowed on the leader, in keeping
with the traditions of the past. This type of leadership places managers at the top and workers at the
bottom of rung of power. In transformational leadership, leader motivates and empowers employees
to achieve company’s objectives by appealing to higher ideas and values. They use charisma and enthusiasm to inspire people to exert them for the good of the organization.
2. Traditional leadership emphasizes characteristics or behaviours of only one leader within a
particular group whereas transformational leadership provides a space to have more than one leader in
the same group at the same time. According to the transformational leadership style, a leader at one
instance can also be a follower in another instance. Thus there is element of flexibility in the
relationships.
3. Traditional leadership is more focused in getting the work done in routine environment.
Traditional leaders are effective in achieving the set objectives and goals whereas transformational
leaders have behavioural capacity to recognize and react to paradoxes, contradictions and
complexities in the environment. Transformational leadership style is more focus on the special skills
or talents that the leaders must have to practice to face challenging situations. Transformational
leaders work to change the organizational culture by implementing new ideas.
4. In traditional leadership, followers are loyal to the position and what it represents rather
than who happens to be holding that position whereas in transformational leadership followers
dedicate and admire the quality of the leader not of its position.
4
4. Strong cultures in an organization promote good strategy execution when there’s fit and hurt
execution when there’s negligible fit. A culture grounded in values, practices, and behavioural norms
that match what is needed for good strategy execution helps energize people throughout the company
to do their jobs in a strategy-supportive manner, adding significantly to the power and effectiveness of
strategy execution. A work environment where the culture matches the conditions for good strategy
execution provides a system of informal rules and peer pressure regarding how to conduct business
internally and how to go about doing one’s job.
A strong strategy-supportive culture makes employees feel genuinely better about their jobs
and work environment and the merits of what the company is trying to accomplish. Employees are
stimulated to take on the challenge of realizing the organizational vision, do their jobs competently
and with enthusiasm, and collaborate with others.